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

Good morning, everyone. My name is Ricardo Moura. I am the Investor Relations manager. Thank you for the -- second quarter of 2022. If you are watching through Zoom, you can click at the translation button at the bottom right of your screen. I'd like to share some disclaimers. Any statement that may be made during the conference regarding Banco ABC Brasil business outlook, projections, operations, financial goals, continue to beliefs and assumption of the company's management as well as information currently available to Banco ABC Brasil. Forward considerations are not a guarantee of performance and those risks, uncertainties and assumptions because they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect Banco ABC Brasil future results and may lead to results that materially differ from those expressed in such compositions. In compliance with the general data protection law, we also inform that this presentation will be published on our social network in LinkedIn and YouTube and that you may be aware that personal data such as image and voice may be shared without any harm of the law. Please note that this line is being recorded and simultaneously broadcasted on the Internet through YouTube and LinkedIn. All country in presentation are available in our IR website. To better follow our presentation, I suggest you to download it. And at the end, you're going to have a Q&A session. So here with me I have Sergio Lulia, our CEO; and Sergio Borejo, our CFO.

Welcome.

Good morning. Thank you, everyone, and thank you for participating in our third quarter result conference 2022.

I'd like to invite our CEO to talk about ABC Brasil result in the third quarter of 2022 would be condition operational highlights. For slides and material, you can see work through on the screen. Sergio, you have the floor.

Thank you, Moura. Now I'm going to start with the highlights of the third quarter. Net profit operation, BRL 218 million, 17.5% growth in ROAE, a 9% increase. You can see this short video about our highlights. [Presentation]

We ended third quarter with a 6% growth in margin decline when compared to the previous quarter and 22% year-to-year. This was a result of diversification and mix of product and client diversification. Margin with clients and net income at CDI showed expansion in the quarter, contributing to 12.8% of the highest growth in a single quarter since 2015, the equivalent of a NIM of 4.8%, [ expiration ] of 100 basis point compared to the same quarter in 2021. Following our highlights, service revenues increased 26% compared to the third quarter of 2021 led by a record quarter in our investment banking revenues of BRL 57 million. Cumulated is already above the whole [indiscernible] 2021. We have very healthy metrics for the third quarter [ 0.5 ] [indiscernible] provisional expenses. Most of it comes from increase in our product portfolio. Loans overdue above 90 days and guide up at 0.2%. The decrease in operations led to losses and renegotiated credit. With that, our coverage ratio reached 673%. Our credit portfolio increased by 11% in 12 months, and I highlighted the Middle segment with year-over-year expansion of 48%, above our guidance for the year. It's important to highlight that for the second consecutive quarter, more than 10% of our Middle portfolio was generated with -- by ABC Link that's been consolidated as an additional channel for this segment. Following our presentation, let's talk about the ABC expansion. We added 321 new clients in the quarter, reaching for the first time 1,140 clients. That is [ 6 points ] of more than 8% quarter-over versus quarter. Corporate reached almost 2,000 clients, which is above -- more than 2000 -- more than twice we had 1 year ago, and that creates basis for future growth as we increase the average number of products by client. Now next topic, the Expanded Credit Portfolio showed 11% growth compared year-over-year, especially in the corporate segment and Middle segment, which grew 48.2% in the month, reaching 9.5% of Expanded Credit Portfolio. The progress on the CIB segment is in line with the strategy of growth increase through investment banking operations and less use of capital markets. Our Expanded Credit Portfolio still have a high sector diversification pulverized credit portfolio. And this composition is in line with our quality operation has contributed to the resilience of the portfolio performance through all economic cycles. Macro sectors with highlights here our transportation and logistics, commerce and new sectors will decrease, relatively speaking, energy and agribusiness would less 0.5 percentage points water. Now let's talk about the financial margins with clients. We had clients this quarter expanding, growing 6% in the quarter and 36% in 12 months. That's the outcome -- the diversification of the mix products and client segment. Spread with clients annualized reached 4.3%. Third quarter, above 4%. The outcome of our client diversification strategy products and channel. Those private clients adjusted on the provision ended by 3.6%, down by 20 basis points compared to the previous quarter. It's an effect of the -- an increase in provisions, and it's closer to our average history. The net income -- net interest income in terms of CDI showed an increase, and it's in line with the CDI. The interest base interest rate in the country as our result NIM reached BRL 338 million, an increase of 41% year-over-year, which is the seventh consecutive expansion growth quarter. Finally, the -- our NIM now we got that was 4.8% in the quarter, an increase by 100 basis points compared to the previous quarter in the previous year. Now let's take a look at our second video. [Presentation]

