Banco Bradesco Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen. I am Marcelo Norbuena. I am here speaking from Cedars de Gidios, the Headquarter of Bradesco Bank, for the presentation of the results on the Q2 of 2024. Now the time is 10:31 a. M.

Operator

And it's a pleasure for me to be with you again this morning in this beautiful sunny morning in the town of Osasco in Sao Paulo. And we are here to talk about our results for the Q2, which hit €4,700,000,000 of net income, growing 12% quarter on quarter, meaning that the 2nd visavis the Q1 of the year with this ROI that you see here in the screen. And here, we have 6 topics that summarize our net income or summarize what happened in the Q2 of 2024. It could also be the summary and the conclusions that will lead us straight into our Q and A. First of all, we had a solid and safe profitability growth.

Operator

And here, I'm referring to our loan portfolio and the mix that I am about to show you in a moment. We also posted an evolution of net NII driven by client NII quarter on quarter and also the reduction in control of loan loss provision expenses. We increased the expanded portfolio in all segments, including in the wholesale bank with emphasis on SME and MSME and individuals. But please note that we are not growing above market rates. We are growing in line with the market.

Operator

We had improvement in NPL in all segments and also we posted growth in the coverage ratio. Operating expenses are growing in line with our expectations. And naturally, with a lot of discipline, we were able to accelerate our footprint, as we've been saying to you before. And finally, we were able to maintain the solid performance in the insurance segment. And further on, I will give you more details about every one of these topics.

Operator

Our loan portfolio went beyond EUR 912,000,000,000 with a quarter on quarter growth. But I would like to draw your attention to an increase of about 5% of the wholesale bank and moreover MSMEs with a growth of 10.12% and individuals also growing 5.7%. In the case of the MSME, I would like to remind you that here we have middle market segments and also SMEs market. And moving on, look at the loan portfolio and the mix with similar growth in individuals, 2.5% and 2.5% in companies. I'm speaking about quarter on quarter.

Operator

But this snapshot give you an idea of our mix. 1st, the first conclusion is that we grew in all lines. Secondly, we grew with a very balanced in the mix with insurers, good NPL levels through time. Constant speed, but not spikes with client NII because here we have payroll deductible loan, real estate loans. These are all very important portfolios for us in rural loans on the individual side, which allows us to have a good balance of our mix with low credit risk.

Operator

Now maybe the card segment that didn't grow as much is something that I will talk about later on. In terms of companies, look at SMEs or MSMEs, we're growing 7.2% quarter on quarter. And again, here, we had good growth in foreign trade, real estate and working capital. But there was also a very satisfactory growth on the company segment. I'm talking about SMEs and large corporate with a very good level of guarantees, which is higher than what we experienced in previous quarters.

Operator

This also ensures good balance for us in the next coming quarters. And this also demonstrates, and if you allow me to give a step back, this demonstrates our capacity of attraction or commercial attraction. Every day, we deploy new models. We are improving our portfolio management with all of that business unit segments that we put together for the loan portfolio. I mean, traction is also important.

Operator

I could have all the limits available, but look at the penetration level that we have in all segments. And soon I will talk about fee income recurring revenue. Here, I have 2 charts that we also presented last quarter. And here, I'm talking about vintages, over 30, but I'm referring to vintages that presented the best correlation of losses in every vintage, 4 months after credit was granted, what is overdue more than 90 days. This dotted line, which is the 100 basis, the average of approvals of 2019.

Operator

That means prior to the pandemic. And here is the line that we use as our own reference. So in the mass individuals, we have controlled vintages between 60% 65% of everything that we approved back in 2019. But we've been gaining traction. Look at the Q1 and then Q2 in the gray bar, how much we evolved.

Operator

Even with that same level of vintages over 30 days, 4 months. And the idea here is that this could be slightly higher so that we will strike the optimum return level in terms of loans. I can take a little bit more risk here and then this will give me a very good return in terms of NII. And delinquency is well behaved going forward. And then I can give you more information about our origination.

Operator

We are growing in line with the market. We are growing with good level of solidity and security, Accounts opening, the reference is again back in 2019. In terms of growth in the Q1 SME, and I'm talking about mass companies, it was more traction in this quarter, but the level is between 60% 65% of what we used to present in the vintages of 2019. This inflection of the curve is the baseline because it was very low here. It means that the approval rate was very low.

Operator

We were capturing lower vintages with lower origination. But here, we are at the same level of individuals with a drop in delinquency in the next chart, as you can see. Now moving on. Here, I bring this slide to show you probably three things. First of all, how come we were able to deliver a total of release loans in the Q2 of 2024 of 84,000,000,000, 34,000,000 being through digital channels?

Operator

And why is it that we believe that we will continue to perform as such in the 3rd and 4th quarters as well? With all of these new modeling system and the intensive use of machine learning, increase in personnel, process improvement and everything else we did, even considering credit card management, not only in terms of middle marketing, but also SMEs of €3,000,000,000 to €50,000,000 I think. We there was a change in preapproved when compared to the Q2 of 2023, starting with a base of 100, that was an increase of 20%. But if we look at the volume, there was a growth of 27% in this sense. What does that mean?

Operator

It means that with the commercial traction that we have in every segment, including in digital channels, naturally, we are delivering a client NII that is growing, stable based on that mix that I showed before. But not only based on credit because that's the main leverage, but also based on liabilities because in 2024, we noticed growth of our receivables from clients, but the cost was slightly lower when compared to the same period of 2023. But the 3rd piece of information I have here for you is the evolution of the approval rate. This reinstates what I said before. And I'll be careful with credit risk.

