Banco Pan SA

BOVESPA:BPAN4

Earnings Call Analysis

Banco Pan's Q2 2024 Financial Performance Bolstered by Strong Credit Growth

In Q2 2024, Banco Pan showcased robust credit growth with a 29% year-over-year increase, reaching BRL 49.2 billion in total credit. The bank attained a net income of BRL 211 million, yielding an ROE of 11.7%. Despite a conservative approach, credit card portfolios grew by 7%, driven by higher client engagement. Meanwhile, transaction volumes surged by 37% annually, hitting BRL 30 billion. Key highlights include significant market share in vehicle and motorcycle financing and strategic expansions in public payroll loans. Delinquency rates were stable, with over 90% at 6.9%, reflecting improved credit quality.

Customer Growth and Credit Engagement

Banco Pan ended the quarter with a notable milestone of 30.1 million active clients. More than half of these clients are now engaged with credit products, showing a solid upward trend from previous quarters. Specifically, credit exposure reached BRL 49.2 billion, marking a 29% increase year over year and a 7% increase sequentially. This growth highlights the bank's strategy of deepening customer relationships, as evidenced by an average of 2.0 products per client.

Revenue and Profitability Trends

The financial performance this quarter was robust, with net income amounting to BRL 211 million. This translates to a return on equity (ROE) of 11.7%. Furthermore, net revenue showed promising momentum with a transaction volume of BRL 30 billion, achieving a 37% increase compared to last year. The financial margin improved to 18.4%, and the bank anticipates continued revenue growth driven by increasing credit offers and client engagement.

Credit Portfolio Composition and Performance

The credit portfolio saw a 7% growth this quarter, primarily driven by strong origination. Personal loans generated BRL 300 million during this period, and the outlook is optimistic for continued increases in demand. In particular, vehicle loans reached BRL 26.5 million, highlighted by a significant 40% growth over the past year. Payroll and FGTS-related loans also showed a 25% growth, contributing to an overall healthy credit growth trajectory.

Risk Management and Provisioning

The bank's delinquency rate was stable at 6.9%, indicating effective risk management despite an increase in net provision expenses of BRL 210 million. This slight increase reflects Banco Pan's conservative approach to provisioning, particularly in anticipating future lawsuit expenses which could be lower moving forward. Overall, the management believes that they have adapted their models to maintain healthy provisioning levels while still supporting growth.

Strategic Initiatives and Future Outlook

Looking ahead, Banco Pan plans to capitalize on its strengths in credit cards and personal loans, which together currently represent about 5% of the portfolio. Management aims to increase this to 10-15% over time by refining product offerings and enhancing the engagement model to capture more business from existing clients. They foresee a proactive approach to product growth, especially with new offerings anticipated in September.

Synergies with BTG and Market Position

As part of the BTG conglomerate, Banco Pan draws advantages from enhanced funding opportunities and integrated operational strategies. This partnership is expected to fortify Banco Pan’s capital base and expand its growth potential. The bank is well-positioned in competitive segments, such as motorcycles (holding over 30% market share) and a strategy to penetrate the vehicle financing market further.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Ladies and gentlemen, welcome to Banco Pan's conference call to discuss results regarding the second quarter of 2024. The conference is being broadcast in Portuguese with simultaneous translation into English. To choose your preferred language, click on the interpretation option in the app menu. The audio and slides of this conference call are being broadcast over the Internet via Zoom, which can be accessed on the company's IR website, www.bancopan.br/ri. The presentation will also be available for download after the call is ended. [Operator Instructions]

We would like to inform that forward-looking statements are subject to risks and uncertainties, which may prevent such expectations from materializing various different from what is expected. These forward-looking statements reflect opinions only as of the date they are made, and the company does not undertake to update them. Present with us are Carlos Eduardo Guimaraes, President of Banco Pan and Mr. Inácio Caminha, Head of Investor Relations and Funding.

