Banco Santander Brasil SA
BOVESPA:SANB3
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
11.93
15.27
|
| Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
[Interpreted] Good morning. I am Camila Toledo, Head of Investor Relations and Market Intelligence of Santander Brazil. Thank you for joining us this morning for the presentation of our second quarter 2023 results. This event is being broadcast live directly from our headquarters in Sao Paulo and will be divided into 3 parts.
First, our CEO, Mario Leao will talk about the key topics of the quarter and also the strategies that are driving our growth for the next quarters and also in 2024. Next, our CFO, Gustavo Alejo will present a detailed analysis of our performance and the results for the quarter. And at the end, we will hold a Q&A session when the analysts will have the opportunity to interact directly with our leadership.
Before we proceed, I would like to give you some instructions to help you make the most out of this event. For those watching us today, there are 3 audio options on your screen. You can listen to the entire session in Portuguese, listen to it in English or get the original audio. Simultaneous translation will be available in the first few options. To choose your audio preference, just click in the icon in the center at the bottom of your screen. [Operator Instructions]
Once again, simultaneous translation is available in both cases, or you can also choose the original audio option. Today's presentation is available for download at our IR website.
Now I'll hand the floor over to Mario Leao, who will start the presentation. Mario, please go ahead.
[Interpreted] Thank you, Camila. Good morning, everyone, and thank you for joining us today for our earnings results call of the second quarter 2023. I would like to start by highlighting the performance and resilience of our net interest income, particularly in the context where we still experience pressure on revenues, given the decision to tighten lending 18 months ago and the focus on higher rating clients more collateralized products. We expect this positive trend that we show you again to continue and accelerate over the coming quarters as we regain our risk appetite, always choosing products and correct clients to expand.
This performance is the directors of the increase in our market NIR, reflecting the continued repricing our commercial portfolio and a substantial increase in volumes, mainly of liabilities. We will elaborate on these points later during our presentation. We continue to demonstrate good asset quality given the continued positive performance of the new vintages, which give us the ability to continue resuming growth in the business lines we have defined as strategic. In addition, we had some nonrecurring items during the quarter which had a net neutral impact on our results as we will detail throughout this presentation.
Thus, we ended the quarter with a net income of BRL 2.3 billion, which means an increase of 8% quarter-on-quarter and equivalent to an ROE of slightly above 11%. Our strategic priority for the year remains focused on maximizing the profitability of our customer base through greater loyalty and in this sense, our high-income segment, Select and the entire corporate segment will play an even more important role in our portfolio.
In addition, we remain steadfast in our commitment to expand our strategic businesses, leveraging a complete ecosystem of numerous cross-selling opportunities and seeking to meet the demand of our customers throughout the consumer cycle. And this expansion will be supported by our great capacity for innovation and use of data, generating an increase in productivity and great operating efficiency, which allow us to deliver high quality and increasingly assertive and problem-solving services with an obsessive view vis-a-vis our customers.
On the next slide, Slide 5, we'll give you more details about our strategy. Today, Santander is already something that we'd like to call digital bank with stores and strategy that is aligned with the vision of a Santander Group as a whole with an aligned strategy that is even more focused in 2 major pillars: multilaterality and centricity. We dedicated a few years to focus in discipline, not only capturing important efficiencies but also maintaining a very single strategy of the Santander brand, to be the best consumer company being whatever the client prefers be it on digital and physical stores, ours or those partners such as Webmotors and Consumer Finance. Our focus is to promote a differentiated services where, how and when our clients prefer through our multichannel digital ecosystem, offering a wide range of products and services designed to cater to the needs of our clients.
We have made significant process in the massive user data. We have a digital system that provides an enriched flow which added to our extensive capacity to process this data, allow us to format the best journey and offer for clients in search of principality. These touch points allow us to use a significant number of variables to support our decision-making process from granting all the way to credit recovery.
One example of this ecosystem is a 32 million hits per month on our Webmotors and Consumer Finance portal and 10 million hits a month on Esfera, Sim, emdia and Return that are all part of this major Santander ecosystem. And the use of deep learning within our organization is nothing new. To illustrate, we can mention speech to text and natural language processing in phone calls in our remote channel which has yielded excellent results for the credit recovery business of the chatbot with a resolution rate of 73%. And we are already moving forward with generative artificial intelligence to support our service teams.
Slide 6, our next slide, highlights the metrics that reinforce our customer centricity strategy and the pursuit for principality, underscoring our focus on improving customer experience and satisfaction at all times. This is our obsession, and we will increasingly talk to the market about how we are addressing this topic. Through more assertive approach to consumer acquisition, we have managed to grow our client buys -- client base by 13% in just 12 months, and this growth has been sustainable. It's worth noting that the majority of these clients were acquired within our digital banking system, resulting in a higher rate of qualified clients.
