Banco Pan SA

BOVESPA:BPAN4

Earnings Call Transcript 2021-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Banco Pan's conference call to discuss the fourth quarter of 2021 results. This event is also being broadcasted simultaneously on the Internet, both audio and slide show, which can be accessed on the company's IR website, www.bancopan.com.br/ir, and webcast platform with the respective presentation. [Operator Instructions] Forward-looking statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them in light of future developments.

With us here today, we have Mr. Mauro Dutra, Banco PAN's CFO; and Mr. Inácio Caminha, Head of Investor Relations and Funding.

Now I will turn the conference over to Mr. Mauro Dutra who will begin the presentation. Mr. Mauro, you may begin your conference.

[Mauro Mediano Dias, executive]

Thank you very much. Good morning to you all with us. Welcome to our earnings call for the fourth Q of '21. So it's a pleasure to talk to you and having this moment to discuss our business and our results.

The presentation today will show you 4 main topics, right? The first one is a quick overview about our results, our main figures. We then will talk about an update on the banking unit, bringing some new figures and new information about how the business is evolving. The third topic is margins and credit in which we can discuss the macro view we have for the credit products and the portfolio quality and development. And then Inácio can bring you the details about our financial highlights, right?

So I will start the presentation on Slide 2, in which we bring the highlights of the fourth Q. The first one is the total client of the bank that reached -- our base reached more than 17 million clients, 17.1 million clients, which is a very good figure in our view. The credit portfolio reached almost BRL 35 billion, growing 20% on a yearly basis. The transaction volume of the fourth Q was BRL 18.7 billion, I'll talk about this later on. The bottom line, the net income of the bank was BRL 190 million and with this net income, we have an accounting ROE of 13.3% per year.

Moving to Slide 3, it's just a quick recap of the entire year of 2021, in which we had a bottom line net income of BRL 775 million, growing a lot since 2019 when the bank started the new strategy and we started to ramp up our results. On the right-hand side of the slide, you can see the ROE for the entire year, which reached 13.9%. It's also relevant to mention that the investments we are making in the bank which are quite relevant to the banking unit, mainly related to technology products, new team, marketing and so on, all investments are booked in our results. Our investment are front-loaded. We are not deferring any kind of expense, which is an important information for the analysts to understand how the results are performing.

Moving to the next slide, Slide 4, we talk about the number of clients. The pace for the quarter, for the last quarter of '21 was 42,000 new clients per business day, which is quite good, a little bit less than the third Q, but again, better optimized in terms of the credit of the clients that I will show you in the engagement levels but also optimizing the cost of acquisition, which is very important for our business. And we will show also some numbers about that. Looking to the next information, it's the total client base, I would say, that we increased the base for approximately 10 million clients for the year, which makes us very proud, very happy and very excited about the opportunities we have of new products to be sold to this client base, okay?

So then moving to the section of the banking unit update. The first slide of this section is Slide #6, brings the main drivers of the business. We always explain this business with 3 main pillars, which are the growth or scale, the engagement of the base and then the monetization, which consists of the services that the clients can buy and also the credit penetration, right? In terms of growth, we reached 12.7 million banking clients at the bank as of December '21, and we see that our cost of acquisition -- cost of client acquisition is decreasing as we are seeing a more very strong organic flow in the client origination.

The second item is engagement. We are keeping the high level of active clients here in the bank with the cross-sell index evolving as we launch and the clients buy new products in the app. Third point is our -- the service businesses, which is generating an intense growth of the fee revenues. The fee revenues are growing at a pace much higher than the credit revenues, which is our intention and is important for diversifying the business. And the last point is the penetration of credit in the banking unit, in the ranking clients base, which is something very important to decrease the origination cost, and we are using the in-app origination in order to do so.

So the next slide, as you may see, will show numbers that explain these main drivers here. The first slide is Slide #7, talking about growth of the base, the base reached 12.7 million clients. In the first Q, we had almost 50% of the new clients coming from organic flow, looking for the bank organically and it impacts a lot, our cost of acquisition that reached in the 4Q, BRL 35. This is a new information we are disclosing as we think this is important for the analysts to understand what we are doing in our business.

So these BRL 35 of CAC includes the marketing expenses, all the onboarding process, all the money we spend with the credit bureaus and all the logistics related to the debt or credit card that we sent to the client, including both embossing of the card and the delivery, right? So the CAC is decreasing a lot. It's a very competitive amount right now, and we are excited about growing the base and the product base optimizing the quality of the clients and the cost of acquisition.

