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

Good morning, everyone, and thank you for waiting. Welcome to the Fourth Quarter and Full Year of 2021 Conference Call of Banco ABC Brasil. With us here today, we have Mr. Sergio Lulia, CEO; Mr. Sergio Borejo, Executive Vice President and CFO; and Mr. Ricardo Moura, 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.abcbrasil.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 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, depend 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'll turn the conference over to Mr. Sergio. Sergio, you may begin your presentation now.

Thank you. Good morning, ladies and gentlemen, and thank you for joining our conference call for the fourth quarter and full year of 2021. In Slide 2, we present the highlights of the year, continuing with our growth strategy, we ended the year with another strong expansion of the client base, adding 852 total clients and 375 clients with credit exposure, equivalent to a 32% growth in the last 12 months. As a result, we ended the year with 3,490 total clients and 2,300 clients with credit exposure. In addition to contributing to the revenue increase, this trend also reduces the average exposure per client, improving the portfolio diversification. We also presented a 23% growth in the margin with clients, reaching a spread above 4% in the second half of the year. This trend resulted from 2 main factors: changes in product mix with an enhanced offer of structured transactions to our clients and the continued expansion of the Middle segment, which reached 7.9% of our expanded credit portfolio. Finally, expanded provision expenses decreased 43% versus the previous year and loans overdue more than 90 days, accounted for 1.1% of the credit portfolio by year-end, in line with historical average. In Slide 3, we present more highlights of the period. Investment Banking presented record revenues of BRL 107.4 million, equivalent to a 101% growth in relation to 2020. The highlight was the DCM area, which priced 47 transactions with a total issued volume of approximately BRL 6.2 billion in the year. New initiatives started to contribute to its revenue generation and diversification. As in the case of ABC Link, Private Payroll Loan and Credit 2 Enterprise or by expanding the portfolio of clients available to clients as in the case of insurance brokerage. Regarding the financial highlights, net income reached BRL 572 million, an increase of 77% year-over-year. While the return on average equity was 12.8% in the period, an increase of 500 basis points over 2020. Regarding the fourth quarter of 2021, the net income reached BRL 162 million, an increase of 52% in relation to the same period of 2020, equivalent to a 13% return on average equity in the quarter, the sixth quarter of consecutive growth. In Slide 4, we present the evolution of the expanded credit portfolio. The expense credit portfolio grew 1.2% in the quarter and 9.7% in 12 months. The Middle segment continues to be one of our main growth drivers. In the quarter, its portfolio increased by BRL 320 million, a 12% expansion versus the previous and 40% in 12 months. This segment continues to grow its relative share, already accounting for 7.9% of the total expanded credit portfolio, an increase of 170 basis points in 12 months. The Corporate segment presented a 3.8% increase versus the previous quarter and 10.5% growth versus the previous year, continuing to be our most significant client segment. Finally, the CIB expanded credit portfolio had a decrease of 4% in the quarter and an increase of 3.9% in 12 months. As a result of the more balanced approach towards portfolio growth and margin generation aiming at enhancing capital allocation. In Slide 5, some highlights on the evolution of the client base and on the average ticket per client. Once more, we closed the quarter with a significant increase in the number of clients with credit exposure, reaching more than 2,300 equivalent to an expansion of 71% within the last 18 months. The highlight was again the Middle segment, which reached the mark of 1,174 clients with credit exposure, which in aggregate accounted for 7.9% of the expanded credit portfolio. In this segment, the ABC Link initiative continues to gradually contribute with the Middle segment client origination. At the same time, the average exposure per client is gradually decreasing quarter after quarter, reaching BRL 14.8 million in the first quarter of 2021. This trend, we have been growing our expanded credit portfolio and at the same time, reducing the average exposure per client contributing for the dilution of the credit risk. In Slide 6, represents a sector breakdown of our extended credit portfolio. Our expanded credit portfolio continues to show a high sector diversification, presenting a well diversified and defensive loan portfolio. The sectors with the largest relative participation increase in were agriculture and livestock plus 0.8 percentage points; and energy sales and distribution, also 0.8 percentage points increase. While the sectors with a relative decrease participation were insurance and acquirers, minus 1.7%; and energy generation, minus 1.5 percentage points. In Slide 7, 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. The ratio ended December accounting for 1.1% of the portfolio, representing a decrease in relation to the previous quarter, which can be explained by the current [ benign ] credit environment that began in the first quarter of 2021, maintaining this indicator in line with