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

[Operator Instructions] Well, it's now time to start. It's a pleasure to call our CEO, Sergio Lulia. Welcome Lulia, the stage is yours.

Thank you, Vanessa. Good afternoon to everyone. It's very good to be here in one more edition of ABC APIMEC. Our meeting is an important agenda and very much expected of everyone. We present the results of our initiatives and our action plans as well as our vision for the future. In this way, we reaffirm our commitment with the transparency and the high levels of governance. And we try to continue strengthening our trust and partnership with you, shareholders, investors and stakeholders. Before we start the presentation in itself, we would like to thank the partnership with APIMEC. It's an institution that efficiently does its role of forming and educating financial professionals. To start our event today, ABC '23, I'd like to talk about our essence, the essence of our company. Our bank, always has been to service well the Brazilian companies contributing for their progress and prosperity. For this, through the years, we've developed some tools that allow us to get to know them very well. We've also developed a service model that promotes proximity with the clients, servicing quickly and in an agile manner. During all this year, we've also centralized our appetite for risk with a diversified portfolio and the presence of our clients. These are the 3 pillars that define the knowledge of our clients, the proximity and the balanced risk appetite. A few years ago, we thought we could do more, becoming more relevant for our clients through the increase of solutions that are available and the expansion of our markets to service even more clients. We then decided to revise our strategy. And we embrace the following initiatives: expand our base of clients, not only in the Middle segment, but also in the Corporate with a larger geographical coverage and dedicated teams to the agribusiness of multinational businesses. As a result, our client base has expanded 2.5x in 4 years, an increase of almost 3,000 clients. Second, to be more present in the lives of our clients with the increase of our product portfolio. Today, we talk with our clients about loans, about investments, finance, external acquisitions, insurance, energy protection of the price of commodities and interest rates and much more utilizing a consultative approach, which generates value for companies. We believe that this focus on the relationship makes us different and makes us be able to grow long-term partnerships, always thinking in the best allocation of the regulatory capital. Today, the revenues with 0 consumption of capital respond to almost 40% of our revenue with clients. And finally, to potentialize the servicing of the managers with digital solutions and self-service, increasing their productivity and the scalability of the business. Our goal is the building of a portfolio of services with clear synergies, which reinforce our positioning with our clients and at the same time, improve our performance, sharing, the distribution channels and the future with a consequent dilution of fixed costs. Parallel to this, the careful management is a priority. Consistently, we reduced our exposure, average exposure, and we diversify the dependence on specific business lines to reach these goals. We carry out the largest cycle of investment in the history with human capital infrastructure that will allow us to continue this expansion of the number of clients and also the transaction volume. Today, we're over 1,200 collaborators, double what we were in 2019. We ended the revision of our organizational design, decreasing hierarchy and making the organization more flexible, agile and multidisciplinary. We are a company more and more sustainable diverse with high levels of corporate governance. Reorganizing the investment bank, together with our credit recuperator becomes 2 new platforms that are partners controlled by ABC Brasil, the insurance broker and the commercializer of energy. But we're still not finished in a certain manner, we'll never be finished. The process of evolution of organizations is continuous and never ends. This year, we had several pains, some due to the accelerated growth process, others a consequence of the economical and political scenario that we're going through. As growth pains, I can mention the quality of the service of the Middle clients. It's below the standard we want. The accelerated growth of the number of clients increased our response time and several steps of the service cycle, which is being dealt with immediately. The huge success of products like derivatives and cash manager also overloaded, and we had to reinforce and become modern. These and other pains have been diagnosed, and we have action plans to execute and deal with this short term. With the economical scenario, we had a market with corporate credit with a growth which was much less than we expected. We haven't seen that in the recent history. Also the increase of default, a gradual process, which goes back to historical levels, and this demanded more caution to credit lines. This stopped us from reaching our potential of generating income in the period. But even not benefiting from all of this leveraging we were able to increase gradually the profitability of ABC Brasil in a sustainable way, proving the resilience of our business model to shocks and reinforcing our capacity of investment. We have a company with a huge potential for growth competitive with no human capital restrictions, funding or regulatory capital, aware of its importance for the growth and the success of its clients and stakeholders. Besides this, we also have a corporate credit market showing recovery with rate more historically, this gives us trust that the best is still to come. And to share the panorama of this market in Brazil, I invite Ricardo de Moura Investment Relation Manager and Strategy to bring us more details about the subject. Moura, the floor is yours.

