BANCO DO BRASIL 3Q2018 EARNINGS CONFERENCE CALL

Transcription

1 BANCO DO BRASIL 3Q2018 EARNINGS CONFERENCE CALL OPERATOR - Good morning everyone and thank you for waiting. Welcome to Banco do Brasil 3Q2018 Earnings Conference Call. This event is being recorded and all participants will be in a listen-only mode during the company s presentation. After this, there will be a Q&A session, at that time further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. This conference call is also being broadcasted live via webcast through Banco do Brasil website at where the presentation is also available. The replay of the conference call will be available through the phone number until November 16th, in English and in Portuguese. To access the replay, please ask the operator to listen to BB s conference call. Identification will be required. Participants may view the slides in any order they wish. Before proceeding let me mention that this presentation may include references and statements, planned synergies, estimates, projections, and forward-looking strategies concerning Banco do Brasil, its associated and affiliated companies and subsidiaries. These expectations are highly dependent on market conditions and on the performance of domestic and international markets, the Brazilian economy and banking system. Banco do Brasil is not responsible for updating any estimates in this presentation. With us today we have Mr. Marcelo Labuto, CEO and Mr. Bernardo Rothe, CFO and Mr. Daniel Maria, Head of Investor Relations. Mr. Marcelo Labuto, you may now begin. MARCELO LABUTO - Good morning everyone! Thank you for listening to our Earnings Release Conference Call. Banco do Brasil posted an adjusted net income of 3.4 billion Reais in the quarter, 25.6% higher than the same period last year. This result reflects the guidelines that have led our work over the past two years, and that will keep on guiding our plans for the upcoming quarters. Which are: Increasing Profitability; Asset quality improvement; Efficiency in capital

2 allocation; Admin Expenses under strict control; Better customer experience, Higher Investments in digital transformation and our workforce. We started our journey from a 6.6% ROE in 2016, and we more than double this figure by reaching 14.3%. We reinforce our commitment to bring returns closer to those ones given by our main peers. This yet is not the level we want, but we know we are on the right path to achieve it. I highlight here our strategy of changing the mix of the credit portfolio. In the individuals segment, we will remain active on the payroll loans, and we will broaden our focus on other lines such as consumer finance and salary loans. As an example, consumer finance increased by 1 billion Reais in the quarter, growing 19.8% compared to June. Regarding Very Small and Small Companies, we are originating more working capital transactions with receivables guarantees and shorter maturities. For the other companies, our strategy will remain on offering Capital Markets solutions. Profitability will also increase by diversification in our businesses. In this strategy, fee income, which grew 5.3% in the first nine months of the year, is even more important. We ll also change the mix of our results formation. The way to do it will be the expansion of the number of active customers in our base and in a more aggressive behavior in attracting new clients. The quarterly result also reflects the improvement in our credit quality. After six quarters, we present a delinquency rate below the financial industry average and lower than our main peers, as we did in the past. Other indicators also show improvement in credit quality. Provisions expenses are 31.7% lower than the first nine months of last year, and the coverage ratio has once again exceeded 190% of the loan portfolio. These indicators evidence the effort made by our employees to ensure our asset quality was a year in which we focused on the recovery of our loan book. For 2019, our planning points out to a more aggressive business attitude. We have not yet released our guidance, but I can tell you that next year we will present a stronger credit growth, in line with our main peers.