A crucial indicator of our success is the number of loyal clients that find us. So those who own 6 or more products and who currently represent half of our active account holders. Our goal is to grow this into further while at the same time, increasing our base of active clients who are also account holders. To this end, we are investing in enhancing our CRM and prioritizing hyper-personalization. Moreover, we are continuously refining our value proposition through outstanding customer service and a wide range of products and services, including our loyalty programs, Esfera and our investment platform, AAA. These efforts have yielded highly positive results in terms of consumer loyalty with revenue per loyal customer increasing by 12% over the last 12 years.
When it comes to customer satisfaction, I want to reinforce that we are fully committed to delivering the highest quality of service. As proof of this commitment, we have seen significant improvements in our Net Promoter Score, our NPS across physical, digital and remote channels over the past year. We are not yet at the level we want to be, and we'll continue to climb. But these advances already serve as a clear demonstration of our dedication to continuously improving our customer satisfaction.
On Slide 7, we present additional information on our strategy for the high-income market. I've been continuously saying this to the market. And this year, we celebrated a decade since Select was established. And we could not be happier with the results we achieved. We ended the quarter with almost 900,000 clients, up 42% vis-a-vis a year ago. Our goal is to reach 1 million clients by the end of this year, and we will not stop there. We want to increase our share of the high-income segment with principality. At Select, we have promoted a major revamp in the segment, and we are working on several initiatives to attract and also retain these clients. Our focus is to offer personalized service, aiming to increase transactionality through an unparallel offer to the market. We provide specialized financial advice through AAA and now we are launching transaction with investment solutions abroad to further enrich our value proposition. The high-income segment plays a very important role in generating profitability in new businesses.
Just to illustrate, Select clients are 3x more loyal compared to retail individual clients. And revenues derived from this segment grow at a 3x faster pace. All this growth and progress is accompanied by a high NPS in the segment, which ended the quarter at 63 points and we expect it to continue rising.
Now Slide 8, I would like to draw your attention to our ecosystem. We've been talking about the Santander ecosystem. The idea here is to show how this plays an increasingly important role when it comes to customer principality, spanning 12 business sectors and offering a diverse range of services. This includes our investment model, a robust technological and operating structure, consumer solutions and services as well as initiatives in the culture and social domains.
Here are some examples of our most effective cross-selling models, starting with our cardholders. After activating the benefits of our Esfera loyalty program, these customers increased their average spending by 50%, which is very relevant. In the Auto segment, we have seen a 26% penetration rate of digital insurance offers in the financial sector through Santander Auto. Our efforts to extract more value from our ecosystem are not limited to cross-selling opportunities because we are also seeking to monetize our holdings.
This quarter, we acquired 100% of Toro stake and divested part of our 40% stake in Webmotors, taking our ownership now to 30%. In 2002, we made our initial investment in Webmotors and after a decade, we formed a strategic partnership with Carsales in Australia, which allows us to further strengthen our position in the market. Now after 20 years, we have reduced our stake in Webmotors at a price/earnings ratio of 42x, but we maintain our exclusivity with Carsales, meaning that we will continue to grow our products and services to an ever-stronger Webmotors.
And this week, more specifically, on Monday night, we announced a partnership between ben, our food and meal benefits company and Sodexo, now called Pluxee, which is designed to add even more value to the products and services offered by both companies. We will come in further on ben's transaction with Pluxee in the next quarters. In addition, we launched Tool Digital Services, an operating structure with ambitious plans to expand the service offer to the market in 2024.
On Slide 9, we comment on how we are continuously enhancing our investment platform to offer full and much more personalized services as well as a new digital experience. Our strategy of escalating up in liabilities have been generating positive results, with net spending reaching BRL 11.2 billion in the first half of this year. In addition, our revenues posted a good 12% increase year-on-year. On this front, we reinforce our positioning with the acquisition of 100% of Toro, as I mentioned before, a company with ultrafast customer growth, reaching 1.3 million customers by June 2023. In addition, Toro has a predominantly young customer base, opening up the possibility to position ourselves before a potential and good quality audience.
We also highlight here our progress with AAA, which achieved new growth in net spending per adviser, reaching BRL 2.6 million in the quarter, almost BRL 1 million a month and which is an increase of 35% compared to the fourth quarter of 2022. This differentiated model of specialized investment advisory services implied in an accelerated expansion plan, which allowed us to reach the market of 1,300 advisers this quarter with the presence in 90 municipalities after the success of this initial stage, we set the goal of having 2,000 advisers in 120 cities by the end of first quarter of '24, we want to draw even more from AAA. And finally, our performance in the private segment remains very positive with consistent growth in the net funding over the last 2 years and a satisfaction rating of 85 points, reaffirming our commitment to offering high-quality services to all of our clients.
Slide 10 here, we describe our corporate business, where we are building a benchmark financial services platform in the market. This quarter, we surpassed the 1.3 million active clients mark with the portfolio higher than BRL 200 billion. In wholesale, we continue to grow our specialized team, which brought about good results, such as the 7% growth in revenues and an increase of 21% in loan operations in 12 months. In addition, we highlight the quality of the portfolio whose share of wallet continues to grow among the best ratings.
