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

[Interpreted] Good morning to everyone. I'm Ricardo Moura, Investor Relations Director and M&A. Welcome to the conference of results of the second quarter of 2022 of the ABC Bank. [Operator Instructions] Before we start, I'd like to share the following disclaimers. Declarations that might be made during the conference relative to the perspectives of business and ABC Bank, projections, operational targets, financial targets, our beliefs and premises of the company's management and also information that is available on the Bank. Future considerations are not a guarantee of performance. They involve risks, uncertainties and premises, and they refer to future events and depend on circumstances that might not happen. Investors' analysis should understand the general conditions, sector conditions and other operational factors can affect the future results of the ABC Bank and can take through results that differ materially from those expressed in the future conditions. Due to the data protection law, we inform you that this presentation will be transmitted in our LinkedIn and YouTube. And after you know that the personal data such as image and voice might be shared with no loss or against the law. I let you all know that this event is being recorded and being transmitted simultaneously on the Internet via YouTube and LinkedIn all the content and the presentation are available on our website. To follow the presentation, you can download them. And at the end, we will have a session of questions and answers. And here beside me, we have Sergio Lulia, our CEO; and Sergio Borejo, our CFO. Welcome.

Thank you for being with us today. Good morning to everyone.

Good morning, everyone. It is a pleasure to share this moment with you.

I now invite our CEO, to talk about the results of ABC Brasil. In the second quarter of 2002, we'll bring you the main highlights and the main operational highlights. If you want to access the material, you can read the QR [indiscernible] on the screen. Sergio Lulia, the floor is yours.

Thank you, Ricardo. Now I'm going to start with the highlights of the period. In the second quarter of 2022, the net profit reached BRL 202 million, a growth of 10% in relation to the prior quarter and 48% in relation to the same period of 2021, equivalent to an annualized return over the shareholders' equity of 16.6%. The eighth quarter of expansion, we ended with a growth of 6% in relation to the prior quarter and about 26% in relation to the same period of last year, reaching a spread with the clients of 4.4% during the period. The quality of the credit portfolio continues being healthy with the low volume of delays and hike coverage. And the second quarter of 2022, we expanded our commercial presence in over 8 cities, working now in 48 municipalities. This movement is to increase the service structure to our clients, especially in the corporate and middle segments. This strategy allowed us to continue growing our client base. which at the end of the quarter reached 3,988 corporate clients, a growth of 547 clients when we compare to the quarter, the largest historical growth in a quarter. And to support this growth, we continue investing in human capital. We have now gone over the emblematic mark of 1,000 employees, a result of the expansion in new segments of clients, the diversification of the product portfolio and the development of new distribution channels. Finally, we would like to highlight the results of the investment bank that reached the revenue of BRL 44 million in the quarter, the best of the history due to the area of debt capital markets but also an important contribution from the merger and acquisitions area. Following our presentation, let's remember our growth strategy, expand the number of clients and, as a consequence, the volume of transactions, also to serve our clients but also the stakeholders, suppliers, employees and the clients themselves, expand our portfolio of products. Leveraging our relationship with the companies, diluting the acquisition and maintenance cost of clients and diversifying our sources of revenue, reducing the dependency to specific lines of business; utilizing third-party channels to distribute our products and also distribute third-party products through our own channels, all this with a goal to expand the structural return of ABC Brasil. It is important to highlight that we continue to increase our geographic presence. Let's now take a look at a short video with the highlights of our commercial expansion. [Presentation]

