Banco ABC Brasil S.A. (ABCB4) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for waiting. Welcome to the Second Quarter of 2021 Conference Call of Banco ABC Brasil. With us here today, we have Mr. Sergio Lulia Jacob, CEO; Mr. Sergio Borejo, Executive Vice President and CFO; and Mr. Ricardo Mora, Investor Relations Director. This event is being recorded [Operator Instructions]. This event is also being broadcast live via webcast and may be accessed through Banco ABC Brasil website at www.abcbrazil.com.br/ir, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco ABC Brasil management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and, therefore, depends on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Sergio. Please, Mr. Sergio, you may begin your presentation now.

Thank you. Good morning, ladies and gentlemen, and thank you for joining our conference call for the second quarter of 2021. In Slide 2, we present the financial highlights of the period. The net interest income reached BRL 345 million in the quarter, an increase of 9% over the previous quarter and up 22% over the same period of 2020. The highlight was the financial margin with clients, which totaled BRL 242 million, the eighth consecutive quarter of growth driven by a higher derivatives and FX volume and by the increase of clients from the Middle segment in the Expanded Credit Portfolio. The expanded provision expenses for the quarter were BRL 52 million, an increase of 5% over the previous quarter and a decrease of 45% over the same period of 2020, consolidating the transition to a phase in the credit cycle with lower provision expenses. The net income reached BRL 136 million in the quarter, presenting an 11% increase over the first quarter of 2021 and of 121% over the second quarter of 2020. The return on average equity was 12% in the second quarter of 2021, a 100 basis points up versus the previous quarter and 630 bps up in comparison to the same period of 2020, the fourth quarter of consecutive growth. In Slide 3, we present the highlights of the period. Continuing the strategy of expanding the client base for the first time, ABC Brasil surpassed the milestone of 3,000 total clients and 2,000 clients with credit exposure. We ended the second quarter with the addition of 234 total clients and 94 clients with credit exposure in the quarter, equivalent to a growth of 60% of the client base in the last 18 months. Regarding product portfolio diversification, Banco ABC Brasil started to operate its captive insurance brokerage arm, ABC Brasil Corretora de Seguros, focusing initially on shared bonds, insurance line directly linked to corporate credit rating analysis, complementary to the current offer of financial guarantees line. Credit Life insurance, life insurance product targeting shareholders of reference of corporate companies and Capital Global group life insurance products. The business plan of ABC Brasil Corretora includes the gradual expansion to other insurance lines during the following months, including agricultural insurance and other property and casualty insurance lines. In Slide 4, we present more highlights of the period. We continued with the expansion of ABC Link initiative that leverages on the distribution of financial services through partner offices, using the banking correspondent legal structure. We focused on the geographic expansion with 18 partner offices already operating or being onboarded in a pipeline of more than 50 offices interested in building a commercial relationship. The initial product portfolio that includes credit and cash management will be shortly expanded with other services. Concerning to our payroll loan product. From May to July 2021, we launched the private payroll loan offering to our employees when the processes and systems were successfully tested. In August, we started reaching out a universe of 700 clients, mainly from the Corporate segment that, together, employ around 1.7 million employees. The first agreements that have already been signed and more than 100 are under negotiation. The expectation is to gain traction over the next quarters with an increasing presence in our corporate clients. Finally, in Slide 5, we discussed the Energy Trading Company which has been operating for a little more than 1 year, initially focusing on energy prepayment and trading. The Energy Trading Company presented 2.9x growth in the number of counterparties and a 3.4x growth in number of transactions when compared to the second quarter of 2021 with the previous quarter. It's currently in the process of expanding its product portfolio to include the negotiation of long-term contracts and flow transactions. Regarding the partnership in capital markets with Banco Inter, there was a joint participation in 3 debenture issues totaling BRL 2.6 billion, out of which BRL 1.5 billion in infrastructure debentures, whose distribution is primarily driven towards individuals, one of the pillars of the partnership. In the pipeline, we have the joint execution of 5 other transactions totaling up to BRL 1 billion, including one infrastructure fund and 2 Brazilian REITs with the distribution also focused on individuals. The 2 teams are having weekly pipeline meetings, jointly analyzing 5 to 10 new business opportunities. Additionally, the coordination and distribution of funds is a new and promising line of business for ABC's DCM area. Besides the infrastructure funds, the partnership is also discussing other types of