Thank you, Lulia. Good afternoon to everyone. Welcome to ABCB 2023. Before specifically talking about the results of ABC Brasil, let's analyze the historical behavior of the corporate credit market basing ourselves and the data that has been publicized by the Central Bank. This credit market is about BRL 2.2 trillion, equivalent to more or less 21% of the GDP. What we have of free resources with lines with no specific destination represents about 64% of this amount. And the ABC portfolio is composed, especially of free resources. This market historically is cycling with periods of higher or lower growth, but subject to rare moments of stability or even a drop in the portfolio. Looking specifically for the credit portfolio, which is corporate, ever since 2006, we have 3 distinct cycles. The period up to 2008, where we have growth rates above average only being interrupted by the crisis, financial global crisis of 2008. Then from 2010 to '15 when we had an average portfolio growth, about 10% interrupted by the Lava Jato crisis. And then finally, the third cycle, between 2018 and 2022, which includes pandemic and which had governmental support, which were unknown, and this contributed to a growth of about 14%. This cycle ends in the second semester of 2022. Now let's analyze with more details the behavior of the free corporate credit. The balance of this free credit was growing annually about 16% to 17%. After September 2022, we saw the beginning of a clear reduction of this growth, reaching a minimum of 2.5% in August 2023 compared to the same months in 2022. But what explains the low growth of portfolio index to the CDI plus the credit spread? The reasons we think, the quick alteration of the basic interest rate after the middle of 2021, this change from going to negative rate to a positive of more than 10% in a little bit over 18 months. In general, these levels of real interest rates, excluding the inflation over 4%, makes the behavior of corporate credit less efficient. Second, the market went through a strong expansion in the credit during the cycle, 2020 to 2021, imposed by government staffs, which extended the credit times. This reduction of times and the removal of these programs reduced the speed of the growth of the portfolio with a reduction of the average balance generation. The third reason was an isolated credit of the client that impacted the bank market as a whole, especially the discount receivables lines. In our vision, the main effects that influenced negatively the free growth of the corporate credit are still no longer so present. This shows a slow improvement after the fourth quarter. In relation to the delay of the free corporate credit and the impact to historical low levels in 2020, '21, this is going through a gradual process normalization in direction to the average historical mean. And the delay of 90 days, 3.3% of the portfolio took place not only because of the delay in itself, but the reduction of the credit portfolio causing a denominator effect, which contributed to the increase of the index. We've also talked about the family of credit lines and the capital flow and the receivable discounts are the ones that showed the highest growth -- these lines have also been -- have retracted the volumes of the portfolio and perceiving the risk of these modalities and with a lower volume of operations. Now when we look at the percentage of credits classifieds between EH and with the total of the portfolio, we see a stable behavior. After an increase of this index in December '22 and February '23, there was a certain stability during the last month. This is good news because this shows maintenance and the quality of credit of the portfolios. And even with a larger perception of risk in 2023, the interest rate and the average spread of free corporate showed a certain stability influenced by less growth in the volume of portfolio and higher selectivity in the concession which privileged clients with a better risk profile. Now let's look at the market of the -- based on the data that has been publicized. And be -- we issued volumes about BRL 35 billion, BRL 40 billion per month. In November, we had a high 80s because of uncertainty of the presidential elections, but this was compensated in December. In 2023, the story was completely different. So after January, which traditionally stopped the average level dropped to an index of BRL 10 million to BRL 20 million because of the impact of certain events, which marked the market, and this was responsible for a lot of draws in the market. In June, a larger stability of the secondary and the papers and the return of resources in the private credit. In the third quarter, a more robust recovery in volume and number of operations. We believe that the fourth quarter will continue showing the gradual recovery, a scenario which is very different of the dysfunctional market that we had during the first semester of 2023. And with this that I return the floor to Lulia, our CEO, that is going to talk about the results referring to the third semester in 2023.

