Banco Pan SA

BOVESPA:BPAN4

Earnings Call Transcript 2023-Q2

[Operator]

[Interpreted] Good morning, ladies and gentlemen. Welcome to Banco Pan's conference call to discuss the results for the

[Audio Gap]

the audio and slides from this conference call are being broadcast simultaneously over the Internet on the company's IR website, www.bancopan.com.br/ir and on the webcast platform. The presentation is also available for download. [Operator Instructions]

We'd like to inform you that forecast of future events are subject to risks and uncertainties that may cause these expectations not to be fulfilled or to differ materially from those anticipated. These forward-looking statements speak only as of the date they are made and the company undertakes no obligation to update them.

Present with us today are Mr. Carlos Eduardo Guimaraes, CEO of Banco Pan; and Mr. Inacio Caminha, Head of Investor Relations and fundraising (sic) [ Funding ]. I would now like to give the floor to Mr. Carlos Eduardo, who will begin the presentation. Please, Cadu, you may proceed.

[Carlos Pereira Guimaraes, executive]

[Interpreted] Good morning, everyone. Welcome to yet another earnings release of Banco Pan. We're going to start on Slide 2. Our NIM credit cost increased because lower provision in the conventional card and an increase in the spread of vehicles. The regulatory impact led to a temporary decrease in pay loans market and INSS, changing our portfolio mix. With the increased rates, where we're going to have our delinquency rates, we're going to go to our payroll loans to historical performance. Our delinquency rates due to higher vehicle shares on the portfolio mix and lower payroll loans origination is as expected. We continue with the conservative strategy in the credit origination, very much focused on guarantee products with a good credit. Our conventional portfolio dropped 13% in this quarter. We had relevant improvements in UX with our app.

Moving to Page 3 now. We closed the quarter with 26 million clients, more than half have credit exposure with us. Our portfolio, close to BRL 38.1 billion, with the small reduction explained by less origination of payroll loans. We have stable net income and a very challenging scenario. I turn it over to Inacio, who is going to give some further details on our numbers.

[Inácio Caminha, executive]

[Interpreted] Moving on to Slide 4, we have the evolution of our client base. We have a focus of growing this number. It reached 26 million clients with great focus on engagement and we've been following a moderate pace on purpose considering the current scenario.

On Slide 6, we have our engagement data. We see here overall stability, very much to the conservative attitude we have in terms of cards. And if we notice, well, in clients with PIX keys, we have a slight increase and we expect this to continue very much due to the improvements, the features we've been launching on our app. We've launched in this quarter, the best user experience on the market. I invite you to open an account and test it. Any client can simply copy a text message and then we identify, well, in terms of amount and key automatically and the client only confirms to proceed with the transaction. This is an example as to how we've been working the experience to make it increasingly more fluid within our applications and our platforms.

Speaking of origination on Slide 7, as Cadu mentioned, we had a second quarter impacted by the suspension of [ LOAS ]. It started in early March -- beginning of March. There was something -- a twitch to the ceiling and when things were open, conditions were different. We saw practically the whole market down, slowing down 30% in the second quarter regarding the first quarter. And so we have an important portfolio in our payroll loan, and we noticed these numbers are now -- general portfolio, we're going to recover it at the end of the message -- the month and as Cadu mentioned. And we'll keep on growing. Other products, we remain stable, originating [ BRL 1 billion ] a month in vehicles and approximately BRL 400 million in FGTS loans or workers' compensation fund. And this origination that was smaller combined with our assignment portfolio, we told that, BRL 38.1 billion, changing the mix. We see here clearly that vehicles grew to 49% of the portfolio; payroll and FGTS dropped 40% in the quarter; cards, BRL 2.7 billion, slowing down in the quarter and the year, showing very well how we have this conservative attitude.