We have 34 offices and partners. We have new management accounts in the segment that is middle and the corporate, all to offer our clients the best service possible. And adding to this, ABC Link has been responsible of about 10% of the operational increment over the middle segment during the second quarter. And finally, our client base continues its expansion with the new 547 new clients in the second quarter, the largest in the history, equivalent to an annual growth of 966 clients, an expansion of 32% in 12 months. Now let's go to the next topic. The expanded credit portfolio has shown a growth of 13.6% in the annual comparison within the guidance of growth for the year between 12% and 16% due to the corporate segment with the annual expansion of 21%; and the middle segment, which grew 34% in 12 months and now corresponds to 8.1% of the total of the expanded credit portfolio. I'd also like to highlight the private bonds, which expanded 37% in the quarter due to the admission of rural credit and the corporate segments in CIB. This is an instrument that we structured as of February 2022. In the next slide, we're going to show the sectorial segmentation of our expanded credit portfolio, which continues being very well diversified with a fragmented portfolio and defenses. This composition allied to the origination of operations of quality, has contributed to the resilience of the portfolio during the different economic cycles. The sectors with the largest increases of participation of services 2.1 percentage points, in agribusiness, 0.8 reporting while other sectors were the largest decreases were energy, minus 1% and civil construction, also real estate, minus 1%. And now let's emphasize the margin evolution and the spread with clients. The financial margin of the clients had its 12th quarter of expansion, growing 6% in the quarter and 26% in 12 months due to the change of the product mix with a larger participation of derivatives, cash management and currency exchange, FX, which are the products that command more spread and less usage of capital and the change of the mix of the client segment with a larger relevance to the corporate segment and the middle segment in the portfolio. The spread -- annual spread of clients reached 4.4%, 10 points based above the prior quarter and 50 points over the same quarter in 2021, the largest level in the 5 years. The spread we declare adjusted by the loan loss closed in 3.8%, a decrease of 10 basis points in relation to the prior quarter, a reflex of the provision expenses, which constituted BRL 50 million more. Now we're going to introduce the financial margin. The CDI was BRL 111 million, while the margin with the market was BRL 61 million during the quarter. As a result, the managerial financial margin reached BRL 477 million in the second quarter, a growth of 7% in relation to the prior quarter and 38% in relation to the same period last year. This is the sixth quarter that we have expanded consecutively. Finally, the net interest margin, the NIM, was 4.5% in the second quarter of 2022, an increment of 100 basis points in relation to the same period of the last year, the highest level ever since 2017. Now we'll show you some indicators that reflect the quality of our credit portfolio. In the first chart, the operations that you can see above 90 days, they ended with 0.4% of the portfolio below the average -- historical average around 1%. This improvement of the due loans in the CIB and corporate as well. The middle segment had a bit of an increase to 2%, still comfortable for this segment that has more diversification and spreads, and substantially below the provisional levels for the segment, which currently are at 4.5%. In the second chart, we have the coverage rate, which reached 619%, 175 percentage points above the level observed in the prior quarter. The result of the drop of the volume of due loans and the reinforcement of the segment provision of CIB and Corporate. In this Slide, 11, we show the evolution of the provision of expenses. This provision closed the quarter with BRL 48 million, equivalent to 0.5 of the expanded portfolio, an increase of 0.1 points in comparison to the prior quarter and a reduction of 0.1 percentage points in relation to the same quarter of 2021. This provision for loan losses reached BRL 31.5 million in the quarter, an increase of 18.8 in relation to the prior quarter and a reduction of 32.4 in relation to the same period last year, even taking into consideration: one, the constitution of an additional provision, generic and anti-cyclic of BRL 50 million for the segment of CIB and Corporate; and marginal levels of credit recovery. Now you can see on the screen, the balance loan losses in relation to the portfolio, which ended the quarter in 2.3%. In the vision per segment, there was a reduction in the rates of CIB and Corporate, even with the constitution of the additional provision of BRL 50 million while the rate of the middle segment maintained itself as 4.5 of the portfolio after the formation of the additional provision that we carried out in the first quarter. Now in the next slide, we're going to talk about service revenue. The service revenue reached 19.5% of the total revenue. It went higher the first time then BRL 100 million in 1 quarter, positively increased by the growing contribution of the insurance broker that began operating in the second semester of [ 2022 ] and the recoveries of the guarantees issued that had a larger revenue -- a lower revenue in the prior quarter, but the investment bank was a highlight, responsible for a good part of this revenue. Let's have a look at a video. [Presentation]