Our net profit of BRL 228 million. Once again, a quarterly record, equivalent to an annual return of 16.5%. Our client base continues growing with the addition of almost 200 groups and an annual expansion of more than 10%, and the revenue has very good dynamics. The financial margin presented growth in OLED slide, closing the quarter in BRL 591 million, 10% more than the same period last year. Services BRL 117 million, BRL 51 million in investment banks. With regards to credit portfolio, the cash asset portfolio presented an expansion of 3.5% and 6.5% in an annual base. The total expanded portfolio grew 5% in the annual comparison within our guidance, which is 4% and 8%. It is important to stress the growth of an expansion of 4.5%, increasing its representativeness to 9.5% of the total expanded portfolio. '24, we hope that the continuity of drop of interest rates will continue for demand for credit products. We have a private bond grew 6.2% and 69% in 12 months, driven mainly by the greatest issuance of rural certificates. Our expanded portfolio continues with the diversification, presenting a credit portfolio, very diluted with greater concentrations and also concentrated in agribusiness, energy and infrastructure. This composition together with the origination of quality operations has been contributed to a resilient performance of the portfolio with a low delay index rates. Subsectors with the greatest increments are energy generation, 0.7 percentage points, telecommunications 0.5 percentage points. Subsectors with a greater reduction of share banks less minus 1.2 and the grain chain 0.9 percentage points. Now we go to the managerial financial margin. It closed the quarter with BRL 349 million, a historical record, 7% growth relative to the previous quarter and 8% compared to the third quarter '22. This result was influenced by the increase of the revenue of products that have greater spreads as well as the increase of the relevance. The margin totaled BRL 99 million a growth of 33% relative to the previous quarter and 23% when we look at the same quarter '22, reflecting a better performance of short-term performance in treasury, but a gradual increase of the balance. The net equity reached BRL 144 million, 0.3% compared to the previous quarter. As it reflects of the expansion of all lines, managerial financial lines closed the quarter with BRL 591 million, growing 10% compared and once again reaching a record. The annualized rate here closed the quarter with 4.8%, demonstrating the sustainability of this rate 5 consecutive quarters. Now we go to services revenue. This quarter had an expansion in all its components, closing BRL 170 million, one of the greatest quarter values, contributing with 17% of the total distribution and 25% of the revenue from clients. Tariffs and insurance brokerage closed the quarter with a growth of 15% relative to the previous one and 10% when compared to the same period 2022. Once again, reflects the increasing contribution of insurance companies. But the highlight was the investment banks, of which revenue presented a significant growth in the quarter because of greater emissions of fixed incomes in the market. And also here, the guarantee lines increased 3.3% compared to the second quarter and presented a reduction of 4% here. Looking at the quality credit analysis, operations that were delayed for more than 90 days closed the quarter with 1.7% of the portfolio, excluding C&IB Credit. The total index reached 0.9%, in line with the historical average. And also things continue 0. With the Corporate segment, the delayed growth the quarter is 0.4, stable and still below our historical average. The Middle segment, the delayed reached 3.3% impacted by older harvest with a denominator effect contributing to the expansion of the index. Also, the high level of collateralization of this segment from BRL 145 million in delay in the Middle, 40%, it has a full coverage of the FGI. The provisions for doubtful debtors was stable. Also expenses here closed in BRL 89 million, equivalent to 0.8% of the expanded portfolio, an increase of 28% was mainly the result of the expansion of the provisions for private bonds, the PDTs and also because of the lower value of credit concessions here. The balance here closed the quarter with 3.4%, stable compared to the previous quarter. In the segment here, there was a reduction of 20 basis points in the Middle segment, an increase of 10 basis points in the Corporate sector, closing the quarter with 0.9% and 1.5%. When we look at the CIB, we have a reduction of 110 basis points compared to the previous quarter, results of an increase in the portfolio in 12%. Lastly, our coverage index closed the quarter with 203%. Excluding the specific event of CIB, this would have been 252%. Now we go to expenses, which in the third quarter 2023, presented an increment of 11% relative to the same period in '22. Close to the floor of the guidance of the year, which is around 8% to 10%. Parallel to this, revenue grew 13% in the annual base and 16% in the quarter, presenting an improvement of 210 basis points, which closed in 38% in the quarter. Now we go to a new slide in the presentation, which shows the change in levels in our operations volumes in the last years. The expansion of the number of customers and the reduction of net average volumes resulted in an important increase in our volume metric. In between the end of 2020 and the third quarter '23, we saw a growth of 4.5x more in terms of our transactions versus a growth of 1.8x the same number of customers in the same period. This expansion was only allowed for because of investment programs, which began in '21 with the objective of reinforcing the structure of ABC. We entered '23 in a new phase with the capture of operational leverage and the reduction of fixed costs once we scaled our revenues and matured on new initiatives. With this, we had the expectation to have a gradual improvement of our efficiency here. When we see the evolution of our profitability, it will be important to have in mind that we have important advances in spite of an operational efficiency that is still not so good. Now let's look at the evolution of our capital raising. At the end of September, the total balance was BRL 47 billion, a growth of 6.4% in 12 months. The management of assets and liabilities had accumulated positions that were positive. The ABC liquidity position was approximately BRL 11 million corresponding to 2x the amount of the net equity. One of the success factors of the bank is the access to competitive funding in local currency and international currency with good volume and interesting deadlines. This condition is supported by ratings, which is equivalent to the main risk ratings in the market. We closed the quarter with a reference equity of BRL 6.7 billion. Net equity BRL 5.7 billion. The total Basel index reached 14.6% and Level 1 capital closed the quarter at 12.7%. This variation resulted in the appropriation of the results in the quarter compensated by the provisioning of the distribution of dividends, increase of weighted assets and supported weighted debt reduction. It's important that the regulatory capital index to do not capture the resources that come from recapitalization of the JCP, which should contribute to an increase. Also, we analyzed here the variation of the net profit. The recurring net profit reached BRL 228 million in the third quarter, a record equivalent to a growth of 4.6% relative to the same period last year. This amount was because of a strong recovery of the revenues with the expansion of all the financial margin lines, which compensated the increase of the provisions expenses and the growth of expenses, where there is a clear trend of deacceleration here. And the annualized return over the net equity reached 16.5%. Excluding the impact of the isolated events in credit, the average return was 16.4% and 16.1%, respectively. We cannot forget 2 important points. First, during the first semester '23, the growth of assets in the credit markets was exceptionally low. Secondly, the fixed income capital market operated in a dysfunctional way. What we want to say is that we are already operating in a new profitability sustainable level, although the conditions are still not ideal. And we have a sub-cost structure with inefficiency levels, which still bothers us. When we look in the future, we are ready for more growth because once the market conditions allowed us so that we can take one more to capture profitability, ABCD. Now I would like to call Joao Biase, Vice President of the CIB and Corporate to show us the performance. Now you have the Joao.