historical average around 1%. In the second graph, we present the coverage ratio, the ratio of the loan loss reserve to loans overdue more than 90 days, reached 277%, 18 percentage points above the previous quarter in our view, an adequate level under the current credit environment. In Slide 8, we show the evolution of the expanded provision expenses and their main components. Loan loss provision expenses reached BRL 42 million in the quarter, an increase of 18% over the previous quarter and up 16% when compared to the same period of 2020. The cost of credit was equivalent to 0.7% of the classified year portfolio is stable in relation to the previous quarter. Provisions for the devaluation of Securities PDS reached BRL 7.1 million in the quarter, an increase of 47% versus the previous and a reduction of 85% in relation to the same period in 2020. Finally, the expanded provision expenses ended the quarter with BRL 44 million, equivalent to 0.5% of the expanded portfolio, stable when compared to the previous quarter, and 0.6 percentage points down in relation to the same quarter of 2020, continuing at a well-behaved level trends that began in the first quarter of 2021. In Slide 9, we present the evolution of our funding. By the end of December, the funding balance reached BRL 38 billion, a decrease of 2% in the quarter and an increase of 7.8% in 12 months. One of the advantages of our business is the first competitive funding, both local as well as in international currency with good volumes and attractive maturities. This condition is supported by [ clarity ] ratings even to the Brazilian sovereign by the main rating agencies or in the case of one of them or not above the sovereign. We believe that the quality of our funding becomes even more important in an environment of rising interest rates continuing to be one of our major competitive strengths. In Slide 10, we present the evolution of our shareholders' equity and Basel ratio. The bank ended December 21, with a reference equity of BRL 5.6 billion and a shareholders' equity of BRL 4.7 billion. In the quarter, the Basel ratio and core equity Tier 1 ratio reached 15.1% and 12.3%, respectively, an increase of 50 and 40 basis points over the previous quarter. This expansion was mainly driven by the appropriation of the results of the period and by the decrease in risk-weighted assets even considering the credit portfolio growth as a result of a better capital allocation. In Slide 11, we present the evolution of the net interest income. The net interest income reached BRL 422 million in the fourth quarter, an increase of 10.8% compared to the previous quarter and up 40% compared to the same period of 2020. The financial margin with clients reached BRL 263 million, stable in relation to the previous quarter and an increase of 22% in relation to the same period of 2020. The financial margin with clients will be further explored in the next slide. The financial margin with market reached BRL 89 million in the fourth quarter, an increase of 27% in relation to the previous quarter and up 30% in relation to the same period of 2020. As a result of the increase in the bank's balance sheet and of interest rate and of [ past ] transactions. The average annualized CDI in the fourth quarter of 2021 was 7.4%, resulting in a shareholders' equity remunerated at CDI income of BRL 69 million, an increase of 47% over the previous quarter and of 323% over the same period of 2020, in line with the increase in the basic interest rate. It's important to note that for each 100 bps increase in the base interest rate, there is an expected increase of approximately 35 to 40 bps in the ROE, given the asset-sensitive nature of our balance sheet. As a result, the annualized net interest margin reached 4.1% in the fourth quarter, reaching the highest level since 2017. In Slide 12, we highlight the evolution of margins and spreads with clients. As mentioned in our previous slide, the margin with clients reached BRL 263 million, ending the year with a 23% increase, continuing to be the main components of the financial margin, contributing with 62% of the total. The spread with clients in the quarter reached 4%, the second consecutive quarter above 4% as a result of changes in the product mix with the enhanced offer of structured transactions to our clients and the increase in the Middle segment, which reached 7.9% of the expanded credit portfolio, contributing with higher spreads. The spread with clients adjusted by provisions ended the quarter at 3.3%, a decrease of 0.3 percentage points over the previous quarter and an increase of 1.1 percentage points over the same quarter of 2020. In Slide 13, we present the services revenues. Service revenues reached BRL 88.9 million in the fourth quarter, a decrease of 8% in relation to the previous one, and an increase of 3.6% in relation to the same period of 2020. This was equivalent to 18.9% of the total revenue. Revenues from investment banking reached BRL 26.6 million in the fourth quarter and in 2021, with record revenues of BRL 107 million. The major driver was debt capital markets, pricing 47 transactions in 2021, which of total issued volume of approximately BRL 6 billion. Revenues from guarantees issued reached BRL 46.9 million, an increase of 2% over the previous quarter and is stable in relation to the same quarter of 2020. Finally, revenues from commercial banking and insurance brokerage fees reached BRL 15.4 million in the quarter, an increase of 28% in relation to the previous quarter and a 50.9% in addition to the same period of 2020. These