Operator

Mix adequate pricing, models that are much more adequate using transactional data, use individual segment. When we talked about the 2019 vintages ratings ranging between AA and B, we were bringing 61% of approvals. But today, the same vintages are bringing between 74% 75% of approval rates with ratings between AA and B. But note that if you look back to June 2023, where you see this red curve, it was in the low range of our approvals. Our approvals increased on average in June of this year when compared to June of last year.

Operator

They grew 25.7%, meaning that 16% that was 16% lower than all of the approvals back in 2019 even with that traction and the growth that I showed you before. But also notice that in order to achieve 25.7 percent in individuals, we grew almost 27%. And small companies, the approval level is lower. It's more conservative. And we are very much with our foot in the ground.

Operator

Therefore, we are very comfortable and very reassured in terms of what we've been doing with our credit selection and our growth growing step by step, but moving forward in terms of our credit risk. And so naturally, we go to our NII, which grew 2.8% quarter on quarter, reaching EUR15,600,000,000 natural market NII given the volatility notice in the past periods was slightly lower, but we believe that it will grow. But now client NII stood at €15,300,000,000 growing 5% quarter on quarter. And the net interest income in the Q1 of 2020 4 went to 15.3 in the second quarter. But notice that in the meantime, if you look at our net NII, we grew substantially and this growth mainly came from our loan growth, but everything was balanced, the last margin, payroll loans and there were other lines that also helped to make up that mix and also in the corporate segment with that net spread.

Operator

But look at the NII growth. Quarter on quarter, we grew 18.7%. And this is what moves the needle in our bottom line. And this is what we have in terms of client NII. Our delinquency curve is coming down.

Operator

NPL creation well under control, in line with the previous quarter, very close to 100%. But the coverage ratio over 90 reached 170. Now moving on, In terms of our expenses with loan loss provision, we reached EUR 7,300,000,000 mainly attributed to these two reasons. We had improvements on of the vintages quality and higher efficiency in terms of collection and credit recovery. And this explains and justifies our loan loss provisions.

Operator

And then we come to another area, and this has to do with having the business areas well traction. And I'm referring to fee and commissions revenue that helps our top line. And if you look at it, they grow almost in all the lines with highlights to credit operations, 3.5% quarter on quarter. And again, this is due to our commercial traction, to the level of relationship that we have with our client base at different levels. So we also grow in current accounts, 3.1%.

Operator

And I draw your attention to asset management. We grew quarter on quarter 6.4% and AUM grew to 33,000,000,000 when you compare the Q2 2024 versus the Q1 2024. And then I draw your attention again to the card income. You saw that our loan portfolio was not growing that much, but we are more conservative in terms of the low income client. And obviously, with those that are non account holder.

Operator

In terms of capital market, we grew 12% almost year on year. So with our pricing, risk is lower and capital markets also grew substantially. It's not absolutely regular, but the growth was quite high.

Speaker 1

You're talking about operating expenses. I'd like to draw your attention to our revisiting of the footprint. We've been doing this very carefully with very discipline. And you can see our client base again has commercial traction growing 1,800,000 clients, most of them coming from payroll loans, INSS, public payroll loans, private payroll loans and a part of this comes from checking account holders that also grew in the last quarter. And we point to our indicator in the guidance.

Speaker 1

First half 'twenty four compared to first half 'twenty three, up 7.6%. And here, I bring you a reconciliation with some points. Personnel and administrative expenses growing 4.3% or 4.5% first half 'twenty four over first half 'twenty three. And this was because of the care and discipline that we've been having in terms of growing our personnel and administrative expenses. But if we look at the complete income statement, you will see other expenses that do have an impact on this indicator.

Speaker 1

This is 4.5% and representing 7.6%. But I bring you an interesting reconciliation just for your assessment. We are shareholders and for all of the companies under Elopar, Livelo, Alelo, Alovelo and Cielo. And what we have seen in these companies, for example, Cielo has been doing a lot of transformational work, but they are also investing to grow, to develop their business. And the same goes for LO, LLO.

Speaker 1

And in these three cases, when we consolidate, we see a 2 digit growth in operating expenses. If we were to normalize this level of growth because it will normalize eventually, our indicator would not be 7.6 percent, but rather 6.2%. As a result of this consolidation, which is positive for the growth of these companies, so this is just a reconciliation to show that our expenses are well under control in the quarter. And then we move to the Insurance Group, another very strong quarter. Net income of BRL 2,200,000,000, 12.7 percent growth quarter on quarter, 22% ROAE.

Speaker 1

And this level of revenue, of premiums, contribution savings bonds with this level of growth. And why is this happening? Why is this growth happening? Because of commercial traction, competitive products and services, both in the bank and in the insurance group. This is what explains this growth.

Speaker 1

There is a phenomenon we'll see in relation to the guidance is that in the Q2 of 2023, the result of the insurance operations, net income in our guidance was $4,800,000,000 in this quarter, dollars 4,600,000,000 But we are taking strides towards Q3 and Q4 to be well within the guidance regarding the results and operations of the Insurance Group. This is our expectation as well as the expectations of the Insurance Group. Technical provisions, EUR382,000,000,000, growing 2.6% quarter on quarter. Our capital remained practically stable, dollars 10 bps. If we didn't have mark to market, given the volatility we've seen in recent quarters, we would have 0.24% up.

Speaker 1

Capital would have grown even with we growing our loan book. And I'll end the figures part with the guidance. So I'll look at implicit net income that we decided to deliver, which is a combination of all of these lines. And if you do the math, our colleagues in the sell side, you will see that we are delivering an implicit potential net income, which is superior to the middle of the guidance. So we have here some supplementary information, which is net interest income minus our evaluation.