funds, including real estate and agribusiness. In Slide 6, we can see the second quarter 2021 earnings evolution and our annual comparison. The recurring net income reached BRL 136 million in the second quarter, an increase of 121% compared to the BRL 61 million presented in the second quarter of 2020, explained mainly by the decrease in provision expenses and the increase in financial margin with clients and with the market and partially offset by the increase in the income tax and social contribution and the increase in expenses, in line with the strategy of supporting the new initiatives. In Slide 7, we present the evolution of the expanded credit portfolio. The expanded credit portfolio presented a reduction of 0.8% in the quarter and grew 9.8% in 12 months. The Middle segment presented an increase of 80.6% versus the first quarter and an increase of 170% in 12 months. Although the relevance of the Middle segment within the expanded credit portfolio reached 6.9% in the second quarter, it contributed with more than 15% of the margin with clients, given its largest spreads. We believe that as the Middle segment continues its expansion within the overall credit portfolio, this effect shall be amplified. The Corporate segment represents a 0.6% increase versus the previous quarter and up 7.8% in 12 months. In the CIB, the expanded credit portfolio had a reduction of 4.1% in the quarter and an increase of 1.7% in 12 months, in line with the segment strategy of increasing the offer of services and structured operations. Finally, we would like to reiterate the maintenance of our expanded credit portfolio growth guidance for 2021, as previously announced. In Slide 8, some highlights of each segment. We've concluded the quarter with an increase in total clients in all segments. The Middle segment had an addition of 185 total clients in the quarter and of 729 clients in the year, an increase of over 2x in 12 months, reaching 1,367 clients. At the same time, the average exposure per client was nearly stable at BRL 2.7 million. The Middle portfolio ended the quarter with an average term of 423 days. In the Corporate segment, the bank ended the second quarter with 1,325 clients. Of these, 1,006 had credit exposure resulting in an average exposure of BRL 16.8 million per client. The Corporate portfolio ended the quarter with an average term of 416 days. Finally, in the CIB segment. The bank ended the second quarter of 2021 with 330 clients, of which 164 with credit exposure resulting in an average exposure of BRL 74 million per client. The CIB portfolio ended the quarter with an average term of 414 days. In Slide 9, we present the sector segmentation of our expanded credit portfolio. It continues to show a high sector diversification exposed to the most dynamic sectors of the Brazilian economy: such as agribusiness, such as grain, agriculture and livestock, infrastructure, energy generation and transmission, real estate, among others. In addition, the sectors with the largest relative increase in participation were banks plus 1.1 percentage points; and insurance, acquires and others, plus 0.6 percentage points; while the sectors with a reduction in relative participation were sugar and ethanol, minus 0.9; and others, mainly retail, minus 0.8. In Slide 10, we present some indicators that reflect the quality of our credit portfolio. In the first graph, we present the loans overdue more than 90 days. As we can see, this ratio ended June accounting for 1.2% of the portfolio, a 0.9 percentage point increase versus the previous quarter and in line with historical average closer to 1%. In the second graph, we present the coverage ratio. The decrease in credit reserves, combined with the increase in past due loans, resulted in a decrease in the loan portfolio coverage ratio, reaching 264%, in line with the pre-COVID-19 levels. We see the current phase of the credit cycle as with a general improvement of the business environment. The increase in past due ratios in the quarter has been -- had been previously provisioned, which reduces the pressure for higher provision expenses this quarter and in the future, assuming the maintenance of current market conditions. In Slide 11, we show the evolution of the expanded provision expenses and their main components. The loan loss provision expenses reached BRL 46 million in the quarter, an increase of 35% in relation to the previous quarter and a decrease of 50% when compared to the same period of 2020. The cost of credit was equivalent to 0.9% of the classified loan portfolio, an increase of 0.3 percentage points over the previous quarter. The provision for the devaluation of securities reached BRL 3.7 million in the quarter, a decrease of 82% versus the previous quarter and up 29% in relation to the second quarter of 2020. The credit recoveries reached BRL 14.5 million, a meaningful volume when compared to previous quarters, resulted from efforts in the recovery of written-off loans related to specific situations. The provisions for asset, not for own use, showed a higher volumes quarter but which we believe will return closer to the historical average in the coming quarters. The expanded provision expenses, which includes the items mentioned, reached BRL 51.8 million, equivalent to 0.6% of the expanded portfolio, stable when compared to the previous quarter and 0.6 percentage points down in the -- in comparison to the same quarter of 2020. In Slide 12, we present the evolution of our funding. By the end