And on Slide 9, we give sequence to that. We kept on expanding slightly the percentage of the portfolio with collateral, [ 92% ], adding vehicles and payroll and FGTS. And this change in the mix and behavior of vehicles pulled, naturally, the delinquency rates to -- from 8% to 9.3%. Where we see in the chart below the net, the NIM and ex assignments, after credit cost, literally checking what is the carryover, that addressed 9%. And we have another factor that is extremely important to the future of our operations, the percentage of renegotiated portfolio is very small. We have a posture that is very disciplined regarding collection. Therefore, the numbers depict the behavior of our customers.

Speaking of clients on Slide 10, we see 13.3 million clients with credit. We always mention that credit is the main tool for engagement and monetization. We are growing the base without diluting the percentage. And we have an offer that is very complete with -- in our app. And the idea is to work on the app and all the channels to bring those clients and engage them increasingly further.

Speaking on fee revenues, on Slide 11, we had a slight slowdown in the quarter. The great impact deriving from the marketplace very much linked to retail events that we've seen early this year. And on the part of cards, we've seen a change, a slight change in the mix, more use in debit, because of more restricted credit card. This shows more transactions as clients have been using the platform. And vehicles, obviously, with the strong origination, especially with motorcycles gaining more space -- and we had an increase in the others, totaling BRL 283 million in the quarter.

As for cards on Slide 12, we continue keeping this conservative attitude. 130 (sic) [ 132,000 ] cards were originated in the quarter. We have TPV stable, with BRL 1.8 billion (sic) [ BRL 3.8 billion ]. With the change in the mix, we had a decrease in revenue to BRL 59 million in the quarter.

In terms of insurance on Slide 13, we also observed the effects of origination and the vehicle mix, despite vehicles having been stable and we had greater stake of motorcycles. And since they have a smaller ticket than the light vehicles, the premiums naturally are reduced slightly. But we assume there should be a development to this total of other head, and we closed the quarter with 2.4 million customers with outstanding insurance policies.

Speaking of our marketplaces, we start on Slide 14. Speaking of Mosaico, we've seen a slight slowdown of GMV and some changes in the dynamics of prices with retailers after the January event, totaling BRL 670 million of GMV and 7.1% of take rate, with BRL 49 million in revenue. But I think it's interesting to notice that the greatest value we see coming from Mosaico is customer capture with higher income. And with that, we can offer more products of the bank specialty credit. So it is an extremely important pillar, to engage more customers with this really cool experience. We launched on the app the same experience we have on Mosaico of standalone. It will be in the bank's website. And we believe this will be an important movement to have customers using things and our bank increasingly more.

Speaking a bit about Mobiauto, we've been improving the experience constantly. There's been an improve in penetration. Indication of customers, how many customers go through Mobiauto and actually start with us. We've been using Mobiauto in a very interesting way to differentiate ourselves in the market because there is a better and more complete experience in the motorcycle segment. The general vehicle marketplace is focused much more on light vehicles than motorcycles and we gain more space and we increase our market share in motorcycles that keeps increasing. We exceeded 32%. It's an operation with great margins and we like the segment very much. We've been operating on it for many years and we see a reflect of this, vehicles that have been announced and are increasing, 270,000 (sic) [ 272,000] and revenue of Mobiauto, almost BRL 19 million in the quarter.

Speaking of our financial highlights on Slide 17, we had a longer evolution of the margin, financial margin. When we look to more recent data first, second quarter, we see a drop in margin as a whole. In terms of NIM after credit costs, we have the portfolios with different profiles that have been sold and they consequently added a bit less results than we were used to. But it's interesting to notice the blue line, the improvement we've had in terms of carryover, coming from 8.7% to 9%, showing a bit of repricing that we've been applying to vehicles.