Speaker 1

In other words, we continue to pursue each one of the indicators. That's our objective. It's not a gift that we wrap in January 1st and open the gift in December 31. No, we continue to pursue these indicators. We believe that they will grow in the NII.

Speaker 1

You could see that we are growing client NII quarter after quarter and I draw your attention to the month of June when we grew a little more than the market, but in line with the market. And you could see the trial balance sheet disclosed by the Central Bank. You did your evaluations, then we have July. So it's easier for you to see and to realize that this level of growth and everything we've done in May June will have benefits in the Q3, which is what we're living now. You didn't capture all the value in Q2.

Speaker 1

And the growth that we show in Q3 will be actually seen in Q4. And speaking about our transformation project, we have been working with a lot of discipline. Casiano is a CTO and he has the transformation office. They have been working and he has been controlling the team positively, checking the timeline and the deliveries. And we detailed all of the execution here.

Speaker 1

And everything is underway. The HR people have been working strongly in reviewing a lot things, but we delivered a variable compensation plan for the second half, which is more meritocratic. And it fits the expectations of our shareholders. And we had accelerated progress in the credit business unit, as I mentioned, with the right pricing, better processes, better collection performance, better portfolio management. With this portfolio management, BU bringing people from the market and implementation of models with a much more intense use of machine learning transactional data and all of that leads, as I mentioned before, to better ratings in our loans for individuals and for companies and for SMEs.

Speaker 1

Our expectation for the second half is that we will start our new affluent segment, continued expansion of SMEs and in the case of Bradesco Expresso, I'd like to stress what I already mentioned in the prior call. We have 2 important platforms in Bradesco Expresso. 1, through which we relate with our banking correspondence at the checkout. And they offer a much better experience when we started that delivery in December January, and we started rolling it out to the whole base. This rollout will be completed now in October.

Speaker 1

And it is very, very important for our strategy in the mass market clients. On the other side, we have the other platform to capture transactions. That is done by a network. Now we are concluding the rollout for capturing networks. And when this is completely done, what we'll have is, number 1, a reduction of operating cost of Fradisco Expresso for their transactions.

Speaker 1

And that's the first consequence. The second consequences will be in a position to have new investments for the capturing network as well as for this new platform that relates with the checkout of the banking correspondence. All of this will be done much more easily in a much more friendly environment for those frontline people. I went out in the field. I did visit some small merchants in the countryside of Sao Paulo to see their experience and I had excellent feedback from the correspondents.

Speaker 1

From some correspondence that have been our correspondence since 2,005. And the 3rd gain, 3rd consequence is the experience of the commercial banking correspondent and of the individual clients who are served through that channel. And also for SMEs, the SMEs platform also is part of this and it involves CLO. And I move to my final slide with the conclusions and the summary of everything I've said so far. Number 1, step by step solid and safe profitability growth.

Speaker 1

I spoke about the mix. I spoke about pricing and about the model. We have revenues growing with a positive inflection of the client NII as well as fee and income fee and commission income, the insurance group, everything influencing positively our result, focus on net NII with a focus on risk adjusted return. I showed a slide with the levers. The proof, everything we delivered in loan, JPY 84,000,000,000 approved and the increase in the NII, client NII as a result of everything we are doing.

Speaker 1

And we expect to have better deliveries in Q3 and Q4. Firm plan execution at an accelerated pace of our transformation. And lastly, enhance the client centricity with a new way to serve new product formats that will fit different client segments, different than what we did in the past with other structures, other configurations and we'll deliver a new app to our clients with a new experience for them as well. We also deliver much greater use of Gen AI to help our beer to interact not only with our employees in the several segments, but also with our clients. So I spoke about the insurance group as well with a great combined ratio below 90 when we had achieved 90 in recent periods, which is an excellent indicator for the sector.

Speaker 1

And lastly, I'd like to bring you one more piece of information, some news, which is the hiring of a new officer for our organization, somebody who will be working with our technology team. This man has a vast experience abroad, vast experience in transformation projects. His experience will be added to Rogerio's team with Edils and Cynthia and our other colleagues who make up the technology department, but linking more and more technology to the business, to the products department, to clients. He will be joining us most likely by the end of August. That's the expectation.

Speaker 1

Everything is arranged. And this officer will be bringing great experience in other transformation projects to add to our efforts. So I'll end my presentation here. I'd like to thank you for your attention and I have my colleague Andre Grevalho, our IRO and Cassianos Gravelin, who heads the financial department. He is our CFO and he is also our CTO.

Speaker 1

And we are available to answer your questions. Thank you very much. Andre, over to you. Thank you, Cassiano. Thank you, Marcelo.

Speaker 1

Pleasure to be here with you. The CEO of our insurance group is participating remotely. And let us begin the Q and A session. Your questions can be sent in Portuguese or English using 3 channels, either e mail to investadoresbradesco.com.br using the WhatsApp number 11974438238. First question from Renato Maloney with Autonomous.

Speaker 1

Renato. Good morning, everyone. So it's good to see you. Thank you for taking my questions. My question is about the guidance.

Speaker 1

In this quarter, you added an additional information to the guidance with a much lower expectation of market NII. But the guidance was reinforced. So I understand that client NII will be lower and provisions will probably be lower. So I'd like to understand. Perhaps you can explain whether this comes from a greater growth of client NII or lower provisions.

Speaker 1

And I'd like to understand actually what changed compared to the beginning of the year when you prepared the guidance when you had a higher market NII expectation? Renato, thank you for the question. I'll start and then my colleagues can add. My first answer to you is we improved our expectations and the outlook considering what we had in mind when we prepared the guidance. So we're able to deliver more now.