Markets, it's important to highlight our M&A performance, which contributed info to our quarter. Not only that, but the level of the insurance brokerage fee grew by 89%, which is part of the growth of our insurance company and our client, which committed to more verification in this line of revenue. It's important to highlight that we started selling agricultural insurance in this quarter. You can see that our total expense grew by 37.8% and reached 38.7%, the efficiency ratio, which is in our guidance. It was a result of new hirings and investments in the structure. We can see the highest program was in profit sharing, which is to drive a higher profitability of the bank. We have some expenses versus in previous quarters, personal, administrative and profit-sharing expenses the expenses. You can see in our chart that funding reached 45% -- BRL 45,000 as in respect third quarter. One of the success factor is the high-volume loans and interest in terms. And this is supported by rating that are similar to the Brazilian Sovereign Ratings. And in pay, one of the agencies one level above sovereign rate so that makes us more relevant in a high increase of interest rates. And once again, this is one of our greatest differential. We can see also the evolution of our shareholders' equity and the Basel Ratio. We ended the quarter at BRL 6 billion preference and BRL 5 billion. And Basel ratio reached 14.7% and level 1, 13.1. This resulted in an increase of assets with its risk and dividend yield was the appropriation of the quarterly results. We can highlight the stability of capital level 1 in the quarter with the of weighted assets are the outcome of initiatives of better use of our capital. This screen, you can see that interest income ranges BRL [ 218 ] million, which is [ 20% ] compared to the previous year. And this trend can be explained by an increase in margin clients, increase in service venues and shareholders' equity at PDI, compensated by increase -- complete increase of vectors, new initiatives, as I mentioned before. When we annualize throughout the previous quarters, net recurring income and our ALA are still showing growth trend consolidated as the pro level of favorable profitability in our [ organisation ]. Net current income reached again more than [indiscernible] and our shareholders' equity reached 17.5%. We understand that this is our initial show results from initiatives that are aiming for diversification of revenue, diversification of risk, which will lead to higher returns and more resilient one, depending on the private cycles. These are the highlights I would like to introduce to present to you today. Now you're going to have a Q&A session.

Thank you, Sergio, for reading us highlights of the Banco results in the quarter. Thank you so much of those that are looking at -- that are watching us today. We're going to open for our Q&A session.

[Operator Instructions] We are available to answer any questions you might have. Now we're going to open for the first question, Ricardo Buchpiguel from BTG Pactual.

Congratulations on your results. I have a question here in this quarter everything had a record high since the IPO of 17.5% considering the bank had leverage environment higher interest rate. Do you see ROI as better or do you expect new [indiscernible] levels of 17.5% even if interest rate start to go down or unpaid loans go back to their historical levels.

Thank you, Ricardo, for your question. Very important one. And what we can see is that when you look at the country performance throughout this year, we have a combination of factors. At one side, we would see as out of the conjuncture or economic environment, high interest rates, unpaid loans below historical levels. And that's been helping our results. But on the other hand, we have an increase in expenses, which is very relevant, just as we said. And these expenses are based on investments we are making to support revenues increased. So as we see, we manage to take advantage of this environment, high interest rate, unpaid loans. So even without this environment, we have some structural decisions to be made, and we managed to do it in a positive environment. Of course, we don't have a ROE/ROI guidance. We have some factors that are not under our executive or decision-making process. But this level of profitability are levels that we consider to be below what we would be happy with. So we are preparing structure initiatives for Middle, more products, investment banking, brokerage, insurance brokerage house. Those are initiatives the level of maturity that are higher than what we've seen and can add to profitability once interest rates goes down or unpaid loans go back to historical levels.

Thank you. Our next question, Flavio Yoshida, from Bank of America.