This quarter, we announced a strategic partnership with SAP to streamline product digitalization and solution customization, thus improving client bank connectivity. In addition, we continue to lead the market in our main business lines, such as trade finance, where we have a share of 25% and foreign exchange operations, which we maintained the leadership for the ninth consecutive year according to the BACEN ranking.
With regards to SMEs where we have a huge focus on expansion, we continue to focus on winning new customers, reaching more than 45,000 new accounts opened every month. We also continue to focus on the loyalty of our base with 53% of our active customers already in loyal. In addition, we are seeking to increase transactionality in the segment, focusing on cash commissions and consortium which increased 10% and 26% in the year, respectively. In the quarter, the SME portfolio reached BRL 63 billion, up 7% year-on-year, maintaining our strategy of clients selectivity with 44% of this portfolio represented by higher turnover clients. We continue to closely monitor the evolution of the macro scenario in order to further accelerate growth here. And we have a very strong vision on that.
On Slide 11 shows our Agro ecosystem. Last quarter, we shared our ambition to reach BRL 50 billion portfolio. And we have been working diligently on several fronts to achieve this goal. This quarter, our portfolio has already totaled BRL 42 billion with 79% of this total coming from our free resources. We continue to invest in technology and processes and continue to expand our specialized team.
In the last 5 years, our team has tripled in size and now has more than 300 specialists, several of them being agronomists. Our strategy revolves around specialized and quality services, understanding the value of being close to farmers and meeting all of their needs. Also apply sophisticated risk models that incorporate economic, geographic environmental and structural data, very specific to the clients' operations. The success of our strategy is clear on the cross-selling side. In just 1 year, we have increased the number of Agro clients in our Select segment by threefold and by 22% in private, where we have already started this cross-selling for longer.
Our Agro belt has been further strengthened by digital transformation. By leveraging the technology for document recognition, we have substantially reduced hiring time and operating risks resulting in a much agile innovation pipeline.
On Slide 12, we present a quick evolution of some strategic businesses. In cards, we maintain our strategy of client selectivity with 97% of new acquisitions coming from existing clients of the bank and with a better risk profile. In Consorcios, we invested in digitalization, expansion of the offer multichannel distribution and improvements in after sales. This resulted in an increase in the origination volume of this product, which grew by 66% in 2 years. With a market share of 22%, our consumer finance business continues to hold its leading position in the market, seeking for an increasingly secure and profitable portfolio. 84% of new originations were made to the consumer and high credit stores. Here too, we are closely monitoring the macro landscape to return to faster growth in the coming years. We are confident that we can gain market share very soon.
In line with our ambition to BRL 75 billion in the payroll loans portfolio by the end of this year, we totaled BRL 63 billion this quarter, 13% year with a higher origination level than the market and increasing our share of wallet among both loyal and unloyal clients. We will continue to focus on digitalization and maximizing the profitability of the agreements.
On Slide 13, we detail how technology is at the heart of our strategy to power our business and our customer focus. We remain dedicated to business transformation and high-quality customer service through F1RST, our technology division and part of a global system of innovation and transformation. Our technologies focus on building this digital ecosystem with stores, multichannel, generating business and ensuring the best customer experience. We launched the new technology operating model and today, we have 27 communities, our business domains dedicated to support transformation and innovation, with teams fused with the business, ensuring agility, efficiency and quality for our business and customers.
New deployments have grown by 40% in the last 12 months with more quality and stability. All of this transformation and data use has gained momentum with open finance, which maximizes opportunities for principality gains. We received around 4.1 million active consents, 1.5x more than those [ sents ]. Currently, 91% of the bank's operations are already in our multiclient environment with the emphasis on the private cloud of our data center in Campinas, ensuring scalability and sustainability to our operation. This very robust technological infrastructure has greatly increased our flexibility and simplified our processes, resulting in greater speed, productivity and operating efficiency. As a result, we have cut our unit cost in half while almost tripling the total number of transactions when compared to 5 years ago.
[Interpreted] After covering all our strategies and growth levers, I will now invite Gustavo Alejo, our CFO, to present the highlights of the second quarter of 2023.
[Interpreted] Thank you, Camila and Mario. Good morning to you all. We will start with Slide 15, where we present our P&L. The first quarter of 2023 brought the continuity of our focus on clientele activity and its effect on our revenue generation. It's important to highlight the beneficial effects of the new credit vintages and asset repricing which are already starting to be reflected in a progressive improvement of our provisions and margins with the market. We expect this trend to continue and to intensify over the coming quarters. Our fee income grew compared to the previous quarter, mainly driven by the improved performance of capital markets and insurance.
