Banco Pan SA

BOVESPA:BPAN4

Earnings Call Analysis

Moderate Credit Card Rebound and Strategic Growth in Lending

In the recent earnings call, the company emphasized a moderate recovery in the credit card segment after a significant reduction over the previous two years. Renewed efforts are centered on its current account and credit card apps, considered unparalleled in the market. They are integral to a strategy that bridges various products and channels, attracting customers with financial and time savings, now identified as the most scalable sales tool. Portfolio growth is anticipated to arise from two primary drivers: an increase in vehicle and payroll loan originations, and a maintenance of the existing portfolio mix, with vehicles comprising 50% of the portfolio. B2B origination currently commands higher commissions, which are expected to decrease owing to tighter margins, potentially reducing commission expenses compared to the previous year.

Banco Pan's Credit Portfolio and Growth Highlights

Banco Pan delivered notable results, showcasing strong origination levels driven by a resumption of payroll volume and a conservative credit origination strategy focused on well-collateralized products with good spreads. The bank reported a substantial reduction in delinquency rate by 18%, attributed mainly to the recent origination performance. This quarter also revealed significant progress in enhancing customer experiences and positioning the brand. The credit portfolio rounded up to BRL 39.2 billion, marking robust year-over-year growth. Net income rose modestly by 4% to BRL 198 million, and return on equity (ROE) remained stable at 11.5%.

Financial Performance and Strategic Capital Ratio

Banco Pan's pre-credit cost margin expanded to 18.3%, reflecting a positive impact from the bank's portfolio optimizations and leading to BRL 1.9 billion in revenue. Despite an anticipated rise in expenses, primarily driven by origination costs and commission-related B2B activities, the bank maintained solid profitability, ending the quarter again with BRL 198 million in net income and an annualized ROE of 11.5%. The bank also reported a strong capital position with a Basel Common Equity Tier 1 (CET1) ratio of 15.8%, providing a firm foundation for Banco Pan's growth strategies.

Outlook and Predictions for Future Growth

Looking ahead, Banco Pan plans to scale its origination, especially within the B2C realm, contributing to substantial growth in the credit portfolio akin to current levels. The bank anticipates slight upticks in delinquency levels but expects to counterbalance this with conservative credit practices and ongoing improvements in credit modeling. The institution is also set to benefit from raised margins on newer credit products due to recent enhancements. Focused efforts on client engagement and transactionality will continue, backed by an integrated approach across products and channels that emphasize brand positioning. The objective is to widen the bank's international scope for more robust global presence.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Banco Pan's conference call to discuss the results for the third quarter 2023. The audio and slides of this conference are being broadcast simultaneously over the Internet on the company's IR website, ri.bancopan.com.br. And on the webcast platform. The presentation is also available for download. [Operator Instructions]

Please be advised that forecasts of future events are subject to risks and uncertainties that may cause such expectations not to be realized or 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 Carlos Eduardo Guimaraes, the CEO of Banco Pan and Mr. Inácio Caminha, Head of Reporting Investor relations and funding.

I would now like to turn the floor to Mr. Carlos Eduardo, who will begin the presentation. You may proceed, sir.

[Carlos Pereira Guimaraes, executive]

A good morning to all of you, and welcome to another results presentation of Banco Pan. We begin with Slide 2, we had strong origination levels with a resumption of our payroll volume. Now we continue to have a conservative strategy in credit origination focusing on products with a good spread and collateralized. We had a drop of 18% in delinquency rate, especially because of the most recent origination harvest, we also had significant evolution in customer experience and brand repositioning.

We go on to Slide #3. We ended the quarter with 26.9 million clients, more than half have credit exposure with us. Our credit portfolio closed to BRL 39.2 billion with an significant annual growth compared to the previous quarter. We reached BRL 198 million in net income, 4% higher than in the previous period. And our return on equity closed at 11.5%.

I give the floor to Ignacio, who will offer you greater details on our bank.

[Inácio Caminha, executive]

Well, let's continue on in Slide #5. Here, we have the clients. We have 27 million clients. And we continue to expand this base, of course, ensuring that our products will grow significantly. We have a new brand conditioning and an evolution in our products and panels and all of this is operating ever better, which enables us to make the most of the customer base [indiscernible].