Moving to Slide 8. We then bring some information about engagement. Also we already talked about the growth of the base, we talk about engagement. So activation level of 52%, even with the base increasing a lot quarter-over-quarter. The cross sell index ended December at 2.6 with respect to the new products that are being launched and bought by the clients in that.

We also ended December with 5.4 million accounts with PIX keys, clients that are using PIX with Banco PAN. It increased 1 million accounts in the quarter, which indicates that the new clients are using the bank and are using the bank as their transactional bank. And the last figure which you already may know is the transaction volume, which reached almost BRL 19 million in the entire quarter.

Slide 9 shows the use of services by our clients. So the first one is the mobile phone top up, in which we have almost 0.5 million clients using the service in the in the last quarter, which is another strong indicator of engagement of transactions being made. And on the right-hand side, you can see the Banco insurance business in which we ended 2021 with 1.7 million clients with active issuance contracts, insurance policies with Banco PAN along with almost 0.5 million in the banking unit. I mean 500,000 clients in the banking unit had an outstanding policy in December '21 and the number keeps increasing, and we expect this number to get -- to keep the pace for 2022.

We then move to Slide 10, bringing some details about the credit business in the banking unit. We ended December with 5.4 million banking clients with credit as we also already talking to you is a very important tool of both monetization and engagement. We understand that the profitability of our business is much related to the credit transactions. So having 5.4 million out of 12.7 million banking clients with outstanding credit and it's an important number that we monitor here. And as you can see in this slide, this number has been ramping up since 2020.

At the right-hand side, you can see the new private products that are launched in app. Of course, the main product here is the FGTS loans, which has more than 1 million clients that took this credit in app, which is also another indicator, not only of monetization but also engagement, where we want, we put also the Payroll business in that, that can record and app related transactions in that. And also in December, we launched the preapproved credit for Banco PAN clients in that for the vehicles business.

This 5.4 million clients had almost, as you can see, Slide 11, almost BRL 13 billion in outstanding credit, right? And interesting observation here is that the penetration of banking clients in our private portfolio reached 37% in December. I mean we had at December a BRL 35 billion total portfolio and BRL 13 billion, which represents almost 40%, in the banking unit. This figure was less than 20% 1 year ago. So the good news here is that we are also penetrating credit in all the credit products of the Banco only credit cards and personal loan in the banking client's unit, which is one of the main objectives here of the project.

You can also see that this BRL 13 billion in credit on the banking unit are splitting all of the products we have, not only vehicles, also, but the products, Payroll and FGTS loans, everything, the clients are using not only the services but also all the credit products that we can offer. Just on the discussion, Slide 12, the next slide. We talk -- we bring an update on Mosaico. Remembering that the Mosaico deal was already approved by CADE and by the shareholders of both Mosaico and Banco PAN, they are still pending the central banking -- the Central Bank approval, which may happen in the next weeks. But we are already advancing the business, working with Mosaico team, and we are very happy with some deliveries we already can show you.

The first 1 is the GMV Mosaico had at Black Friday during November, which was BRL 535 million, a very impressive growth regarding -- compared to 2020. And this is the result of the cash back penetration in the client base as Mosaico now have the cash back to -- with the main part of Brazilian retailers. The second important figure to show is the financial products, which are Banco PAN products offered in Mosaico platform. We had more -- almost 0.5 million requests of new cards since November when the cobranded card was launched. And of course, penetrating financial products in the Mosaico platform is one of the main ways to monetize the base and to monetize the business. And this -- we will [ help ] a lot during '22.

And the last topic is the marketplace of Mosaico being offered in our app. We launched Loja PAN in end of November, and we expect this also to grow a lot during this year. So with this is like we end the session of the Banco banking clients, and then we can move to margins and credit.

Moving on to Slide 14. First of all, some key messages, and then we will go to the detailed numbers. The first message, which is very important for the analysts and the investors to understand is we are working here at Banco PAN with a high level of net interest margin, a high level of NIM, even after credit cost, right? So we have space, we have room to any kind of deterioration if it happens as we work with high levels of margins even after credit cost. And which are the main base regarding margins and credit. The first 1 -- the first of them is the NPL ratio, the delinquency rate, which is growing, of course, as we know, we are changing the mix of the portfolio, and we are seeing the return of the pre-pandemic levels for all the products in terms of NPLs, but this is offset by this high gross margin that we work and we price in our products and we are maintaining the renegotiation volumes of our portfolio next to 0, irrelevant regarding the size of the portfolio.

