Banco Pan SA

BOVESPA:BPAN4

Earnings Call Analysis

Banco Pan Reports Strong Q4 Growth

Banco Pan experienced a notable quarter with credit origination soaring by 28% from the prior quarter and a 7% growth in their credit portfolio to BRL 41.8 billion. The company enhanced its customer base to 28 million, with over half holding credit, contributing to an 11.1% growth in adjusted net income reaching BRL 195 million. Active client engagement rose, with 65% active customers holding on average 2.2 products each. The banking app's enhanced experience and convenience continue to drive client satisfaction. Financially, the net interest margin improved from 3% to 3.8%, which helped in achieving a total profit margin of 19.1% and revenues of BRL 2.7 billion for the quarter. Expenses related to origination were significant at BRL 600 million, but controlled overall, assisting in closing the quarter with a healthy ROE of 11%.

Steady Growth Amid Conservative Strategy

The company has demonstrated resilience with strong credit origination, achieving a 28% increase from the previous quarter and a 7% growth in the overall credit portfolio. Such progress is the result of a conservative origination approach, emphasizing products with warranties and attractive spreads. This conservative philosophy has also translated to a slight reduction in delinquency ratios, signifying an improvement in credit quality. The app's enhanced customer experience contributed to a robust client base of 28 million, alongside a disciplined risk management approach, leading to an 11.1% rise in adjusted net income, translating to BRL 195 million.

Expanding Customer Base and Engagement

Customer numbers continued to climb, resulting in a total count of 28 million by quarter's end. This growth not only derives from the company's brand position but also from the excellent user experience provided. This is expected to bolster further growth. Client engagement metrics are also strong, with 65% of clients being considered active. On average, active clients use 2.2 products each, indicating healthy customer integration into the company's ecosystem. Retail origination reflects vibrant performance in verticals like vehicles, with leadership in new motorcycle financing and a substantial presence in light vehicles.

Improvements in Delinquency Rates and Revenue Growth

The company experienced improvements in delinquency rates, a positive sign for future quarters, and has projected a beneficial trend in credit behavior margins, indicating a potential rise to around 10% in 2024. This potential growth aligns with a robust revenue performance of BRL 375 million for the quarter, with notable contributions from vehicle and insurance premiums, reinforced by seasonal boost from Black Friday sales.

Sustained Fee Revenue and Conservative Card Issuance

With a conservative yet dynamic approach, the company is issuing new cards, starting with lower limits to gradually build client loyalty and reduce risk exposure. A rise in Total Payment Volume (TPV) from 3.4 to 3.7 reflects a growing client base and a steady increase in card revenue is anticipated in subsequent quarters.

Insurance and Marketplace Strides

In insurance, the company has issued premiums totaling BRL 229 million and serves 3.4 million clients with active policies, signaling robust business growth that enhances customer experience. Marketplaces posed challenges with a GMV of BRL 950 million due to an overall market downturn, but the company is strategizing to enhance customer engagement and leverage its app experience to increase transactionality.

Sound Financial Performance and Positive Outlook for 2024

Net interest margin (NIM) grew from 3% to 3.8%, reflecting a healthily managed financial spectrum. Overall margins reached 19.1%, with net provision expenses well controlled. The company generated revenue of BRL 7.7 million in 2023 and is projecting a significant uptick in activities for 2024, with an adjusted Return on Equity (ROE) of 11.3% and a solid Basel ratio of 15.8%, aligned with their growth aspirations.

Strategic Outlook and Growth Projections for 2024

Looking forward, the company expects an upsurge in its credit portfolio, with a reduction in credit assignments compared to 2023. The NIM is predicted to remain consistent, while post-credit cost margins might increase due to higher margins from recent vehicle vintages. Focus will also be placed on elevating engagement levels and transactional activity through the introduction of new channels, products, and the repositioning of brands to be more aspirational.

Earnings Call Transcript 2023-Q4

[Operator]

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

Please be advised that forecasts about future events are subject to risks and uncertainties that may cause such expectations not to be fulfilled or differ materially from what is expected, 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, the CEO of Banco Pan and Mr. Inácio Caminha, Head of Investor Relations and fundraising.

I would now like to turn the floor over to Mr. Carlos Eduardo, who will begin the presentation. Cadu, you may proceed please.