3 The reduction of the risk premium, after elections, and the expectation for the structural reforms implementation are positive aspects that will contribute to a more consistent growth of the economy and to the credit market acceleration. We are prepared for the growth in credit. The efficient management of our assets allows us to reaffirm the target of reaching 11% of CET1 in This projection already considers the full impact of the implementation of the Basel 3 rules, the credit growth projections for the coming years and the adequate return to our shareholders. We also forecast that we will be able to reach the high-end of the range for the payout ratio. The control of admin expenses also remains one of our main pillars. In the first nine months of the year, we kept our costs under control, with a growth of only 0.8%, which is well below the inflation for the period. This is an assumption that remains for the next quarters, as well as maintaining the cost to income ratio at the current level. Other targets of this management is the improvement in customer experience and the substantial investment in digital. These are two topics that are highly related and, perhaps, the most challenging at the moment. They point to the need to adapt to the fast changes that the financial system faces, and that impact the way clients relate to banks. We will continue to focus on the specialization of our service network. In this quarter, we reached 622 digital and specialized branches. We already have almost 2.5 million customers who started their relationship with us entirely digital. This number includes the opening of checking or payment accounts by mobile and the credit cards issued online by non-account holders. Our digital relationship for the Estilo and Exclusivo segments serves about 4 million customers. Regarding to mobile users, we exceeded 16 million users in our app. Mobile is today, alone, the channel responsible for almost 60% of the transactions carried out by our customers. These significant numbers show the size of our operation and reinforce the conviction of our way forward. Banco do Brasil is already the largest digital bank in the country, and we always innovate. In the third quarter, we were the first to operate with financial transactions directly through Whatsapp, using cognitive intelligence, which creates more convenience for our customers. We also expanded our open banking project by

4 announcing the partnership with BxBlue, a Fyntech that works with payroll loans. This month, we started offering other lines of credit through this platform, as well. For us, fintechs are partners in the joint development of solutions, where the winners are our clients. Another new solution is the digital credit portability. Now our customers can simulate and transfer their loans from other banks to Banco do Brasil directly through the mobile, without going to a branch, making the process simpler and faster. Investments also remain our focus. In the coming days, we will reach the the 2 billion reais mark in funds raised through our investment simulator, which was launched in December last year. The customer experience will be increasingly decisive in the banking market. A more agile, simpler and disruptive bank will also be a more efficient and profitable one. Finally, I would like to thank Banco do Brasil's employees for their commitment, competence, and dedication. One of our main pillars are the investments we made in training, performance compensation and in career development. Our employees are the greatest strength, and the asset that will lead Banco do Brasil to reinvent itself every day, increasing our relevance to our customers and bringing the expected return for our shareholders. Thank you all, and now Daniel Maria will bring you some additional details with his presentation. DANIEL MARIA - Labuto, thanks for your presentation. Good morning, everyone. Moving to page 4, we bring some highlights of the 3Q results that Mr. Labuto just commented. On slide 5, we bring some market ratios and the average estimates by analysts for 2018 and 2019 to those metrics. Adjusted earnings per share reached BRL1.22 in the 3Q2018. The dividend yield was 4.98%. The price earnings ratio reached 6.74, and the price/book value ratio was 0.79 in the 3Q2018. On the next page we bring the building blocks for the net income for the 3Q2018 and for the 9M2018. The adjusted net income for the 9M2018 was BRL9.67 billion that represented a return on equity of 13.4%. This adjusted net

5 income was brought from an NII of BRL37.14 billion in the same period. The cost of the credit provisions was BRL11.0 billion. The fee income was BRL20.2 billion in the period that covered 85.2% of administrative expenses. By the way, the ratio fee income on admin expenses is the highest level since On slide 7, we show the earnings breakdown. The 3Q2018 NII came flattish to the 2Q2018. The funding expenses grew due to the increase in the average balance of the commercial funding compensated by the treasury results. The fee income grew 5.3% in the 9M2018. In comparison to the same period last year, with a highlight to the checking account fees, that increased 6.1% and the asset management fees that grows 12.0%. On slide 8, we have an expanded view of the loan portfolio and the credit quality. In September 2018, the loan portfolio reached BRL686.3 billion, an increased of 0.1% over the previous quarter. The NPL ratio over 90 days has decreased 51b.p. quarter on quarter, reaching 2.83%. The new NPL was 0.27%, lower than the past quarters, mainly explained by the companies' portfolio as we are going to discuss ahead. The coverage ratio increased to % and the cost of risk fell to 3.35% the fourth quarter reduction in a row. On slide 9, we show the individuals portfolio. This portfolio grew 2.0% compared to the 2Q2018, reaching BRL184.6 billion. We highlight the increase in lines such as personal loans, that grows 19.8% quarter on quarter, confirming the strategy of diversification for loans other than payroll. Besides we keep our leadership in payroll loans in Brazil. The NPL ratio above 90 days decreased 6b.p. reaching 3.27%. The NPL formation over the loan portfolio reached 0.79% lower than the past quarters. The coverage ratio increased, reaching The credit provisions expenses were BRL1.8 billion in the period for this portfolio. On slide 10, we present the loans to companies that reached BRL263.9 billion in September We highlight that the very small and small companies portfolio is close to the inflection point, as Mr. Labuto highlighted. The right path for this portfolio is approaching the normal levels and disbursements are growing. For instance, in the 3Q2018, disbursements in the very small and small companies portfolio grew 19.8% in comparison to the 3Q2017. The NPL over 90 days reached 3.77%. This ratio does not carry anymore that specific case in