Speaker 1

You just have to check the expectation of implicit net interest income in the guidance, and you'll see that we have a higher number. And the market NII is expected to be better for Q2 stronger than Q2. And quarter after quarter, we'll continue to increase our growth NII in our client NII, but we cannot separate the provision cost from the growth of NII. They move together when you have a better mix with the right pricing, adequate modeling and models. We are bringing growing results with safety, Renato.

Speaker 1

This is how we see this. This is my expectation. And Andre Cassiano, you can add anything? Well, good morning, Renato. I just would like to add to what Marcelo said.

Speaker 1

Like to remind you that in the guidance, as Marcelo mentioned during the presentation, we have the implicit net income. That's our reference. And we started adding something more to show how we are looking at our NIM, This is specific guidance. How we set out the ranges which we believe are fundamental to get to this implicit profit. And the traditional guidance, by the way, is annual.

Speaker 1

So the lines will fluctuate, but it is just a north for us, an incentive for us. We want everyone to focus on the initial guidance because it is very tangible. It is very strong so that our people can work with a lot of dedication. And more than that, we cannot forget that the lines have values that will complement the market NII. It can come from the client NII, can come from very controlled expenses or in fee and commission income.

Speaker 1

So we're confident in the implicit profit. It's a base, and we'll try to deliver more. And just to add this time, we added a slide to the presentation, which is the slide of the levers. In other words, we present to you measures that have been adopted to accelerate our revenues. Our revenues don't grow in a linear fashion.

Speaker 1

They will expand more in the second half compared to the first half. And Marcelo spoke about number of clients who are preapproved, offering of loans to these clients, increased approval ratio, better management of the client funds. In other words, a number of measures that should help us accelerate revenues and margins in the second half. It's a game we're playing. It is a challenging one for sure, but we continue to pursue the goal.

Speaker 1

That's my point.

Operator

Moving on to the next question from Eduardo Hausmann from BTG. Good morning. Congratulations on the results. I have two questions. The first is about your risk appetite.

Operator

I think the financial conditions of the country and even abroad got worse. I just want to understand how this could eventually change the bank's risk appetite for the next quarters. And my second question is about the recently announced change in variable remuneration. Does that contemplate anything like short term or mid term? I know that you are in the midst of an important transition.

Operator

I just want to understand whether you're contemplating anything for next year. Thank you, Rosemarie, and thank you for your questions. I would say that our risk appetite is moderate because we have our feet on the ground. You might recall that I showed a chart of the approval rate. In 2016, it was now 16% lower than what we used to approve in the past.

Operator

In terms of individuals when we compare it today to June of last year visavis June of this year. But in SMEs, that's still lower, 17% against 27%. And if you look back, remember what I said about mix and pricing. So we have models, mix, pricing and obviously, this composition of risk appetite with a much more severe portfolio management based on SME, meaning that we are much more comfortable in terms of what we are doing. But we still, in keeping with the market, we are not exceeding the level of growth, but we have a lower appetite in terms of SMEs.

Operator

But as we are monitoring that very closely every single day, maybe tomorrow with a change in the macro landscape, we may adjust our appetite for risk. So we are growing with quality and a good level of security and solidity. And the new variable remuneration that I could not summarize that in only 2 minutes, but I'll try to give you an overall picture. If I take, for instance, the wholesale bank, the managers, they were already measured on what they generate in their portfolios based on some indicators. But the leadership group was less linked in terms of the weighted average to the unit itself, but they were more linked to the bank's general business.

Operator

And the bank's general business remains an important trigger because we have to meet shareholders' expectations. But it's important to look at the leadership group and one of our colleagues

Speaker 1

that

Operator

the remuneration is a bit higher because they have to take care of a lot of people. So this applies to operating efficiency and areas related to this transformation. So things were done in such a way that is based on merit. So if Andrea delivers more, I have to compensate him better when compared to another colleague that has a good better when compared to another colleague that has a good profile, a good track record with the company, but he didn't deliver as well. So his compensation is not the same as Andres' compensation.

Operator

But we look at the different business units and we look at individual performance, but mostly based on what is under that individual's wing or responsibility. And the new variable compensation is already being applied in the second half of the year. Now the next question comes from Thiago Batista from UBS. Thiago, welcome. Congratulations on your results.

Operator

I have two questions. The first, Noroya, when he presented the strategic plan a few quarters ago, he said that the bank expected to have returns very close to the cost of capital at some point in 2025. When we look at Bradesco's results this quarter, is it possible to say that the rebound of the bank is occurring faster than you anticipated or maybe not or maybe are we it's in line with the capital or the estimate for 2025? And the second question is about the insurance company. What was the impact of the events in Rio Grande do Sul?

Operator

How does that affected the bank's results? Or there is still something to be recognized going forward? Well, Thiago, sorry, I said Rosman. No, Rosman was the previous question. Thiago, this ROE close to capital in 2025, as you mentioned, I think the dates may change.

Operator

I mean, we are not promising to deliver ROE close to capital with a very specific view. But we I think we are talking about 2026. But now what I can tell you goes in line with what you said. Well, we are moving faster. Yes, we are faster than what we previously anticipated.

Operator

That's why when I talk about the guidance and the net income, we were above guidance. So I think that we can deliver something in addition to what was implicit in our net income in the combination of all KPIs. But in terms of your second question, all of the potential impacts for the insurance business that is much more related to the auto segment has been already absorbed in this half year. And in terms of the solidarity with our clients and people in Rio Grande do Sul. Not only at the bank, we made there were several actions, but the insurance company paid for all the claims and everything has already been contemplated in the results of the bank, which was good.