of June, the funding balance reached 36 point -- BRL 35.6 billion, a reduction of 5.7% in the quarter and an increase of 2.3% in 12 months. The market continues to offer abundant liquidity options, both in local and international currency, with good volume and interesting maturities. We continue to see our capacity to access quality funding as one of the advantage of our business. On Slide 13, we present the evolution of our shareholders' equity and Basel ratio. The bank ended June 2021 with a reference equity of BRL 5.5 billion and a shareholders' equity of BRL 4.5 billion. In the quarter, we had a Basel ratio in a core equity Tier 1 ratio nearby stable as a result of the increase in risk-weighted assets and of the distribution of interest and capital compensated by the appropriation of the results of the period and the ratification of the capital increase of BRL 62.5 million obtained in the quarter. In Slide 14, we present the evolution of our net interest income. The net interest income reached BRL 345 million in the second quarter, an increase of 9.4% compared to the previous quarter and up 22% compared to the same period of 2020. The financial margin with clients reached BRL 242 million in the second quarter, an increase of 11.8% in relation to the previous quarter and up 18.9% in relation to the same period of 2020. The financial margin with clients will be further explored in the next 2 slides. The income from shareholders' equity remunerated at CDI was BRL 28.5 million in the second quarter of 2021, an increase of 65% over the previous quarter and up 22% over the same period of 2020, in line with the base interest rate trend, given the asset-sensitive nature of our balance sheet. As a result, the annualized net interest margin, the NIM, reached 3.5% in the second quarter, an increase of 0.3 percentage points in relation to the previous quarter and 0.5 percentage points up in relation to the same period of 2020, returning to the levels seen in 2019. In Slide 15, we present the evolution of margin and spreads with clients. The financial margin with clients reached a new record of BRL 242 million, the eighth consecutive quarter of growth, an increase of 11.8% in relation to the previous quarter and of 18.9% in relation to the same period of 2020. This growth was supported mainly by the improvement of the product mix with increased revenues from cross-selling, such as derivatives and FX, by the increased representativity of the Middle segment in the expanded credit portfolio with higher spreads and by the higher number of days versus the previous quarter. Currently, the margin with clients remains the main line of the financial margin, contributing with approximately 70% of the total. The spreads with clients reached 3.9% in the quarter, an increase of 0.4 percentage points when compared to the previous quarter and 0.2 percentage points up over the same period of 2020. The spread with clients adjusted by provisions ended the quarter at 3.4%, an increase of 0.8 percentage points over the previous quarter and of 1.3 percentage points over the same quarter of 2020 driven by lower provision expenses. In Slide 16, we present the services revenues. Services revenues reached BRL 72.6 million in the second quarter, an increase of 1.4% in relation to the previous quarter and of 24% in relation to the same quarter of 2020. Looking at each of its components, the revenues from guarantees issued reached BRL 42 million in the second quarter, a decrease of 1% from the previous quarter and an increase of 2.4% over the same quarter of 2020. Investment banking reached BRL 20.8 million in the second quarter, a decrease of 0.9% over the previous quarter in relation to the same period of 2020, a quarter in which this line was especially affected by the effect of the COVID-19. Investment banking revenues increased by about 130%. Finally, revenues from banking tariffs reached BRL 9.8 million in the quarter, an increase of 20% in relation to the previous quarter and up 21% in relation to the same period of 2020. driven by the increase in the number of clients and transactions. In Slide 17, we present the change in expenses and our efficiency ratio. The personnel expenses, other administrative expenses and profit sharing reached BRL 142 million in the second quarter, an increase of 7.5% in relation to the previous quarter and of 23.7% in relation to the same period of 2020. This was mainly driven by the development of structural initiatives, including the continued expansion of the Middle segment, the launching of new business lines and innovation and digitalization initiatives. As these initiatives are developed and gain relevance, they accelerate revenue growth and dilute costs and expenses. As a result, the efficiency ratio reached 35.5% in the second quarter, 0.7 percentage points down in relation to the previous quarter and 1.7 percentage points down in relation to the same period of 2020. Finally, on Slide 18, we discuss the bank's profitability. The recurring net profit reached BRL 136 million in the second quarter, 11% up from the previous quarter and 120% up from the same period of 2020. The recurring return on average equity was 12.3% per year in the second quarter, an increase of 1 percentage point versus the previous quarter and up 6.3 percentage points versus the same period of 2020. These are the highlights we would like to present. Now we are ready to answer the questions of the participants of the teleconference. Thank you.

