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

[Interpreted] Good morning to everyone. I'm Ricardo Moura, Director of Investor Relationships and M&A [ prepared ]. You're welcome to the teleconference of results of the fourth quarter of the ABC Bank. Those of you who are watching via Zoom and you want to follow an English click on the button of translation below this screen. Before we start, I would like to share the following disclaimers. Declarations that can be made in this conference relating to the perspectives of business of the bank, projections, operational targets, financial targets, they are beliefs and primates of the administration of the company, also information currently available for the bank. Any future consideration and not -- it's not a guarantee of performance. It involves risks, uncertainties and premises because it refers to future events. And therefore, it depends on circumstances that can or not occur. Investors as analysts would understand that the general conditions, conditions of the sector and other operational factors can affect the future results of the bank and can result in different results than those that are expressed in the future conditions. In compliance to the data law. We also for the this presentation is being recorded and is going on to the social media, LinkedIn and YouTube and that you must know that your images and voice might be shared with no breach to all the content, including the presentation will be available in our Investor Relations site. To follow the presentation please download the QR code, which is on the screen. And at the end, we will have questions. Today we have our CEO, Sergio Lulia and Sergio Borejo. Welcome.

[Interpreted] Good morning to everyone, and thank you very much for participating in our teleconference of results of the fourth quarter. Good morning, everyone. It's a pleasure to be here. I now invite our CEO to talk about the results, bringing the main highlight of the financial and operations. If you want [indiscernible] the presentation from QR code on the screen. Sergio Lulia, the floor is yours.

[Interpreted] I'm going to start with the highlights of the fourth quarter of 2022 and the year as a whole. We ended the year with a growth of 27% in the margin with clients in relation to the prior year, a result of the gradual diversification of the mix of product segmentation of clients an expanded credit portfolio has a growth of 14.7%, and it has an annual expansion of 40%, exceeding BRL 4 billion and corresponding to BRL 9.6 million of the expanded credit portfolio. The service revenues has a growth of 18% in relation to '21, driven once more by a record revenue of BRL 145 million of the investment bank and by the contribution of the insurance broker. Finally, the net income has reached BRL 800 million, a growth of 40% in relation to 2021, equivalent to annualized equity return of 16.2%. This represents an expansion of 343 basis points in relation to the prior year. And now let us watch a video with our highlights. [Presentation]