On Slide #6, we have some information on [indiscernible] which is very important. We would like to remind you that we are somewhat impacted because of our conservative stance in the credit portfolio that began in the fourth quarter of 2021. And this is an important product to generate engagement with the clients with a better scenario, we will see an expansion of these indicators. In PIX, for example, we have a significant difference, and we see an expansion of clients who are users of PIX keys. Although it seems to be flat, there is a reduced component of credit card, and of course, we have transactions and debit cards and current accounts, which means that we have already perceived an increase in engagement because of the several initiatives that we have, and we have 2.1 products per active client.

Now to speak a bit about [indiscernible] on Slide #7. This was a very strong quarter. We had a growth in vehicle. Since we began with origination, the expectation is that this will advance. And this has been driven significantly by motor cycles. We have 3% share in new motor cycles. We returned to the volumes of the release of LOAS, which began on September.

Important to highlight our very strong presence in this market. And at this moment of change, we were the bank with the highest share of loyal in this resumption with importance in the market. We want to [indiscernible] and in terms of audits, we continue to be somewhat small, but we would like to grow. And we believe that this will be supported by the evolution that we have done with our credit lines. In the quarter, we totaled BRL 7.5 billion of credit in this [indiscernible] in vehicles, in payroll loan and BRL 100 million in personal loans talk about our portfolio.

In the next slide, we had a 3% growth in the quarter, totaling BRL 39.2 billion. Of course, the strongest origination in the quarter contributed to this. We had a somewhat lower volume in the portfolio of BRL 2.7 billion. And of the BRL 39 billion portfolio, we have BRL 20 million in vehicle with 26% growth in the year, payable loan and FGTS, BRL 16 million with a growth of 4% in the year, credit cards to BRL 0.2 billion. This is a very important resource, 41% growth, personal loan with a small nominal value we have had a move forward of the portfolio as a whole with a very good portfolio in terms of risk.

In Slide #9, you see our retail delinquency with an improvement in our indicators. In credit cards, it represents 16% plus personal loans, part of vehicles, payroll loan and FTTS, adding up to 24%, showing you what we call a very defensive mix from 15% to 99.1%; 7.9% from over 90%, and this is what we have observed in the behavior of our products and our I think and to speak about pricing, we have a net margin that is quite sound. We hope that this will continue to evolve further in 2024 with an improvement in the scenario and with the assertive pricing of the new harvest vehicles. With the reduction of a ceiling, there has been an impact, but we're able to offset this in other lines through our results.

In Slide #10, and we show you the evolution of the clients with credit. We have always said we want to grow with engagement. And of course, credit is important, not only for engagement, but also monetization. We ended with 13.6 million clients, and we will continue to -- also expand our share of wallet. We have an ever-growing base of credit in our clients in the market.

On Slide #11, our fee revenues with an expansion to BRL 297 million, driven by the increase in vehicle. Now this is an important complement for our bank results, and we hope that this growth will continue on. In the fourth quarter, we have the traditional enthusiasm because of Black Friday, and we're quite enthusiastic with all of these movements.

In card on Slide #12, we per our conservative stance as you can see in credit cards. Now despite this, we have had important evolutions in the product and in customers experience, and we have launched new credit cards that are aligned with our rebranding. We have 2 new cards. One is called [indiscernible]. The other one is called [indiscernible]. We believe that this will have very positive results, enhancing engagement with our clients going forward. We had 83,000 new cards issued in the quarter and in terms of total volume, BRL 3.4 billion with BRL 55 million in revenues.

Now let's think about insurance on Slide 13, an expansion with a greater number of clients, 2.6 million clients will have some type of product contracted with us. And in terms of engagement, we foresee a positive impact for this product. We had BRL 191 million in premiums issued for this quarter.

