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

Good morning, everyone, I'm Ricardo de Moura, Director of Investor Relations and Proprietary M&A. Welcome to the results conference call of the First Quarter of 2023 of Banco ABC Brasil. [Operator Instructions] Before we get started, I would like to share the following disclaimers. Any statements that may be made during this conference regarding the business prospects of Banco ABC Brasil projections, operating and financial goals constitute the beliefs and assumptions of the company's management as well as current available information to Banco ABC Brasil. Future considerations are not guarantee of performance and involve risks, uncertainties and assumptions because they refer to future events, and therefore, they 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 the future results of Banco ABC Brasil and may lead to results that materially differ from those expressed in future conditions. In compliance with the general data protection law, we also inform that this presentation is being recorded and broadcasted on our social network. And that in proceeding, you are aware that personal data, such as voice and image may be shared without any harm of breach of law. All contents including the presentation is available on our IR website. To follow the presentation better, I suggest you to download the content on the QR code that you have on your screen. And at the end, we are going to have a Q&A session. By my side, we have Sergio Borejo, our CFO. Welcome, Borejo.

Good morning, everyone. Good morning, Ricardo. Thank you for the opportunity. It's a great pleasure to be here with you. I would like to also invite directly from New York, our CEO, Sergio Lulia.

Good morning, everyone. I'm here following the presentation and I'm available for Q&A. So it's up to you, Ricardo.

Thank you, Lulia. Now I invite our CFO to present the results of Banco ABC Brasil, bringing the main financial and operational highlights. Borejo, the floor is yours.

Thank you. Well, let's start with the results. We will start with the highlights of the first quarter of 2023, in which the net profit reached BRL 190 million, a growth of 3.7% compared to the same period of 2022. That represents a reduction of 3.7% compared to the previous quarter, capturing the isolated impact of a company in the CIB segment, which was provisioned from 30% to 70%. The return on average equity was 14.4%. Excluding isolated impacts on provision expenses, the return on annualized capital was 16.5%. In the same period, we had a growth in the margin with clients of 20% compared to the same period in the previous year and 3% compared to the fourth quarter of 2022. The portfolio quality remained resilient. Operations with delays over 90 days closed in the quarter at 0.6% below our historical average and in line with the previous quarter. Finally, the expanded credit portfolio operated, practically instability, had an expansion of 16% in the last 12 months, while the middle portfolio grew 38% in the same period, both within our growth guidance for the year 2023. And now let's watch a video with our main highlights. [Presentation]