Operator

So we don't anticipate any impacts going forward. The impact was fully provisioned in our results line. Thank you for your questions. Any more comments? Eva is here.

Operator

Eva, do you have any additional comment, please? Hi, Marcelo, and thank you, Andre. It's just important to give a little bit more visibility to Thiago that the amount was €165,000,000 gross, €100,000,000 net. That was the impact to the insurance business. And we do not believe that this will be carried over in the next quarter.

Operator

So there will be no further effect in our P and L. And also, you talked about our the insurance assistance when we aided our insurance holders and those that were not insurance holders. So the impacts have been already contemplated in the P and L of the second half. And now we just have to look at the second half in a more objective and clear way with all our objectives in line. Thank you, Ivan, very much.

Operator

Thiago, thank you.

Speaker 1

Thank you, Ivan. Thank you, Thiago. Next question from Bernardo Gutmann with XP. Good morning. Thank you for taking my questions and congratulations on the performance this quarter.

Speaker 1

After the important derisking work and work to improve the quality of credit, you know, resuming origination of individual loans and I imagine that this growth should be a combination of different segments in addition to the mass market. The bank historically also had this DNA, a strong exposure to low income. It would be interesting if you could elaborate on how you're advancing to the top of the pyramid. The market seems a lot more competitive with some well established players. Perhaps you could speak about the different digital platforms and other initiatives in Financial Advisory, which you are pursuing to improve your mix and positioning in the individuals segment.

Speaker 1

Thank you, Bernardo. Thank you for the question. You actually mentioned some important conclusions. It is true what you said. You will remember an indicator I showed of credit cards.

Speaker 1

We are not growing that portfolio a lot. There's a variation in terms of service provision there and fee and commission income, it's low. But we grew a lot more in the high income portfolio. We grew 12% year on year. So what you said is true.

Speaker 1

We have substantial growth in mid income, in high income as well as in lower risk product, which are also originated by DIGIO and by Bradesco, Expresso, such as payroll loans. I spoke about the four lines: INSS, public, private, payroll loans and FGTS payroll loans. So we are growing in all of these audiences and with a lot more care when it comes to low income and non checking account holders when we used to have every current credit card growth. So we are growing quite well in high income and we are growing now with the adequate lower risk segments. And thank you for the question.

Speaker 1

Thank you. Next question from Brian Flores with Citibank. Thank you for the opportunity. Norangia, Andre and Cassiano. Norangia, you mentioned something interesting.

Speaker 1

We are kind of doing the math here. Sometimes we tend to focus a lot on assets. But in liabilities, we can see that the cost of deposits is improving as a percentage of CDI. So my question is, what are the measures you're taking there? Could you perhaps give us more color on the competitive landscape in this segment and what should be the trend looking forward?

Speaker 1

Thank you, Brian. Thank you, Brian. Cassiano, it's a pleasure to EC you. Well, we have adopted some measures focused mainly on our commercial action. We have been doing important work in the part of middle market with our cash and the commercial evolution.

Speaker 1

And that's an important piece of data. And also our CRM and all of the work that we are doing in terms of working with the database, our data scientists have helped us a lot in terms of low and mid income clients, deposits, savings that grew again this quarter together with the time deposits where we have a CDB in our CDB that remunerates the balance of our general clients. So these three components, better optimization of costs and long term funding costs for companies that gave us a much better balance in terms of cash and liquidity and have brought very interesting gains in our cost of funding. So this visibility, this commercial action that Marcelo so well spoke about in the presentation to be focused on the client, close to the clients. It's not just the physical contact face to face.

Speaker 1

It's also the app contact. As Marcelo mentioned, we now have a new app, a new functionality, new concept. So this concept of presenting proposals, presenting opportunities, this has brought us great results. And in terms of investments, the specialists that Marcelo spoke about, it's not just cash. It's also the assets part that is evolving a lot this quarter.

Speaker 1

So this is the component. We are focused on the assets line item, yes, but the liabilities line item is also important for our comeback story and profitability. Brian, let me just add to this. We're talking about growing NII, client NII and NIM. We are talking about growth and fee and commission income growing and also controlling liabilities.

Speaker 1

That's the result of commercial activity, mobilization, capacity and penetration that we have in our client base of different segments. We're talking about high income retail, bank wholesale, bank, mass market SMEs and so on and so forth. So thank you for the question.

Operator

Next question from Danielle Weiss from Safra Bank. Good morning, Andre, Marcelo and Cassiano. Congratulations on the results. I would like to refer to Change the Bank. Whether I mean, I know you accelerated the footprint, 411 movements this quarter.

Operator

And even then, we see the client line growing and the individuals segment is growing. So can you tell me about this migration of clients' pains and learnings? What is your actual pace? Would you like to accelerate the pace or maybe step on the brake a little? Just let me know a little bit about the way you were serving clients today.

Operator

Well, thank you for your question. It's just natural that the main concern of the bank is with our client base. All the compensations that you can offer comparing talking about this pre transformation or transferring them to another unit or a digital unit. We're doing that very carefully. But with great discipline, we were able to deliver more than what we expected to see for this period.

Operator

So as we are being successful in this evolution, we will continue to move in that pace. But we will increasingly use intelligence, dedicated teams, proper studies in order to minimize any impact to our client base. That's why I mentioned the number of the numbers related to the base growth. Part of it comes from current accounts too. But so we are focusing on growing without losing quality, but at the same time, we're going to increase our operating efficiency.