numbers were driven by the expansion in the number of clients and transactions and by the start of the insurance brokerage business, which completed its first full quarter of operations and continues its process of gaining scale. In Slide 14, we present the change in expenses in our efficiency ratio. Personnel expenses, other administrative expenses and profit sharing reached BRL 166 million in the fourth quarter, an increase of 11% in relation to the previous quarter and up 28% in relation to the same period of 2020. This was mainly driven by a 26% increase in the number of employees over the last 12 months in order to support the continued expansion of the Middle segment as well as the development of structuring initiatives. The efficiency ratio reached 35.2% in the fourth quarter, 1.9 percentage points up in relation to the previous quarter and 0.3 percentage points up in relation to the same period of 2020. In Slide 15, you can see the annual earnings evolution. The recurring net income totaled BRL 572 million in the year, an increase of BRL 250 million over the previous year. The result was mainly driven by increase in financial margin with clients, the decrease in provision expenses and the increase in the shareholders' equity remunerated at CDI. And was partially offset by the increase in income tax and social contribution, resulting mainly from the higher profitability in the period, but also influenced by the increase in the statutory rate, which was in effect until the end of 2021. It was also offset by the increase in expenses in line with our strategy of supporting new initiatives as I already mentioned. The return on average equity reached 12.8% in the year, an increase of 5 percentage points over the previous year. In Slide 16, we show the bank's profitability. When compared to previous quarters, the recurring net income and the return on average equity in the fourth quarter continues to present a consistent gradual growth trend. The recurring net income surpassed BRL 160 million milestone for the first time in the quarter, while the return on average equity surpassed the 14% mark the sixth quarter of consecutive growth. We discussed on the next slide, the start of our second investment cycle. In 2019, we started an investment cycle aiming at diversifying ABC Brasil's operations and starting its digital transformation process. Over the last 18 months ending December 2021, we increased our expenses by 21% and our team of employees by 30%. The results of this investment included expansion of the Middle segment, which currently has approximately 1,700 clients and a credit portfolio of almost BRL 2 billion. In parallel, we expanded our investment banking area and start the development of several new business lines. During this time, ABC Brasil grew its total clients by 74% expanded its margin with clients by 41% and its net interest income by 38%. Currently, we continue to identify several attractive investment opportunities, both markets in which ABC Brasil is already present as well as in adjacent segments that present network synergies, being those with clients, services or channels. In this sense, we initiated in the fourth Q of 2021, a new investment cycle, [indiscernible] as the first one, expand our portfolio of products and services, diversify and accelerate our revenue sources, dilute fixed costs and expand ABC Brasil's structural ROE. The second cycle includes the expansion of our team of employees as well as investments in technology with the main focus on commercial and digital transformation areas, aiming at enhancing the client experience, capturing scalability gains and reducing cost per transaction. We believe that some of the benefits of this new cycle, we already emerged in 2022, but we will likely be closer to its full revenue generation potential within the next 18 to 24 months. This second cycle as the prior one, is being funded by ABC Brasil's own earnings generation. By doing this, we believe that we are building a resilient and diversified business model, combining increasing earnings with ROE expansion. Finally, on Slide 18, we discuss our guidance for 2022. We expect expanded credit portfolio to grow 12% to 16% in 2022, mainly driven by an increase of 40% to 50% in the Middle sentiment. Regarding expenses, considering personnel, other administrative and profit sharing, the guidance includes an increase of 30% to 40% in '22 comprised of approximately 1/3 related to the inflation of the period, 1/3 to investments in commercial expansion, and 1/3 to investments in technology, data and innovation. The increase in expenses should be followed by a significant expansion in revenues so that the efficiency ratio remains within the 36% to 39% range. Finally, we remain confident in our business model and in the evolution of the new initiatives that have been implemented since 2019, already contributing to the growing results of 2021. These are the highlights we would like to present. Now we are available to answer the questions of the participants of this teleconference. Thank you.

[Operator Instructions] This concludes today's question-and-answer session. I would like to invite Mr. Sergio to proceed with his closing statements. Sergio, please go ahead.

I would like to thank you all for participating in our earnings results teleconference, and we remain at your disposal for any doubts you might have. Thank you.

That does conclude the Banco ABC Brasil audio conference for today. Thank you very much for your participation. Have a good day. And thank you for using Chorus Call.