Well, about the expanded credit portfolio, in addition to the already mentioned growth of 16% in the year, it is important to notice the core performance of the corporate segment which presented an expansion of 22% in the last 12 months, representing almost 58% of the expanded credit portfolio. Analyzing by credit segment in the annual comparison, the decline in loans at CIB was offset by the growth in corporate securities and guarantees issued with expansion of 31% and 5%, respectively. In the quarterly valuation, the first quarter traditionally presents a higher concentration of maturities. The middle segment, for example, presented a 4.7% reduction compared to December 2022. This behavior, well, it's in line with the portfolio's historical seasonality. In the next slide, we can observe the expanded credit portfolio. That continues with a high sector diversification, presenting a very scattered credit portfolio. Besides, it has its largest expansion in defensive sectors, like agro business, energy and infrastructure. This composition, together with the origination of quality operations, has contributed to the portfolio's resilient performance, maintaining low delay rates even at moments of economic cycles with higher interest rates. Now we are going to emphasize the financial margins with clients which had its 15th consecutive quarter of expansion. The results of gradual increase in products with higher added value in the revenue mix, including derivatives, products related to energy and expansion of cash management services, annualized spread with clients reached 4.4%, the seventh consecutive quarter above the 4% market. The spread with clients adjusted by provision closed the quarter at 3%, an increase of 23 basis points in the quarter, reflecting lower provisions expenses in the quarterly comparison. In relation to the financial margin, the margin with clients was -- remained line in, closing the first quarter at BRL 345 million and representing a growth of 20% compared to the same quarter of the previous year and 3% compared to the fourth quarter of 2022. The shareholders' equity to CDI was BRL 141 million in the quarter, almost in line with the previous quarter. Margin with market had a total of BRL 64 million in the first quarter of 2023, a 23% decrease compared to the first quarter of 2023 (sic) [ 2022 ] which was one of the quarters with the highest historical performance in this line. As a result, the net interest margin reached BRL 550 million in the first quarter, a growth of almost 23% on the year. Finally, the annualized rate of net interest margin closed the first quarter at 4.7%. And remember, the first quarter has fewer calendars date and that makes the seasonality lower in relation to the margin. Starting the analysis of the credit portfolio, loan overdue more than 90 years -- 90 days, sorry, ended the quarter at 0.6% of the portfolio, a little bit below our historical average. Delays of the CIB and corporate segments were practically stable compared to the previous quarter, showing the resilience of the portfolio, even in a scenario of higher interest rates. It's important to notice that these delayed level does not capture the impact of the isolated events in the CIB segment. In the middle segment, the delay reached 3%, a result of the slight reduction in the portfolio in that quarter. And delay increase is concentrated in specific older [ crops ]. Remember that this number does not capture eventual reviews regarding the coverage of a daily basis. Following our presentation, the expanded provision expenses closed the quarter at BRL 99 million, equivalent to 0.9% of the expanded portfolio. And the main special effects of the quarter were a provision of the company in the CIB segment increasing 30% to 70%, is increasing expense in the quarter, partially offset by the reduction of 2,682 credit portfolio and the migration to names with better credit score. Also in this specific quarter, we improved the methodology for classification of credit operations using a more granular scale in line with the implementation process of the IFRS 9 rules, considering the parameters of resolution 2682. And given the portfolio with good clients, we had shorter deadlines and good guarantees. Well, meanwhile the loan loss reserve in relation to the portfolio ended the quarter at 3.2%, an increase of 50 basis points in the quarter. In the view of the segment, there was a reduction in the corporate and a slight increase in middle. In CIB, we increased the level of provisioning due to the current situation of the company in the segment as we mentioned before, Finally, our coverage ratio covered 496% above the historical average. Moving to the service revenue. It reached 13.5% of the total revenue in this quarter. We continue to verify the growing contribution of the insurance tariffs and brokerage, which caused the quarter with a growth of 51% compared to the same period in 2022, reflecting both the growing contribution of the insurance broker as well as the increase in our client base. On the other hand, in relation to the investment banking, the historical seasonality of the first quarter that are less dynamic compared to other periods of the year, it was impacted by the low volume of fixed income issues in the market. And now for the expenses, which in the first quarter of 2023 presented a 5% reduction compared to the previous quarter, in the annual comparison, they grew 20%, a rate substantially lower than the expansion of the previous year. With that, we keep as an expectation for the year, a gradual improvement in the efficiency index with continuous control of expenses together with the continuity in the expansion of revenues through the gain of scale, maturation of new initiatives and the capture of operational leverage. On Slide 12, we present the evolution of our funding. At the end of March, the funding balance totalized BRL 44 billion, growth of 11% in 12 months. Management of assets and liabilities had accumulated cash position positive in all vertices. Our liquidity position at the end of the quarter was approximately BRL 8.5 billion, the equivalent of 1.6x the value of the shareholders' equity. One of the Banco ABC Brasil bank success factor in [ excess ] of competitive funding is both local, international currencies. This condition is supported by rating rates equivalent to the Brazilian rating by the main market risk agencies or in the case of them, a grade above the sovereign. We believe that the quality of our funding is even more relevant in a environment of high basic interest rate, standing out more than ever as one of our main differentials. As we can see here, we ended the quarter with a reference equity of BRL 6.5 billion and shareholders' equity of BRL 5.3 billion. The total BIS ratio reached 14.8%, while the Level 1 capital closed the quarter at 12.8%. This variation resulted from the increase of the high weighted assets, and in fact, partially offset by the appropriation of the first quarter of 2023 results and the issuance of equity instruments. We consider the current level of capitalization comfortable and enough for us to continue with our business plan. Now on Slide 14, we see the evolution of the annual results. The recurring net income from the first quarter of 2023 reached BRL 190 million, a growth of 3.7% compared to the same period last year. This trend can be explained mainly by the increase in margin with clients and an increase with shareholders' equity, remunerated as CDI being partially compensated by the increase in the provision expenses and the growth of expenses, which already has at low trends. The average equity of the quarter was 14.4%, a reduction of 114 basis points compared to the same period in 2022. In relation to the recurring net income and the annualized return on shareholder equities were affected by 2 main factors: additional provision of the isolated case in CIB segment and the lower income from investment banks. Excluding those individual impacts in the provision expenses, the annualized return on equity would be around 16.5% in the quarter, even considering investment bank income lower than our historical average. Well, those are the highlights we would like to present. And now we are available for questions from the participants in the video conference. Thank you.