[Interpreted] Okay. Let's continue our highlights. About the expanded credit portfolio, we had a growth of 14.7% in 12 months. Value within the guidance of growth, which is between 12% and 16%. Beside the middle growth, it's important to note is the performance of the corporate segment with an expansion of 20% in the last 12 months, reaching almost 57% of the expanded credit portfolio. In the quarter comparison, the highlight was the performance of the CIB, which expanded 7.8% in the period as we can observe the expanded credit portfolio has a diversification with a spread portfolio and defense. This composition alike to the quality operations has been contributing to the resilience of the portfolio along the economic cycles. The macro sectors were the highest increases in relative partition or energy, plus 2.8 percentage points in agribusiness, 0.9 percentage points, while the macro sectors with the reductions were commerce, minus 1.2% and transport and logistics, minus 0.4%. Now let us emphasize the financial margin with clients, which has had the 40 consecutive quarter of expansion. Results of the gradual diversification of the mix of products and client segments. The annualized [ bed ] with clients reached 4.3%. The sixth quarter with consecutive growth above 4%. The spread with clients adjusted by the provision, closed the quarter with 2.8% a reduction of 80 basis points in relation to the prior quarter, a reflex of the increase of the expenses of provisioning, especially by an isolated event relative to the CIB segment. Continuing, you can see that in the fourth quarter, we again have the expansion of the 3 lines that form our financial margin. The margin with clients, the main line of the financial margin closed the fourth quarter with BRL 335 million, a growth of 4% in relation to the prior quarter and 27% in relation to the same period of 2021. The shareholders equity remunerated at GDI was BRL 139 million in the quarter and BRL 475 million in the year, in line with the evolution of the interest made during the period. The margin with the market was BRL 82.5 million in the quarter and BRL 294 million during the year of 2022. As a result, we highlight that the financial margin reached BRL 557 million in the fourth quarter and the eighth consecutive quarter with the expansion, exceeding for the first time, the value of BRL 2 billion in the annual accumulated. Finally, the rate net interest margin closed the fourth quarter at 4.8%, contributing for the NIM of 4.6% in 2022, an increment of 90 basis points in relation to 2021. Talking about the credit portfolio, the operations past due over 90 days closed the quarter at 0.5% of the portfolio below the historical average. The ratio for the segment, there was an increase of the middle ratio, above 2%. It's a trend that was already expected given the nature of the companies of the segment and the maturity of the portfolio. Now the delays of the corporate segment and the CIB was stable in relation to the prior quarter. It's important to highlight that this level of delay is still does not capture the impact of the isolated event in the CIB segment. Following presentation, the expenses banded provision closed the quarter in BRL 115 million, equivalent to BRL 1.2 million for the expanded portfolio. BRL 13 million, we're referring to the growth of the credit portfolio. The largest part of this increase was a reflect of this event in the CIB segment, which generated an increase of the constitution of specific provisions in the order of BRL 67 million. Besides this, we have the generic provision allocation prior constituted of BRL 50 million, reaching a provisioning level around 30% for this case. It is important to emphasize that we see this event in this isolated cases, a large company, which is not directly related with the moment of the credit cycle. While this is the loan loss reserves in relation to the percentage of the portfolio ended the quarter at 2.7%, an increase of 40 basis points during the quarter. In the segment vision, the corporate and middle maintained the levels of the prior quarter, resulting in a stable rate comparing to the quarter. Now in the CIB, we had an increase due to the situation that we just mentioned. Our ratio of coverage reached 543%, 113 percentage points below the level observed in the prior quarter. Now let's move on to service revenues. This reached 15.4 million of the total revenue in the quarter. and 17% in the annual comparative. This performance was the result of the record revenue of BRL 145.10 million and the investment bank during the year of June '22 and the onto on the tariffs and insurance brokerage that closed the quarter with a growth of 67.2% in relation to the same period of 2021 and reflects the contribution of the insurance brokers and the increment of our client base. In the item expenses, we can observe that the total expense grew 48.5% in the annual comparison, while the efficiency ratio of 2022 to reach 38.4%, within the guidance for the year. As mentioned in prior quarters, the increase of the total expense was impacted mainly by the investment cycle in structuring initiatives, including the continuity expansion of the middle segment, the launch of new business lines and innovation fronts and digitization. We can observe a reduction in the speed of the growth of the expenses in the fourth quarter of '22. Our expectation is that this trend continues in '23, while the revenue will maintain its expansion speed through the maturation of new initiatives and the capture of operational leverages contributing for a gradual improvement of the ratio of efficiency. This will be one more leverage to contribute to our profitability. In relation to the evolution of funding. At the end of December, the funding balance was a total of BRL 45 billion, a growth of 1.7% in the quarter and 18.4% in 12 months. One of the success factors of ABC Brazil is the access to competitive funding. In current and also internationally, with a good volume and interesting terms. This condition is supported by the ratings equivalent to the Brazilian rating by the main risk agencies of the market or in the case of one of them, 1 degree above sovereign. As you can notice, we closed the semester with a reference equity of BRL 6.4 billion and a shareholders' equity of BRL 5.2 million. The Basel ratio reached 15.2%, and the level 1 was stable, 13.1%, even with the growth of the asset base and more provision expenses. The stability of the capital base is the direct result of the highest level of profitability. We consider the current level of capitalization or capital ratios comfortable to continue to execute our business plan. Now on the screen, the chart demonstrates the evolution of the annual results. The recurring net income of 2022 reached BRL 800 million, a growth of 40% in relation to the prior year. This trend can be explained, especially by the increase of the client margin, also the shareholders' equity remunerated at CVS compensated also by the increase of administrative expenses and provisions. The return on annualized equity was 16.2%, an expansion of 343 basis points in relation to 2021. Now in the recurring income of the fourth quarter was BRL 197 million, while the recurring equity was 15.3%. If we did not have that situation in the CIB segment, the net income would have been BRL 226 million. And the return on equity would have been 17.5%. Even considering this effect, we have a return -- a good return in the fourth quarter around 120 basis points during this higher than the same period in '21. We will analyze now the results of the closure of 2022 in relation to the guidance for the year announced at the beginning of '20. We reached an expanded credit portfolio of 14.7% being driven by the expansion of the middle segment and annual growth of 40.1%, both within the guidance. Now the expense growth ended 2022 in 48.5% above the guidance of 30%. This is a result of higher inflation and the expansion of our team of employees and investments in technology with the main focus in commercial areas and digital transformation. This growth of the expenses has been compensated by a higher expansion of the revenues, contributing to the efficiency ratio of 22%, which reached 38.4% within the guidance of the year. Now to end, we're going to introduce our guidance for 2023 with relation to the expanded credit portfolio or guidance of an annual growth between 12% and 16%, once more driven by the expansion of the middle segment with the expectation of an annual growth of portfolio between 35% and 45% in relation to the guidance of the expenses considering personnel expenses, other administrative expenses in PLR, our projection is a growth between 15% and 20%, substantially lower than the growth presented in 2022. The expectations that 2023 presents a slower growth of the expenses and a continuity of the expansion of the revenues through the maturation of new initiatives and the capture of additional operational leverage. This is the rationale for the definition of the guidance of the ratio of cities that we are projecting between 35% and 38% for '23. So these are the highlights that we wanted to show you. Now we are at your disposal to respond to all the questions that the participants of this teleconference might have.