Take a look at our highlights. The area of investment banking of ABC Brasil has the best quarter of its history. There were BRL 44.1 million in revenue. With the strong growth and important transactions in debt capital markets and in M&A, the company's [indiscernible] Indigo Brazil; the sale of the asset Sacre II in Santa Ana; CSN, the sale of CBN and GNF with Vale and the issuance of BRL 1.6 billion debentures -- simple debentures and the infrastructure of Copel. Our commitment is with results. As you have seen, this was the highest service revenue of the history in 1 quarter. Now let's present the expense variation and our efficiency rate. The personnel expense grew 39% in comparison to the same quarter last year, reflects of the inflationary effects and the growth of 32% in the number of employees during the last 12 months. We overcame for the first time the emblematic number of 1,000 employees, a result of the expansion in new client segments, the diversification of the portfolio of products and the development of new distribution channels. The investment in human capital includes the reinforcement of our commercial strength, also the support areas that are responsible for the sustainability of operations and also adding new capacities like innovation, data science and cybersecurity. The total expenses grew 46.8% in the annual comparison, while the efficiency in rate reached 38.8% during the quarter within the guidance of 36% to 39%, which was announced in the beginning of the year, a relevant increase of the revenues, balancing the expense increment related to the expansion of our operations. In relation to the evolution, at the end of June, the balance was a total of BRL 43 billion, a growth of 8% in the quarter and 20% in 12 months. One of the success factors of ABC Brasil is the access to competitive funding in local currency as international current with good volume and interest time frame. This condition is supported by rating -- ratings that are equivalent to the Brazilian rating of the main risk agencies in the market, in one of them, one degree above the sovereign level. We believe that the quality of this is more relevant in a place with a quick increase of the interest rates and highlighting as being one of our main differentials. We can also look at the evolution of the net worth and the Basel rate. We ended the second quarter with reference equity of about BRL 6 billion and net equity of BRL 4.9 billion. This Basel rate remained about 15% and the level 1 capital reached 13.1, rates that we believe adequate to support the growth strategy of our organization. Here in the Slide 17, you can notice the evolution of the annual results. The recurring net profit for the second quarter reached BRL 202 million, a growth of 48% in relation to the same period of last year. This trend can be explained mainly due to the increase of the margin with clients, the increase of the service revenue and the increase of the revenue of the equity invested in CDI, and partially compensated by the growth of expenses, a result of the investment in new initiatives, as I've already mentioned before, and increase of the tax and the social contribution result due to the largest -- larger profitability during the period. The annualized return of the equity was 16.6% in the quarter, an increase of 430 basis points in relation to the same period of 2021. When we analyze during the last quarters the shareholder' equity and the annualized return over this equity in the second quarter of [ 2002 ], we have a consistent trend of growth, consolidating your structural elevation of profitability. The recurring profit in the quarter was higher than BRL 200 million in 1 quarter, whilst the return of the equity represented the eighth quarter with consecutive growth reaching 16.6%. We believe that this result, even though initial of -- different initiatives of growth and diversifying the client base and the revenue sources, and at the same time a larger diversification of risk exposure, resulting in larger returns and more resilient returns during the credit cycles. Once more, we would like to reinforce our investment thesis that balances 3 different elements. First, we are an institution with a long history of profitability, we deliver shareholders' attractive returns, consistent and growing through the distribution of dividend yields. Beside this, our results are sufficient to support not only the payments of our shareholders but also the reinvestment that is necessary for the growth and the scale of gain of the current operations which includes the continuous search for the reduction of the acquisition cost and the cost of serving our clients. Finally, we have invested resources and efforts to expand our operations in areas where we have obvious synergies, what we call the right-to-win. This includes capture of options and hidden values, which is something that we still have not totally explored for the diversification of the revenue flows, a larger growth of our results and, finally, a structural increase of return of ABC Brasil. These are the highlights that we wanted to show you. Thank you very much.

Thank you, Sergio, for bringing us the panorama of the results of the bank during this last quarter. I also thank you all of you that followed our transmission up to this moment. Now we'll open for questions and answers.

[Operator Instructions] Let's start with the first question from Ricardo [ Gustavo ] from BTG Pactual.