Well, let's speak about our marketplace beginning with Mosaico on Slide 14. Now the digital market has undergone some changes this year. We have expanded the reach of our experience. We had a GMV of BRL 721 million with a take rate of 6.5%, an important step to better position the bank in this scenario is that for Black Friday, we're going to launch a checkout on our platform. This doubtlessly will be a significant change in experience that will become more fluid. We will begin with larger retailers [indiscernible] this more fluid client journey will enhance engagement and expanding the take rate we obtain in these transactions. We have also launched the web version of an shopping, enabling clients to have more options of access. We have 12 million sole visitors per month, and this enables us to sell more products and work with cross-sell with everything that we have in the bank.

On Slide 15, we refer to Mobiauto that complements the experience of clients in this total platform. We launched a new app for the search vehicle, another way of showing the power that we have in the vehicle funding market. This has become very popular. We have 8,200 active store owners working with us through Mobiauto, of course, within the scope of vehicles, we have almost 20,000. New funding with go through Mobiauto represents 6.4% of all of the funding we do. And this figure is growing. We have 282 vehicles announced and revenues at around BRL 20 million for the quarter.

Now the think about our financial highlights, and we go on to Slide #17. We have a net interest margin [ concluded ] to be a very sound levels, and we have an outlook of growth because of the pricing of our new [indiscernible], our new products, a total 3% in general.

Now let's look at more results on Slide 18. Margin as a whole. And before the cost of credit, it had an expansion to 18.3%, even with the locations because of the toil of our portfolio that has a positive impact on the bank's margin. We got to BRL 1.9 billion in revenues. Now when we think about expenses, we have observed a behavior within what we have priced or 4.7% on expenses vis-a-vis the portfolio totaling BRL 445 million.

Now regarding expenses, we were expecting an increase because of the expenses with origination, the resumption lows and with resumption of there still a significant part of B2B that does have an initial cost in terms of commission. With all of this, we end the quarter with BRL 198 million of profitability with an ROE of 11.5% annualized for the quarter.

Now to conclude the slide here, our capital and equity on Slide 19. We ended the quarter with 15.8% of Basel CT1, a comfortable level for us to treat our growth strategy at the bank.

I would now like to return the floor to Cadu for his closing remarks.

[Carlos Pereira Guimaraes, executive]

Well, on Slide # 20, we will speak about message. Simply to conclude the presentation. We're going to continue to grow our origination with an increase of B2C, there will be a relevant growth in our credit portfolio, very similar to what we have at present. We will have a slight in the delinquent levels because of our conservative stance and the constant evolution of our credit models, we should have a return in the higher margins of the recent product harvest. We will continue extremely focused on engagement levels and transactionality, leveraged by the integration of products and channels and the positioning of our brands. We want to be even more international.

With this, we would like to conclude the presentation, and we open up the floor for questions and answers.

[Operator]

[Operator Instructions] Our first question comes from Pedro Leduc from Itaú BBA. You may proceed, Pedro.

[Pedro Leduc, analyst]

Question. When I look at the evolution of NIM and you have a consolidated financial margin. I think it is very good and it increases because profitability has been very important in the last quarter. Cadu, perhaps you can help us understand what is it that led enhancement is origination, something in the portfolio? And if we can continue to observe this level of profitability in coming quarters?

[Carlos Pereira Guimaraes, executive]

Thank you for the question. Now we had a somewhat different mix this quarter vis-a-vis our assignment -- are the assignments had a different portfolio, a portfolio with a longer term. And this enabled us to have better profitability in the quarter. Now as mentioned by Inácio in the presentation, our net margin NIM, has obtained a very high level for some time, 12% to 13%, and we expect this going forward for the coming year, I mentioned formerly, we're expecting an evolution of our profitability because the recent harvest of origination has been enhanced and this tougher credit cycle that we underwent in 2022 and 2023. All of this has been digested as part of [ Marbella ] for the coming year, we expect when we bring the [indiscernible] we our portfolio and market to the goal that we have set around [indiscernible].

[Pedro Leduc, analyst]

Well, in the comments you said you expect [indiscernible] in the portfolio opportunity present by the volume perhaps will remain a certain [indiscernible]

[Carlos Pereira Guimaraes, executive]

[indiscernible] is the one we have now in more or less at the level that we did in this last quarter and the growth in origination, especially in vehicles and payroll loans. And we're going to have a resumption in the credit card. We haven't stopped working with a credit card. We had a reduction during the last 2 years, but we're ready to come back in a conservative fashion, because although the credit card for our target audience, first day is not a business with high profitability. It has a very narrow margin. However, it is an important source for client engagement.