The second important item is a decrease of interest rates in Brazil. But as ordinarily slow, we worked here with our portfolio 100% hedged. We do not take market risk in our portfolio. And we repriced all the products in the origination, right? We had, during the second semester '21, more compressive margins in the payroll business. This was already reviewed when the ceding rate was changed by the government on December. So in the new origination we are already satisfied -- very satisfied with the levels of profitability also in the payroll business.

Third, item to mention is our asset quality. We had almost 90% of the portfolio in assets free of credit risk, i mean, the payroll business and the FGTS loans and another 40% -- 43% of the portfolio with collateral, which is comprising the vehicles business. So 90% of the portfolio is very defensive in the individual credit market in our case, of course. And the next item, which is important for the business is the credit assignment. As you may know also, we like very much the business of assigning credit as we can optimize our channels, our origination, and we can generate profits without allocating capital or funding, but this business had a tough moment during the second semester of '21 as margins were compressed.

Looking forward, we see that this -- the credit reassignment business should resume to its previous margins or even above with 2 main drivers. The first driver is favorable business, going back to the margins we had in the past, we've been exceeding, and the second important driver is we are seeing a lot of our partners in this business, a lot of other banks that work with us in this business, showing interest in the FGTS loans. Now we are originating a lot with very low origination costs and indeed very good profitability. So with these 2 items to mention, we hope that the private business, the credit assignment business, should get back on track in '22, which is a very important driver for our results.

Moving on to Slide 15. I will begin to show you the numbers that explain these main topics working I put in the Slide 14. So the first one is we are maintaining our NIM without credit assignments and without credit cost at a high level, which indicated in the slide, reaching 12% in the fourth Q of 2021. Even with this level of margins, as I already mentioned, but I would like to reinforce is that we keep our portfolio highly collateralized, not only because of the vehicles, but also if you consider that the business of payroll and the FGTS have kind of strong collateral to -- in order to take off the credit risk.

And the third point, important to mention also, is we are being more conservative on the origination, in last we will show you the number of cards sold -- new credit cards sold in the quarter, and it decreased compared to last quarter, but not only in the credit card business, but also the vehicles business, we are being more conservative in the origination and in the collection, which is very important. Vehicles prices are very strong in Brazil. So it gives us comfort in order to try to execute the client and get the car back. So we are more conservative expecting that the environment can be more tougher. But as I explained, we do not have renegotiations. We are very diversified, and we are comfortable of operating credits in different moments of the cycle.

Slide 16 indicates the portfolio mix and how it is evolving. We reached 12% of the portfolio in the unsecured product which is small compared to the entire portfolio and brings engagement, brings more margin, as I already mentioned. The delinquency rates, the NPL ratios, the short-term NPL ratio reached 7.8%, which is quite stable during -- over the year, right? And the 90 days indicator has been increasing as we already explained it because of the mix, because all the products are turning back to the levels -- the pre-pandemic levels, and I already mentioned, but just reinforcing any kind of renegotiation is impacting this figure here. Just to end this last session before going to the financial highlights, Slide 17 talks about the gross margin, right?

We had -- as long as we have the portfolio growing 20% in 2021, as you can see on the left-hand side of this slide, our NIM without the impact of credit assignments grew 50%, which is way above the portfolio, showing that we are being capable of bringing products to more margin and repricing deposits that we already operated. And the consequence is that even with the entire margin, the clear blue line being flat from '20 to '21, you can see that the NIM, if you don't consider the credit assignment, is growing a lot. And as I already mentioned, we expect the credit assignment business to have better margins moving forward. So this is something we see as [indiscernible] for '22 and on, okay?

So Inácio, you can move on with the financial highlights, and then we'll be here for the Q&A session.

[Inácio Caminha, executive]

Right. So jumping to Slide 19. You see the regular charts that we show on results. So net interest margin stood flat in BRL 1.7 billion, with the NIM ex -- excluding the assignments still going up. Provisions expenses remain also quite flat, raising marginally to 4.8% of the portfolio. And the main message here that wasn't explored forward, is that the expenses -- overall expenses reduced in this quarter. So it was driven by a reduction in origination expenses because our CAC is much lower at a very competitive levels. And also, we have been originating more credits using our app, so not being commissioned to a significant part of the origination.

When you look at the administrative personnel expenses, they increased a little bit, driven mostly by the annual readjustment that we have on our payroll for our employees. And what is important to notice here is that all the structured investments that we have made have been done in terms of personnel and the growth would be marginal from now on, and we can now start benefiting from everything that we have built and seek to generate more revenues over the portfolio or over as well regarding services. And with that, we got to the BRL 190 million net income in this quarter, 13.3% accounting ROE.