Congratulations for the results. We've seen the default in historical minimums. And even though we see good health of these companies in general, perhaps this should normalize to historic levels with time. So my question is how does this normalizing risk. Are we going to reach the normal levels? And I'd also like to understand the additional provision that you've made. And if this makes sense to have some sort of reserve of provision for the next semesters, would this make sense for the structural levels of the bank?

Well, thank you for your question. It is a question that involves several different aspects. We actually do have lower default rates than the historical level. That is a fact. And also when you consider the increase of the Selic rate as is happening, it's been going up consistently during the last 1.5 years. And the reason for this low default rate, which I believe that it is extremely low, corporate default is low. And I think there are some states that can help us understand this for example of the fact that the Brazilian companies have gone through the series of crisis since 2014 and 2015. This made the companies have sort of a careful management of their investment strategy or the leverage strategy, the profile of the debt. And this helped the companies be now in a better situation. Another factor was the access of quality financing lines, which existed for the larger companies. One point to the capital market development, which we mentioned during our presentation, crisis, debentures, et cetera, that attended the quality fund for a large part of the clients. And in the case of the smaller companies helped by the credits that were proposed by the federal government during the pandemic. FGI [indiscernible] that also grow quality. So today, we are going through a small worsening in the rates. It's low still. And in the corporate segment, delinquency, it's low, but we do not see signs of changes. And when we take into consideration the level of the interest rate and the perspectives of the world economy, the increase of the interest rates all over the world, chances of recession in developed economies, which also always affect the Brazilian economy, we decided to make an additional provisioning then would be recommended by the -- we had already done this in the last semester. Now we did this for the CIB, corporate so that even if there is a deterioration of these portfolios, which -- as I said, we do not see this happening, but even though if we do see this happening, the portfolio would be protected.

Well, the next question that we have comes from Flavio Yoshida from Bank of America.

Congratulations for the results. My question is about the quality of the portfolio. We saw here the middle portfolio with a deterioration to 2%, and it's still not something to be concerned about, but were you expecting this that this is to change your growth appetite in this line? And if the provisioning level that you showed, the percentage of the portfolio that is 4.5%, if I'm not mistaken, if you believe this is sufficient and if it will grow even more. My second question is in relation to the expenses. You've been contracting a lot of new employees. The rate of increase in salaries will increase, so you'll have more expenses. I know you have a guidance of the efficiency index you're within this. But I'd like to understand how do you see this? And at the end of the day, it's important to see the efficiency rate or index or the expenses itself.

Flavio, thank you very much for your questions. I'm going to start answering and then I'm going to ask my colleagues to help me here. Well, when we talk about the middle market, the exposure, as we've said, it's a sort of more fragmented and diversified exposure. So you do less of a specific case -- cases of the corporate and CIB. So one -- just one company can change this rate, and it has more to do with the portfolio as a whole. This is a segment that today shows the total spread when we consider not only the credit operation but also other products, for example, cash management, insurance, et cetera. It's something that has a spread between 8%, 8.5% and 9% per year, and we have 4.5% as you yourself mentioned. I believe that our business plan, we don't expect default. It's just segment that has spread for this magnitude. So I think we did have this small deterioration. We are paying attention. It seems that it's stabilized. We cannot guarantee, but that's what it seems to be. So the provisioning of 4.5%, which was done in the first quarter, is more than enough, and we have no intention in increasing this. And even less do we think of revisioning our growth strategy for the middle. This is a strategy that will take the bank as we wished it to, a bank that attends companies of all sizes in all segments. It's a specialized banking companies in selling products and credit service. And we believe that this -- our growth can be very big. We have the available capital. We have the teams. We have the technology investment. This is constant. We're investing a lot in technology to have a scalable structure. So we're very, very enthusiastic with the sector. Now the second question, when you talk about the expenses, I'm going to ask my colleague here to help me answer this question.

Good morning, and thank you for your question. When we talk about the expenses, we have become on a strong rhythm of contracting. We contracted 268 people in the last year. And -- if we add this to inflation, we'll reach more or less 45% increase of expenses during the period. This is the expected rhythm. We imagine that this would happen. It is totally within our expectations. The rhythm of the contracting of employees will continue taking place in the second semester, probably not in the same rhythm that they have -- that took place the first semester, and also bringing -- this curve will bring back the rate to the guidance rate. So we trust that we will comply with the growth guidance of expenses as well as the efficiency index. It is within what we had planned.

