Banco Bradesco Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2023

There are 3 speakers on the call.

Operator

Vessel ratio to year 1 was 55 bps. Finally, the insurance group continued to show a good level of results, making a significant contribution to the bank's performance. Such as Irene and Kunumi, companies specialized in these technologies, we also have excellent partnerships. We have more than 300 data sciences and around 500 models that use generative artificial intelligence. It is the experience, which is an area that DESO, which has a mandatory presence in all of the organizations' squads, has the objective initiative of making the clients' journey always more current, fluid and enjoyable.

Operator

And it has been recognized by clients and from publications and awards and our digital channels with very significant numbers. In individuals, for example, on average clients access, our individual account app 20 times a month and there are now over 16,000,000 accesses per day. BIA, the digital intelligence is a pioneer among Brazilian banks capable of carrying out transactions and it continues to evolve with the slogan Make it easier with Bradesco, which is already in the media. In addition to all the products and services already running, it is now doing PIX instant, transactions using WhatsApp and working to prevent fraud in case of suspicious transactions through messages to our clients. Everything we are doing in digital gives us certainty about the path we are following with our clients, allowing greater autonomy with a better experience and for us much more business and lower cost to serve.

Operator

Along those lines, we also developed Bradesco global solutions in this constant suit to enhance experience for our services and channels. We are reinventing and improving the way we connect to our clients by launching Global Solutions, a new open, connected, customized, multichannel platform. Our client journey is showing tangible digital transformation in wholesale banking, which began a few years ago. Our proposal is to offer a unique experience in the banking industry. Global Solutions is monitoring our clients' needs so that we can always offer companies the best solutions for financial management such as cash management, payroll, Insurance on a multilingual, multicurrency and multibank platform fully customizable for each company with the advantage of visualization across multiple companies in the same conglomerate.

Operator

In our high income vertical, in the slide, we show some numbers in detail, a key point for our strategy, something we have discussed a lot with you, I. E, our performance in the high income segment, our goals to increase our share of wallet gaining principality in the customer relationship. In Bradesco Prime, we have more than 4,000 client relationship professionals and more than 2,000 investment specialists working to enhance services for this segment, constantly focusing on delivering a differentiated experience For our clients, Agora, our broker at house currently has JPY 81,000,000,000 in assets under custody

Speaker 1

and around one 1000000000 clients.

Operator

In order to further enhance this experience and deliver advantages, we are now charging we are not charging any brokerage fee for trades made through Agora's app and website. And another area of Odessa's asset is a key actor this year with over 700,000,000,000 yen assets under management, positive net funding for the year and outperforming the industry in terms of growth. Bradesco's Asset Manager has earned recognition and several financial industry awards. A highlight with the bond funds, which in addition to good to mention our newest asset, TVO, focused on alternative funds and which currently has JPY 34,000,000,000 asset under management. The bank that stands with you, these initiatives in our high income vertical industry of in Brazil and also to our offer of international products and services.

Operator

A good example of this is the My Banat, international digital account that we launched in July this year, showed convenience to our clients. It has already reached more than 100,000 accounts industry, at Bradesco Bank and on the other hand, the private bank operation also continues to expand with 45% increase in client assets and liabilities reflecting the evolution on real estate loans, cards and investment industry. Bradesco Bank's operation is also transforming its digital journey to add agility, autonomy and convenience for our clients. At Global Private Bank, which includes our operations in Miami, Luxembourg and Cayman. Our customer satisfaction indicator, NPS, stands out in the market.

Operator

It is also worth mentioning the international awards that highlight our team's quality. For the 4th 1st consecutive year, we have been named Brazil's Best Wealth Management Advisor. I would also like to touch on the cards area. I should highlight 2 new novelties in the card segment. For some time now, we have focused on partnerships that create value and centrality for our clients with Principality to the 4.

Operator

We have recently announced exclusive partnership with Amazon and we are the Amazon cards issuers. So This partnership has already posted excellent numbers in its initial months, and it is part of our strategy of associating with companies and brands of great value for clients. We have a complete portfolio, the only one that covers all major current initial brands, we also have just launched Bradesco Centurion American Express, which It boasts the best benefits and value a card can deliver for the most demanding clients. Again, Principality, it's all about Principality. We have focus on repositioning in the high income segment.

Operator

And these cards currently account for 64% of individual revenues, first contributing to our 2 digit growth in card revenues. Another important point is to speak about agribusiness. Farm loans are on the rise. We are a leading bank in this area. We continue to evolve in our offering and structures to deliver outstanding customer service.

Operator

Last quarter, I shared with you the launch of our e agro forum with you. For this quarter, I highlight our JPY 19,500,000,000 volume disbursed, which was 100% up compared to the previous quarter. Our structure focused on Agribusiness has 1,000 points of services distributed across Brazil in addition to 14 ecribusiness platforms and we are adding another 4. We have more than 100 specialists who help our clients with consultancy and advice. Due to the importance of this segment for the bank and for Brazil, we will continue to strengthen our structures and operations.

Operator

Malvin, here are the details for our Q3. Net income was up 2.3 percent reaching 4,600,000,000 for the quarter. On the annual comparison, we had an 11.5% decrease. Our credit provision expenses fell 1,100,000,000 and delinquency ratios have already shown improvement. Client NII for the quarter was lower mainly due to the product mix effect.

Operator

On the other hand, market NII has continued to show evolution. It was already positive in this quarter and will continue to improve and be positive in the Q4 and along the year of 2024. Our insurance group continues to post excellent results and we'll be ending the year with revenues greater than BRL 100,000,000,000 and over 23% ROE. We will be showing more details in the next slides.

Speaker 1

Now let's talk about our loan portfolio. In Corporate Finance, it was 1.8%, mainly driven by large corporate for credit origination to small companies given the economic situation in this segment, which is experiencing higher delinquency ratios. We are set to increase origination in the segment in the Q4. We are already increasing it. And due to the credit policy adjustments, our individuals' portfolio were down by 0.1%.