Regarding recurring ALL, we saw an improvement of 12%, thanks to the new vintages mentioned before. Despite the impact of the collective bargaining agreement and inflation, our expenses increased slightly by 1% in the quarter which was a positive result that reflects higher admin expenses due to the seasonality of the first quarter.
The quarter was also marked by some nonrecurring effects that canceled each other out. Among them, the gain from the sale of part of Webmotors already mentioned, which totaled BRL 1.1 billion before taxes, a tax liability arising from the recent Supreme Court decision on PIS and Cofins of BRL 2.7 billion and the reversal of part of the additional ALL we recognized in Q1 of BRL 1.5 billion. As a result, our net income in the second quarter amounted to BRL 2.3 billion, up 8% when compared to the previous quarter, resulting in an ROE of 11% for both the semester and the year-to-date.
Let's move now to Slide 16, in which we talk more about our net interest margin. While our spreads have been impacted by our selectivity in loan origination which is part of a known and expected design, our client NII grew in the quarter. This growth can be attributed to the higher average balance and the benefit we had of having more calendar days when compared to the previous quarter. In addition, our market NII continues to show a gradual and positive evolution, thanks to the repricing of our banking book. For the coming quarters, we expect even more favorable results in this line as previously mentioned in previous quarters.
On Slide 17, we take a deeper dive into the evolution of fees and expenses. Over the quarter, there was a 2.5% increase in fees. This growth comes from higher revenues generated from insurance and cards and the rebound of the capital markets. Now shifting the focus to expenses. We continue to demonstrate our commitment to cost management. While expenses increased marginally, this was mainly driven by strategic investments in technology and the overall growth of our business.
On the next slide, we present the indicators of the loan portfolio and balance sheet segments. This quarter, we saw a reduction in demand for credit in some segments as well as the impact of the exchange rate variation, mainly in the large corporate segment. However, the positive evolution of Agro matched to an important increase in the rural product loans portfolio in the quarter of 24%, and our securities portfolio also grew by 13%. And as a result, the expanded portfolio reaches 2% at the end of the quarter.
In the individual segment, we continue to focus on secured products such as payroll and mortgage loans, which performed well during the quarter in terms of the portfolio. Approximately 66% of our total portfolio of loans to individuals, including the financial portfolio is already secured. Regarding our funding activities, we saw a growth in funding through time deposits, LCI and LCA with retail representing an important share. Total funding increased 3.4% in the quarter, and this reflects our strategy of increasing liabilities.
Finally, our CET1 ratio stood at 10.6% at the end of the period. Although there was a slight decrease compared to the previous quarter due to risk-weighted assets, it is worth remembering the implementation of Resolution 229 effective July 1, which will be officially reflected in the next quarter. Considering this effect, because it's already effective, we would have reached 11.2% Tier 1 capital, returning to our target ratio of between 11% and 12%.
Slide 19 illustrates the evolution of our asset quality. As expected, our NPL indicators continue to show favorable trends. In particular, our 15 to 90 days NPL showed an improvement of 30 basis points, mainly in the individual segment corroborating the higher quality of the most recent vintages. However, the over 90-day NPL showed a deterioration concentrated in individuals, reflecting the impact of older vintages and the renegotiated portfolio. We expect a good performance of the most recent vintages to contribute to the continued improvement of our cost of credit throughout the year.
Regarding our credit recovery operations, this quarter was posted by -- we posted the best performance in our history in this area, leveraged by artificial intelligence and massive user data. Finally, the despite a decline during the first half of the year, our coverage ratio remains quite healthy at 214%. This drop is partially attributed to the partial reversal of the additional provision for nonperforming loans.
Finally, on Slide 20, I would like to share with you some indicators that prove the effectiveness of the credit appetite adjustments we implemented at the end of 2021. The focus on clients with higher credit ratings and secured products has resulted in sequential improvement in the loss absorption of products such as cards and also personal loans. New vintages already represent 59% of the total portfolio. And currently, around 66% of our personal loan portfolio is backed by some form of collateral.
Moreover, the superior quality of these new vintages has translated into a more favorable performance of our nonperforming loan indicators. In fact, the short-term NPLs of these new vintages are 100 basis points lower than those of older vintages, confirming the positive impact of our credit adjustments.
And with that, I would like to turn the floor back over to Mario for his closing remarks. Mario, you may proceed, please.
[Interpreted] Thank you, Gustavo. And to conclude our presentation, I would like to reinforce some highlights of the quarter and especially some trends for the coming periods. Our loan portfolio continues to grow with growth in the strategic businesses such as corporate and payroll loans where we chose to grow, we are growing strongly, represented better margin performance where we expect sequential improvements further on. New vintages with a healthier client mix, we continue to positively impact the cost of credit. These trends, coupled with the obsessive pursuit of customer experience and principality of customers, supported by technology and increasing use of data makes us confident, and I am confident that we have a good capacity to grow our portfolio and the business over the next 12 to 18 months.
And with that, I pause, and I turn the floor over to Camila to initiate our Q&A session.