On Slide 18. Again, we have financial margin, we see this reduction to 16.7%. On the general margin result of this assigned portfolio, excluding assignments, we have an improvement of 10 bps. When we look at net provision expenses, we had a retraction. And of course, the main reason is that we actually, as we have been saying since the beginning of the year, that we expected an improvement in the behavior of cards. We've been observing that month after month. And actually, the second quarter, we had less provisions than in the first one, or fewer provisions than the first. And speaking about other expenses, because of the smaller origination of payroll and smaller customer base increase, we had fewer expenses with originations, totaling BRL 400 million, within total BRL 995 million in expenses. We closed the quarter a stable an BRL 191 million result with 11.2% in ROE, adapting the -- well, ex goodwill was the cycle.

And to conclude our presentation, we have a slide on capital. We have a strong level or capital level and sustainable level for our growth strategy, closing at 15%. And we see overall that we had major advances in the user experience and also delivering a platform that is increasingly more complete of banking and consumption for our customers. And we have been focusing on product divestation in accounts, directionality with more customized services with the intent of [ earning ] the journey increasingly more fluid and intelligent.

With this, we close our presentation and we open up for questions.

[Operator]

[Interpreted] [Operator Instructions] Our first question is from Gustavo Schroden from Bradesco BBI.

[Gustavo Schroden, analyst]

[Interpreted] I'm going to ask 2 questions. The first is related to the credit portfolio. We've seen a drop that is sequential. Yearly growth seems to be a bit lower. And we see something in the payroll loan portfolio. We understand the regulatory issues in March. I'd like to understand the dynamics of commission, if you think that the fact that you lowered commissions to complete the cap that has been changed to payroll loans and FGTS, those would have any effect? Or does it have any competitive dynamics that's a bit different from before? Again, we understand the March regulatory issue, but it seems to me that -- well, I'd like to understand a bit more the drop in payroll loans. And the other question is regarding portfolio assignments. The bank continues to have high assignments. If we consider the level of portfolio origination this quarter, the result has not been so good. I'd like to understand the spread in the grants or assignments hasn't -- haven't been so good, if the bank will continue with this strategy of portfolio assignment. And like, I know it's always been done, if it will continue this percentage level vis-à-vis the origination of portfolio. To me, this is a high point. And in the quarter, it impacted NIM, the net interest margin, in the consolidated. I'd like to understand the 2 dynamics so that we can better analyze the bank.

[Carlos Pereira Guimaraes, executive]

[Interpreted] Thank you for your questions. Regarding the first question, when you see the payroll loan market as a whole, not only what was originated by the banking correspondent, but the non-banking correspondent branches, you see that the payroll market has dropped in the second quarter. So it hasn't been something necessarily related to a reduction of the ceiling. And also, a reduction to the commission that you pay to the banking corresponding market as a whole has dropped and quite a lot. And it's not necessarily -- it's a competitive market, as always. Several players have been here for many years, few new relevant players in this market for the time being. So it's been more a matter of the market as a whole being impacted by the ceiling and also impacted by the [ LOAS ], as we mentioned previously, but not necessarily linked only to the corresponding banking channel, and it dropped in a relevant way overall.

Second question, well, portfolio assignment, our profitability in this quarter was worse because we assigned a portfolio that is more with lower results, so to speak. This explains -- so that was longer term. So this explains the drop in these assignment results or granted. Obviously, this is a consequence of smaller origination. We believe the origination will be recovered for a few reasons. The main is that [ LOAS ] will be back on the 25th, everything has been approved. So this will be back, an important share of the payroll loans that we've had and the market had last year. So this is the first point.

The second point also, future interest rates have been dropping. We have a bit more margin in the payroll loans product and it benefits profitability and the growth of the product further ahead.

[Gustavo Schroden, analyst]

[Interpreted] Thank you, Carlos. Just pardon my ignorance, what do you mean by this [Foreign Language] in Portuguese portfolio?

[Carlos Pereira Guimaraes, executive]

[Interpreted] Well, it works as following. We have a portfolio 3 months after it's been originated. Assuming you have a time line of 84 months, you have 70 -- 81 months of interest to accrue, obviously, adding provisions of future commissions, doing everything properly. When you assign a portfolio with 12 months that have gone, the result of the assignment which is because you have fewer future interest on what you're assigning.