Speaker 1

Even though credit origination was growing in the 3rd quarter when compared to previous quarters, and we will continue to increase credit origination in the 4th quarter. As interest rates fall, we see demand for loans improving in the lower risk segments such as vehicles, payroom deductible loans and real estate loans. The daily average of total landing in this quarter was 14% higher than the previous quarter, being 26% higher in individuals and 11% higher in corporates. Even considering that we grew during the quarter and we have not yet recovered in all portfolios by the same pace, it is a fact that our origination and lower risk Mix are still squeezing the client NII. We believe that we will get to normalize origination levels throughout the 3rd quarter and throughout the year 2024.

Speaker 1

At this moment, we are operating below the guidance range. All our reviews and reevaluation of credit models and policies have shown important results. The new credit vintages are still performing 50% better than the 2021 vintages, And we continue to monitor these delinquency ratios in short run and the volumes. The new vintages already account for 57% of the individuals portfolio in the retail banking segment. The quarter's ALL was 9,200,000,000.

Speaker 1

Credit provision expense was 10.9% lower than the previous quarter, so this lowered the cost of risk to 4.2%. The year's guidance range goes from €36,500,000,000 to €39,500,000,000 At this time, we are expecting to end the year close to the top as we indicated previously. Despite the improvement, we're still operating with a high level of cost of risk because this is a long tailed process. The total credit provision balance was basically stable and quite steady at BRL 59,000,000,000, accounting for 9.4% of the loan profile. Our coverage ratio for over 90 days fell to 155%.

Speaker 1

However, excluding 100% provisioned loans, this ratio remained practically flat at 239%. As we have been saying, we see the reduction in the level of coverage as something natural for the end of the credit cycle and at a moment when credit origination still low. Our coverage ratio is certainly starting to improve with lower NPL and increased credit origination. Speaking about NPL creation, that It was the highlight of the quarter. There was improvement across all segments.

Speaker 1

It reached 10,000,000,000 yen which was a significant drop when compared to the previous quarter. In terms of individuals, total JPY 6,500,000,000 and with companies accounted for JPY 3,500,000,000. NPL creation is set to continue to improve over the next quarters. Our 90 day delinquency ratio was down by 10 basis points with the same level of improvement for individuals and large corporates. In the SME segment, there was still a worsening in the ratio, but less And in recent quarters, despite an unfavorable denominator effect due to the declining in the portfolio, we believe that SME delinquency will at least stabilize in the 4th quarter since the vintages have been posting much better performance.

Speaker 1

Now short term delinquency, you can see that there was an improvement across all segments: 30 basis points in total delinquencies, 20 basis points in individuals, 40 in SMEs and 80 basis points in large corporates. This performance should continue to benefit longer delinquency in the coming quarters, that's for

Operator

sure.

Speaker 1

Total NII for this quarter, it stood at R15,900,000,000. Market NII has turned positive, showing an improvement of R1,300,000,000 in comparison to the same period of the previous year, and it will continue to evolve during the Q4 and also throughout 2020 news report, client NII fell by 9.6 in the annual comparison, reflecting lower volume of loans and a initial 0.6 percentage points decrease in average spread, which stood at 9.1% due to the mix of lower spread and therefore lower risk. We are below our total NII guidance range. Fee and commission encompasses a challenge, reflecting regulatory aspects and the competition with new entrants that still have regulatory asymmetries. Industry, in terms of asset management, the changes that we have made to our strategy are already beginning to produce effects.

Speaker 1

End cards, the trend is to continue to improve due to the expansion and new products in the high income segment. In relation to guidance, we posted an improvement and got closer to the range we had previously indicated. Total operating expenses were up 8.1% in the annual comparison. However, personnel and admin expenses together grew by just 0.6%. The large contribution to higher total expenses came from other operating expenses line due to the low comparison base in 2022.

Speaker 1

In the Q4, other expenses comparison base will be normalized, thus reducing the total expenses line's annual growth. The collective bargaining agreement of 4.58 percent came into effect as of September, so it impacted our personnel expenses line at the end the final part of the quarter. Compared to the Q3 of 'twenty two, this line showed a fall of 0.2%. Admin expenses in the same period only grew 1.4% as a result of our efficiency initiatives. We are promoting a far reaching review end of our service model with a focus on reducing the cost to serve.

Speaker 1

This involves adjusting our physical presence, which will continue in the coming quarters Ed has the strategy of Bradesco Digital as one of its main levers.

Operator

The income

Speaker 1

from insurance for the quarter was rmb4.6000000000. Year to date, growth is 25.6 percent at the top of the guidance. The quarter's net income was steady at 2,400,000,000, showing a almost 24% ROE. Premiums continue growing, reaching BRL 28,200,000,000 in the quarter and 79,000,000,000 in the year to date numbers. The period's result also benefited from improved operating efficiency and acquisition cost ratio in addition to financial income.

Speaker 1

13.4 percent 50 bps in total peso, which achieved 16%. We continue to make full provisioning of interest on shareholders' equity, which has now reached 8,600,000,000 for the year. Our liquidity position remains quite comfortable with LCR closing at 183%. So this is the end of the presentation. Thank you so much.

Speaker 1

And once again, thank you for joining us. And now I will join Casiano and Ferretti for our Q and A session. Hello. I am back now. And now Joining me is Octavio Encaciano.

Speaker 1

We also have the CEO of the insurance company.

Operator

We will initiate now the Q and A session.

Speaker 1

Questions can be asked in either Portuguese or English. Answers will always be in Portuguese. Our first question is from Helaut Meloni from Autonomous. You may proceed, sir. Good morning.

Speaker 1

It's nice to see you again, and thank you for taking my questions. We had a very important derisking of the book this quarter. I would just like to understand whether this already places the bank in a position where you can resume growth as soon as the market improves. And what does that mean in terms of client NII for next year and for the coming quarter? Thank you.