[Interpreted] Thank you, Mario, and thank you, Gustavo. We will now start the Q&A session. [Operator Instructions] Our first question comes from Bradesco BBI from Gustavo Schroden.
[Interpreted] My first question relates to the quality of the portfolio. There was a provision reversal, which, in our view, is relevant. And on the other hand, we saw that you also sold BRL 2.6 billion in your portfolio. If you adjusted the 15 to 90 days, maybe you wouldn't have the improvement that you reported if we made the adjustment of the portfolio sale. I mean if you look at the 90-day NPL, there was still an increase, especially in regards to individuals. So my question to you refers to this move, is it backed in what more specifically? Is it backed on the better vintages because there was a relevant drop in the coverage ratio in our reading. So I would just like to get a better understanding about this provision and whether it was a bit anticipated. I mean, given the fact that we still see the current indicators at least in our own readings, that they remain a bit challenging.
My second question now refers to the reversal of your provisions because you had to revert the provision you did last month about PIS and Cofins and I think they still have some parts to be reversed. Can you tell us whether this will come next quarter as a nonrecurring effect, so that this will help us in our modeling.
[Interpreted] Well, I will split this answer with Gustavo. I think it's important that we start with PIS and Cofins and then get that out of the way. And then I hope that -- I mean, of course, analysts can ask for the questions but -- okay. Yes, we restructured PIS/Cofins of all of the associated companies. We had shares of -- we had some cases, some losses from the bank, not only PIS, but PIS and Cofins and that we won the lawsuit, BRL 8 billion. So the Santander Banco, the Bank Santander SA had some PIS and Cofins losses. And today, together with this PIS lawsuit, we had PIS and Cofins lawsuits from the associated company. When the Supreme Court was favorable, I mean, was favorable to the government and unfavorable to the taxpayer, what they -- the final opinion was based on the merit and the merit applies to Santander and our associated company. So with that, for the associate companies, we had to make provisions for PIS and Cofins.
But your question, and I think this applies to other analysts' questions, what about the other 8.5-plus, I mean, looking at the reversal of the first quarter and the remaining from the bank. In the case of the bank itself, our thesis, in addition to the discussion about the merit, there was also a procedural discussion. And that's what led us to win that Cofins discussion back in 2015, and this is a discussion that will remain, and that's why Gustavo and I believe that we would need to make other provisions for this quarter. And so while we -- while there is this dispute not -- no longer on the case of the merit, there is no provisions to be made.
So we are not discussing whether we should discuss in 2 quarters that defeat, but that defeat was associated to the thesis based on the merit of PIS and Cofins. And again, as the associate companies, the associate companies through our ecosystem, there was a discussion solely based on the merit. So then we rebuild that provision. But for the bank, in addition to the merit dispute, we are still disputing the procedural ritual. And in terms of this procedure, we are very certain that we will win the case, that's why there are no provisions for that. And if you have any further questions, I can clarify them later.
Now in terms of our loan portfolio, now I'll try turn to -- will answer my part and then I'll turn it over to Gustavo. Why did we reverse BRL 1.45 billion in this quarter? Well, we reverted that provision for a few reasons. One, the ALL was generic in the first quarter, that was done because we wanted to be conservative because by reversing the entire thesis of PIS and Cofins, we created a positive extraordinary that could have gone through the line of results. But part of that provision was built up generic, and that was BRL 1.4 billion and that was because we were very conservative.
Looking 3 months later, I mean, the continuous performance of our new portfolios and the possibility of recovering the older portfolios, we concluded that, that conservative position and the generic ALL was no longer necessary. That involved a deep discussion with me, our CFO and others and the conclusion is that we do not -- no longer need that additional overlay of BRL 1.45 billion because the extraordinary effect that generated that overlaid in the first quarter was in part, constituted now. So we thought that it was correct to do it now, given again that the performance of the portfolio is fundamentally better.
Therefore, if we still remain more pessimistic in terms of the mix and the ratio of the new in relation to the whole, we could have held that for longer. But in our view, the performance is in line with what we expected and that 12% organic decline, if we look at organic ALL that had a 12% decline, that is also a very important number that is associated to the over-90 information. And even though that over-90 was deteriorated, this is also associated to the performance of the older vintages and the renegotiated portfolio that we are trying to reduce. And everybody asks us about that directly and we want to increase our representativeness of the new vintages. Okay. Gustavo, anything you would like to add?
[Interpreted] Yes, that's precisely what you said. The fact that you mentioned the BRL 2.6 billion related to the sale of the portfolio because part of the portfolio was at a loss, and that part also impacts the 15- to 90-day NPL. So part of the NPL is included in the BRL 2.6 billion.
[Interpreted] We now have a question from Flavio Yoshida from Bank of America.