[Carlos Pereira Guimaraes, executive]

Good morning, everybody, and welcome to another release presentation for Banco Pan. We begin on Slide #2. We had strong credit origination this quarter, 28% higher than in the last quarter. And we are using a conservative strategy and origination focused on products with warranty and a good spread. Our portfolio grew 7% in the fourth quarter. There was a slight reduction in delinquency ratios, thanks to better recent origination harvest. We continue to move forward in terms of the experience and convenience of our app.

Page #3. We ended the quarter with 28 million clients, more than half also have credit with us in this credit portfolio, we reached BRL 41.8 billion, a growth of 7% vis-à-vis the previous quarter. In terms of adjusted net income, we had BRL 195 million, a growth of 11.1% per ROE.

Now I would now like to give the floor to Inácio, who will offer you more details on our products.

[Inácio Caminha, executive]

Good morning, everybody. We continue on in Slide #5. We see the ongoing growth of our customer base, not only in terms of brand positioning, but in terms of UX that we delivered to clients has contributed significantly, and our channels are ever more integrated. Doubtlessly, this will give thrust to the growth of our customer base, increasing that figure of 28 million clients.

In Slide #6, some details on engagement, 65% are active clients. We have 2.2 products per active client. We also see our Pix key evolving to 2.8 million clients. And in TPV, we can see more directly the evolution of transactionality, we went from 22 million per quarter in the fourth quarter 22 million to 25 million with a trend for continuous growth.

Retail origination on Slide 7, I think you can observe that we had strong figures, BRL 9.6 billion for the quarter with a high in vehicle BRL 4.2 billion in the quarter in the month-to-month evolution, we have BRL 1.6 billion. In January, we continue on with a very strong pace. We're absolute leaders in these new motorcycle segment, and we have 35.6% in light vehicles. And in others, we have another 11%. And of course, the trend will remain strong. In FGTS, we also are strong. And in B2C, we're working towards having over more shares.

Now since the beginning, we're running at 2/3 coming from B2C credit and payroll coming also very strongly. We're quite confident about coming quarters. Personal loans are slower because of a more conservative stance and this should change during 2024. Let's speak about the credit portfolio in more detail on Slide 8. Throughout the year, we have been practically flat. We began with a strong dynamic growth of 7%, totaling BRL 41.8 billion, once again, driven by vehicles and payroll credit, very strong in vehicles of 32%, leading to a portfolio of BRL 32 billion with BRL 7 billion for payroll and credit cards also very strong.

On Slide #9, well, we have a very clear view of the improvement in delinquency rates. We had already mentioned this the previous quarter, and we hope that this will gradually evolve going forward. We ended with 15% to [90%] and the other at 7%, a more significant drop, as you can see. Now what we like to observe in delinquency rate is the behavior margins in terms of credit. We had a trend that was very close to 9%, and we now see an evolution towards 10%. As we have been mentioned, we have a new harvest of vehicles and very good position and the trend towards an increase is what we expect for 2024.

On Slide #10, this is something we have reiterated since the beginning of our credit history. This is the main tool to monetize and engage customers or clients. We have been evolving in this metric with a growth quarter-on-quarter. Besides the growth, of course, we have a number of clients with credit, we do want to increase our share wallet and become ever more relevant with each individual client. This is why we're seeking this level of engagement that will complement transactionality. This is important for monetization.

The revenue on Slide 11 very important, and we continue to grow. The performance of this quarter totaled BRL 375 million. This is very visible because of the evolution of vehicles, BRL 163 million for vehicle, BRL 51 million for insurance premium. And in marketplace, we had a growth because of Black Friday, something that we had already expected. And this makes up that move forward in terms of our fee revenue.

Let's speak a bit about cards on Slide #12. We continue to maintain a conservative stance. But we are now issuing new cards with a completely different dynamics where issuing lower value for clients. And as they use up their credit, we work on these clients in such a way that they can broader their capacity for loyalty or on our part, a reduction in risk exposure. Now this has not happened so far, but we are enhancing the number of clients that are using the bank and the TPV volume show you an increase of 3.4 to 3.7 for the quarter. And in revenue per card, we have a lag between beginning the invoicing and the interchange value and we do expect the growth in the coming quarters.

When it comes to insurance on Slide #13, we see the evolution of premiums accompanying the evolution of vehicles totaling BRL 229 million of premiums issued with 3.4 million clients with active insurance. This is a highly interesting business that will complement the client experience.