[Operator]

[Interpreted] Our next question is from Pedro Leduc, Itau BBA.

[Pedro Leduc, analyst]

[Interpreted] They are 2 very much related questions. Trying to better estimate the trajectory of ROE from now onwards. Starting with the pace of origination that has been mentioned here, I'd like to understand how the second quarter started very weakly and then improved as things settled in terms of change. And BRL 6.3 billion of total origination, that was still quite good. May have been the low in the year, payroll, [ LOAS ] is back, vehicle, et cetera. A second part also related, profitability of what you are originating now? In terms what -- in terms of the portfolio, I assume [ DI ], a lower curve, it's increasing the spread of your new origination. This may help you in a carryover of -- also, the assignment market is very competitive. I'd like to understand your positioning, if it makes sense for me to think about the low of the year in terms of originations. From now onwards, you will be able to absorb better spread in the new season or if you have to carry it over.

[Carlos Pereira Guimaraes, executive]

[Interpreted] Thank you for the questions, Leduc. Well, the first one, our origination in June was higher than the origination in April, okay? Especially in terms of payroll loans, actually, it has improved over the quarter and from September, fall, because of the return of [ LOAS ] at the very late August, we expect that origination will increase in the third quarter compared to the second quarter. For the fourth quarter, even more because we have a quarter filled with [ LOAS ]. So our expectation that we have for now. As to profitability in origination, actually, there are several effects that impact origination. I'm going to talk about payroll loans and vehicles. For payroll loans, we have approximately 30% of our origination now of pages -- payroll loans, that is we do see we do not depend on commission payments; and 70% we still do. Only for payroll loans, when future interest drops, so we increase the profitability. Obviously, we are in a competitive environment. It depends on what competitors do. And I believe profitability, putting everything in the bucket of payroll loans, it tends to increase slightly for the third and fourth quarters. That is my view, obviously, thinking about positive and negative things that we should have in profitability, future interest dropping, we increase profitability; competitive environment and increase in commission, profitability is less. So I believe that the origination of the payroll will have better profitability in the third quarter compared to the second quarter. This for our payroll loans.

For our FGTS, we have 65% B2C; 35% B2B. Well, the funding improves, we have to check on commission and competitive and especially in the B2B channel. And in terms of vehicles, it's a business with origination that is much more diversified. We have 15,000 sellers of vehicles. So we have no ceiling there. And then basically, obviously, we have competition, but we have more freedom in terms of pricing the product and actually, for you to be able to set up some kind of buffer for delinquency. That's what we've been doing at a time higher rate, obviously it may impact somehow, an increase in credit costs, but what matters to us more so is net margin, less cost of credit. And we've been managing that quite well even at times of increased delinquency that we saw last year and that we're living now.

[Operator]

[Interpreted] Our next question is from Olavo Arthuzo from UBS.

[Olavo Arthuzo Duarte, analyst]

[Interpreted] I have 2 questions on my side. The first is, I'd like to understand a bit more about the quality of the bank's portfolio. We've seen in the quarter delinquency increasing a lot, reaching 8% points, but I would like to know more on the younger things or seasons. So well, when you consider payroll loans, vehicles, how do you -- how are you dealing with product originated late last year, early this year? And considering assignments, you understand and see that the question is not so trivial. Could you share with us how much are you turning on this portfolio originated late last year and the first quarter, just to give us a notion, a better notion in terms of the bank's balance sheet?

[Carlos Pereira Guimaraes, executive]

[Interpreted] Thank you for the question, Olavo. With regards to the quality of the portfolio, especially of the younger products from late last year to this year, the loss expected of the portfolio loss -- I'm not talking about delinquency indicator. The expected loss started the year flat compared to what we had last year, it was a higher level. We priced that. So -- and now in the past 2, 3 months, we've seen a drop in the expected loss when compared to late last year and the first quarter. So it is a loss until the first quarter, similar to last year. Loss is not a delinquency indicator. And from April, a reduction in the loss.