[Interpreted] My question relates to your risk appetite. During your presentation, you talked a lot about your delinquency indicators that now are showing a better performance, that 15- to 90-day performance is improving. And in fact, this is a result of this greater selectivity that you started in 2021. But -- and I want to hear from you something about originating credit in a more intense way in terms of volume and also in terms of larger risk in your business lines. What we see is greater growth particularly in the more conservative lines in terms of delinquency like payroll loans and mortgage loans because the spread in these cases are lower. So what is your view in terms of accelerating origination?
And my second question relates to recovery revenue. This quarter, we saw a recovery -- a good recovery. Is this stemming from this new performance? I would just like you to give me a little bit more color about that.
[Interpreted] Thank you, Flavio and it's a pleasure to talk to you again today. So I'll try to be brief. The message, after all, it's just a continuation of the same message we've been delivering in the last 5 quarters. And every time we've been talking about the same topics, with the same soundness and predictability. And every single quarter, we become more certain that we made the right decisions. The decisions were made at the right timing because after September 2021, things became clearer. So with that, not only we will accelerate the more secured portfolios because we want to continue growing our strategic business. Our growth that is quite safe, payroll loans, out of financing, I mean, out of financing, it's -- is not performing that much because of the current contract of the entire market.
And now also, if you consider the cost of credit and new vintage as well, we are granting credit, but the borders are higher than what we had before. Every quarter that goes by, we are more confident because we say the portfolios that are growing, we will continue to grow them further. And in the portfolios, where are growing marginally or maybe credit cards is probably one of the most important example. We say, okay, probably it's now time for us to give more emphasis to these areas. I mean will we be comparable to what we did in 2021? I would say, absolutely not. We are not going to seek for our clients in the open sea, like we did in the past. We will continue to seek for principality, and this is something I've been talking constantly.
New clients are always welcome, but we will try to be more selective, even in terms of the digital clients, we want to have more selectivity. And Toro makes a very good, qualified selection. So client acquisition, yes, but we try to look for loyal customers in our base. But credit card, I mean, because of all of the correct decisions we made, we lost share. We are not happy with that, of course. So I'm not saying this with joy. But from now on, I think we can probably stop that decline, become more stable and put more emphasis in our specific audiences, like in-house clients, but credit card is an example of an area where we want to grow. We want to grow earnings and everything associated to credit cards.
So the answer is yes. Every quarter, we want to increase origination. Again, not in that open sea as we did back in 2021, but in a more qualified and selective way. But certainly looking for a growth quarter-on-quarter, that's why we say that the margins will grow from now on, not only because the markets will improve, but also because we want to increase our customer base.
[Interpreted] Flavio, it's great to see you again. Okay, recovery, as we mentioned in the past quarters, we use a lot of data intelligence in recovery. That's why recovery has been robust. We test different strategies, and we always find new strategies to increase collections. We are constantly seeking for new strategies. There was a benefit from some specific strategies where we acted more closely. So the trend is that our capacity will be increasingly higher in terms of collection, given the entire architecture and structure of our data modeling structure that we have in place. I mean this is something that has been built in the last 3 years. So we were able to make progress, and this is one of our strengths in this area.
[Interpreted] Now we have a question from Yuri Fernandes from JPMorgan.
[Interpreted] When you were talking about recurring...
[Interpreted] Yuri, I think that if you speak farther away from the microphone, we can hear you better.
[Interpreted] Can you hear me better now? My question is about the other lines. I think that there were more funding and legal provisions. My question about others is whether in the funding line, I think you had some losses in the quarter. My second question is about the market line. I think it was an improvement. The NII -- the market NII improved. But what do you expect going forward? I would just like to understand the progress in terms of market NII.
[Interpreted] Yuri, your connection was not very good. But I think you were asking about that line of others and what explains that variation quarter-on-quarter on that others line. And then I think you asked about market NII. You see that there was an improvement and what we can expect going forward.
[Interpreted] Okay. Others line, I couldn't hear your question very well. Your connection was poor, but I think you already look at the explanatory notes. There was a provisioning for contingencies. There was some evolution in that regard. So basically, this is one of the major moves we see in the quarter.
[Interpreted] Yuri, you also asked about labor, I think. And you will find an explanation in the explanatory notes in our release. The judiciary had an opinion between the end of last year and early this year. So this line is growing more in a way once this is decided, we may resume to better levels. So that was -- this justifies the performance in that first quarter. We can give you more details if you want to.
Again, we've been constantly referring to the improvement that we expected to have. In this quarter, we are already delivering some improvements. So it's important that we are delivering to our expectations, and we see a convergence of this negative number that certainly, we don't like that. But as our balance sheet is structured, we expect that quarter-on-quarter, we expect to see continuous improvement. And in the short run, we expect to revert that line into a positive line. And then we will be able to have a positive contribution of the market NII to the market. So every quarter, we hope to show you that in more concrete terms.
[Interpreted] Now we will take a question from Pedro Leduc from Itaú BBA.