6 process of renegotiation that was solved during the 3Q2018. The new NPL ratio to the loan portfolio was The regularization of one specific case positively impacted the ratio. Adjusting the ratio, discounting that case, the new NPL over the loan portfolio ratio would have been 0.87%. The coverage ratio was 197.7%. The credit provision expenses reached BRL1.3 billion. On slide 11, we have the agribusiness portfolio that reached BRL188.2 billion in the 3Q2018, mainly impacted by the deduction in the Agroindustrial segment. The NPL +90 days was stable at 1.62% and the NPL formation reached 0.45%. The coverage ratio increased to % and the credit provisions expenses were BRL1.1 billion. On page 12, we bring the net interest margin. NIM decreased 4.0b.p., quarter on quarter reaching 3.94%. This is explained by the higher level of liquidity assets in relation to the total assets in the 3Q2018 compared to the 2Q2018. The risk adjusted NIM increased from 2.84% in the 3Q to 2.92% in the 3Q2018. On the next slide, we bring the spread by portfolio. The credit spread increased 19b.p., reaching 7.61%, mainly due to the increase in the spread in the companies' portfolio. That increased by 34.0b.p. over the previous quarter. The spread for individuals and agribusiness portfolio was stable. On the slide 14, we have the BIS ratio. In September 2018, it reached 9.66% of CE Tier 1. We reinforce our targets to reach the minimum amount of CE Tier 1 of 11.0% in January On slide 15, we bring the changes in the CE Tier 1 comparing September 2018 to the previous quarter. We note that the position of the additional stakes of Banco Patagonia as we have previously noticed the markets consumed 12.0b.p. of CE Tier 1. We closed the quarter with 9.66% of CE Tier 1. Ending the presentation, we bring the guidance. We highlight the new guidance of NII: -6.5% to -5.0%. We delivered -6.9% in the accumulated 9M2018 and we forecast the NII inside the new guidance by the end of the year. Administrative expenses stayed below the guidance, increasing 0.8%, slightly below the low range of the guidance. All the other lines are within the guidance.

7 Saying that we conclude today's presentation and we move forward to Q&A session. Thanks a lot. OPERATOR - Ladies and gentlemen, we will now begin the Q&A section that will be held by Mr. Bernardo Roth. If you have a question, please press *1 now. We request for all participants to ask only one question at a time. Our first question comes from Carlos Macedo from Goldman Sachs. CARLOS MACEDO - Hi. Good morning, gentlemen. Thanks for taking questions. I have one question. I think Labuto, in the beginning, you mentioned that congrats on taking the CEO position, first. But second, putting on the grill already, you just mentioned that you expect long growth to approximate levels of your private sector peers next year, which, you know, if you listen to them, it will be probably somewhere in double digits, on the low double digit side. What lines of credits do you expect to grow to reach there? I mean, there has been a lot of growth on the consumer side, a recovery in SME s, you know, the corporate side has been lying a little bit. What lines do you expect will drive that? And how do you hope to achieve that growth? Is it with, you know, are you going to increase your risk appetite or is it just a matter of demand coming through the Banco do Brasil branches that you expect will increase, as economy ramps up? Thanks. BERNARDO ROTH - Hi, Macedo. Good morning. Bernardo speaking. Thank you for your question. You know, we expect that the change in mix is going to keep improving the results of the bank through the next quarters. So we are going to keep our focus on personal loans, consumer loans. Growing the non-payroll type of loans in the total mix. Although payroll loans and mortgages are going to keep a higher participation on total portfolio for individuals, a growing participation from non-payroll loans in the total mix, that is going to help with profitability. And also the SME, not growing that much this year, because the base effect. Looking at how our portfolio looked like 3 years ago and how it has been performing since the recession. So we are still going through a clean-up process, right? And we are focused on growing the working capital type of lines of credit with SME s. In fact, in our case, it is very small, small companies, right? Because it is up to BRL25.0 million, it is different from our peers. So we expect that type of business, working capital with very small, small companies to grow at a good pace next