Beginning in the fourth quarter, we intend to work with more card origination with a lower average cement in a conservative fashion seeking greater engagement with our clients.

[Pedro Leduc, analyst]

Excellent. Thank you very much, and I wish you success.

[Operator]

Our next question comes from Flavio Yoshida from Bank of America. You may proceed, Flavio.

[Flavio Yoshida, analyst]

Congratulations for your results. My question refers to the portfolio growth. In this quarter, we see an enhancement in resonation vis-a-vis the second quarter, but below the first quarter of this year and the last quarter of 2022, and the credit that has decreased. Now origination continues to improve in the coming quarters? Or do you think that it will remain at the level it is now? And do you think about the volumes of kinder allocated?

[Carlos Pereira Guimaraes, executive]

Now regarding retention. In the third quarter, we had origination very close to that of the first quarter of this year and the average of the year 2022, BRL 7.5 billion. When we look forward, we foresee the possibility of growth in the production of vehicles. When I think about being out there both you and new vehicles that is our business is on for growth and there's room for growth in the payroll loans. Going forward we will have a quarterly origination based on BRL 7.5 billion with a trend that is growing. As I mentioned before, level of assignment should be really close to what we achieved now in the third quarter, which is lower than it was in previous quarters.

Now if we add these 2 effects, we expect a growth as a consequence of these effects, a significant growth of our portfolio throughout the year 2024.

[Flavio Yoshida, analyst]

And secondly, a follow-up in vehicle origination, which, in fact, was quite strong. So do you have greater appetite? Or would it be competition with smaller players?

[Carlos Pereira Guimaraes, executive]

I would say that the appetite is larger and greater [indiscernible] in the segment. We're comfortable with our modeling, with our credit policy, with our positioning, with the store owners. We have several instruments to increase loyalty with the store owners, we have Mobiauto. We also offer credit store owners to have a turn owner -- turnover of their inventory. Everything that we have built in the past years at present is [indiscernible] vehicle financing. As Inácio mentioned, in terms of new motor titles, we have 32%. In terms of origination, where by for the best, we also have 28% among new motor cycles. We're in the first or second position. We have 9% in vehicles. And in the coming quarters, we hope to further increase our origination.

This is a segment that we know well. We have been working with it for some time, and we're quite enthusiastic with the recent evolution, not only in terms of credit modeling, but the experience with the product. We need very few calculations so that in 10 seconds, we can tell the client if he is approved or not. This has help us get to where we are and to know that we have room for growth.

[Operator]

[Operator Instructions] Our next question is from Olavo Arthuzo from UBS. You may proceed Olavo.

[Olavo Arthuzo Duarte, analyst]

We have 2 questions at our end. First, is to explore the vehicle or origination, I think that to your [indiscernible] was made very clear, which is the focus you have. I would like to gain a better understanding of origination in motor cycles. We're still at 40% apart from the historical average that we had of 20%. So the first question, what can we expect going forward regarding the mix of vehicles. And if you could also include your outlook, what has happened with vehicle dealers? What is happening with them?

[Carlos Pereira Guimaraes, executive]

Well, thank you for the question. Olavo, regarding the mix between our origination of vehicles it was close to 25% and 75% in the past and the margin was 40%, motor cycles and 15% vehicles. And this is what we expect to maintain this mix going forward. We have a very strong positioning in motor cycles. We always have. I have been in the bank for 11 years. We've always in first or second in terms of market share or motor bikes. We're very comfortable with this level and the eventual growth of financing in motor cycles.

We have a very good positioning at dealers that has been built during the year, a highly alert product and assertiveness in prices and sound credit. This gives us the comfort to continue on with this level. We don't believe there will be a change of mix between light vehicles and motorcycles going forward. Obviously, when you reach 32% of market share in motor bikes and 9% in light vehicles, we have more room for growth in light vehicles vis-a-vis that motor cycle. But in motorcycles, there is room for growth because of our excellent historic positioning.