[Interpreted] Thank you very much. Thank you very much. We have given you the Panorama. We thank you all so probably the transmission. Now the session questions and answers is open.

[Interpreted] [Operator Instructions] First question comes from Ricardo Buchpiguel from BTG.

[Interpreted] [indiscernible] Congratulations for the results, I'd like to -- and this -- and provisioning of the Americanas cases this year and also the scenario specific case. Would it be possible for us to see an expansion of the ROI due to the factors that I mentioned, Middle [indiscernible] and another topic, ABC has been growing a lot during the last year. And I would like to understand if the bank is going to make any changes to the capital. Are you happy with the Basel ratio or something with the issuance? Are you going to change the mix of the capital and would this be this year or next year. I'd like to understand your perspective.

[Interpreted] Thank you for your question. In the case of Americanas, we have a provisioning of 30%. This is the percentage level recovery. We don't have a lot of information. And with time, we evaluate and see what is going to be necessary in this specific case, I think the level of information is still very low. We don't have the information hasn't been publicized is huge expectations because the shareholders are responsible for the administration of the company, and I'm sure that they will solve the situation. So we are going to follow this closely and after this, when we have a higher level of information, we will define the level of provisioning that will be necessary. And if it's necessary, we will be doing this as we always have with no problem. As for the year, the year is just starting we have a healthy and well provisioned portfolio. But as we [indiscernible], we have perhaps a deacceleration of the economy, higher interest rates. And this is a world that we know how to navigate in and we feel fine navigating through this year. In relation to your other question of the capital structure, well, we have a capital structure that we feel very comfortable with depending on the acceleration or not of the growth of the bank, which is going to depend on macroeconomical levels, we're very well prepared and very well equipped. It might be necessary to do the recap utilization of dividends that we've already done in the past. And if you -- if we feel it's a good opportunity of growth, we will propose to the investment this opportunity of investment. And so we will decide it's along the year.

[Interpreted] We have another question Schroden from Bradesco.

[Interpreted] Sergio, Borejo, I'd like to explore topic of the environment middle sector perhaps a bit above the independent specific case of Americanas, which you've already been mentioned at team at the beginning of this year, we've seen a series of the companies are requesting a [indiscernible] the company is preparing restructuring and indicating and restructuring several years of companies with challenges or difficulties to continue the operations. So I'd like to understand how are you seeing this different to the Americanas, which seems to be a specific and isolated case with a different nature. I'm thinking here more on the operational side, the business side, indebtedness, the capacities to generate cash. I've seen that your guide as guidance is aggressive [indiscernible] the company, but I'd like to know how you're seeing this. And if there is any yellow flag or is it part of the business? I'd like to understand because we've gone through 1.5 years or 2 years and taking out the small ones, I think the middle and large companies healthy for the low level of indefinite. And now in the beginning of the year, we've had some unexpected use less than 45 billion year. So isolating the case of Americanas, which I believe is an isolated case. I'd like to know your opinion well.