Thank you very much, Lulia. Good afternoon, everybody. As Lulia said, I am Joao De Biase, Vice President of ABC Brasil and responsible for the CIB segment clients with annual revenues over BRL 4 million and Corporate clients with annual rate between BRL 304 billion. I entered this year in the -- I came here. I would like to summarize the reasons that attracted me to this project. Firstly, I would like to say that I have been tracking ABC Brasil as a partner for more than 20 years. And I'm very happy to see what Lulia's said in the beginning of our conversation because I believe it is possible to reconcile a technical expertise, long to midterm results generating increasing and sustainable results and also in a wonderful working environment, never forgetting performance and competitiveness. This is why we are unique. And although we are a niche bank our operations in the hotel and our performance here allows us to have a dialogue, a constant dialogue with our Corporate clients, all the way from daily operations, all the way to a very strategic movement. Also, we are a relationships bank, a clients bank. We always focus our supply in customized solutions benefiting from deep sectorial benefits here. The CIB Corporate segment is a traditional market of ABC Brasil, working for more than 30 years, and today correspond to 90% of our expanded portfolio. And in keeping with our strategy in the last 4 years, we still have been able to grow the client base by 58%, equivalent to more than 800 economic groups. We did this expansion, maintaining the average ticket per customer in a stable way. So is to reduce our concentration to specific sectors. So here, we have been able to grow our portfolio without growing out the average ticket to the customer, thus increasing diversification. We always position ourselves as partners of our customers, offering not only credit but also an increasing amount of financial solutions in keeping with our portfolio diversification strategy. We extended our sophisticated groups, including Investments Bank. Also, we increased the representative of our revenue, such as cash management, derivatives, brokerage and exchange. With regards to this group of products, the CIB Corporate clients are responsible for most of the revenue of the Investment Bank. So here, we have expanded here in fixed income, working with securitization and structured operations. Also, we reinforced our research area, which is an important differential already recognized by our customers, including less known areas as the investor base. Here we're still expanding our work here. We are reinforcing our commercial capacity in areas in the Midwest and Northeast, where we have a lower presence. Parallel to this, we began a commercial effort focused in extending our relationship with multinationals, which corresponds to less than 4%. Like our other segments, they have specific demand. Also, we are more focused in replicating success cases, disseminating better practices so that each customer can benefit from gains and knowledge with new structures here. Summarizing things. During the last years, we have extended our addressable market. At the same time, we have expanded our product portfolio and available services, increasing the sophistication of services, attesting to our customers and capturing synergies here in operations, aiming to diversify our revenue source and increase of the structural profitability of our residents. Now I would like to give the floor to Sanchez Vice President from Middle.