We will speak about the market place on Slide #14. Of course, we were expecting an increase because of the Black Friday, although the country as a whole observed a drop vis-à-vis 2022, there was BRL 950 million of GMV with 6.3% of take rate. We have already spoken about this new take rate dynamic changing the competitive scenario among retailers. There was a drop in the quarter and what we have here as part of this strategy with Mosaico and all of that environment. So we are truly seeking is to make the most of the top of the funnel. We have 2 million users navigating, which represents an enormous opportunity to bring that client into our environment, offering new products, and this has had a good evolution in our app. We have a very pleasant experience within our app which is another tool that will help us in expanding engagement or transactionality during the year.

We ended up with BRL 60 million in revenue. Mobiauto which is our other marketplace has contributed to the experience of our clients. We have 9,000 stores working with this platform of Mobiauto and with constant growth, which is always very positive. When we look at the share of clients that are funding their cards, and they have been to Mobiauto, we have reached practically 8%. It was 5% at the end of 2022. This has grown as well as the volume of new funding and the region representativeness of the Mobiauto has been very positive. We have 12 million visits per month. We observe this at the end of the year, and we had a lower base during 2023. So there is a significant growth dynamic here. We ended the year with 291 announced vehicles and BRL 25.7 million revenues for the quarter.

Let's speak a bit about financial highlights on Slide 17. We have net interest margin on a sound basis pointing towards the growth in this margin. The NIM after -- well, it has grown from 3% to 3.8%, and we exclude the assignment from other areas. So this dynamic is very important for our results.

Now if we look at the results on Slide 18, the total margin reached 19.1%, [BRL 2.7 billion] for the quarter, net provision expenses extremely well controlled. This is what we expect representing 4.7% of our portfolio. Expenses as a whole, an increase during the quarter is, of course, driven by a stronger origination, practically BRL 600 million in expenses with origination and BRL 160 million with administrative expenses and personnel. We ended up in profitability with BRL 195 million, and ROE of 11% due to the acquisition of Mosaico. If we look at the same indicators from a yearly viewpoint, we continue with very good margins with an outlook for improvement.

We totaled BRL 7.7 million in revenue in 2023. Expenses with net provision of 5.6% compared to a portfolio of 4.7% because of the control of the card portfolio in expenses, a growth of 2% as a whole. Now all of course associated to origination. Now administrative and personnel expenses growing 5%. And in 2024, we already observe a deficiency that is significant, and we will see a considerable enhancement during 2024 and these other expenses and the results for the year BRL 777 million, adjusted ROE of 11.3%.

Now in 2024, we have legacy deposit that will consume part of our results with maturity at the end of 2025. We're very close to the maturity date. And this will contribute upon maturity with an additional 2 points of return on equity, an important dynamic going forward that we will follow up on. To conclude with equity and capital, we ended the quarter with 15.8% of basel ratio, quite compatible with our growth strategy along with our funding base that offers a significant comfort to continue on advancing in our assets.

I would like to return the floor to Cadu to speak about the outlook for the year.

[Carlos Pereira Guimaraes, executive]

Now to conclude the presentation on Slide 21, these are outlook for 2024. We expect a relevant growth in our credit portfolio and a significant drop in the amount of credit assigned compared to the value of 2023. The NIM will remain similar. We will continue to grow our origination with an increase in the B2C channels.

Now the NIM after credit cost will grow due to the greater margin of the recent vehicle vintages. We will continue to focus on engagement levels and transactionality, driven by new channels, products and the repositioning of our brands, which will end up being more aspirational.

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

[Operator]

[Operator Instructions] Our first question comes from the phone from Olavo from UBS.

[Olavo Arthuzo Duarte, analyst]

I have 2 questions. The first, you have shown us the figures of your portfolio and the CDI operation. I would like to have an overview on the purchase of products and how we should look upon this for the rest of the semester? Second question refer to the legal framework for guarantees.

How there has been a recovery in terms of vehicles? And after the legislation that has been suggested, what is going to happen with the pricing of vehicles and how you are going to collect for this going forward?

[Carlos Pereira Guimaraes, executive]

Well, thank you for the question, Olavo. Let's begin with the purchase of the portfolio. It was a payroll portfolio, something we were able to do in December, a very good operation, and of course, connected to our bank strategy. New acquisitions may take place. We have actively sought out the acquisition of new portfolios, and we believe that they will appear throughout the year 2024. All of this has to do with our strategy. Now for those who understand risk, know of the price of purchase and sale, this was a very good opportunity with the right price. So we made the investment of BRL 1.3 billion. We do expect to carry out new operations throughout the year. Of course, if the profitability is good, now the legal framework of guarantees that will impact us in the vehicle business.