When you ask about NPL of the recent products, it's not a very good indicator. Since it's very young, the delinquency indicator doesn't mean much. It's not a good indicator for us to talk about. What we look very much here is the expected loss that we have further ahead in pricing. And obviously, when we check loss in pricing that we call exempt, over time, we see the exposed loss, whether it's increasing or reducing, considering what we priced in the beginning. So products up to March, loss that was more or less similar to what we had last year. April onwards, a smaller loss than we had last year because we tightened credit NPL of 90 of recent products, the one we generated. Now NPL is 0, so it's very young. They're very young products to get the NPL that is 90.

[Olavo Arthuzo Duarte, analyst]

[Interpreted] Okay. Very good. With everything that you've mentioned, of the improvement that you see in the losses, the index that you have, as coverage, you -- it leads us to think that the bank will continue to -- will actually go back to running a bit higher, higher in what sense, in terms of the coverage level. Yes, the coverage of the bank. We've seen it drop this quarter. It makes sense that we should think that it should increase from now on. Does it make sense?

[Carlos Pereira Guimaraes, executive]

[Interpreted] Yes. Second semester, we believe this will increase, the coverage will increase.

[Olavo Arthuzo Duarte, analyst]

[Interpreted] Perfect. If you'll allow me to ask a second question on a second topic. I'd like to understand the investment expenses. On investments, if the bank has been making, regarding the focusing on digital, considering the landscape that we see in the banking industry, that has helped in the cost, produced there with the increase of ROE. I'd like to have an update from you on this topic. If you could share with us the strategy of spending and investments in digital. If you could give us a flavor, Cadu, how much are you expecting to spend this year comparing to last year? Just for us to understand whether it went up, it's flat, it's dropping. We don't need many numbers, just to have a sort of a general view on that, that will be great.

[Carlos Pereira Guimaraes, executive]

[Interpreted] Okay. Great. Great question. Actually, as Inacio said during the presentation, in first quarter, we had a good catch-up in terms of our app compared to the market. To say we are much better than we were 6 months ago. And the second semester, we also will have great developments. The message is for next year, we should have great efficiency in terms of cost, not only regarding investments made in banking, but also in the bank as a whole. We have a major efficiency gain in banking, but we had a lot of investment. And now it's very much the run the bank and change the bank. So we have the major savings in terms of cost/investments that we can make as of next year. The second semester, we further evolve the bank and from next year onwards, we can optimize this cost line in a major format.

[Operator]

[Interpreted] Our next question is from Jorge Kuri from Morgan Stanley and it will be asked in English.

[Jorge Kuri, analyst]

Congrats on the numbers. Quick question on your effective tax rate. Is there any guidance that you have for the rest of the year and next year? There's been this really big change from the 30s to now the teens. And just wondering what the next 18 months should look like.

[Unknown Executive]

Jorge, thank you for your question. We expect that the tax, this level, will keep at around the 20% from now on. So this is our best expectation for the future.

[Operator]

[Interpreted] Our next question is from Pedro Leduc, Itau BBA.

[Pedro Leduc, analyst]

[Interpreted] So it's less related to the results themselves, but more regarding this part in the release that is about repositioning the strategy of one bank. Could you elaborate on that for the second half, next year, what are you aiming at in the mid, long term and whether we should add some more of SG&A here?

[Carlos Pereira Guimaraes, executive]

[Interpreted] Actually, what have we been building over the past years? We have several channels, several products, different companies, Mosaico, Mobiauto, that we need now to integrate, integrate different channels, different products. Diversification is a word that we like a lot. This is what we have set up. And from now on, what we seek is integration of that. But I do not see that, an increase, with an increase in cost for the bank as a whole. I think there's a good optimization for us to carry out of next year. Obviously, we also want to have a greater cost optimization. We have a major pathway to take. So we are excited about what we have to do in terms of cost and integration of channels, products and services. Because when you buy part of companies, of different companies and different cultures, and there is a time for us to optimize and manage. And ultimately, we want to centralize all the experience of our customers in a single app, an app that not necessarily requires a checking account.