8 year. That is going to help a lot with the profitability of the overall credit portfolio. This is one of the most profitable type of business in normal times, but it is not only through credit that we are going to get there. As Labuto mentioned, we want to diversify the sources of new business to do with the clients that already exist in our portfolio and new clients as well. So we want to grow through fees as well. And that is the way of growing without consuming capital, so helping increase profitability, and that is the target. That is, basically, the strategy that we have been deploying for the last 2 or 3 years. So we are going to keep doing that, we have been showing improvements in the profitability. If you look at the return on equities in the shareholder s view, where we take out the hybrid from the capital, the BRL8.1 billion from the capital. We reached in this quarter 15.7%. So the distance is narrowing, but we still have, not a long way, but a way to go, to reach the same profitability as of our peers, by diversification, changing mix in the credit portfolio, diversification through fees, new clients, not only the existing clients but also, you know, improving the profitability for the existing clients that we have using our products and services. CARLOS MACEDO - Thank you. Just one follow up then. So you would say that it would be more of a commercial effort, to increase loans than something that where you would have, you know, bigger risk appetites, slightly more relaxed risk perception, like longer terms, higher approval rates, things like that? BERNARDO ROTH - I would say it is a commercial effort but also, when you grow the mix of non-payroll loans and the very small and small companies, there is a change in the risk profile of the portfolio. So there is more risk because these are type of loans that carries a higher risk, but if you consider risk-return is very good. So, it means that if we are going to make money, but we are going to bring more risk, but it is a risk that we can take. The increase in profitability, increase in margins that we make through these types of loans more than cover the increase in risk. So, it is a commercial effort but there is a change in the mix that carries a higher risk but, you know, looking at the quality of our client-base, right? Where even in higher risk type of product, our delinquency ratio is pretty low. Just to give you a number, right? It is 2.6% for credit cards. One of the higher risk type of products in the market, and the delinquency ratio for credit cards in Banco do Brasil is only 2.6%. Meaning that we can grow this type of lines of credit that have

9 a higher risk and keep delinquency ratios under control and improving, you know, the margins and spreads and so on. CARLOS MACEDO - Ok. Perfect. Thank you so much. OPERATOR - Remembering, if you have a question, please press *1. Our next question comes from Domingos Falavina from JP Morgan. DOMINGOS FALAVINA - Thank you, everyone, also for taking the question. Labuto, congratulations on the new CEO role. My question is one on strategy and, sort of, you know, how should we think about, you know, this term, as you as the CEO. So, specifically here my question is, and if possible, please, like, rank in terms of the top 2 priorities. When we look at the income statement of the bank, how do you want to be remembered as the CEO of the bank? You know, on loan growth, would it be efficiency gains? Would it be insurance? Products growth? Would it be fees? asset quality improvements? And just to put into context, you know, to some of us here, at least, when you look at, you know, the period that Bendine ran the bank and the bank had no ROE shrink, however a very rapid growth in terms of loan, capital being burnt. Look at Caffarelli, more recently, you know, branch transformation, ROE going up, capital being built. You know, each product has had a slightly different rate. So my question is, when you look at the products, which ones are priority? Or how do you want to be remembered as CEO of the bank? BERNARDO ROTH - Hi Domingos, good morning. It is Bernardo speaking, ok? I will take the question. I can tell you that strategy is not going to change that much. We are deploying we decide, we review our strategy, you know, in the beginning of the 2Q of every year. So, the strategy was pretty much in place when we had the change.,so we are not going to have a big change in strategy or direction, you know, for the next year. And everyone here, you know, including myself, Labuto, and Caffarelli at the time, and all the others executive VP s, we are part of this process. So everyone stepped in and give their ideas on how we should move forward. So there is no change in direction. The idea is to keep growing, you know, efficiency. So we are going to keep addressing costs, in the way we can, to keep administrative expenses growing, at least in line, if not lower than inflation. We are going to keep growing fees over inflation. You know, cost