Well this law is now in effect, but there are still uncertainties riddling this. We don't know how it will work. The great bet is that there will be less friction when we seek out and apprehend a vehicle. An officer of justice would do this previously, you can now do this through notaries or through the department of motor vehicle. We still don't know how this will operate. Presently, we haven't changed the pricing of the vehicles based on our expectations of how this will operate. It's not very clear to us how all of this will roll out in practice.

[Operator]

The next question from Flavio from Bank of America.

[Flavio Yoshida, analyst]

I have 2 questions. The first question, referring to the credit portfolio. We have observed when we speak with other banks, is that -- they will also have an increase throughout the year. And I would like to know how you're getting prepared for this new competitive scenario that will be somewhat more fierce, not only how you're getting prepared in the auto business, but also in the area of payroll, which is one of your focuses. Another point that I would like to explore more, you were speaking about your credit portfolio for 2024 and your new credit assignment strategy.

[Carlos Pereira Guimaraes, executive]

Thank you for the questions, Flavio. First of all, in fact, well, we have always worked in highly competitive markets, vehicles, payroll, the workers' compensation fund or credit cards. These are very competitive markets. And we believe that 2024 will continue on with the competition what we have been preparing or differential something that will set us aside, so that we can compete in a more relevant way in the segment. As Inácio mentioned previously, the funding of motorcycles, we have more than 30% of this market. We are, by far, leaders in this funding a vehicle of used autos.

We are in the third and fourth place for the largest funders in Brazil. And this market, well, they have been very competitive for some time. We could have new entrants, which would make competition ever more fierce, but we believe that we are ready to continue to be relevant players in the segment in which we are present in vehicles, in payroll, in FGTS or the workers compensation fund. Well, this is our background during the last few years.

Regarding your second question, the growth of the portfolio; in 2023, we held an assignment of almost BRL 13 billion for the portfolio. In 2024, we're expecting a relevant decrease in this assignment. This is a tool to enhance the portfolio, and you will see this in our balance. Secondly, we're more optimistic with the increase in origination and increase that began in the fourth quarter. When you put together the increase in origination that began in the third quarter, and we're going to continue like this in 2024. And the lower volume of assignments in 2024 compared to 2023. This leads us to expect a significant growth in our credit portfolio.

[Flavio Yoshida, analyst]

Now this change in your assignment strategy, which is the underlying reason you have done this during the second half of the year?

[Carlos Pereira Guimaraes, executive]

Well, the rational, we always considered credit assignment as an important part of our business, an important tool to be able to generate capital, funding, managed risk. It has always been and will continue to be important for us beginning in 2024. In 2023, '24 not only Banco Pan, but the group as a whole feels more comfortable with an increase in holding back this portfolio because of the amount, because of the capital that we have that the group has or to have the amount of funding and the price of access to funding when we look at it through this broader outlook of funding and capital, not only for Pan, but for the group as a whole. This gives us the comfort or reducing the amount of assignments expected for the year 2024.

[Operator]

Our next question comes from Mateus Raffaelli from Itaú BBA.

[Mateus Raffaelli, analyst]

We're going to speak about credit again. When we began speaking about credit cards, we saw a significant increase in the number of issuance. Now you were speaking about your approach, your approach with clients. If you could give us more color to understand once based on your approach, what we can expect throughout 2024? So that we can work with this during the year and what it is that we can expect through this change.

[Carlos Pereira Guimaraes, executive]

Thank you for the question, Mateus. In the fourth quarter, we truly did increase the number of credit card issued. But if we translate this into expected risk what is this that we do. We base ourselves on the number of cards issued multiplied by the average limit, origination and the updating index. When working with this, the credit card in the fourth quarter has a production representativeness in the bank that is truly very small. There was an increase, but a binary increase when you work with these multiplications that I have just mentioned, quantity, ticket, usage and activation.

This gives us BRL 35 million of origination in December when we were aiming towards BRL 3 billion, which is still a minor business that we're working very cautiously with. The credit card on its own is a product with a very tight margin, but something that brings about imports and engagement, which is what we are seeking. Now having said all of this, we do want to continue to grow in the number of cards during 2024. So we don't expect a growth in the share of the credit card portfolio as part of the bank's portfolio throughout 2024. We hope that it will remain very close to about 5% that we have.

[Operator]

Our next question comes from Arnon Shirazi from Santander Brazil.