When you look at the same charts in the annual comparison, we see a very strong evolution. So net interest margin increasing at a strong pace, also provisions expenses very controlled and reducing a little bit over the portfolio. Expenses showing the recent investments that we have done throughout this year, we'll show some detail ahead again. And finally, net income increased to BRL 775 million and 13.9% accounting ROE.

The origination we show on Slide 21, we can notice that the FGTS loans were really the main highlight of this quarter. And this should remain to be as this product has been growing or has been keeping a very strong pace of origination. So it was almost BRL 800 million per month. And we have more than 2.2 million clients with this new loan, more than half of it originated through our app or our direct channels. The vehicle financing stood at very strong levels and are payroll naturally reduce in fourth Q because margins were still compressed. And now we have a much better environment to originate these loans with more spreads. We just have to wait for the update on the 5% additional margin to reestablish the potential of new origination, not only for us but for the entire market.

The credit portfolio in Slide 21, ended the quarter or -- and the year at BRL 35 billion, increasing 21%, payroll loans plus FGTS represents 44%, while vehicles represents 43%. Vehicles increased 32% on a yearly basis. And credit card also increased, doubled actually in 1 year, but it still represents only 10% of the portfolio and the final product which are personal loans, represents only 1%.

So when we look at the entire portfolio, it is well -- it's very defensive with 88% of the portfolio being collateralized or comprised by payroll loans plus FGTS, and we only have 0.3% of the portfolio renegotiated, which also shows a lot of quality in our figures. Going to the individual products on Slide 23, we have payroll and FGTS loans. So in the upper right chart, we clearly see that FGTS loans have been gaining more traction, and we will probably lead a big portion of our portfolio's evolution throughout '22, the other metrics remain quite stable. So we still are originating a very significant share of all the loans related to federal codes, 97% was what we did in fourth Q, with only 3% related to states and municipalities. So we are very, very satisfied with the performance, especially with the increase in origination in our app.

Vehicle financing on Slide 24. We also see a very interesting trend of growth. Always bear in mind that the origination has been done in a very conservative way, not only in terms of underwriting criteria, but also in terms of profitability and other metrics regarding interest rates, funding, commissions and also the expected loss is only from the origination, plus, obviously, the levels of down payment and the term of the loans and to boost even more the evolution of the vehicle financing.

We are also very satisfied that now Mobiauto is Central Bank approved, it's acquisition, and we are combining the 2 operations and will definitely have a much better experience in that sense because with Mobiauto, we began the journey when the -- as long as the client starts to seek for a new car. So we may offer vehicle finance or send him to a corner dealership that work with us. And with that, we can create more engagement, not only with find a client, but also with dealerships.

Credit cards on Slide 25. We see a very good level of engagement and also of the volumes. The clients have been using more of our products. So we see that despite the additions is that we decreased in a preventive action because of the economy scenario. We still see a very strong evolution, not only in credit card transactions, but also in revenues, interchange revenues that we have from these cards and the portfolio keeps hope. So this is a very interesting product with a very good profitability that generates a lot of engagement with the clients. And with that, we can definitely improve and increase cross-sell and excel inside our platform.

So insurance is another product that is very important and relevant to generate service fees. We have currently 1.7 million clients with insurance -- with active insurance. So we generated, only in fourth Q, BRL 124 million in premiums, generating BRL 54 million in revenues for us. When you look at the insurance evolution, the premiums evolution on a yearly basis, we have doubled it in 2 years, reaching BRL 581 million. And we also see a lot of potential for it to keep growing as we provide more products and offer more new type of insurance to our clients inside our app.

And funding on Slide 27 is another way to see how we have been evolving naturally as a credit portfolio growth, it has been performing. So as the funding base increase, just to give a highlight here on a new funding that we took on December, we disbursed $150 million in a credit facility with the IDB to BID Invest together with the other creditors. And this is a specific line that we'll foster in the development of social lending for clients, not only micro entrepreneurs, but also, for instance, to finance clients buying motorcycles and contributing to the household income. And the overall performance of funding have been boosted by the ratings that we have. So '21 was a very important year in which we increased significantly the way that the market notices us, reduce the rates that we pay, increasing volumes and increasing exposure to several type of different investors.