Speaker 1

Hello, Renato. Good morning. Good morning, everyone. It's a pleasure to be with you. Thank you for your question.

Speaker 1

Yes, Renato, you're right. We had to make some adjustments to our loan portfolio due to the delinquency levels that we noticed, especially coming from in our small and micro sized companies. But looking at the numbers, we may be sure that we already reached The peak of delinquency and from now on,

Operator

we will continue to grow.

Speaker 1

I mean, we never cease to operate. We continue to operate normally. But the fact is that we were trying to work with safer portfolios, with lower delinquency levels, and we are now looking at the growth of mortgage loans and payroll loans and rural loans, but the more riskier portfolios had to be put on hold for a while and mainly also transactions involving small and micro sized companies. But we've already experienced some growth, which you could notice from the presentation. There was an important origin both in terms of individuals and also companies.

Speaker 1

Therefore, from now on, I mean, growth has been resumed. It's returning to normal levels throughout the Q4. I think this should continue. And the same thing goes for the year 2024. It's all so natural that as there hasn't been any strong growth in the loan portfolio, it was a very modest growth of our loan portfolio.

Speaker 1

And this is something That happened maybe across the board amongst all financial organizations. So client NII is a bit hurt, and it takes longer time to resume that margin, I mean, based on the all the operations that we are generating. But as I was saying we didn't stop to operate. We are still operating with clients with a better score, with a better risk profile. And this gives us

Operator

a certain

Speaker 1

comfort in terms of the results, but this will pick up with time. And in addition to that, There are also some other growth levers in terms of client NII. And it's important to mention the underwriting performance that we had this quarter that has been performing well. It grew almost twice as much. Therefore, the work we've been doing at Bradesco Asset is already showing some significant results, more than EUR 770,000,000,000 of assets under management.

Speaker 1

And this is also posting positive results to our company in addition to Bradesco Financimento, Consorcio And the insurance company, which remains an important lever and it is certainly contributing to the results of the bank, All of these different levers, as we move them, they are here to improve our final results in addition to all of our work in terms of cost control. Therefore, the expectation going forward is to see the growth of this portfolio. Thank you.

Operator

Particularly regarding credit, you have the perception that the problems Great. And you had to make a more dramatic adjustment and whether you're going to maintain your guidance for the rest of the year. Hello, Mario. Thank you. Good morning.

Operator

Indeed, in some lines of the guidance, we are below the expectation. We are absent the low range of the guidance, but it was absolutely to make an adjustment in loan granting particularly for small and midsize enterprises, Mario, because like I said, these are the loans that give us the best margins with best rates industry and you can add new services. So that became a little tighter for us to pursue the guidance. But we have an expectation also given the growth of loans in the recent quarter, the evolution of credit, as I mentioned, our expectation is to grow. We should target, I have to tell you, more the lower range of the guidance, but we are working on it.

Operator

Well, credit, I think we can talk about this. We have to adjust industry market NII, as we mentioned, and this was solved. It's water over the under the bridge and this will be solved in 2024. We still have a large discrepancy in SMEs and also for individuals. This bothered us.

Operator

We had to make some necessary adjustments for that. And when we make these adjustments, we reduced the speed of loan granting, we had to slow down. We continue to operate, yes, but with companies with a better risk rating and better guarantees. But we kind of hold back those operations that have no guarantee and that offer a credit NII that is term. So that's an ongoing work that we do to maintain the loan book at a normal acceleration.

Operator

Q4 should show a credit acceleration in all that for like corporates, individuals or even SMEs. So it was necessary. It was responsible on our part to make that adjustment, Mario, so that we could control delinquency. In the 90 day delinquency, we could see a reduction. When we look at shorter delinquency, we can also see a reduction in all wines, significant reductions in the shorter term delinquency in all wines.

Operator

And when this shorter delinquency will become an over 90 day past due delinquency. The expectation is that this will improve and this will improve all the interest rate curves. That is the work that we tried to do. 2 days ago, we ended the month of October and we can see SMEs Delinquency reducing it. It was what we posted a lower delinquency than in Q3.

Operator

So our expectation is to continue to work hard to to your answer. Mario, as we have been saying, it's something important. Our RPS, insurance expenses, guidance and even AAL ALL on guidance, we will achieve the guidance. Like you said, we do have a challenge. And as Otavio mentioned, it is important for credit and client NII as a whole.

Operator

And Octavio mentioned about when we adjusted the guidance in the end of the first half, we had a better expectation for SMEs, we had more items in our balance sheet such as insurance, revenues, fees, etcetera. So there's this movement. Perhaps it was somewhat more detached in Q3 compared to the guidance due to the SME. But all other lines overall, moving forward, 4, almost all of them,

Speaker 2

4. And

Operator

this is what we are pursuing to in full speed in all lines to increase the credit NII in this new normal. We have to remember that we are starting with a smaller base, but our growth will be according to expectations in 2024 despite. If I may ask a follow-up question. What were the changes in the product model to contain the problem. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Mario, we are a bank with a footprint all over Brazil.

Operator

We are present in all states, in all municipalities of Brazil actually. And there are different situations in different municipalities in each one of these different cities where we have clients. Some are more impacted by a higher interest rate. Actually, the whole country is impacted by a higher interest rate. Others are impacted by perhaps local issues.

Operator

Of the year, the changes made were not just the credit model, and I'm referring here to the mathematical model where we had some fine tuning, but we had changes in our credit policy in terms of the appetite in which to operate. Perhaps not operating with this client or operating with this client only if they can provide a guarantee of some sort. So there are a number of variables. I cannot really list them all here, but we basically had a more adequate adjustment In our risk appetite, geographically speaking, also according to sector, so that we can have a greater accuracy in defining the models. It's hard to mention one variable or another, but the accuracy of the model now is very much directed to the right pricing, adequate guarantees, geolocation so that we can be more correct with our model.