Good morning, I am Antonio Sanchez responsible for the Middle Vice President responsible for the Middle sector here. I would like to look at our Credit and Customer portfolio. Even with a more challenging economic scenario and restrictive credit, we have been able to evolve in this segment. Here, we are working in 4 fronts, so to increase loyalty and profitability of our relationships. The first front refers to the expansion of our customer base. We work with an advisory and strategic approach, focusing in the construction of eternal relationships. In the last 12 months, we increased the customer base by 10%, surpassing more than 500 economic rooms. And now today, we serve more Middle clients than 2-3 years ago. And there's still room to grow. We believe that the existing Brazil, 44,000 companies with net sales of BRL 30 million. And this growth, our estimate is to be able to reach 17,000 and 20,000 companies, parting from our own sales force partners and digital channels. This is a small market share, which facilitates our growth, reducing our exposure. On the other hand, the expansion of the Middle because of the greater spreads work as one of the leverages of expansion of financial margins. Here, the Middle corresponds to a little less than 10% of the expanded credit portfolio. We want to expand this. In terms of total revenue, the Middle is closer to the CIB. Also the expansion of this segment contributes to a diversification of the portfolio for comparison. The average ticket of the Middle BRL 2.3 million less than the average operations in the Corporate segment, which is BRL 20 million and CIB, BRL 80 million. The second front we've worked in is the expansion and the adaptation of our products, right? We want to. Also, we began to use a great granularity here in operations, and we adopted new guarantee structures, making our supply more competitive. And this has resulted in the increase of the average group of customers and an increase in revenue with low consumption of regulatory capital. And then we have the third pillar, which is the capture of operational efficiency. In 3 years, we have built a modern platform and to be able to see to an increasing number of companies. In the last 12 months, we have delivered improvements here, adding tools that increase the product of customers and reduce cost per transaction. This increasing use of technology has allowed ABC Brasil to see 2 clients with even more competitive costs. And as a counterparty is the human capital. Today, we have a commercial labor on the street, advising to leverage and set customers and prospective new operations. All of this work has allowed us to improve the efficiencies of our managers. To give you an example, the average of customers per manager is practically the same managers that have been in-house for 12 months. This accounts with the support of specialized structures here. Lastly, the fourth work front is related to credit. During the last years, we have built a credit track record. We have gained credit intelligence, fine-tuned our concessions models, expanded our database and built an increasing base of the client. This includes to refine our calibration strategy and also prioritize our approach with customers future. For '23, we established our annual growth guidance with regards to '22 between 5% and 15%, reflecting in a more conservative approach because of the greater interest rates that we saw in the beginning of the presentation. When we look beyond '23, we believe that what we did until now is only the beginning, although Middle is profitable, the return of equity is still below here. Our expectation is that in the next quarters, we will capture operational leverages and dilute costs of taking the operations to another level. Once we get a great amount of customers, we hope to consolidate our action in this segment and reach another level of profitability to allow this to be a promoter for the bank. I would like to call Izabel Branco Talents Vice President and ESG to talk about the strategy in this area. Izabel welcome, you have the floor.