Another very interesting point that give more comfort to investors is our capital base. So we presented on Slide 28, 15.4% CET1 and we also give here an exercise showing what is the impact of Mosaico, once it gets approval. So December figures would have been 17.3%, if the deal was already approved. So this shows not only very interesting and high levels of capital but also our ability to generate capital internally through our results giving all the foundation for us to keep growing our books.

And to conclude on Slide 29, we see a summary of how we monetize our business here and how we get more profitable as time goes by, even though we have invested BRL 1 billion in '21 to promote all the growth in client base and also in products and services offered to our clients, expanding our team, investing in new systems and more technology. Regardless of that, we see that net interest margin rose 24%, reaching BRL 6.7 billion. Fee revenues had an even stronger growth, growing 54%, reaching BRL 743 million, leading to a net profit of BRL 775 million, growing 18% on a yearly basis, which in the end results the 13.9% accounting ROE, growing as well in comparison to 2020.

So this is the conclusion of our presentation. And now we open the line for questions.

[Operator]

[Operator Instructions] Mr. [ Gustavo ] send us a question via webcast. So you believe that the reduction in credit card loans and issuance in 2022 due to asset quality issues could impact the growth of the number of clients as credit cards are important to attract clients?

[Mauro Mediano Dias, executive]

Thank you very much, [ Gustavo ], for the question. The answer is no, and I'll explain why. First of all, as you saw in the first -- in the last quarter of '21, even selling less credit cards than in the previous quarters, we saw very strong numbers related to engagement of the clients, right? And it happened because we have more products, we are more diversified. So we have much more things to offer to the client than only the credit card. So that's why we do expect that we can keep increasing the client base even selling, for instance, selling less credit cards. So with this level of card, we expect to keep increasing the client base at a pace of 35,000 to 40,000 new clients per day, which you will see as a very good number, and we can optimize the quality of the clients that are coming to bank with the level of investment with a very competitive cost of acquisition.

[Operator]

A question from Pedro Leduc.

[Mauro Mediano Dias, executive]

Sorry, Leduc, we can't hear you.

[Pedro Leduc, analyst]

Can you hear me now?

[Mauro Mediano Dias, executive]

We lost you sorry.

[Operator]

Please, Mr. Pedro, you may proceed. [Operator Instructions]

[Inácio Caminha, executive]

Great. So we just received a question from Pedro Leduc here from Itaú. Managing credit risk, how much of it down, until what level? How are you working to improve recovery of volumes, for example? And then another question I will do afterwards.

[Mauro Mediano Dias, executive]

Okay. Thanks very much, Leduc. Sorry about this logistics problem here, where we are very happy to answer your questions. First of all, let's talk about coverage. Our coverage has been quite stable over the last quarter, decreasing a little bit, which we think is normal during credit cycles. But it's very interesting to reinforce that our portfolio is comprised mainly of defensive private risks, which is the payroll segment, FGTS loans in the vehicles business. And we do not post all loans, we do not renegotiate loans. So this is a clear figure. Any kind of calculation that the analysts can make regarding coverage is a clear figure as we do not have any backed from renegotiation as the dollar rent does.

[Inácio Caminha, executive]

And the other question about credit growth. We are repricing credits, which is another tool to -- just another tool to manage risk, but this reduces growth most likely. What can we expect for loan book growth in '22?

[Mauro Mediano Dias, executive]

We do see our book growing, right, at the -- at this group -- at a pace above the market, above the average of the financial system. And why? First of all, because despite the 5% margin issue in the payroll segment, which will impact January and February, we expect to grow a lot to come to our previous levels of origination in the payroll business, so to grow this portfolio. We are origination -- we are originating a strong amount in the FGTS segment. So these 2 segments should help the portfolio to keep on increasing. In the vehicles business, we are adjusting and we'll wait and see. But I do expect that we can come back to higher levels and keep the portfolio increasing. And the unsecured loans are just a small part of the portfolio. So we do not impact too much the overall picture of the credit scenario for [indiscernible].

[Operator]

There seems to be no further questions. I would like to turn the floor over to Mr. Mauro Dutra for final remarks.

[Mauro Mediano Dias, executive]

Thank you very much. Thank you all for being here with us. We are very excited with the opportunity we have with the size of the client base and engagement levels of our client base. So we expect to keep on increasing revenues. And regarding the macro scenario or in the credit scenarios, something natural for us. We've been making credit in Brazil for more than a decade. So we already saw some market movements, and we are prepared. We are making our technical adjustments and preparing to any kind of deterioration that maybe can happen. So expect to see you in the next quarter. And thank you very much.

[Operator]

This concludes Banco Pan's Conference Call. You may now disconnect, and have a good day.