Operator

In addition, we brought many of the operations this detachment of the delinquency curve, we brought many operations in to be analyzed in the traditional model. In other words, What is it that we need to adjust the model here and there? Where do we need to adjust the model? And that's the work that we did to adjust the credit policy and the credit modeling in this result. And let me add to what Otavio said.

Operator

In even the cohorts this year change, we've been speaking about the cohorts. The cohorts already reflect these policies by the title mentioned. And the cohorts give us Peace of mind that we are on the right track with the exception of LCA that required more adjustment in Q3 improving in October. But the CACORES Give us some peace of mind that now we have the policies coherent to the macroeconomic scenario that we are envisioning for the rest of the year next year. Of course, we have the high interest rates.

Operator

We have to have the country growing again, credit origination again. And NPL creation is good news. When we had a reduction in almost 1,000,000,000 in when we had a reduction in almost 1,000,000,000 in the quarter. This was very important to show that the right things we did and these were quite big, both in origination and in credit policy. All of that gives us comfort so that since July, we've been improving.

Operator

And as mentioned, in addition to all these specific points mentioned by Otavio, if there is one point that perhaps we got wrong was perhaps maintaining our risk but tight perhaps a little longer during the cycle. I think that perhaps it was the wrong time to adjust hour risk appetite. And we refer to the latter amount, we adapted our processes and reviewed our policy.

Speaker 2

My question is Your ability to improve profitability in sort of the current competitive environment, right, you've gotten a bit more cautious with lower in the lower income segment And you also have digital competitors there with low cost to serve. And then now you're moving up to higher income where you have incumbent competitors with historical advantages and other competitors with strong investment platforms. So just want to think about how you will fit into this sort of new competitive environment. And when we look at the ROE, not on a consolidated basis, but your insurance ROE has been fairly healthy in the mid-20s, banking ROE mid single digits sort of at best. How do you think about the outlook of those two segments in particular, ability to improve the banking ROE and then with insurance next year, perhaps some headwinds with lower rates, will that insurance ROE kind of normalize a bit so that could also be a little bit of a challenge?

Operator

Thank you, Tito. In the competitive environment we are operating in, growing or not growing, lower income, difficulty to grant loans for this population and costs to serve, there are some important aspects to mention here. The stability of increasing the profitability of our clients in this competitive environment, I think that Bradesco has an important geographic footprint present in all municipalities of Brazil, as I mentioned before. We have to adjust this and we've been doing this. In the last 2 to 3 years, we've been working to reduce our cost interest to serve in the different geographic distribution of our branches.

Operator

In this presentation, you could observe the size of the adjustment we made in our headcount and also in our physical structures, the physical branches of the bank, rethinking the structure of the branches, their size, whether they should remain open or not in the different locations, With a vis their ability to create results, the GDP of that region or the municipality, that city we are operating in. So these variables we are assessing, obviously, we are a Brazilian bank. We have a responsibility with all of these municipalities. But today, people have changed their habits. The way clients relate with the banks has changed.

Operator

There are some digital banks that don't even have branches, but these are banks that are well positioned in the market. So it is necessary. It is absolutely necessary, Tito, that we make adjustments, adjustments we've been making and we'll continue to make in 2020 form a slight thing and working hard on this because it is important. The fiscal cost serve is quite high in our bank and we have to make adjustments. In January, Vodiscu Digital will be pooling implemented together with Nxt so that we can serve these clients that open checking accounts with Bradesco that come to Bradesco.

Operator

And we want to serve them 100% digitally as long as they want this without the need for the clients to go to the physical branch of the bank unless they need some kind of advice, consultancy or such things. So these brands will be complete of sale. It will be a lot smaller with all the associated costs of armored cars, Guards, etcetera, all of the costs linked to a brick and mortar agency or branch. So that's number of our bank. We are always operated with a retail bank and will continue to operate in this segment with the adequate risk appetite for each one of these audiences and with the right pricing.

Operator

Prices defined according to geography, like I said, price is defined according to type of guarantee, price is defined according to profitability, relationship with the client, the municipality that the clients have with our bank, but always with the adequate price. So that's regarding low income segment. For higher income, like I said, everyone wants to operate in higher income. But with this goal, we believe we have a comparative and competitive advantage. Firstly, because we can serve the higher income audience in all places of the country.

Operator

We have 1,300,000 clients that are in higher income, Bradesco Prime, not to mention Private Bank, which is growing and growing. Now we have more than and they do not have yet a manager Australian firm. And you all know that when we have a checking account with an exclusive bank manager for this client, This client becomes a lot more profitable. We can bring the client's Principality to our management and of course this client will be a lot more profitable. So you are right, this is an extremely competitive market, but we have a blue ocean to work with these higher income clients.

Operator

Also, the bank, the corporation itself enjoys a competitive advantage of being able to provide all products and services, we have an insurance company, a consortium company and asset actually 2 now with TIVIO. To asset management companies. We have another financial company. So we have all products to serve the needs of these higher income clients in addition to cards. Like I mentioned, we have a card geared to higher income than Amazon card.

Operator

So we'll have products in our shop to offer to these clients, always respecting a customer centric approach, the right product at the right time in the moment and the last moment of this flight. All of that And the industry will allow us to compete better in this competitive landscape. Like I said, the insurance company is coming strong delivering a very adequate ROE, contributing decisively for the earnings of the bank. And of course, the ROE of the bank will consequently be a lot greater. Of course, we're not happy with the ROE industry that we are recording, it is inadequate.