I would now like to turn the call over to Mr. Carlos Eduardo Guimaraes, who will start the presentation. Cadu, you may proceed.

[Carlos Pereira Guimaraes, executive]

Good morning, everyone. Welcome to another earnings conference call of Banco Pan. We're going to start on Slide 2. We have a strong credit origination this quarter. We have a conservative approach of risks with collateralized products and good spreads. Indicators of delinquency ratios improved as a result of better origination products. It's important to mention that a number of credit cards that were issued but dropped in relation to the previous period, but the portfolio grew by 7%. We expect major growth in this product and also in personal loan in this period with a higher engagement with our clients.

Now moving on to Page 3. We ended the quarter with 30.1 million clients and more than half of those clients are exposed to credit. Our credit ended at BRL 49.2 billion, 29% higher than that of the second quarter of 2023 and 7% higher than the previous quarter. We reached BRL 211 million in net income with an ROE of 11.7% for the year.

I'd like turn the call over to Inácio, who will provide more details about our figures.

[Inácio Caminha, executive]

Okay. Continuing on Slide 5. We see again the number of 30.1 million clients, continuing the activation and cross sell and 2.0 products per client, active clients, and we see the big skis and the transaction volume that amounted to BRL 30 billion, growing 37% in 12 months. And this move shows how we want to grow in the relationship and the engagement with the clients and gaining more primarily and growing the products and the results with profitability.

On Slide 6, we see the numbers, strong numbers, strong figures in different products. BRL 9.7 billion was the total. We reached this quarter in vehicles, we reached BRL 4.6 billion and motorcycles, we increased the market share. In payroll loans and credit, we maintained a good pace, especially because there is a stronger seasonality in the first quarter, traditionally. And we have been able to diversify with more public agreements and then leave some of the burden of the INSS. And generally speaking, we have been able to expand the B2C origination. Portfolio acquisition is a strategy that we adopt at the bank. It was a bit lower this quarter because of the interest market dynamics. And as for personnel loan, we made BRL 300 million, but we expect this to increase.

Talking about the portfolio, we can see the composition on Slide 7. We had 7% growth this quarter. And this is driven by the origination that has been growing strong, but also the assignment of portfolio that has been reduced every quarter and BRL 2.1 billion was what we reached this quarter. But when we compare these numbers with what we did in the same period of last year, we reached 40% lower. So there is a downward trend, which is quite significant. Out of the BRL 49.2 million, vehicles, and that would account for BRL 26.5 million. So that is a 40% growth for the year.

Payroll when we add to FGTS, we see a 25% growth in the period of 12 months. And we have the clean products whose evolution have been stronger in the quarter. As Cadu mentioned, we expect this number to increase so that we can have more profitability and a broader margin for the bank.

Now talking about the delinquency rate. We can see that the mix of the portfolio was stable comparing the quarters and over 90% was also stable at 6.9%. 15% to 90% index had a reduction, which was quite significant, which is expected for this period. And we see the products individually, we can see that they are performing well. And this also helps the results that we have been presenting at the bank.

Now talking about credit, clients with credit on Slide 9. This is a very important topic. And it's related, very aligned with engagement and the cards are very relevant for that. So we have clients which have the exposure, and we maintain this percentage as we grow. In addition to increasing the number of clients with credit, we have also been able to work the share of wallet. And focusing on the clients with whom we already have a relationship.

So we have this being monitored at the bank, and this is how we have been getting closer to the clients. And talking about fee revenue on Slide 10. They maintained stability amounting to nearly BRL 400 million in this period, this quarter with focus on cards. As we can see on Slide 11, we see that the number of cards issued was a bit lower in comparison to the previous period, but there is expectation of growth in order to broaden the space. And this is very aligned with the build your credit strategy, and we monitor and we follow the lives and the use of the credit of the clients and provide more limits.