As you said, I am Izabel the Vice President of Talent and I've just reached recently to be part of the Executive Committee. Ever since '21, we have been intensely working to accelerate the implementation of our strategy. Our goal is to establish an organization model that supports the scaling of our business guided to the client with fluidity, traversability, adaptability. In the beginning of this, we, with consultants, measure the availability of changing and moving. The result could not be better. We reached the maximum level and the map of transformation in the high-performance zone. So we created the transformation program. It's a program that manages the main initiatives that are necessary to execute the business strategy, prioritizing the leveraging of the segment to bring more agility, efficiency and focus on the client. This brings benefits not only for the Middle but for all the other base of clients. The project has different fronts to support the advantages and the different areas. In the area of talent, we are responsible for new initiatives. For example, management of changes, internal communication, training and organizational design. This tries to adequate the structure of people, of the bank to the challenges that are proposed. We have a lot of work revising the structures that exists, the functions, critical interactions between the areas and the competencies that are necessary to support the new market demands. We also, in this year of 2023, we changed the Executive Committee with the creation of the Middle Executive Committee, which is led by Sanchez and Joao De Biase with the Vice President, Corporate. We also brought the Vice President, Operations and Technology, Leopoldo Martinez so that we can have simple and scalable process. The total experience area is led by Marco Mastroeni with Products and Innovation. Besides Alexandre Sinzato who is transitioning to take over the Vice Presidency of Risks until the end of the year. And then at Talents brands and ESG with me. This new way of organizing ourselves is the base of the growth that we are looking for. And all this exercise was done with a lot of cooperation and study using market references to accelerate any shorten ways. Of course, we needed a new form of operating and organizing ourselves to be able to reach what we want guarantee agility, scalability and traversability. With this new model, we have more fluidity and the areas connect themselves in the structures in a more horizontal way. We then observed this collaboration, which shows us that we are in the right direction and that this effort is worthwhile. To transform this collaborators, another initiative is the program of capabilities, which guarantees that our people have the new skills that are required for this moment. These capabilities that are linked to the operational modest resources and knowledge, sustaining day-to-day and guaranteeing the development of the teams a way of being and guiding all this important movement to keep the essence of such a special culture as ABC Brasil, where the vision of the proprietor really happens is our big goal. At the same time, we evolve in the direction of a more agile, integrated and an organization that has the capacity to grow. The way we relate to partners, collaborators, investors is the base for all the decisions that are taken during all this journey. Now as for the brand, we listen to our stakeholders to have a more connected to our values positioning. Our best attribute is to be a partner with competence and experience to carry out business and for people to evolve with the long-lasting relationships, human relationships build values. In relation to our ESG agenda, we continue evolving in time. We have prepared ourselves to for risks and capture opportunities that can cooperate with the sustainable development of our clients. To support this plan, we have an ESG committee directly linked to the administration. So the environment, climate and governance issues are integrated in the main instances of decisions of the organization. We also define climate change as a priority because we understand its global relevance and the impact in all societies. We relate ourselves with all the productive sectors of the economy. So we have the potential to influence positive transformations and society and also to promote a low-carbon economy. In 2023, we started the metrics of these greenhouse gases that come from financing activities. We want to have a decarbonizing plan aligned to the Paris Agreement to reduce emissions with financial solutions that support our clients in the transition to a low-carbon economy. We also have to mention that in August when we had a sustainable finance framework, which allows us to access new opportunities for sustainable businesses. The point of view of Talents, we believe that we're evolving more and more in our strategy to attract and retain talents forming human capital with expertise and engagement for us to continue growing. It's with this message that I say goodbye. Thank you very much for your attention. Vanessa, I give the floor back to you.

Thank you, Izabel. Thank you for everyone that has participated in the presentation. Now, we are going to give you an award. For delivering this award, the APIMEC President Lucy Sousa will be here and once more, our CEO, Lulia.

Good morning, everyone. Once more, I'm very happy of participating here with you. It is a huge honor. It's 70 years of the partnership. And this year, we bring this award, and we thank Lulia for representing Brazil in this. It's an attendance stamp.

It's wonderful to receive this recognition. This stamp reflects our transparency when we publicize our results our corporate governance and the evolution of our business. I share this honor with the whole team, ABC Brasil, that is part of the story and makes it be possible every day. Once more, thank you, APIMEC for the recognition and for this partnership for so many years. Now I would like to invite you all to participate in our session of questions and answers.

Here we are. But before we start the questions and answers, I'd like to welcome Sergio Borejo, who is the CFO. Borejo, it is a pleasure to have you here with us today.

Welcome, everyone who's listening to us colleagues, our friends. It's wonderful to be here once more with you.