Thank you, Borejo, for bringing us the overview of the bank's results in this first quarter. I also thank everyone who's following the broadcasting. Now I would like to invite our CEO, Sergio Lulia to start the Q&A session. Lulia, the floor is yours.

Hi, Ricardo. I haven't heard any questions so far. Great. Now we will start our Q&A session.

Well, to everyone who is following us, feel free to ask questions. [Operator Instructions] Our first question comes from Flavio Yoshida from Bank of America.

I have a question in relation to the middle portfolio. We saw that the overdue has increased a lot. And in this quarter, the growth reduced. At the same time, you have a guidance of growth for this portfolio for this year. I would like to understand when we get all that together, if the guidance of this [ 35/45 ] portfolio continues, if you see any risk of not reaching the guidance, if you want to uptake a stronger growth for this portfolio throughout the next quarters.

Flavio, thank you for your question. Well, this reduction -- well, this increase on the overdue in a way or another, was something expected. Our portfolio was a new portfolio. It grew throughout the last years, it got more and more mature. And with this maturation, we have this trend and the overdue was natural to increase. And we reached, as you've mentioned, 3% in the first quarter of 2023, there was a reduction in the portfolio in the first quarter. As in the first quarter of last year, we started the year with the first quarter that was weaker. The middle portfolio had a reduction. And even last year, we grew more than 40%. Of course, that's not a guarantee for the growth this year but we expected a first quarter that was somehow weaker production, mainly because the third and the fourth quarter of last year was a little bit stronger. In relation to this year's guidance, we are going to keep it. It's way too early, we are in April still -- well, in April last year, we had the similar situation. And the issue now is the volume, the volume and the demand for credit, if it's going to return or not. It was weaker in the first quarter. We believe it was potentialized besides the seasonality, it was potentialized by the interest rates but we are keeping the guidance and also our middle-term and long-term plans. And that's part of our strategy here.

If I can ask another question in relation to the evolution of the NII and the NIM because you've mentioned there was a migration for clients with better ratings and that explained the provision that wasn't that high and in relation to the U.S. provision. And we have a lower number for the middle. So when we get everything, the middle growth that was a little bit lower and the better rates in clients, what should we expect for the growth of the net interest margin?

Well, Flavio, this, you were right in relation to the portfolio growth. But the engine for the margin growth here for us and when we look 12 months to the past, it was 20%, is the mix of products. In our point of view, if we manage to continue with added value products, so energy, cash management, we also have other products. Derivatives was pretty good. All that helps us in this net interest margin expansion. Our ambition, our objective is to continue with the diversification, adding added value to our portfolio. And in our point of view, we have room, room to continue with the gradual growth. It won't be a [ step ] in our margin expansion but we believe there is room for growing the margin, not with the same size we had probably in 2022 but the trend is to escalate.

Ricardo, if I can add a little bit about that, well, and take advantage of Flavio's question, here's what I think. One thing is our strategic planning, I believe it's pretty clear. You know what is it, this diversification of customer segments with a stronger position in middle market. We have a large management of products and that brings a higher profitability even for segments that we were present. And the third is assembly of channels that is broader, including digital channels. Well, a factor that is essential for the success of this is strategy and we've seen that in the last 30 years, is to navigate the credit cycles. If you know how to go through that, it's to speed up when you have to speed up, brake when you have to brake, have some portfolio arrangements when we see those opportunities. When there is a proper economy, you make your adjustment but that doesn't change the long-term planning. It makes it more feasible. And in this first quarter, for instance, due to the credit scenario that is a little bit more challenging, as well as the closure of the capital market and everything, it is the moment in which, as in 2022 -- 2020 during the pandemic; in 2014, 2015 during the Lava Jato case; in 2018/'19, you have great companies with an excellent rating that accessed bilateral loans in the past. They would go for the capital markets. And then they come from the bank balance sheet and they pay rates and the fees that they don't -- tariffs that they don't pay. We take advantage of this moment to use those assets concerning the risk we are taking as a bank. And you are a little bit more conservative in other sectors. There's no problem. And then when the credit cycle improves and we are at the end of the cycle, we have an interest rate at this level for a while. The economy is losing speed. We have some political issues that have jeopardized some aspects. But it's a moment in which it's reasonable and important to the bank to select the assets. And it's one of the advantages. And you have a portfolio with a short duration, a year, something. And the bank that has flexibility due to the size it has with customers -- with clients, so we can enter and exit according to the scenario. Once again, it's more an example of things that we've done in different crisis, in different moments in which the credit was more complicated. We did once again but looking ahead, our plan is intact and won't change. That's it.