Operator

This is explained by delinquency and market NII in the past, but we are recovering the ROE. The insurance company as well as all of the other companies of our organization are important in forming the result. So looking forward, our expectation is that with all the work we are doing with verticals, with the higher income segment adjusting the structures, an important adjustment to our structures With the related companies, Bradesco Insurance, Bradesco Asset, Cars, all of the different levers that we can work with, With all this, we'll bring better results to the organization. We'll improve our ROE not only because of the increase in the loan book, but because of all of the products and services that we can offer to these clients. Thank you for the question, Tito.

Speaker 2

Thanks, Octavio. That's very helpful. Just one quick follow-up. On the insurance ROE, is it fair to assume that there could be some pressure from a lower rate or how do you think about ROE versus interest rates for insurance in particular?

Operator

In the initial, Tito, Brightcove Insurance posted and is posting significant results this year. This is not new. You know the insurance company really well. The insurance group has been posting recurring results for Bradesco. And this year, In particular, this happened.

Operator

Of course, there were benefits of the interest rate, of the industry portfolio being managed by the insurance group with interest rates and the GPM, IPCA indicators and that benefited even more the financial results of the insurance company. Although we do see a decline in interest rates by the Brazilian Central Bank Insurance Company, we'll certainly end the year. We'll put more than BRL 100,000,000,000 in revenue. So it's all about working the claims ratio. We have to continue to work with the assets we have in the insurance Healthcare Insurance with the Insurance Group.

Operator

So will this be challenging for an insurance company? Yes, as it is for any company. But I understand that the insurance company has important assets, managerial ability, Ivan conducted a beautiful reorganization of the insurance company with an update of systems to interact with clients, the digital platform of the insurance group is doing really well. This year, to give an idea, the insurance company will end with about 3,000,000 items sold only over mobile. So there is this whole framework in the insurance group.

Operator

We believe that despite the lower interest rates, GPA and IPCA's insurance group will continue to deliver significant and sustainable ROEs over time.

Speaker 1

Our next question from Rafael Faggi with Citibank. Good morning, everyone. I would like to revisit the topic of your NIM. You had a significant reduction in NIM in the quarter. And you also showed how much of Each component accounted for that drop.

Speaker 1

When we look at the mix, it was quite relevant in the half year. In 1 year, I think it represented about 1,000,000 in this half year alone, 700,000,000. I want to know whether this was just due to SME or there is any other element that impacted the quarter's results? And how should we expect the recovery maybe in the Q4? Maybe this has been a very significant drop this quarter, and maybe we could see some relevant Thank you, Rafael.

Speaker 1

It's good to hear from you. Rafael, in fact, you described our results in terms of the NII or NIM, there was reduction in on average spread that came down to 9.1. And as you put it quite well, this was mainly due to the mix. This reduction in business and loans 2 SMEs, it's quite relevant in terms of putting together the spread. Just to give you an idea, throughout the year, you may notice that there was A drop of almost 10,000,000 in that portfolio, and this has a major impact in the overall result.

Operator

But

Speaker 1

This matter has been solved. We have appetite to operate further. And you know that The formation of NII depends on your growth. Therefore, it doesn't happen in the immediate month after that or in the subsequent quarters. So the portfolio has to evolve so as to see any improvement in NII.

Speaker 1

And the mix of the portfolio had an impact, especially in terms of SMEs. But we already saw some growth in loans. We saw their numbers throughout this last quarter and in October, there has been further progress. We have to make adjustments all the time. We have to have the adequate pricing for every type of product so that at that margin, We can see a significant recovery, but this is a gradual process, Rafael.

Speaker 1

We look at this every month, every operation to see the recovery on that line. But we know that it is possible for us to recover it because these transactions at this level of clients, it's just that spreads are naturally better. So what we have to do now is resume these operations, but certainly with a good degree of caution. And also having in mind the size of loan that we are giving to these clients, but we don't want to lose them. And all of these loan transactions usually come with other products and services in terms of the client principality, in terms of collection, loans, Credit cards and all of that plays into having a more robust NII throughout the Q4 and also throughout 2024.

Speaker 1

Therefore, we have just to go after the improvement of this financial of this NII or NIM. Our next question It's from Danielle Vas from Safra. You may proceed, Danielle. Thank you, Feretti. Good morning, Ottavio and Catzienou, thank you for taking my question.

Speaker 1

We already talked a lot about SMEs, But in fact, this is a segment that is worth elaborating a bit more because usually there is volatility, but the margins are usually higher. And in 2020 2021, with the Stone Epizona that recovery of credit is not so easy, You have to know how to operate in this universe of small and micro sized companies. And I think that NPL hasn't yet gone back to normal.

Operator

Do you

Speaker 1

think that this is more related to a movement in the industry? Do you see other sectors with worse delinquency or some that have better delinquency numbers, how do you see the health of clients and how difficult it is to collect?

Operator

And what

Speaker 1

is the behavior of the new vintages? And what do you expect going forward to 2024? Well, thank you, Daniel. Good morning and thank you for the In fact, this segment of small and micro sized companies, it's a good segment, but it's very complex to work with it. I mean, this is not a simple task, but we see that the industry has Even higher delinquency depending on the segment and depending on the focus of every financial organization Whether it's more located in the Southeast or spread around the country, it's not very simple to operate in this segment.

Speaker 1

And this segment is also affected, as you well know, by the economic cycle, higher interest rates, issues related to growth. These companies faced difficulties during the pandemic. Some recovered better than others and some others even ceased to exist. And so this industry, as you put it yourself, it's a complex industry to work with. It's difficult for us to develop some work with them.

Speaker 1

That's why we are always very cautious, and that's why we are taking a very close look to small and micro sized companies. The managers are that are with Corporate 1, we see stable NPL delinquency stable and companies that gross more than €30,000,000 So in these cases, delinquency is more stable is more with small and micro sized companies without leaving aside individuals. That's always a very sensitive issue in terms of the loan book and the impact of interest rates, especially if you look at portfolios like personal loans and credit cards. Therefore, when you add all of these factors together, You can then see our capacity to increase our loan grants,

Speaker 2

but

Speaker 1

we are becoming more stringent in terms of keeping the controls in place. But we are very certain that delinquency is under control.