[Arnon Shirazi, analyst]

My question refers to the default dynamic. It has been relatively stable vis-à-vis previous quarters, but it has had a significant drop in terms of the 15 to 90 days, something that is very positive, which is your expectation for 2024? And I have another question for 2024, which are your greatest revenue? Do they come from credit, will the default levels pose a difficulty in this?

[Carlos Pereira Guimaraes, executive]

Not only in the recent past, the third quarter and the fourth quarter, but also for 2024 what we have said is that the default level will have a slight improvement. Our expectation for improvement in the results for 2024 comes mainly from better pricing and a better margin before the cost of credit and not due to a significant evolution in the cost of credit in our more recent vintages and I'm referring to the end of 2022 and 2023. The price of loss that we expected is more aligned with the price that we had set forth vis-à-vis what is about to come.

At the beginning of 2022, we have expected a loss of ex-ante pricing. We thought that the loss was greater. And of course, this pressure, the net cost of margin at the end of 2022 and mainly in 2023, the expected loss that we put in the pricing of products became more aligned as we tend to say at the bank, the problem is not to have a high loss or minor losses, the problem is that if you have a significant discrepancy between the loss that you thought you would have before the ex-ante pricing will complicate things.

So we see a slight reduction in the default indicators, but an increase in the net margin of the cost of credit, explained by what I have just said, due to the better prices that we have attached to origination.

[Operator]

Our next question comes from Brian Flores from Citibank.

[Brian Flores, analyst]

I would like to understand the dynamic of this new direction. You're working with the [BTG Pactual], but I think this dynamic will become ever more difficult if you could refer to this somewhat.

[Carlos Pereira Guimaraes, executive]

So thank you for the question, Brian. Now the sound was not very good. I believe you were referring to the FGTS. Yes, that was precisely origination of the workers' compensation fund the FGTS, in around [BRL 350 million BRL 400 million] per month. And this is what we expect for the year of 2024. It's a highly competitive market where we have a significant position. We have become leaders with a significant market share of origination, but also with a completely digital experience with self-contracting and the FGTS product continues to be very important for the Banco Pan. The origination of FGTS will continue in that range, BRL 350 million, BRL 400 million of that amount, 60%, 65% is B2C, the difference is for the bank correspondent.

This is a business that we like. It's important for the client. It has a competitive rate. And this is a project that has come to a standstill. It is important for the client. It is important for the bank, and we will continue to be flat in origination throughout 2024. Origination, when I said that the portfolios that we're going to grant in 2024, they were payroll and FGTS. When we assigned less in 2024, the portfolio as a whole, it means that the FGTS portfolio will also have to grow during 2024.

[Operator]

Our next question comes from Eric Ito from Bradesco BBI.

[Eric Ito, analyst]

I have 2 questions. First of all, I would like to better understand the growth of your credit portfolio that was significant this year. What do you expect in terms of portfolio growth this year? And if you will have an increase in profit in the coming quarters, because you're working with more profit of all vintages or if the growth is lower, this will swipe away the growth? And as Inácio mentioned, this new acquisition will bring about 2 more points in ROE. What will happen once this is more normalized going forward to 2025?

[Carlos Pereira Guimaraes, executive]

So thank you for the questions, Eric. First of all, we don't offer guidance from the bank. What I can say is that profit for 2024. We expect a slight increase. And when you grant less and were going to assign much less throughout 2024, this impact the short-term results and enhances the medium-term result. When we have less assignments, this will impact the short-term results, as we have better vintages, better indicators, more efficiency and cost despite a significant reduction in the amount of assignments, we hope to have greater profit in 2024 vis-à-vis 2023.

For 2025, the expectation is to have a significant increase. A larger part of our portfolio will have been held back until the end of 2024. When you speak about sustainable role in 2025 and 2026, a sustainable return on equity should be 21% to 22% for the bank. But this is for 2026. This is what we're seeking here of course, there is a certain path that we have to tread and this path is the integration of everything that we are building, integration of different channels with different products, and of course, bring in transactionality where we have had an evolution.

[Operator]

[Operator Instructions] As we have no further questions, I would like to return the floor to Carlos Eduardo for his closing remarks.

[Carlos Pereira Guimaraes, executive]

Thank you very much to all of you for your attendance at one more conference call. And as we mentioned during the presentation, we hope to have a 2024 better than 2023. We hope to see you again at our next earnings results conference. Thank you.

[Operator]

The Banco Pan's conference call ends here, we would like to thank all of you for your presentation -- your attendance. I'm sorry. Have a good day.

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