Congratulations on your results. Borejo, Sergio and Ricardo, I would like if you can help me understand unpaid loans and coverage with the very low levels of unpaid loans. But you expected it to go up next quarter. So I'd like to understand from your side if that's what you expect and what speed it can happen in the following year and whether this high coverage is behind it or if there is some sort of consideration in your portfolio? Of course, unpaid loans but you have a preventive movement in the future or if you already expect something?

Thank you, Flavio, for your question. I'm going to start answering, and Borejo or Ricardo can help me. I think the answer here has to do with the previous question asked by Ricardo in the sense that we are going to do appear in the Brazilian market and ABC Brasil, which has a very healthy portfolio, better than our competitors. But from our 35-year experience in this credit market, we know that at a certain time, it's going to go back to normality. So we've been viewing provision and credit reserves that we find appropriate for our portfolio, even though the unpaid loans are lower. Level of coverage are -- is actually high. So with time, we can see some signs and through all times, maybe unpaid loans levels could go back to historical levels, but we have built our coverage. But maybe as you can go through years with level of unpaid loans. Right now, we think that we have appropriate conditions we are prepared for interest rates at 3.75%, economic decelerating and other challenges yet to come. We think we are well prepared and we don't have any stress in our portfolio. Borejo and Ricardo, what do you think?

I think it's in line with Sergio just said. Take our level of unpaid loan, the 30 basis points, and I think that is way below the bank historical levels or the financial market in general. But bringing it down to 100 basis points, I mean this coverage will be in line like 200%, which is very reasonable coverage. And secondly, this quarter had an increase in our portfolio. Our portfolio goes up partially in the Middle segment, the bank has the policy of banking 4.5% of provision in the whole Middle assets. preventive actions cycle, volume change vehicles can turn, and we need to have our balance sheet prepared for that. Thank you for question. Next question, Eric from Bradesco.

Congratulations on your results. First of all, the operational leverage. I'd like to know for the next year, do you see an exposition the investment you've done throughout years? Or should we wait invest more next year and have more gains in 2024 in the leverage and the revenue, you have a very strong results this quarter, especially with DCM. Do you think there was fewer dissipation because of the election and the fourth quarter should be stronger? Or will you see a strong pipeline for the end of the year?

Well, Eric, thank you for your question and your participation in our conference call. Our operational leverage, you have a growing effect throughout the next few years. And the expansion of Middle, I'll try to explain. If you have one wave of hires, managers and so forth, when you go to the second wave, we doubled the size and so on and so forth. Our waves are still going to happen, and we start to see the effect in 2023 but with growing effects throughout 3 years, '24, '25, '26. This structural reality for the bank, where we have a dilution of fixed costs, we are going to increase expenses at one end, which is hiring sales force. This sales force at the beginning is cost to portfolios and so on and so forth. So we anticipate more expenses. But that's going to have a diluted effect as the way it goes out in the next -- throughout the year. As banking revenues, we now have a franchise of investment banking that is well consolidated, segmented. It's well known by the market. Before, there was -- it was something common. When you start a franchise like that, you manage to gain your clients by working on your own client base. What we can see today that in some cases, we are getting mandates from clients where we have no other. Those are mandated by the ability that we have to deliver investment in products, especially fixed income and M&A operations. Last DCM project is coming strongly as well. Third quarter was strong, and I think for the whole market is going to be like that. And it's a good year. We are expecting a good year. We don't have the figures yet, but we have a good pipeline for next year. And capital markets in Brasil are not going to suffer blackouts that we used to have in the past, but the market disappear. Of course, we have time where is the market is stronger, but we are very optimistic and we have structured teams. We have good syndication with other banks with large names, but also investors in second and third lines that for the access to these sort of operations, not only for the third quarter but for years to come. Now to comment, I think the market is looking for an increase of costs coming down and the growth of our client base. We have 300 more clients in the quarter. These are [ 300 ] clients on one single product. So you have a huge potential to cross-selling and these betas being growing. So there are potential new clients that are potential price to other products. And we have a 36% growth in our client base that position to be explored for 2023 and other years to come.

Our next question comes from Pedro Leduc from Itaú. Pedro?