[Olavo Arthuzo Duarte, analyst]

Thank you very much, Cadu. If you allow me another question and I would like to hear your opinion about the credit cards. You have just launched [indiscernible] and [indiscernible]. What is it that we can expect in terms of strategy with these new cards? If you could speak about the client profile, the benefits that you will be offering? And how do they compare with other cards that you already have?

[Carlos Pereira Guimaraes, executive]

Thank you for that question. As I remarked credit cards are a very important tool for client engagement. [indiscernible] day, and we need to come back assertively to this business, and it is in this point of time that we find ourselves now as our clients have mid or lower income levels. And as I mentioned formerly, we would like to add part of the public of the B bracket in this new rebranding and cards have a very high margin. We have a very assertive in credit and in terms of financing as part of the credit card, you can pay an installment especially for the one paid in installments. We don't believe very much in this product, the client can fully understand and regardless the discussion on the end of the credit -- moving credit. We're bidding on a product that has o moving credit and help the clients to understand the installments that have to be paid. We will have a fifth part and a certain number of parcels, and this will help the clients fully understand his or her finance.

So basically these 2 cards [indiscernible] is for a somewhat lower income bracket and [indiscernible] for much higher revenue levels. And in both cards, we're going to explore the full your credit. The are will have a certain limit, and we will set for rules so that the client an enhanced the credit limits through time. We believe that this is a very good strategy. It will help the clients to achieve higher limits basically by further using the bank. And of course, there will be several benefits offered through the card. Benefit at the movie theaters with significant discounts in all of the theater rooms like Cinema throughout Brazil, 50% discount in enema, ticket, 50% discount is drinks and popcorn or a couple that go once or twice quite a month to the movies, of course, this is a very, very good benefit for the clients.

Now beside the card, we're also quite enthusiastic with what we have created in the current account. I am a great user of our current account app and the card app. And I dare to say that in the market, it's very difficult for anybody to have a better experience with compared to what we have in the bank. And this is what we want to offer to our clients. A financial benefit and the time benefit which also translates into money of course, cash. We're quite happy with the integration of products and channels that we have built. And the credit card, of course, is an important tool to bring together this strategy.

When we look at our figures, part of the lot of evolution of engagement doubtlessly is due to the strong reduction that we had in credit cards in the last 2 years. And now is the time for a resumption. A very cautious resumption because the credit card business regardless of the changes that are being forecast for the future, it tends to be a volatile business for our audience, of course, because you can divide the credit card business into several semi businesses. But with assertiveness in credit and without having parcels are installment is difficult to balance the credit card business.

[Olavo Arthuzo Duarte, analyst]

Well thank you to make it clear. You spoke about [indiscernible] card as for the higher income bracket, could you give us some figures of the bracket you're referring to?

[Carlos Pereira Guimaraes, executive]

Referring to BRL 4,000 to BRL 5,000 per month and upwards.

[Olavo Arthuzo Duarte, analyst]

Thank you, Cadu, for your answers.

[Operator]

Our next question comes from the webcast from Ana Hills from Santander Bank. I would like to gain an understanding of your expectations for the growth of portfolio. And if there's a goal in terms of mix, additionally, which initiatives are you undertaking to increase the B2C origination?

[Carlos Pereira Guimaraes, executive]

Well, thank you for the question Ana. When it comes to the mix going forward, what we expect is maintaining the mix we have at present, where vehicles represent 50% of our portfolio. The growth will come mainly through 2 pillars: an increase in origination, especially vehicles and payroll loans, a reduction of assignment compared with what we did in the past. And the growth strategy for origination in B2C, in FGTS, 65% of our origination is B2C, 35% B2B and in payroll loans, 30% is B2C and 70% B2B. What we have built through time and the application, of course, is not fundamental component in our growth strategy for B2C is to add products in the app so that we can increase the B2C in a scalable fashion.

Recently, we added 10 products, semi products of payroll loan. We have portability. We have loans much more. All of these projects are now part of the app. And this is the most scalable sales tool. With the integration of products and channels and an enhancement in our application. We expect to grow the B2C origination at the bank.

[Operator]

Our next question comes from Eric [indiscernible] from [indiscernible] Bank. You may proceed, Eric.