And we have been working on fees with more interchange and also with the annual fees that we have been offering more benefits and charging fees for the use of those cards. As for insurance, so the premiums amounted to BRL 254 million, and we have the total number of clients with the agreement, and this is very important in order to have a cross-sell, especially when we talk about vehicles, but we also expand to the use of cards and also the insurance, insurance with PIX. So for sure, this is going to complement our sources of income.

Now talking about our financial highlights, financial results. On Slide 14, we can see the evolution of the financial margin amounting to 18.4%. And I am, if we exclude the results with the assignments, we also can see an evolution reaching 16.4%, and if we also include the credit cost, we continue seeing a growth of 9.6% which is very consistent with the evolution that we have been seeing in the bank, important evolutions that we have seen along the time, building ever more profitable portfolio. And we'd like to highlight some compositions of our results. We see the breakdowns of the margin. It amounted to BRL 2.3 billion of this quarter. And only with excluding the results that we got from the assignment. So we can see a very important growth and it's a growth that was more accelerated than the credit portfolio.

When we saw the net provision expenses, they were marginally higher, practically stable if we consider quarter-on-quarter. And we consider this cost of credit, which is flat from 1 quarter to the other, and the nominal growth follows the growth of the portfolio. Expenses as a whole are very well controlled, amounting to BRL 1.1 billion for this quarter. And when we look at profitability, we reached the result of BRL 211 million in net income. The layer was better for this period. And the net result dropped a little in this quarter, but the ROI of 11.7%.

It's in line with the update governance and also with the improvement of our processes. So we refined our model of provisions for lawsuits and that resulted in additional expense of about 210 million if we can see that net of charge back. And for the future, we expect to have recurring expenses with lawsuits higher than the previous quarters. However, for sure, much lower than what we posted the second quarter of 2024.

And lastly, on Slide 16, we have a reference of capital -- pro forma capital, considering that we are part of the BTG conglomerate. Our individual closed at 14.4%, BRL 8.2 billion of net equity. And with enough resources to continue our growth strategy, which is very relevant.

And we end the presentation here when we would like to open the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Pedro Leduc.

[Pedro Leduc, analyst]

First, what led to the increase of the provision in the quarter and what we can expect for the quarters ahead. Was there a product which was originated, any information is welcomed. And in relation to provision expense, I understand there has been progress. But how do you expect this to perform in the next quarters? How do you see the quality of order of credit, especially for vehicles, which is the item that has been growing stronger.

[Carlos Pereira Guimaraes, executive]

Leduc, in relation to the provision expense and its magnitude. We update our models from time to time and we include the contingency model. So this quarter, we had basically 3 major pillars. First, we divide the actions as a strategic and mass action. For strategic actions, which are the ones that have higher average ticket, we updated legal analysis on those actions, and we reinforced this provision of those strategic actions, okay? So this was the first point.

The second point was the following. The number of lawsuits -- civil lawsuits that we receive per month, and now I'm talking about in mass terms has been increasing. And there's also the percentage of success that has been reduced a bit. So if we add those 2 moves to the update of the strategic actions, we adjusted our provisions in the balance for this quarter at BRL 210 million net of charge-backs and that what we expect down the road. As Inácio mentioned, we have a much lower level than what we had in this quarter. However, higher -- a bit higher than what we posted in the previous quarters.

And another important point for us to mention and this would account for 80% of the civil lawsuits that comes from the loans -- from the payroll loans and the cards. So we consider -- as we do the pricing, we consider this in the business, and we understand that the margin is very interesting for the product less than what we had last year, but better than what we see in vehicles, but still a very interesting margin for us to continue working with this product.

So our appetite for growth or vision of business and expectation of results, not only considering the payroll loan product, but for the bank as a whole, it will not be changed. So it was a one-off movement in a way, when we updated our model, we updated how we see the strategic lawsuits. And for the future, we're going to have a much lower number than what we saw this quarter.