Next question is from Eric Ito from Bradesco Bank.

I have questions about the follow-up of NPL. We see in an improvement to CIB. And at the same time, you made this additional provision. But I'd like to know if there's any specific case of provisioning in the court of the CIB. And my second question about investment banking. I'd like to know what the expectation is for this quarter, do you think it's still going to be strong for this quarter? And what do you expect in the dynamics in this area for next year?

Well, let's start with the investment bank side. Here, it was really a good quarter for the debt capital markets, but we also had an important M&A contribution. So what do we see moving forward? We see a good pipeline for both, so both on the fixed asset market. The market continues active; and also in the M&A, which is a traditional product with a longer cycle, and we now have advanced operations, operations already designing. So we're only waiting for the closure of the operations. So the next, we hope to have a good visibility, and we see a good quarter coming along as well. Now talking a little bit about the CIB and corporate delay, don't have just one big event. There's some events. In CIB, you have a structure which is more concentrated, but there's no one case that make this movement take place. But it's several -- these past due loans, the decrease happened. It's due to a certain amount of occurrences.

The next question is Yuri Fernandes from JPMorgan.

Congratulations to all of you. I have a question about portfolio growth. We see that you've gone back to the guidance, then expanded, but the middle part is a bit lower even though you grew strongly in the quarter. So my question is what do you think you'll do by the end of the year. Will you remain in the guidance? So -- just to me -- so that I understand better than volume, how do you see this demand? How do you analyze your appetite? And also the revenue, the NII of the bank has grown very well, the spread of clients. The results have been good. So the question is should we this expand financial margin. These magnitudes of 5%, 6%, how do you see this? The spread is the big more difficult to pass over the mix. The middle mix continues helping. Just to understand because I know that you have expense challenges, but the revenue has been very strong. So if we could trust NII a bit better. I think everything will continue going very well for you guys.

Yes. Thank you, Yuri. Thank you for your question. The -- we actually had lost a bit of traction during the second -- first quarter, but it came back on the second quarter. Now you have a natural accommodation when you have new teams. So we opened new middle market offices in 8 new cities in the corporate. Also we expanded our commercial but the rhythm takes a bit of time, right? The cultural part, the credit filters of the bank after the 1 or 2, 3 months of this we see of this hiring, we see that the growth happening, and that's what we hope that will happen in the second semester of 2022. So -- and I think the guidance will be maintained. We trust that we will reach this. We've had good business opportunities. And we do not see the spreads increasing. So there's competition in the segment. We're having good conditions of pricing, the point of view of good conditions of cross-sell, our business plans when we imagine joining the middle segment, we imagine that the entry product will be credit, which is the traditional in the corporate segment. And then with time, after 1 year, 2 years, where you have that client, then you have -- you can start selling other products. And that's not what we see. We see that the cross-sell is happening much quicker. And some clients, we start the cash management even before we have a very good solution developed here. First, we have the cash management, then we come in with the credit. That has been a good surprise. We see currency exchange assets for protection of exposures, currency, interest, et cetera. So we continue very optimistic. The larger surprise -- positive surprise has come from the expansion of a number of corporate clients expansion. This is our most traditional segment. It's where we operate. Ever since this bank existed, we've always been competitive. We continue being competitive with our core, and it's a segment that has a very good performance, and we're very happy. The expense side is monitoring daily, right? Maybe that's an exaggeration but weekly, and we are aware of the risk, the expansion of the magnitude of 40% a year or what this brings to the organization. If the revenue doesn't follow this, we do this monitoring very closely. Things are going well. I think the initiatives that we took 1 year, 8 months ago, whether it be product segment, geographic expansion, they are bringing revenue. And this monitoring, we carry out for you to maintain the efficiency in rate in a competitive level is fundamental for our business.

Next question, Pedro Leduc from Itau.