Now I'm going to ask about the quality of your portfolio, but I'm going to do it differently. When I look at the average ticket, the term that you announced, this quarter showed a different thing showing. Average time is growing up. In Middle, we have 270 days in the second quarter 250 days. We have an increase in average lead time in corporate. Now larger ticket -- larger average ticket, let's match it with management using our cover. But I find it weird that so many tickets with lead times for terms or not absolute fast. I was expecting to see a shorter time. I'm trying to be the rate levels here. In any case, congratulations for your results.

Okay, Pedro, here we have an interesting movement. When you look by segment, on the Middle market, you have some FGI effect. That helps in extending our terms. Same thing happened in the past. When you look at the portfolio as a whole, if you see the number of clients that we have. And divide by the average ticket, we have a trend -- a downtrade, and that happened since the second quarter of 2020. And altogether with you, they reduce the average ticket to also try to mitigate our risks, considering that today for Middle markets we have 9.5% of our total portfolio, that's something we didn't have before. We see an opportunity to growing in our clients. In some cases, we expand this growth by level collateralization, level of spread, level of warranty, from our point of view, still appropriate. We haven't changed our risk appetite. And altogether, we can see a decrease in our average ticket.

Okay. That's very clear.

And given that segment by segment, the Middle market to have the SGI who went back for the third quarter, we are allocating a lot of process product. And it is to expand the line, and that's our goal. In general, what we usually discuss here, if you have -- if you see some nominal data, we had high inflation. So from real value in, the amount still going up.

Okay. Next question is from Gustavo Schroden from Bradesco. Gustavo? Okay. Let's go back to Eric Ito's question. Eric, you can ask your question. Eric Ito from Bradesco.

I apologize for technical issues here. Sergio, Borejo, Ricardo, congratulations for your results. Very strong results. I'd like to change topic, and I'd like to discuss new initiatives, especially insurance and payroll loans. And if you can give us an update on payroll loan and also insurance if you can update us on the size of this business. And is this, Sergio, is this a business you consider additional ROE that can consider for, I don't know, the time of 1 year, 2 years, 3 years. If you can talk about those 2 topics, I'd appreciate it.

Thank you, Eric. We have 2 businesses, very important ones. Both of them, we see as business that are going to be important in our other range diversification to restructure ROE to service our clients at all of our stakeholders. But they have different dynamics. You should not opening our numbers, but what we can tell you is for -- in terms of insurance, we are really happy with our results. According to our business, our insurance area is already profitable, expected that for the third year of operations. We just cited our first year. We are launching new presence like insurance for agricultural business. So it's a profitable business, it's very low fixed cost. So revenues, fee based only. And compared to the previous, we can see a relevant part coming from insurance. And next year, we're going to start announcing some specific data about this initiative. In terms of payroll loans, we are trying to some difficulties that we found in the way more than -- difficulties that were more than expected for companies. We have -- we are experiencing open doors. The companies, they think they know our credibility, but that or human resource department integrate the bank in key role portfolio is taking longer than we expected. First, contact with new clients is great, but then that turn into business, it's taking longer. It's the first niche when we work with private individuals. Of course, we are in a protected environment because those are employees of company clients. But what we want to do is make the life of these companies' human resources easier to some sort of onboarding and finding new ways to reach our clients and increase the reach of these products. So in terms of expected results, it's still below expected. We will -- expenses and yes.

So we are coming to end of our conference call for the third quarter 2022. Now I'm going to pass the floor to Borejo and Lulia for their final comments. Borejo, you have the floor.

Well, first of all, I'd like to thank you for the opportunity to be here, and I hope to see you again in 3 months with more and better news to you.

Thank you so much for participating. We managed to show consistent results throughout the past few quarters. Our team is very excited, very motivated. And we can see the fruit of our investments are showing up. Now this company has a different size, different level of complexity, and we expect new levels of return to our investors. So see you guys in 3 months.

Thank you all for your participation. The presentation is already available in our IR website, and the video of this broadcast will be in our YouTube channel. It's also available in our ABC Brasil website. Our ABC IR is happy to follow up with any questions you might have. See you later. [Statements in English on this transcript were spoken by an interpreter present on the live call.]