In relation to your second question, when you talk about provision expense and the future, we believe that there will be a reduction. When we look down the road, there will be a slight reduction of the indicators of the line rates and provision expenses in the future. Of course, we also have to consider a larger portfolio. So we have to consider the size of the portfolio. But our vision for the future is that we are going to have a reduction in those items. But there's something to mention, card and personal loan is related to a very small portfolio. We are far from the optimum level, both for engagement and also activation.

So we see a scenario that we are going to have the levels maintained or reduced, but we want to increase our card portfolio and also for personal loan whose delinquency rate and also provision expense is higher, but margin is also higher. So this is how we see those items for the future. And I would like to remind you that card is a very strong source of engagement and also for personal credit. And after long studies, we feel very comfortable to accelerate, especially our credit models. And also considering our monetization model for those 2 products.

[Pedro Leduc, analyst]

That's very clear, very detailed. Congratulations as always.

[Operator]

Our next question comes from Gustavo Schroden.

[Gustavo Schroden, analyst]

First, I would like to have a follow-up on the provision expenses and also the civil lawsuits that you mentioned. Cadu said, part of it is related to the payroll loan. And I don't know if I understood well, but you said that this has been priced. But I understand that if it's priced already, I mean, if we didn't have an increase in those provisions, we would consider in a different way, considering that everything is under control, like the OpEx and the NIM and everything else.

So we would expect those to have increased considering the history results. When you say it's already priced, especially when we are talking about payroll loans, shouldn't this increase be mitigated, I would like to understand this relationship when you say that it has been priced, but there has been an increase. So why wouldn't have this effect this quarter.

My second question is related to the mix. We saw the numbers. We saw the figures. It seems that you had a reacceleration in credit cards. Could you tell us about the rationale behind it. I heard that you said that you would like to have a more conservative portfolio when we saw an acceleration in credit card. So can you explain the strategy. And then you have PIX now and pay later. Could you also talk about this dynamics.

[Carlos Pereira Guimaraes, executive]

Thank you for the questions, Gustavo. First, in relation to the provisions. When I say that the provisions have been priced, I mean what we have been originating as of now. So considering the expected profitability, we consider the number of products that we are producing now. and considering also the lawsuits. And considering the higher level of what's been coming in and the successful. We have already been priced in our payroll loan and the cards and even with the new pricing, considering what we are producing today, we still have a profitable product less than the past, but still our product is very profitable.

In relation to the mix, we have about 5% in credit card and personal loan. And we believe that the ideal level is something around 10% or 15% for the future. And this is what we are going to be working on. When I say that we want to grow in cards and also in personal loan, there is a mix of profitability when the portfolio with interest is something very important. So we are going to grow those 2 portfolios in parallel, and we are going to see the number of interest rates that we are going to have inside those 2 products.

So it's based on this that we feel comfortable. In addition to the new credit models that we are having and this is how we intend to grow our clean product. Even with this product, we are going to have 90% of our portfolio collateralized, especially with vehicles, we are going to continue growing much more than we are today. It's a very nice product, profitable product, and we have been working on this product. We have already had this product for different cycles, and we want to continue growing. The payroll loan has a margin which is more tighter. And we have the strategy with the card and the personal loan that we are going to implement as of September.

When I say card and personal loan, I mean this and the derivatives, the PIX that is paid using the card. When you pay the card installments, the personal loan -- it's all part of the personal loan family. And this family together with the rational card will allow us to grow as of September.

[Gustavo Schroden, analyst]

Cadu, that's very clear. In relation to credit. I understand the assignment or the result of the assignment has been decreasing. Could you say something about it?

[Carlos Pereira Guimaraes, executive]

Nothing different has happened. As we have been mentioning for a while, we expect an important reduction in assignment when we compare it to the results of last year. And this is how we have -- how we see everything. There is nothing to comment about the number of assignments in the second quarter.

[Operator]

Our next question comes from Olavo Arthuzo.