Thank you. Thank you, Sergio. Thank you, Flavio, for your question. Now let's go to the next question. It comes from Yuri Fernandes from JPMorgan.

Thank you, everyone. I would like to ask about the PDD outlook. It's difficult to have a visibility in corporate cases. They come and go. But the impression I have is that we had a reshuffle of the [indiscernible] in other portfolio. And we have a provision that is good so far. My question is, do you expect to continue with 100%, 70% and the PDD with the best option? This -- sorry, loan loss provision would go back to the level. It will be high for provisions. What should we expect in relation to LLP?

Yuri, thank you for your question. Talking about the specific case of CIB, we believe that 70% reflects close what the CASA shows. In light of what we see today, we don't expect more or less provisions. We believe it's pretty compliant with what we propose. Of course, if the plan doesn't close or with other basis, we are going to review. But considering the information we have, 70% is pretty adequate. In relation to the future outlook, we -- well, this is one of the most difficult things for us to foresee in our balance. So we have 1 or 2 cases of provision. Those things change the short-term scenario. What we see from today? Well, we don't have a specific case that calls our attention. Despite the high interest rates that's been around for a while, the maturity of corporate and CIB and the middle, 0.6% above 90 days, well, that's a good number below our historical average. And we expect, well, we expect a year so far, a year that will be normal without any specific case in our watch list, of course, with all challenges of an environment with an interest rate around 14%.

And the specific case, Borejo, thanks for your answer. The treatment for those overdues for -- well, how it's going to work in order to consider the coverage, it's well provisioned. But I would like to understand the ratios from now on.

Well, according to our policy, what we usually do, while we -- the plan is not signed. We are going to count the -- we are going to count the overdue from that moment. And then when it's signed, it's a new operation. Probably due to the size of the case, we will release the overdue time as I -- with and without the specific case. So we have better transparency to the reader of the earnings. That's what we are thinking about doing.

Now next question from Mateus Raffaelli from Itau BBA.

Ricardo, Borejo, Lulia, I would like to go back to the middle, relating to profitability. Of course, this expansion was very good when we increase the -- spreads is scattered, the provision. And then 2023 would be the year in which the middle is not what retains and contributes in that aspect to the bank. Is there any expectation for you this year or the overdue periods seen in this segment? And the credit scenario would postpone the middle to overcome the profitability, may be due to a higher cost of credit, potentially lower volumes, considering a lower demands of customers, as Borejo mentioned previously?

Mateus, thank you for your question. This year for sure -- well, not for sure, but considering everything we've seen, middle is a segment with a positive profitability. And even with the delays we have that is around 3%, the provision is [ 4.6%, 4.5% ]. So we did that last year. And the provisioning, well, it supported overdue periods of this size. So I don't see this outstanding amounts that will affect us. So the challenge is, as Borejo mentioned, we had in the first quarter, today we have a tighter credit [ ruler ] -- and we have up to November, the numbers is tighter and makes the origination of new operations more difficult but we have well-established process and tested projects. So the decision to grow or not is a decision that is under our power. You open or close the tap today, we are a little bit tighter but I believe that we are at the end of a tighter credit cycle. Maybe it will last up to 4 months. But we have conditions when we start the process of adjustment of the monetary policy if we have good rules for approving the reforms in June and July. We are going to have a proper economic climate, allowing the bank to allow a little bit more flexibility. Clients are there. Contacts are made. Commercial teams are well informed, the process are arranged. So it's a matter of deciding when to speed up. So far, we are not doing that but soon we are going to do that.