Vehicle loans, we're going to have an app for customers for vehicle loans. If they want to have an account, we can add it. If not, they can have an app for vehicle loans. So we believe that an app is an important medium for us to communicate with customers regardless whether it's checking account, payroll loans, vehicles, all this integration. And obviously, to have the bank a bit more aspirational in terms of features. We are now bringing to the customers savings in terms of time and savings in financial terms. This is the mindset we want to make clearer and implement from now. Always, the customer has to see in the bank an advantage in terms of time or a financial advantage and how are we going to do that? With all the channels and services, channels, products and services that we have been building over time, without having it impacting cost growth. But on the contrary, we believe this will represent major gain for next year.

[Operator]

[Interpreted] Our next question will be via web. [ Anna Sousa ], Santander. I'd like to understand a bit more about the future outlook for Pan. With the macroeconomic scenario improvement, what are the expectations for profitability in 2024?

[Carlos Pereira Guimaraes, executive]

[Interpreted] Thank you for the question, [ Anna ]. We provide no number guidance for next year's results. But actually, the macroeconomic scenario is improving. We have inflation under control, drop in interest rates, not only of [ select ] future interest rates. This status helps, many times indebtedness of people does not follow the same speed as those macroeconomic indicators. No doubt, I believe next year, macroeconomic terms will be better than this year. We believe in that. Obviously, the speed of deleveraging that we see today in customers, people in Brazil in general, may be a bit slower, but we see an improvement for next year. And we do expect that next year, the bank will have a result that is significantly better than this year because of the macroeconomic scenario and the whole credit history and delinquency that is being digested over the past 2 years.

[Operator]

[Interpreted] Our next question is from Gustavo Schroden from Bradesco BBI.

[Gustavo Schroden, analyst]

[Interpreted] So a bit more in line with the previous one. If we think about 8, 9 quarters that the bank in terms of bottom line, is BRL 190 million, BRL 195 million in terms of profit or income, it has been in this level of profitability of 11%, 12%. My question is more on this line. Well, interest starting to drop, can we envisage a level, a higher level of profitability? And when will we get? Now I understand there's no guidance, but the discussion was more on -- less on those terms -- when can we start thinking about an expansion in terms of results and ROE? I was quite surprised to see a worsening in terms of delinquency this quarter. I think it was -- had been close to the peak. That was the discussion I wanted to have, but it was addressed in the past question, if you feel there's anything to be added, Cadu?

[Carlos Pereira Guimaraes, executive]

[Interpreted] Yes, we can add. What do we expect for next year, an improvement in probability in the bank, basically coming from 3 pillars, I'd say. One is reducing delinquency, explained by everything I've mentioned previously, digesting macroeconomic moment that is more difficult; two, cost efficiency that we intend to implement for next year; and three, recent products and services originated with better profitability based on interest rate drops and expected smaller losses. These are the 3 pillars that we expect to impact next year's results and increase the level of results that we've been having in the past quarter. It's very much explained by a situation that is more complex in macroeconomic terms.

[Operator]

[Interpreted] [Operator Instructions] Since there are no further questions, I would like to hand over to Mr. Carlos Eduardo Guimaraes for his closing remarks.

[Carlos Pereira Guimaraes, executive]

[Interpreted] Thank you for yet another participation in our earnings release conference call. As we mentioned in our chat, we do expect to have an improvement next year. And we're working hard towards that. And we will continue talking, not only on our conference calls. We are interested in going deeper into the numbers we presented. We're going to do that over the next few days. Inacio [ and our staff ], they will be here available to clarify any further doubts and questions you may have regarding the figures and numbers of the bank.

[Operator]

[Interpreted] The Banco Pan conference call is now closed. We thank you all for your participation and wish you all a very good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]