[Olavo Arthuzo Duarte, analyst]

I would like to approach OpEx. We noticed that we had a growth in this quarter. Strong growth, I would say, in the comparison -- in the annual comparison for personnel and the bank. And you also mentioned the important fact about the headcount, which is port for the quarter. I would like to understand 2 things: If the increase in headcount driver was to reinforce the sales area? Or was it allocated to the IT area.

My second question is that in the previous earnings conference call, Cadu, I think you mentioned a flat OpEx expectation for this year. I would like to confirm that. Would you reiterated this expectation. And if so, would we see a reduction in the personnel line? Or would the efforts be more concentrated in expenses?

[Carlos Pereira Guimaraes, executive]

Thank you for the question, Olavo. First, in relation to the headcount when we compare it to the first quarter, I can see there was an increase of 50 headcount, a very small growth and there was a decrease when compared to the second quarter of last year. So in macro terms, it continues the same. We are going to remain flat in terms of personnel expenses when we compare it to the same period of last year. And we do not have major expenses related to investments for this year.

Of course, opportunities may come up. But the way we see it at the moment is that expenses are under control and the bank is gaining in efficiency because the size of our portfolio is increasing quite a lot, as Inácio said, 30% when compared to last year and 7% compared to last quarter. So we expect that we are going to grow in large strides with the credit card and with flat expenses.

[Olavo Arthuzo Duarte, analyst]

Okay. Would you allow me to ask a second question? On Page 14 of your release when we talk about credit origination, we saw that there was a retraction in vehicles for the quarter and also maintenance for motorcycles. Do you think that this dynamics is a normalization in association with vehicles? Would you consider this to be a normalization or do you think there is a player increasing the competition in the market and that would impact this decrease in the origination when compared with previous quarter.

[Carlos Pereira Guimaraes, executive]

In relation to vehicles market, it's a very competitive market, and it has been like this for a while. So obviously, we have credit. We have circles of credit in some circles considering different players. Sometimes there is more or less acceleration, but we are very well positioned in this segment. As for motorcycle use and new motorcycles, we hold more than 30% of the market share. We are the largest players way ahead of the second place, and we know how to work with the motorcycles, and we intend to grow with this market.

Of course, after reaching 30% of market share, it becomes more difficult to grow. We have 9% of market share for vehicles and we intend to increase in the next months. We may even untracked commercial part or we can also develop new models, and this is what we have been studying at the bank. When we look ahead, we see the potential of growth in light vehicles and also growth in motorcycles. We don't see different competitors in the segment. And they also have their movements for accelerating and deaccelerating their processes. And this is something that happens along the time. But we are very enthusiastic about this business.

[Operator]

Our next question comes from Brian Flores.

[Brian Flores, analyst]

Perfect. I would like to ask a question, maybe a follow-up on the growth, if I may. We have seen a very favorable growth, as you mentioned, but the basal ratio is dropping a little. It's already at 14%. I understand because you're building capital to growth. When are you going to strike a balance between capital and growth and Cadu, if you have an update on the size of the portfolio that you consider to be optimum for this year and maybe for next year. And then I'll ask a second question.

[Carlos Pereira Guimaraes, executive]

Okay. Thank you for the question, Brian. What we have shown in terms of basal ratio in Inácio's presentation is a pro forma basal ratio. So the regulatory one is that of BTG that was at 16.5%. The group BTG has a lot of capital to continue growing and ever more Pan is integrated to BTG. So this pro forma basal ratio of 14.5% is not a concern to us. What is valid is to look at a basal ratio of the group. And we are concerned of delivering a very important growth for the company in the next quarters, and this wouldn't be a restriction for us.

[Brian Flores, analyst]

Okay. Perfect. And in relation to the size of the portfolio to believe that it's going to remain at 55% or a bit higher?

[Carlos Pereira Guimaraes, executive]

Since we are a bank that do not provide guidance, I would say that we are going to continue growing. But I'd rather not to estimate numbers otherwise my -- our lawyer will not be happy. She will reprimand us.