Operator

Our next question is from Thiago Batista with UBS. My question is a follow-up to Tito's question regarding the profitability of your retail business. When we look at the ROE in the last 2, 3 quarters, about 11%, 12% in the consolidated number, is between 5% and 10%. We see other players in the wholesale having an ROE of 20% plus. Thank you, Tiago, for the question.

Operator

Usually, it's a very good observation you made. When we look at the segments, the financial industry, financial sector and Intobank, the profitability of the wholesale bank is doing quite well above the cost of capital. The profitability of the high income bank you're including prime, private, also doing well above cost of capital. The insurance company wouldn't even say that you will serve the 2's help. Retail was always a segment providing good results, but this segment went through some processes, challenges over time, regulatory challenges, the fact that people are opening checking accounts with no 2 years ago, this segment was giving results ROE above the cost of capital.

Operator

But we entered a phase initial cycle of very fast increase in the interest rates. Social benefits provided by the pandemic ended, those government aids and people got reminded. And Thiago, this is very common. You've probably observed this. Income people today now have 2, 3, 4, 5, 6 credit cards in their wallet because it's very easy for them to have access to credit, either opening checking accounts in mobile phones or asking for a card digitally, they don't even to go to a brick and mortar branch and speak to a manager to get a card.

Operator

So it became very easy for them to get Credit, and this is a determining factor for this longer delinquency cycle we've been observing in addition to the interest rates that prove a lot. Right. Having said that, with that scenario in mind, we still are convinced and this is based on studies, it's not my personal opinion, the retail is possible to be profitable with profitability above the cost of capital. However, we have to have a more adequate class and we have to select our audience to be served. Thus, digital is fundamental at this moment so that we can serve this client without the need to be physically present with a bank branch or even with a physical structure of people.

Operator

And if we do have a physical structure, you should be very much geared have them pay your water bills, electricity bills or bullets. We cannot do that anymore. Indeed, we cannot be profitable if we have a bank branch just to serve this kind of transaction. So you saw in the presentation, on the right side of the screen, you could see the size of the adjustment we've made in our physical structure and the size of adjustments in our personnel structure and our headcount. This adjustment is well planned out and it will continue much more vigorously along 2024 because we definitely have to adjust our costs to serve.

Operator

It is the same, Tiago, that this is the new normal, As you observed yourself, Tiago, so this is the new normal in this cost to serve this adverse selection that existed, well, we had to adjust to that. We and the whole market. That's the challenge for all incumbent banks. We had to make adjustments, eliminate asymmetries, more mitigate asymmetries so that also in the retail bank, we can have a return above the cost of capital. And this is possible station that the country will be growing in the coming years given everything that has been happening, the tax reform that is coming.

Operator

If the country continues to grow for several consecutive years, we'll have higher income, more income, more people with income initial available for us to be more profitable, particularly in the retail segment. So there is an important challenge for all of us, incumbent banks and especially for Bradesco. Thank you, Thiago. Our next question comes from Bernardo Gutmann with XP. I have one question regarding credit quality.

Operator

On the other hand, the coverage ratio posted another quarterly reduction getting to a low historical level. So my question is, have to rebalance that equation. And if you will allow me, is there any ideal value that you pursue in terms of coverage ratio? Thank you, Bernardo. Indeed, the coverage ratio is reduced to 155 now, Credit with 100% cover to the ratios at 240.

Operator

It was a small reduction, but it is only natural, Bernardo, that at the end of a cycle of slightly higher delinquency, that will consume provisions. Actually, we provision exactly to use when we go through a different or tighter credit cycle in the company or in the country and this is exactly what happened. At the moment that we resume portfolio growth and improvement in the margin, it is only natural that the coverage percentage will be adjusted and will be increased. We are very comfortable with the level of provisions. We have 59,000,000,000, almost 60,000,000,000 BRLs in provisions, an excellent percentage of provisions for those industry operations that are 100 percent provisioned for adequate provisioning above 90 days, delinquency, Rates dropping not as much as we would have liked, but when we observe short term delinquency, these rates are falling in a robust fashion.

Operator

Of course, that will have a reflection in 90 day So everything that we are observing No, there is no more or no increase in ALL. The ALL we have the provision that we have gives us confidence that we have the correct coverage for the portfolio that we have today. And this reflects the growth of the loan book. We are going to see an increase in the loan book. This will bring an increase in ALL.

Operator

It's good ALL because it's good operations that are coming in. But with the IFRS, this aspect will change, which is the expected loss. It is with this model that we are working to define the provisions that we can make to increase or even reduce ALL. In one specific comment, we are one of the few banks that are treating specific clients as delinquency. If it weren't for this effect and the additional part of credit that is considered delinquent in Q3, if it weren't for that, the coverage ratio would have stayed stable.

Operator

And the point that Otavio mentioned regarding the origination of new loans, this is what is going to lead

Speaker 1

Our next question is from Eduardo Rosman with BTG. Good morning, Rosman. You may proceed. Good morning. Good morning, everyone.

Speaker 1

I have two questions. My first question It's about dividend payout. The bank has maintained a very high dividend payout, plus to 70%. But assuming that the bank intends to expedite growth next year and profitability is still below anticipated levels. I mean, you're not building a lot of new capital.

Speaker 1

So what could we expect in terms of the payout next year? This will be my first question. I would just like to understand the payout dynamics or whether it wouldn't be worth it to do some buyback. And the second question is about cost of capital. We've been talking a lot about cost of capital, I think one of your competitors usually publishes how much they believe their cost of capital is.

Speaker 1

So in your view, What is Bradesco's cost of capital today considering the dynamics of interest rates going forward? Thank you. In terms of dividend payout, this year, we already provisioned for that. And I think the buyback It's an important alternative, so much so that we just renewed our buyback program. That was just about a week So that could be a good alternative even considering the value of the shares.