Operator

That also goes through Bradesco Expressu, something I mentioned during my presentation. I don't know whether Andreo or Carciano have anything else to add. I think you said it all. I believe that the experience that we were able translate and that changed the bank translates what we did. That's an important learning.

Operator

You ask about our lessons learned. If we translate our desire to be a lateral bank, this has been translated into all of these good news. And client Principality, client is at the core of everything you do. All of the movements we did in a very assertive way, we did that preserving that principality. So we're going to increase credit to use more of our digital for 66 percent of our account holders use the digital channels.

Operator

So the experience with of our app has been very good. And the main lesson learned comes from the entire leadership of the bank. The entire bank understands the need and the capacity we have to do more. And this is a very important commercial activity. And so in summary, this depicts the movement that right now is very strong.

Operator

And we can certainly do the same thing at the same speed next half year and next year. The other aspect is that the service point of the future will not necessarily be like the one we have today. 122 points that we inaugurated, we are removing from the traditional branch the people that serve companies with earnings up to BRL50 1,000,000. And now they are much more focused. And they work with a more agile operating system with credit experts that sit with companies and help them make more efficient decisions.

Operator

So we transform that service point into something more objective and with higher productivity. Thank you, Daniel. Next question from Yuri Fernandes from JPMorgan. Yuri? Hi, Andre.

Operator

Thank you, Noronia and Cassiano. Congrats on your results. My question is related to margins, the spread itself. Client NII, there was an inflection about 10 bps. I think everybody was expecting that.

Operator

My question relates to the speed of it. You talked about SMEs, but my question is whether this SME mix is the mix from very small SMEs. I mean, there were rural working capital was weak. So my question about spread, you think that you would go back to that 9.7% or 10% that you had in the past, but at what speed your margin will be resumed? And whether the mix of that SME improvement will be good enough to help you accelerate your return?

Operator

And the second question is about more structural cost of risk when compared to your historical numbers. You said that everything is improving, the vintages are improving, but cost of credit is still much higher. I mean, there were some things in terms of impairment, reversal when you look at the overall picture. But my question is, when you look back, do you think that Bradesco could resume the cost of risk that you had in the past or not or maybe things are different? I mean, you will focus more on high income.

Operator

Looking ahead, the next 2 or 3 years, what do you see in terms of cost of credit? And again, congratulations on the results. Thank you, Yuri. Well, I will start with my initial manifesto with the loss of JP of the death of the Head of JPMorgan, my condolences go to his family and to all of the people at JPMorgan with Deraham's recent loss. In terms of cost of credit, this is our expectation.

Operator

Go back to the previous numbers in a time line. Obviously, this will have to mind the mix. Given the mix in another mix, this is fit into what we saw in the past. Now as for spreads and growth curve, this also follows the risk appetite and the mix that we capture because if we expand the capture of payroll loan, I mean those four lines because when I refer to the payroll loan, there are 4 lines. And certainly, you go back to a higher spread, but we want to have a mix with a higher remuneration.

Operator

And that is in line with what you said, but with no very specific guidance to get there. But in fact, delivering better results in the combination of the many lines that we have here. So this is what we expect to see. And now my colleagues can add to what I said if they want. Yuri, I just have an additional comment.

Operator

Our cost of credit in the second half was 3.2%, which is very close to what it was in the past, meaning that the main ROE driver this year comes from this reduction in the cost of credit. But going forward, maybe the main ROE driver

Speaker 1

will be

Operator

more towards revenues. Next question from Tito Labarta. Tito, the floor is yours.

Speaker 2

Hi, good morning, everyone. Thank you for the call and taking my questions. Two questions also, Ken. First on fees, in the quarter fees were fairly healthy this quarter, particularly loan fees and asset management fees, but also capital market fees jumped quite a bit. Just how do you think about the sustainability of this and the belief to grow your fee income, particularly, I guess, on anything there to highlight that may have been extraordinary or difficult to sustain for the rest of the year?

Speaker 2

And then second question on expenses, operating, I guess, personnel and admin holding up pretty much roughly in line with inflation, but a big jump in the other, particularly within other line. If you can just give some more color on that and what drove the increase there on those other expenses? Thank you.

Speaker 1

The fees that you mentioned Tito, had a good performance like I said during the presentation. We have been delivering this result in a sustainable way. It's recurring. I actually used this word in terms of fees and commissions income. The one that drew the least was credit cards payments.

Speaker 1

Of course, capital markets, for example, and you know how the equity market is behaving. It's kind of slow and this is an important item for the capital markets. And of course, there is an oscillation, a fluctuation, greater fluctuation coming from IB Global Market that make up the capital the market capital line depends a lot on the number of transactions and capital inflows and outflows. So there was a more significant variation. But regarding the other revenues, we are growing quite well and in a recurring fashion.

Speaker 1

This is our expectation to continue to grow fee and commissions income better than in prior periods. Regarding personnel expenses, I'll ask our CFO, I'll ask our CFO, Cassiano to answer. Good morning, Tito and thank you for the question. As regards personnel and administrative expenses, as Marcelo mentioned, we have strong control about 4.5% increase. And it's a totally different period because that takes into account the collective bargaining agreement of 2023 now and 2024.

Speaker 1

So we are very much focused on controlling expenses. The main difference comes from the other revenues, operating revenues and expenses. We had a baseline deviation last year. We had some reversals, gains of some specific claims that caused the reversal in the past. So the baseline this year, it's kind of a difficult comparison for this indicator.

Speaker 1

And Marcelo mentioned something important that I would like to stress here.