[Interpreted] I would like to talk about the SMEs, it's a relevant portfolio with higher spreads, with higher cross-selling potential. So what do you see going forward and even in 2024, combined to the broader strategy of the bank. That was the first part of my question on SMEs. And again, I think that you have NPLs more under control and maybe you can tell me a little bit more about the demand side. And my second question is related to Desenrola. So any information you can share with me, like impact on results, cause impact on cost of capital. Anything you can share is welcome.
[Interpreted] Thank you, Pedro. It's a pleasure to be with you again here. So the first part of your question, SME, that's something I briefly mentioned during my presentation, and I've been talking to analysts and investors about that as well. Well, this -- it is -- this is a big bet. It's not that it was small and then they became relevant. But it accounts for 12% of our loan portfolio. But the view that I have, and I take this opportunity to share with you, it's a business that for us is very relevant because it impacts our results. It has performed quite well.
In the corporate segment, not only SMEs, we had a record year last year. And the first half year has more challenges when compared with last year because the macro scenario is tougher now. But the corporate portfolio as a whole performs well. We grew less this first quarter in the corporate segment when compared to what we expected. We dedicated a lot of our time in the first quarter to the SME portfolio so that we could make new arrangements in our portfolio. We work hard to calibrate the portfolios, to lead the portfolios with the qualities and the ratings that we wanted.
So by the end of this half year, we are very pleased with what we accomplished in terms of that portfolio. And in the second half, and from the second half onwards, we will certainly have a better performance. My view is that we will be able to double this business in the next 3 years. This will not be necessarily a nearly linear growth. I -- so if we have BRL 60 billion here, we have to look for BRL 120 billion in the next few years. Again, it will not be linear. But again, because for being prudent, we may decide not to grow as we did in the first half. But with everything we've been learning through our models, personalizing the offer and the dedication of limits to customers. I'm sure that these are strategic portfolios, and they will grow stronger from now on.
And this Desenrola topic, I'll leave it for Gustavo.
[Interpreted] In terms of recoveries, and I will connect Desenrola to that aspect. We've always had this focus in the entire customer journey. So we always have different offerings to our clients. With Desenrola, on tranche 1, we don't have a lot of relevant audiences. Now tranche 2, conditions are not so different from the ones that we offer. What happened is that we saw people more inclined to negotiate their debt with us, and we've been there for them. In terms of the impact, I think it's maybe too soon to say anything. But we see lower portfolio volume on Level 1 and Level 2, we still have to see.
[Interpreted] Now we have a question from Daniel Vaz from Credit Suisse.
[Interpreted] First of all, well, my question is about loyalty and principality. And this sounds to me very similar to your competitors. So I think that the environment is more prone to a qualified growth. But it seems like margins from overdraft and credit cards makes a lot of difference for NII. So not only this seems to be an environment of portfolio growth in those smaller risky lines, but also growth to the industry as a whole, and this is important for the maintenance of margins. First question is whether you agree with that view? And the second question is what is the bank's view in terms of cost control vis-a-vis the importance of maintaining client principality.
[Interpreted] Daniel, this is a very broad question, and thank you for asking that. I'll try to shorten my answer because this is very much connected to our strategic view and the view that I have been emphasizing with you from day 1, which is to transform the bank into a view of a consumer company. We talk about stores, we've talked about clients, everybody talks about clients, but we are constantly seeking for different answers to increase principality. So what are we doing in terms of expenses. We don't think about expenses as an input per se but we are focusing on self-funding because I have to invest in people if I want to reach principality and loyalty. I'll mention a few examples.
We grow Select to a number of 1 million customers this year. Even though I'm very digital and even though I have a very robust app and even though I have -- I use artificial intelligence, et cetera, I need the human element to serve my Select customers. So I am hiring some Select's experts, and I get the funding from that through efficiency from other business lines. AAA, we started with a few hundred, a model that -- it was an old model that would not allow us to escalate and reach the numbers we have today. And everything now is related to investments and all of these investments refer -- I mean we are investing even though we had losses in the past, but now we are making an extremely good expense management.
Our investment is about BRL 20 million a year, and that's a lot of money. So how do we earmark these expenses because even though things are not growing in material terms, but it's important that a channel that where matters, where customers need human contact when they need a mobile service that can be impeccable. And I have to constantly improve our app or maybe design a new app, et cetera. So the answer to expenditures is a way of getting to the top line and how do we get there? We get there by bringing customers closer.
So what are we doing in terms of credit cards and overdraft. I mean, we are just looking in-house. That doesn't mean that we do not have the option to grow because we are growing well quarter-on-quarter, and we continue to grow. But we -- this is not a race for who has the most clients. But the clients that I have, how do I bring them closer to us. It's, on average, clients have 5 accounts per client, more than 1 million accounts throughout the population. How can I be the #1 account? And these require several answers that go through CRM, payroll and the offering. We have to simplify the offer, and we will choose to do that in an impeccable way. So I hope I covered some of the elements of your question.