[Brian Flores, analyst]

And I would like to have a follow-up on the credit card. Could you provide some information of how much of this portfolio would generate interest to you?

[Carlos Pereira Guimaraes, executive]

Yes, sure. At present, approximately 15% However, we have some strategies in order to increase the portfolio with interest rates with the card. So one of the strategies is to have more penetration of interest considering this combo. They are very important products in order to increase the engagement with our clients.

[Operator]

Our next question comes from Antonio [indiscernible].

[Unknown Analyst]

Congratulations on the results. I have 2 questions on my side. The first 1 you have already mentioned about competition. Could you also talk about competition in the payroll loan. And the second question is relation to the capital. I would like to understand the synergy with BTG. What do you see as opportunity in terms of costs, regulatory-related costs or operational costs, when you look at the relationship you have with the BTG.

[Carlos Pereira Guimaraes, executive]

First, in relation to competition of payroll loans. And just like what we mentioned about vehicles competition, it's very fierce competition. We've known the product for a while, and we can have a good performance even within this competitive environment. I believe that recently, as we have been discussing with different banks, including the Central Bank, there are some non-ideal practices that are implemented by some of the institutions, especially the new institutions. And we have been trying to combat those actions. So it's a very competitive product. It's very important for us. And we have some practices out of the regulatory levels, and we are trying to fight against.

In relation to BTG synergy, there are many opportunities. There is opportunities of integrating teams. There's the opportunities of exchanging ideas, knowledge, sharing knowledge. And this is something that we've been doing a lot. And there's also an opportunity of funding. And BTG has been providing more growing volumes of funding more than Pan would be able to get from the market. So we see very important opportunities and also the opportunity to use the capital in the bank and the capital offered can be used by our bank and BTG provides us with the strength to continue grow in terms of funding we are also allowed to grow in terms of capital and also providing the knowledge so that we can ever -- can be ever better.

[Unknown Analyst]

Very clear. Just a follow-up, if I may ask for OpEx. I understand what you said about the capital ideas and funding. But when we look at operating costs, is there anything else? Or do you think that everything that is important has already been mentioned.

[Carlos Pereira Guimaraes, executive]

Yes, we have already discussed many issues, but we still believe there are items that can also be developed. So it's a discussion that we have nearly on every week in order to capture synergies, quality synergies. And we have been discussing this quite a lot. Part of the synergy has already been acquired, but we still believe there is some room to improve in the future.

[Operator]

[Operator Instructions] Our next question comes from Pedro Leduc.

[Pedro Leduc, analyst]

It's more related to a discussion that we have been talking about the payroll loan that has the fund in FGTS. And we understand that Pan operates using those products. So could you tell us how you're getting prepared to see this project in the future in terms of timing, funding, et cetera.

[Carlos Pereira Guimaraes, executive]

Leduc, I believe that we cannot control the timing, of course. But I would say that in the beginning of the fourth quarter is something that can happen. We think there is a great potential. So these are areas that can grow a lot, the public payroll loan. And in the past, it used to be a tailor-made product, which was not very scalable. But when we standardize the system as we did with the public payroll loans, so this is a product that is good for everyone, for the clients, for the economy that is going to have positive aspects in terms of credit. It's good for everyone.

So we are very enthusiastic. We are knowledgeable about the systems that are going to be used in the product and the product is a combination of what is already used in INSS, FGTS and then it was also used in the Auxílio Brasil. These are products that we know a lot about. So we say that we are very knowledgeable of all those fields, and we are helping develop this product, and we have a lot of expectations about this project.

[Operator]

If there are no further questions, I would like to turn the floor over to Mr. Guimaraes for his final remarks.

[Carlos Pereira Guimaraes, executive]

Thank you very much for attending our call in the discussion of another result of our Banco Pan, and I hope to see you next quarter. Have a good afternoon.

[Operator]

Banco Pan's conference call is now closed. We would like to thank you for your participation, and have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]