Operator

When we

Speaker 1

look to 7.3% indicator consolidated for Bradesco and when we exclude the companies of Elopar and Cielo, we get to 6.2% within our guidance. We continue to be very focused on that considering the whole transformation that is happening. And also in terms of personnel, we're still hiring people. We're hiring people for the technology department. We're hiring for credit, for investments, for loan products.

Speaker 1

And we're hiring a lot of data scientists. Still we were able to balance the result with the adjustment of our footprint. So I think that expenses are under control and they should bring us a positive bottom line for us. Thank you, Tito. Next question from Mario Pierry with Bank of America.

Speaker 1

Good morning. Congratulations on the results. A number of positive trends this quarter. I would like to focus more in the long term. When I look at your efficiency ratio that is improving, it's still very high, close to 52%.

Speaker 1

So Norangga, when you mentioned your strategic plan for the next 5 years, You never mentioned numbers. So I'd like you to focus on this. How would you see the evolution of the efficiency ratio? And where do you want to be in 5 years regarding this ratio? My second question is a brief one.

Speaker 1

I'd like to understand the impact of the BRL depreciation and the growth of credit this quarter. All right. I will ask well, thank you for both questions, Mario. And actually, I mentioned a number expected for the next periods until 2028. And Cassiano was kind of answering regarding the expenses.

Speaker 1

So I'll ask Cassiano to more directly answer your question. Hello, Mario. Thank you for the question. Our operating efficiency ratio is exactly where we want it to be. It has an initial increase, which is natural, given the investments and the transformation expenses, although we are controlling the personnel line.

Speaker 1

So it has a higher curve. And as Marcelo mentioned, at the end of the project, we wanted to be close to 40%. That's our target more towards the end of 2027, 'twenty 8. We understand that in the second half of twenty twenty five and in the year of 2026, we'll be able to improve the efficiency ratio, bringing it down. The most important thing is that we are in this ascending curve, which was defined, designed, studied and ratified.

Speaker 1

And then it will start descending in 2025 or 2026, so we'll land at around 40% by 2028. So we are very pleased because we are following the plan that we have in the transformation project. Thank you, Castiano. But you see Mario, when he says he's pleased, he's momentarily pleased, whenever pleased with a 52% operating ratio. I want to stress that we will pursue this indicator, which is again not now.

Speaker 1

It will not be at the end. It will be in the process. And as regards to foreign exchange variation, well, it basically hits the wholesale portfolio. We didn't have anything relevant in the micro small and midsize enterprises and the individuals portfolio. But to remind you that we produced a lot in trade finance during this period.

Speaker 1

So the variation is not just based on what we are carrying, but based on what we originated. And setting aside the wholesale portfolio looking at SMEs and micro companies and individuals, I think we're doing quite well. So I just wanted to point that out. Thank you, Mario.

Operator

Next question from Pedro Leducci from Itau BBA. Can you hear us? Yes, yes, I can. Thank you, Andre, Noroni and Cristiano. Congratulations on the results.

Operator

I just have a quick follow-up in terms of client NII. There was a very nice growth in the quarter, but you talked a lot about the mix. We see also a lot of spread. And looking at the rates at the end, it's hard to identify that spreads were going up, which lead us to understand that there was a component of funding mix that was quite relevant. Can you please help us understand what led you to that 2 46 basis points of spread increase?

Operator

So that will allow us to see where the adjustment is so we can make calibrations for the Q2. My second question is about health insurance. We see increase in technical provisions

Speaker 1

and

Operator

whether that could be like a pent up profit for the second half because I know that you are becoming more strict with the providers. Pedro, thank you for your questions. It's a pleasure to see you again, you and your colleagues. So let's start with the second question. I will also like to ask Ivan to join us.

Operator

Ivan, would you like to comment on the second question? Marcelo, yes. Growth reflects, Pedro, the growth of our portfolio. Efficiency and the financial discipline of our healthcare companies, they reflect the good moment that we are experiencing in the post pandemic period. So that the increase in number of clients and a prospective view in terms of giving a higher degree of comfort to our clients is what allowed us to I think the connection is poor and the image was frozen.

Operator

So Eva will come back soon to finish answering the question. But Andre maybe you can answer the first question. Client NII, that's a very good point you mentioned. Client NII involves 3 main drivers. Number 1, portfolio growth.

Operator

Portfolio growth brings increased client NII. So the growth of our portfolio is a good part of that explanation. The second part that is related to spread and you noted that quite well. There was a slight growth in client NII spread, still very moderate. It's just an inflection point.

Operator

It's the beginning of a more robust and relevant improve going forward. So I would like to explain the lower part of growth with client NII. And there is a third part, which is what Marcelo Cassiano was explaining and this is related to the liability management, client funding. We are being more efficient in terms of dealing with funding from client. We are giving better results and we are working better with our mix and this lowers our funding costs.

Operator

The combination of these three things is what allows us to recover client NII. And as Marcelo was saying, we already threw up many seeds that will allow us to see to say that we will have a better Q3 when compared to the Q2. I mean, certainly, you saw the growth of the portfolio with this mix. It's not a big spike in terms of the client NII, but it will show gradual growth. We will have an even better performance in the Q3.

Operator

I think Iva has joined us again. Iva is back. Hi, Marcelo. Thank you.

Speaker 1

I would

Operator

just like to say that we had an operating increased performance of Bradesco Sauvage in that Healthcare segment. And this obviously puts us in a comfortable position in terms of the investment we've made in the value chain of the healthcare segment. We do believe in this market and we are very comfortable and we have a very positive perspective view. And I think I hope I answered your question and I'm available further on if you need any further clarification. Thank you.