Speaker 1

So that buyback program is ready and renewed when the time comes. And for next year, Even with lower results in comparison to what we would like to have, we will certainly try to remunerate our shareholders with a reasonable and adequate payout. Therefore,

Operator

as

Speaker 1

I was saying, It does make sense to resort to buyback. In terms of cost of capital, maybe if you're ready, you can say something. Our cost of capital is very similar to what the analysts calculate, something ranging between 14% 15%. I just have another follow-up question. And now thinking about next year,

Operator

do you

Speaker 1

think that the payout would be along the same levels. Do you think that you will remain having this high payout to have an additional benefit because I think this also has an impact on the tax rate. Okay, if the benefit remains continues, I think so. We would probably try to use it and then have the full benefit because this would serve our shareholders well. But there are still some steps that are necessary until we see what will happen.

Speaker 1

There was an important change in terms of interest on capital That was being discussed at the Senate level, and that was an important adjustment that happened because with that, shareholders We'll be more comfortable. But regardless of what may happen, our intention is always to make full use of interest on capital. I understand that the minimum would be 30% according to the bylaws, Our next question is from Yuri Fernandes with JPMorgan. Good morning, Piretti. Good morning, Otavio.

Speaker 1

I have a question related to your NII. Looking at liabilities, on the liability side, things were performing well. I mean, you had good funding in the quarter.

Operator

But don't you think this was a pushback

Speaker 1

in your margin? I mean demand deposits were down, savings deposit also down in this scenario of high interest rates. But I just want to look at that liability line, whether this does not affect II. And in terms of SME, you're constantly talking about this mix that the company is working Very closely. But there was a drop of 1% when NII was down by 5%.

Speaker 1

So the mix of SMI is very, very

Operator

tight. Could

Speaker 1

you share with us something related to that segment of companies below 30,000,000? And I think that the mix of SMI should be a little bit different. Hi, Yuri. Good morning. It's a pleasure to have you here with us.

Speaker 1

Thank you for your question. In fact, I mean, if you look at the market as a whole, the funding cost of the incumbent banks. I mean, our funding costs increased due to the competition coming from new platforms, smaller banks and other things, there are a series of factors that at the end benefited some. And in other instances, it increased the funding cost even because today, it's very easy for clients to choose where they want to invest their money. And this increases our funding cost.

Speaker 1

But anyhow, the reduction in savings account or even demand deposits is quite natural. Given the current situation of people, I mean, savings, deposits are dropping not only in Bradesco, but in any other In terms of bank, this drop in savings deposits is across the board, maybe also because people are now choosing to invest in other instruments other than savings account and also because families need to use that money because of high interest rates, inflation issues, this is a cyclical phenomenon, and it's very hard to avoid that. And demand deposits, it's pretty much along the same lines. Demand deposits were kind of inflated due to many government programs and benefits that the government offered. That's why I talked a lot about Principality, the share of wallet of our clients.

Speaker 1

We talked a lot about that during the presentation because, in fact, this is a challenge that we face every single day when we go to work. We have industry to work the centrality of the client, the share of wallet because there, that allows us to improve the liability margin. We made important investments to make that possible. I talked to you about wealth management, more than 4,000 Prime clients and a lot of investment experts. I mean, there we also bring Loans to these people, of course, they take credit as well, but it's important that we bring the Principality of the clients to our organization.

Speaker 1

We did some relevant work, Extensively recognized Bradesco Asset.

Operator

So this growth

Speaker 1

has been quite significant. We had more than 770,000,000,000 of assets under management. And even private banking, we increased the liabilities on the private banking side. I believe that we are moving in the right direction to bring more investments from our clients. Even with Agora, our brokerage firm, There are several levers that can be worked on to bring principality.

Speaker 1

And in turn, we will increase the liability NII through funds management or CDB or any other kind of investments in our trading transactions with clients using our own brokerage firm. This is the first step, and it has proven to be right. We are evolving in terms of the liabilities, and we are also making important strides towards improving NII. When we had interest rates of 2% a year like we had in the past, maybe that liability NII would make a lot of difference, but this is important if you want to grow your loan book. But with an interest rate that reached 14% and 12 point something today.

Speaker 1

That liability NII makes a lot of So

Operator

I think that's it

Speaker 1

in terms of the liabilities. Now speaking about SME portfolio, and we have been talking about that extensively. In fact, you should know Bradesco has a very geographic footprint. I'm not talking about 30,000,000 upwards, but I'm talking about companies whose revenue was way below that when you work with secured accounts, with receivables, discount, etcetera. These are very profitable transactions.

Speaker 1

Now when we look at the fee comparison at the Central Bank, you see the size of the spread of these portfolios visavis a portfolio from a midsized company. There is a huge difference, which is natural because of the risk that these companies represent. So the margin of this mix of types of clients With whom we've been

Operator

working with

Speaker 1

in terms of small and micro sized companies is what made that difference. I don't know exactly what the percentage is, but

Operator

and they

Speaker 1

can give you more details on the numbers. When we look at our SME portfolio, Approximately twothree of that portfolio are clients below 50,000,000. And this particular portfolio It's a bit compensated by the mid size company portfolio. That is very clear. I just have one last follow-up.

Speaker 1

Funding, Otavio. How much is it today? I don't know whether you can break it down. I mean, average funding or CDI. I think if all of the incumbent banks struggled with it.

Speaker 1

There was a worsening of the numbers. Well, we do not release specific numbers. If you look at some movements in our portfolio, part of that has to do with a more

Operator

focused work

Speaker 1

using some investment experts. At first, They looked at funding that were there in demand deposits. These are investment funds, so had some minor adjustments. This is probably something that is behind some of the moves. Thank you.

Speaker 1

Thank you very much. Thank you, Yuri.