[Interpreted] [indiscernible] thank you for the participation for the question. And the way that we see this Americanas seems like a [indiscernible] it's something independent. This new case, as you said we've gone through a period, and we've said this, where the default is below the historical average. In the middle market, specifically, we've seen a worsening of the performance of the second in the second semester of 2022. So the due dates have grown. We have about 1.2%. Now it's gone over 2%. It's reached over 2%. And so we never considered that this would be a segment with this level of spread. So it reached 2% and now it seems to be stable. There are specific cases, but those that have been publicized up to now, we have cases of companies that are known, which were already sort of doing a bit tighter in the financial market. So I don't see this as a big surprise. I think in general; the portfolio continues to be very healthy. And in the corporate Brazilian universe, the companies that are not doing well are very few. On the other hand, the financing conditions due to the events announced. It's a bit more restrictive. It has been an important vehicle to finance Brazilian companies ever since the pandemic. So I wouldn't say there's a yellow flag, but there's caution as for the expansion of the middle segment just this happens to getting new clients, especially in areas where we are not [indiscernible] spreading of the credit risk, innovation of the portfolio regional we believe that we have a small market share in the segment even in time with more caution with credit, we will be able to increase our number of clients.

[Interpreted] We have another question, Flavio Yoshida, Bank of America.

[Interpreted] I’d like to take the queue from what has been said now. We see that it's rather difficult I think the capital markets due to the event of the Americanas, we see that the issues of fixed revenue a bit more different. The issuance of bonds. And I think this is something that drove the results in 2022. So I'd like to understand your vision about what you expecting to the specific line and also taking the queue again in the part of expenses, what we see here, starting with the companies that we've seen recurring the topic of division being more and more discussed. We see your guidance, but I'd like to understand if you believe that there can be any additional effort given that the economical scenario for the year is challenging.

[Interpreted] Well the first question, and then [indiscernible] help the second one. Structurally, the market we see as a market expand in Brazil with a large number of companies of different sizes, and this benefits a lot because we go from the large companies until the middle and small company. And so it's a market that we believe a lot in. We're very well equipped. And now in the beginning of the year, we are doing a restructuring of our investment bank, highlighting it a more independent system partnership with minor shareholders changing the portfolio to quality and now the market in general is bad as cases that have been announced that companies that had a large participation of debt in the capital market. It is retracting the funds cautious of the quality and afraid of new purchases. So as a total, the market is more difficult. But we have to wait. And if I say anything, I won't have a base [ to say ]. But I believe that soon the market will be back to normal, we have to wait to see. Now I’m going to ask for help with answering your other question.

[Interpreted] The expense, this reduction of the growth rate is something that we've been talking about, and I agree with you, we had the year of '21 and '22 with several structural investments, reorganization of areas, transformation processes, the operation of several ops working in a way to improve and increment the services of the banks. This was done in these years. What happens is that the investments will continue in a more moderate menu within the plan that we have to 3 years [indiscernible]. And if we have to drive the [indiscernible], we have the space. We have a mechanism to adjust the expenses versus the revenue, which is very good. So I think we feel very comfortable with the expense growth that we announced for next year the improvement of the operational leverage of the bank.

[Interpreted] Thanks. Let’s move to our next question.

[Interpreted] So its [indiscernible] congratulations. The corporate cases -- in this corporate case, if I could be going back here. I have 2 questions. The NII of the portfolio is there any significant impact and also provision -- it depends how this [indiscernible] capitalization. But if nothing happens, this credit now from the [indiscernible] so it's nothing happens 2, 3, 4 was overdue according to the Central Bank, just to understand this. And another question going away from the topic of Americanas as we've seen the revenues and other expenses are strong. There's some reversion what was this and [ probably ] understand this, please.

[Interpreted] I'm going to start answering, and then I'm going to pass the floor to my colleague here. As per the Americanas, the exposure is short term from February to June. Nothing has expired, but soon it will be. So, the criteria of provisioning is either the rule or the prorating. So if the company has a [ raging the grade ], and then we do provision. We've seen this happen in several times. The other the way you can have an operation with no guarantees, but if it's delayed, we provision the criteria we are going to be hope so that we'll have clarity on the case and then we can drive with the potential of the recovery and take the necessary measures. Now in these other cases, as for the operational expenses these provisions for operational expenses for several events. Specifically, in the fourth quarter, some of these events did not take place. So we reversed part of these provisions. If we look against here the number -- the years numbers is very similar, higher value but in general, it's not -- nothing very expressive. So if we compare year-to-year, the numbers are very similar. Specific quarter that was reversed.