Operator

Thank you, Pedro for the question. Andrey, next question from Edoardo Nicio from Geniau. Congratulations on the results. I have two questions. The first is about your client new client platform that you were launching.

Operator

Could you give me more details about the platform? How do you intend to reduce the cost to serve? I don't know whether that will be only through the reduction in the footprint of the branches or you're contemplating other initiatives that will lower the cost to serve? The second question is simpler. You talked about implicit profit.

Operator

I think analysts have their own calculation on the side. But if you could share with us the numbers that you have in mind, the numbers you use, I think through my calculations is EUR 18,000,000,000. I just want to make sure whether that number is correct. Thank you, Nishu. In terms of our client platform, we have plans that converge here.

Operator

1 is the positioning of Bradesco espresso because this lead us to a reduction in the cost of serve of espresso. But this is combined with that strategy to be present in the physical world with a variable cost. This is our expectation. But we have other initiatives, not only the reduction of the footprint, because we want that unit cost of serve reaches a different level with time. But we are still working with Tullio's team and other teams from the different areas of the bank to take that to market when the right time comes.

Operator

So thank you for that first part. And now I'll turn the floor over to Cassiano to answer your second question. Hi, Nishu, and thank you again for your question. Well, we usually don't give guidance in this regard, but it seems that the market consensus is quite adequate, dollars 17,500,000,000 or dollars 18,500,000,000 So that range seems to be quite adequate. Okay?

Operator

I mean, that's very close to your number. Your number was right on the spot. Thank you, Nishu.

Speaker 1

Next question from Carlos Gomez Lopez with HSBC. Thank

Speaker 3

you for taking my question. Two questions. One about China NII. I wanted to go back to market NII. In the past, the bank has taken positions for long short term and short term interest rates.

Speaker 3

How would you say the balance sheet is positioned today? And what would be beneficial for the short term? And the second question is a macro one, one of the type that Andre likes. We see that Bradesco is gaining momentum is at an inflection point as you mentioned. What about Brazil?

Speaker 3

Do you see that demand is getting stronger, weaker? What is your assessment of the current embassy? We have a lot of negativity in the market. We are also cautious. Thank you.

Speaker 1

Carlos, thank you for the questions. I'll ask Cassiano to start asking about market NII. Carlos, thank you for the question. Good to ECU. Well, in this quarter, we had a reduction in market NII and this had basically an effect on the trading.

Speaker 1

The ALM is very balanced. Our pre fixed future portfolio is in good order together with our liabilities that are increasing. That is a natural hedging cycle. There's no other type of specific movement. So it's very well balanced.

Speaker 1

Obviously, we don't expect any strong and fast interest rate increase as it happened in the recent past. So we're working with market expectations. If everything is okay, we'll have a healthy ALM in the second half of twenty twenty four and most likely in the start of 2025. Nothing to really add, but Carlos, our expectation is what Cassiano mentioned. We expect to have 2 quarters better than the one we've just seen.

Speaker 1

That's our expectation in terms of market NII. Andre, you could answer Carlos' second question about the macroeconomic situation in Nanowlet. Okay. So what we have seen so far is a strong increase in the macro uncertainties, the macro risk and this is affecting a lot of financial assets, but not so much the real activity. Our economist had a slight revision in terms of GDP growth expectation.

Speaker 1

It was around 2.3 percent with a possibility of being something better than that. So 2024 is a year that has been very little affected in terms of economic activity, not very much impacted by the macro risks that are impacting the assets. If that uncertainty continues, well, the CELIC interest rate will remain stagnant for longer. Our economist team expects the CELIC rate to be at 10.5% at least until the end of 2025. And of course, that removes vigor from the economy.

Speaker 1

But basically in 2025, if the economy is not vigorous, that's not good for the banks, it's not good for those that rely on domestic activity. But we have to deal with this just like all companies. And we'll take our internal measures to increase efficiency trying to offset this effect which is not under our control. Well, I second everything that Andre mentioned, Carlos. In terms of the outlook, we had an initial outlook of the GDP growing 2.5%.

Speaker 1

It was reviewed to 2.3%. It is good growth in our opinion for 2024. We have a very low unemployment level. And I know that this has a consequence in the monetary policy. We are following up close exchange rate because that can have an impact on inflation, which is not good.

Speaker 1

It's bad for us if we have a potential increase in the interest rates. But with this potential reduction of interest rates in the U. S. Market, it's possible we'll see a reversion of that. We'll have to monitor.

Speaker 1

We'll have to follow that. But as Andre mentioned, for next year, the growth expectation changes. If we maintain the interest rate, that's okay. And then we'll have a lower potential activity in 2025. In terms of risk appetite, we are always with our eyes open.

Speaker 1

We're monitoring them step by step. And if it's necessary to change the appetite of the bank, we'll do it. Thank you, Carlos. Okay. We are now closing the Q and A session.

Speaker 1

Those questions we were not able to answer here will be answered by our Investor Relations team. Before I turn the floor to Marcelo to his final statements, I'd like to remind you that in our Investor Relations website, you can find the presentation that was presented here in a lot of support materials. Marcelo, go ahead. Thank you, Andrea. Thank you, Cassiano.

Speaker 1

Thank you to all of you who joined us. I'd like to thank the sell side team that asked questions. Thank you very much for your interest in our bank. Thank you for your questions. Thank you to the investors that follow us to our clients.

Speaker 1

I'd like to stress we're always here available to have meetings with the investors, with the sell side team to explain any line of the balance sheet you're interested in. But I share with you a positive outlook. Thank you very much and have a great and blessed week. Thank you.

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Earnings Conference Call
Banco Bradesco Q2 2024
00:00 / 00:00