Operator

Next question from Anna Hughes My question goes back to the guidance, but speaking more about fees, you are somewhat distant from the guidance. I'd like to understand which fee lines will drive growth so that you can meet the guidance in Q4.

Speaker 1

Hi, good morning.

Operator

Thank you for joining us. This line of fee income is improving quarter on quarter and quarter by quarter. Increase this fee income line due to a number of aspects, which I believe are important. We are having a substantial improvement. As we showed you, in the wholesale bank, in underwriting operations, you saw the amount that grew, the percentage that grew.

Operator

We have quite a good pipeline for Q4 and also for 2024 We have a good expectation that companies will be renewing their debenture operations, the ones they have in the market and new operations that we also do. It is a natural movement by companies. They'll wait for better market movement. The cost is still high, but operations are maturing and the companies will need to adjust. So there is a good outlook for the fees related to underwriting.

Operator

There is a good expectation that is materializing regarding fees in asset in Bradesco Asset and now at industry view, our new asset that we have more geared to structured product performance and there's good expectation there. In the normal range. These are just some of the aspects, but I believe that there are a number of lines. Even the insurance company, the BOSCO consortium, So there are a number of companies, many businesses of the bank that will bring improvement to the fee income. Very well.

Operator

We are going to have our last question by Pedro Leduk with Itau BBA. Good morning. Go ahead. Thank you, Ferreri. Two quick questions.

Operator

First, robust growth in the other business lines, if you could elaborate on that, greater share in the crop plan? And my second question going quickly back to SMEs, Freddie mentioned the concentration in also given the origin of our bank 80 years ago, Bradesco grew following the growth interest of the agribusiness of Brazil, particularly in the countryside of Sao Paulo and the north of Parana state. So we were always focused on agribusiness among the private banks, we are leaders in agribusiness. And if you get BNDES, we are also leadership leaders in this business for agribusiness operations via BNDES. In agribusiness is a part of the Brazilian economy, which is an excellent growth driver for the Brazilian economy, not just today, it has been so for some years now.

Operator

We are giving special attention to the agribusiness industry in Brazil, particularly given because agribusiness is not a small business. Agribusiness is a big, big business in Brazil with a volume of resources which is huge. So we specialized our team. We had 9 55 branches that we're trained specifically. The whole team of these branches was trained in the last 3 to 4 years to serve our agribusiness clients in any of their needs, for the position of machinery, for planting their crops and talking with agronomist engineers.

Operator

So 955 specialized bank branches all over Brazil. And we have all of the agricultural regions being served by specialized people to serve the needs of agribusiness markets. In addition, we have a constant presence in all the main agricultural trade shows in Brazil. This year, the business volume that we captured was double that of last year and delinquency in front loans is very, very small. So there's a moment when the farmers, they need to exchange their machines.

Operator

Their equipment and equipment is becoming more and more sophisticated, the combined machines and all driving the business. And another initiative we had, we had about 5 to 6 separate business platforms in the industry about 2 to 3 years ago. And we're located basically in the Midwest, in the countryside of the state of Sao Paulo. So platforms, few platforms that we had, we expanded those to about 14 to 14. And in the main agricultural production, nuclear in Brazil, whatever the commodity they are growing, we have a platform there with a specialized team and we grew this team of specialists.

Operator

All of these platforms have agronomist engineers to give comfort to our farm clients. So this is a little bit of the growth we had in agribusiness. We'll continue to grow these platforms. Like I said, there are 14, 14 platforms. We'll be opening another 4.

Operator

Next year, we should grow even more because there are other areas that are posting a lot of agribusiness for us and where they're changing the crops. They are moving from livestock to soybean to corn and we're studying these moves so that we can provide the right advice to our clients. So agribusiness is the focus of Bradesco. We'll continue to focus on agribusiness and the trend is that we'll grow this business even more. With regards SMEs and the acquiring part of your question, we currently have an acquiring company Cielo in a partnership with Bancadou Brasil.

Operator

It is working super well. Cielo, you will remember 3 to 4 years ago, had problems and difficulties in posting good results, but they adjusted. Cielo now has been posting good results. But not just about the results. Most importantly is what Cielo means to the business, to the offering of products that a wholesale bank needs to have.

Operator

All of the companies that we have in our ecosystem of benefits and in the acquiring business. So today, it is working really well. We have a good partnership with Banco DO Brasil. Both banks It is a pleasure to have you on board. In the industry, it's growing.

Operator

It's perhaps losing some accounts that in the bottom line bring losses, but sometimes where you can gain market share and not be profitable. So we had to make choices so that we could have profitability in our businesses with smaller companies. But you see, Pedro, it's all on the table. We have to look at CLO, how important it is for our results, how we should look at that company, In the portfolio of products and services that Bradesco has to offer to our clients and acquiring is Definitely very important for us to continue to grow. And again, maintaining the principalities that we want to enjoy with our clients, cash management, Kartik team to grow assets and reduce liabilities.

Operator

So it's all on the table for us to look at. Thank you very much. Excellent.

Speaker 1

With this, we conclude the Q and A session. All the questions that have not been answered will then Before I turn the floor back to Otavio, I would like to remind you that in our Investor Relations website, You will also find this presentation and all of the material related to this earnings release call in addition to other information. Thank you. And let's move to your final remarks. Thank you.

Speaker 1

Thank you, Castiano. Thank you, Ophareti. Thank you Thank you very much to the entire team that helped us put this together. Thank you so much for joining us. Thank you for your time.

Speaker 1

I think we talked about Several aspects related to the P and L of the bank, there are still some challenges. And you're very precise in terms of your diagnosis. We will improve. We will make important improvements, and I hope I was able to clarify your issues. In case you still have any pending issues

Operator

in mind, please get in touch with us, get

Speaker 1

in touch with anyone from our team because we really want to clarify any issue that is still pending.

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Earnings Conference Call
Banco Bradesco Q3 2023
00:00 / 00:00