[Unknown Analyst]

We have 2 questions. Now first, I would like to for the following, you will have strong origination in the coming quarters, perhaps stronger than this quarter. We also have assignments with lower spreads. Now this quarter, for example, we have the commissions or origination, maintaining the bottom line more stable. When can we expect a more significant expansion of the ROE? And which are the levels of enhancement that you expect? What is behind this? My second question, I would like to explore the payroll loan market with lower rates or aggressive tactics in the market? What are you expecting in this market?

[Carlos Pereira Guimaraes, executive]

Well, thank you for your questions, Eric. First of all, regarding the commission. This was a order with higher origination in B2B originations, we pay high commissions and the rest of the commission is paid throughout the existence of the contract now. This commission is higher, commission is due to a higher origination of payroll loans quarter. In terms of new entrants and the payroll loan. We have been speaking about for some time already the businesses that we work with payroll loan vehicle, FGTS and cards, these are very, very competitive businesses. We now have a new market entrant, and we have to be prepared. We are prepared to continue to compete in a highly competitive environment, We're enthusiastic with what we have in building and what we will build in terms of differentials going forward work and perhaps success in mega competitive environment. We will have 1, 2 or 3 more competitors in FGTS. We have a new one every day. And despite this, we continue to be the highest originator of in Brazil. This is part of our business to work in a competitive environment. We respect the competition. We respect new entrants. We carry out a great deal of surveys to always be aided and at the forefront of this highly competitive environment.

[Unknown Analyst]

Thank you, Cadu. If you allow me a follow-up in origination of payable loans. Are you seeing of decreasing the share and working more with a digital part to eliminate the pressure of commissions perhaps?

[Carlos Pereira Guimaraes, executive]

Well, in truth, the alternation of B2B is those profitable operation, there is an accounting issue that initially, it brings us a lot. We have the commission. We still don't have the interest rate. But in the long term, it is profitable operation. We're not going to decrease the B2B in absolute terms. We're going to increase the B2C, so that the net between B2B and B2C will be similar to what we have in the [indiscernible] 40% for B2B, 60% for B2C. And as we have funding and capital to address this growth, we would like to change the mix and not reduce the production of B2B. Profitable business, we are fond of.

[Unknown Analyst]

Thank you. Thank you, Cadu.

[Operator]

[Operator Instructions] As we have no further questions, we will now end the question-and-answer session. I will return the floor to Mr. Carlos Eduardo Guimaraes with the closing remarks. Cadu, you may proceed.

Simply a minute. It seems we have a new question that we're checking up on. Our next question comes from Brian Flores from Citibank. You may proceed, Brian.

[Unknown Analyst]

Good day to everybody, and thank you for taking my question. You were ready to leave the call. Which is the pace of growth of commissions? We see that in the interannual comparison, there was an acceleration and you're close to BRL 9 billion. So which is the pace that we should observe going forward. Will they be in the low digits or the higher digits? And which are the drivers of this growth?

[Carlos Pereira Guimaraes, executive]

Well, thank you for the question, Brian. Now these commissions come from the production of B2B and B2B commission was a function of the margin that we have in the payroll loan business. I'll give you an example, given the reduction of margins we saw recently, it means less cost of funding. There was a reduction in the ceiling of payroll loans and a reduction of funding for 2 years. So our main adjustment variable in B2B to balance out the profitability of the business is to reduce the commission paid to the bank or funding presently. And this is not what appears in the figures presently. What we are producing at present, we are at one of the lowest historic levels in the payment of commissions to bank correspondents because of the tighter margin we are at very low margin.

Now how does this appear in our balance Part of the commission is paid head on. This has retained what we pay throughout time has been reduced. Now looking forward, if we continue on with present scenario, we expect a reduction in the line item payment of emissions because of the lower levels vis-a-vis last year.

[Operator]

As we have no further questions at this point, we will end the question-and-answer session. I will now return the floor to Carlos Eduardo for the closing remarks.

[Carlos Pereira Guimaraes, executive]

Thank you very much all for your attendance. We hope to see you again in 3 months.

[Operator]

The Banco Pan conference call ends here. We would like to thank all of you for your attendance. Have a good day, and thank you for using Chorus Call.

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