10 of risk is going to keep reducing. The next quarters we have room to do that, so we still have room to improve and we should even go below 3.0% of costs of risk in the near future, before we come back to over 3.0% as the mix starts to have more of these small and very small companies and non-payroll loans in the total mix. And next year, also, we should grow in the NII, because with the change in mix we should see in the NII growing next years. So, helping with the top line, to grow top line and improve the earnings per share. So we have, of course, changes in the style in executing the strategy, right? So I can tell you, everyone has his or her own style, but the strategy itself is pretty much the same. DOMINGOS FALAVINA - Understood. Very clear. Thank you very much, Bernardo. BERNADO ROTH - No problem. OPERATOR - Next question comes from Carlos Gomes from HSBC. CARLOS GOMES - Hello. Good morning. Congratulations on the results. Can you give us an update on the payments for economic plans? And whether you are going to make any disclosure about them? Thank you. BERNARDO ROTH - Hi, Carlos. Good morning. Thank you for your question. In terms of economic plans. We, since the decision of the Supreme Court in Brazil, we have seen an increase in executions and, as the plan was being prepared. So we have seen an increase in expenses with economic plans this year, since the 2Q. But it is something that should, you know, overtime reduce. And we have provisions in place that covers all of our exposure. So we think that it is something that in the next quarters, maybe not the beginning of next year but by the end of next year, til the end of next year it should reduce by a good pace. CARLOS GOMES - That is what I don t understand. You have new plans. That is what I understand from your answer. BERNARDO ROTH - Sorry, there is no new plans. It is the execution. They are old plans that we are paying, right? The payment are increasing. It is only that.

11 CARLOS GOMES - The payments have increased. And do you have to create any provisions for it? BERNARDO ROTH - In fact, what we are doing, paying, right? But there is a time difference between the payments and the release of provisions. So it will take a while, because we pay first, before the process is considered ended by the Court, only after that we release provisions. So there is a lag between the payment itself and the release of provisions. CARLOS GOMES - And do you think there will be a neck in the release of provisions at the end of the process or non-material? BERNARDO ROTH - You know, it depends how this process of, you know, the people that can t apply to be part of this agreement that was approved by the Supreme Court. So only after the whole process that is going to take 2 years, we may have some provisions to release. So, from now on, we are releasing the provisions made by the cases that we have paid. That is it. OK? So, as the payment occurs way before the end of the process itself, there is a lag between the two, the release of each of these provisions takes a while. CARLOS GOMES - OK. That is it. Thank you very much. OPERATOR - Next question comes from Alain Nicolau from Bradesco. ALAIN NICOLAU - Hi, guys. Thanks for taking my question. I think just one topic is missing. You have a really strong credit collection recovery in this quarter and you generally have the seasonality in terms of recovery where your 2Q and 4Q are stronger. So my question is: is anything non-recurring in this line? Or what should we expect for the 4Q? Another strong quarter or you have some normalization in this level? Thank you. BERNARDO ROTH - Hi, Alain. Thank you for your question. You know, credit collection in the 3Q came at a very good pace and we expect that 4Q is going to be a good one as well. I would say in line with what we had in the 3Q but it tends to decrease next year. Why? Because, you know, the new losses are not happening at the same pace as in the past. So the size of the total portfolio for collectible losses are reducing, right? So, for next year that should be lower than

12 what we are doing this year. But for the next quarter it should be, at least, at the same level. ALAIN NICOLAU - Ok. Thank you, Bernardo. OPERATOR - This concludes today s Q&A session. I would like to invite Mr. Daniel Maria to proceed with his closing statements. Please go ahead sir. DANIEL MARIA - Thank you all for the attendance and for the questions. We remind that the investor relations team is available for further questions. Have a nice day and good weekend. Thank you. OPERATOR - That does conclude Banco do Brasil conference call for today. As a reminder, the material used in this conference call is available on Banco do Brasil investor relations website. Thank you very much for your participation and have a nice day. You may now disconnect it.