[Interpreted] Now the question comes from Olavo Arthuzo from UBS.
[Interpreted] I have only one question. I would like to draw your attention to the capital side of the bank. Because in the second half, in early July, there was a regulatory change in terms of products and further on, in 2025, there are some discussions related to RWA changes to the operational side. So my question is whether you could give me an idea of how much that first change that was enforced right now will impact the bank's capital in a positive way. And also whether you can give us an idea of how much this operating RWA change will impact the bank in 2025. And in the midst of all of that, how do you see a possible capital payout right now or whether you will be more conservative in terms of these 2 new resolutions?
[Interpreted] In terms of the first part of your question, in terms of Resolution 229, as I said before, the positive impact is of 60 basis points. So in our balance sheet, we have 10.6% effective July 1. This ratio will go to 11.2%, and this is within the range that we believe to be comfortable and adequate. This is the first part. Now, in regards to operating risk. I think it's a little too soon to tell you what the impact will be because this is an ongoing debate. We don't know what the ratio will be. And then after that, we will be able to evaluate whether we will change our payout policies -- dividend payout policies.
[Interpreted] Now we have a question from Tito Labarta from Goldman Sachs.
A couple of questions, I guess. Mario, you mentioned you're moving into higher income segments. Just wanted to ask you about how do you view the competitive environment, both in the high-income segment and the low income segment and following on previous questions, you talked about principality and gaining that. So I just want to see how you feel Santander is positioned relative to your peers in the 2 different segments? And also following up a little bit on the capital question, you're around 11% quarter 1, more or less, but with ROE around 11%, how do you feel you're positioned, particularly once rates start to come down for future growth in these segments from a capital perspective and your -- compared to your peers?
Sure, Tito. So I'll kick it off with the [ perspective on ] [indiscernible] our competitive landscape on high income, you ask about low income as well. So I'll cover both, and then Gustavo will comment on capital. So on high income and we talked about it a couple of months ago when we met in New York, how do you guys position yourselves? How do you guys differentiate? It's a very fair question. We ask ourselves every day. It's not obvious. And we keep -- we should keep asking and repeating the answers and enhancing them.
There's a few answers. Our approach is as per why we believe we have a consolidated franchise. It's not that we're building something. We are reaping the benefits of having built through the last decade, and we are now reaping the benefits. We're not satisfied. We want to double. So we're going to be much bigger in high income. High income is less investments, right? So we cover clients in Select, which are not necessarily employee, but they are -- employed, but they are investors. So the approach is, a, the lowest load per adviser per IFA across the industry. So we kick off AAA with 100 clients per adviser. On average, competitors, both broker-dealers or banks, they have between 600, 700, sometimes even more. So obviously, it's a mathematical thing.
When you have 100 clients you cover, you can cover much faster, much quicker, much closer. Obviously, we can enhance that low towards maybe close to 200, but we're always going to have in our operating model for AAA, a lower account load and therefore, much more principality derives from that relationship.
We also invested a lot in digitality in the apps, what we call the investment platform. There's still a lot to be done, but we believe we are very passive with peers on the digital front. On the remote side, on being able to talk with a human, not necessarily with the bricks of a store, we offer 24/7 personal response via chat, via telephone and obviously, the stores in the open hours. So we believe we are a multichannel in our high income segment in a way that some of our competitors, which are, for example, fully digital, they cannot offer.
The behavior varies across the country, Tito, as you know well. But in most of the regions where we have Select stores, customers actually do like to go to the stores and talk to the specialists. So we believe those things combined are differentiating factors. And very soon, sharing the spoiler here, very soon, we're going to join the international account, debit card, et cetera, front and hopefully, with that, we're going to complement the offer even further.
On low income, it's a different answer. Like I said before, we're not looking at open seas type of client acquiring and after that, becoming the principal bank. We have a lot of low-income clients in our base, which are the clients we are mostly focused on, payroll clients. There are a lot of payroll clients that based on the pyramids of all companies, they are low income on average. And with the knowledge we have about the employer, the behavior, the sort of fixed income type of approach on a risk perspective, we believe we can do much more in low-income clients, including credit cards, including [ cheque especial ], the overdraft accounts. And by that, we believe we can keep growing in our low-income segment in a much more controlled way than, again, we did in the other part of the cycle.
And then capital, Gustavo?
Yes. Tito, as I just mentioned, we are within the range that we are -- we consider an important good range. Obviously, that in the future, we're going to see a better performance in depreciation and also in markets. And potentially, we are going to have room for more improvements in terms of profits. So all in all, we are comfortable with the range that we have and, in a perspective, even more.
[Interpreted] With that, I would like to conclude today's conference call. I would like to thank you all very much for joining us this morning. And after this video conference, myself and the entire IR team from Santander Brasil will be available to clarify any further questions. Thank you all very much. Have a good day, and I'll see you soon.
Thank you all very much. I'll see you next time.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]