[Operator Instructions] Our first question comes from Gustavo Schroden with Bradesco BBI.

Can you hear me?

Yes, yes, we can. Hi, Gustavo.

My question is regarding the sustainable ROAE. You -- we've seen an improvement in the net interest income and net interest margin of the bank is supported by this better mix. Also, it seems that our asset quality is under control. So my question is what is the -- the ROAEs improving from last year, definitely. But my question is, what is the sustainable ROAE that you think that the bank can reach, I mean, in the next 2 years or 3 years ahead?

Gustavo, thanks for your questions and for participating in our conference call. This is a tough question, and I -- we could have answers, let's say, for the near future, and it could have other answers for the, let's say, medium term or long term. In the near future, what we are seeing is the ROAE gradually recovering from last year's peak by the points that were explained in the presentation, including, for instance, things that are external to us like the increase in the Selic rate but others that are a consequence of the measures that were adopted such as the reduction in the provisions for losses and the recovery in the margins from the investment bank. But besides this -- let's say, these effects that are specific to 2020, there are some structuring initiatives, such as the expansion of the middle market, that start to have some impacts on our ROAE, and we hope that this effect will become bigger quarter after quarter. As we have said, the middle market, for instance, it accounts now for 6.9% of our total credit portfolio, but they already represent a 15% participation in the margin with clients. And I think over time, this participation will only increase. Besides that, there are some other initiatives that we have invested heavily in the last 2, 3 years. including the digitization of the bank, the development of the power trading company, the structuring of the payroll lending initiative and others. But we have incurred in costs, but the revenues are still not there. And starting from now, these new businesses, they will start to show some revenues. This revenue will be small in the beginning, but we expect that, let's say, in 18 to 24 months ahead, they will contribute significantly to our ROAE. So having said that, I believe that -- and please, this is not a guidance. You know -- you have been following us for many years. You know that we don't release any kind of guidance for ROAE. But I believe that our sustainable ROAE has to be at least around 15%. We will be very unsatisfied if after those initiatives mature we deliver an ROAE that is below 15%.

No, that's very clear, Sergio. And I understand that it's not a guidance. I know that is just -- I mean, the best that you can provide. That's perfect. If I may do a second question here. It's regarding your mix because I'm not sure if -- I mean are you focusing on SMEs as well now? But does the bank consider to do something on the individual side, maybe payroll loans for these SMEs that you are investing? I mean, would that make sense or the bank will continue focusing on companies? What is the strategy here?

Gustavo, that's an excellent question. I would say that our strategy is to be, let's say, the bank of choice to [ big ] and middle-sized Brazilian companies. Maybe in the future, we can expand to even smaller companies. But for this moment, we are targeting companies that have BRL 30 million or more. But we want to be the bank of choice, not only to these companies, but to their suppliers, to their clients and to their employees. So given a relationship that has been established between the bank and the corporate client, we think that we could serve this side better if we go also to their other stakeholders. And that's why we have initiatives such as the private payroll lending, which you have mentioned, and I think it's going to be a very successful initiative because this is a B2B2C kind of business. So it's important not only to have the relationship with the corporate customer but also to understand the credit strength and the economic cycle of those clients because of things such as the turnover of the client impact a lot on the private payroll lending, and we believe we have this strength. So this is one side of initiatives, but there are others. So supply chain finance and other initiatives are targeting more on the suppliers and on the clients of those corporate clients. So every new product or every new channel that we can develop that can better serve our customers and all their stakeholders will be in the core of our strategy. On the other hand, any kind of product or initiative that has nothing to do with our main client, which are the corporate clients, we will not develop because then we think we wouldn't have any competitive advantage in developing initiatives that are not correlated to our existing client base. I don't know if it was clear.