[Operator Instructions] And we have Antonio Sanchez, Vice President of Retail and Middle; Sergio Borejo, CFO; Sergio Lulia, our CEO; Izabel Branco, Vice President of Talent Brands and ESG, Joao De Biase, Vice President of CIB, Corporate; and also Ricardo de Moura Director of Investor Relations, M&A and Strategies. Now you can participate and interact with all our guests. We have already the first interaction, which is from Flavio Yoshida from the Bank of America. Good afternoon. It's wonderful to have you here with us today.

It's a pleasure. It's my pleasure to be here. Congratulations for the results. I have 2 questions actually. The first one is when we look to the coverage of ABC, it is historically comparable of it's more or less low this coverage. So how can we think about this coverage rate? When we look forward, will this go back, this improve? Or is it going to stay in this level of about 20%? And then my second question, I'll ask when I've listened to the answer to the first question.

So Lulia, would you like to answer.

Thank you, Flavio for your question. The trend is that the coverage will increase with time. For 2 reasons obviously, other provisions will take place our business. This happens with time and part of this delay is that we have an important percentage, which is covered by FGI. This will also be recovered as we have this, even though we don't have provisions at this level that we did in this quarter, even so the trend is that this goes up. Would you like to go to the second question?

No, that's fine. It's clear.

My second question is about the profitability of the bank. We've seen an improvement this year. It's more to understand your mind. What should we expect in the next 3 quarters? Do you think this is already an adequate level? Or should we wait for a stabilization? Or do you still think there's better things to come and where would it come from? Would it be a portfolio growth, more efficiency? I'd like to understand your mindset about these items.

I can answer. Well, we've tried to emphasize in our presentation that the level of profitability of the bank is already higher than it was way back. That does not mean that we're happy. This is a work in progress. We see this level now as consolidated, but we're not happy with it. And what is going to take us to the next level. There are several things. We highlighted in all the segments, the high percentage of income coming from operations that use less capital. This has 2 advantages. First of all, this increases the structural IO and it also makes you closer to the client, more present in the day-to-day. So instead of just talking about loans, as I mentioned, you talk about cash management derivatives, operations, capital markets, you talk about energy sales. So this mix of products, it is structurally taking us to a larger profit rate. The second driver is the operational leveraging. So there was this investment in the number of transactions that we showed you increased a lot. The Middle segment is a segment where we present cost to income above that it will be when the segment is -- grows. So it's all -- so it's projected above the breakeven. But as Sanchez mentioned, it's still a presence. It still is lower than the average earnings of the bank. So when the Middle is mature, we think it might even be -- the country will have a structural profitability higher than the banks. Adding all this, this will take us to higher earnings a little by little. There's no jumping. It's continuous improving improvement of processes, improvement in selling products, higher productivity because they want to hire account load. So this is everything that we're thinking about, and I believe that we'll capture this in the next semesters.

Did he reply?

Yes, super clear.

We now have another question, which comes from Eric Ito from Bradesco BBI.

I have 2 quick questions. First of all, I'd like to understand about the portfolio growth. Ricardo already commented a bit that the scenario is getting a bit better with the Corporate showing itself. I'd like to know what do you expect of the portfolio growth in 2024? If you could explore the mix, what would be the total? Can you imagine how this will be next year? And the second, I'll ask afterwards.

I think he can answer too.

Well, we don't have a guidance for '24. We're going to disclose this in the next earnings release, which will be the fourth quarter. But certainly, if we are right with regard to the evaluation that Moura did in his presentation, that the credit cycle is going back to a growth close to the historic average. Certainly, we will present a growth greater than this year because this year as well as specific credit issues in the beginning of the year, the frustration here for banks in this segment was the growth rate. We can see that a very high interest rate reduces the demand for credit in general for working capital and investments. Companies shelf their projects. Often times their debt cost is over the cost, right? And also without counting the change in government where economic analysts seems to stop a bit here. It seem to us that all of these is reducing in intensity. You begin to see an interest rate that is dropping and economic activity, and we can see the directions. And very soon, this should lead to the growth rate, but we're going to have to wait for the next earnings release for this.

If I can ask a second question here, I'd like to explore with regards to the Middle. We know that here, there was an impact and a denominator effect in the older harvest. What do you think would be stainable here or stable from here on?

You want to answer that?

Well, thank you very much for your question. We in fact have this effect that you mention. And one important detail for this point is the fact that the NPE in the Middle, if you consider the coverage, the insurance coverage we have, 40% is covered by insurance. So among the different insurance levels, some versions, right? So this gives a certain tranquility here, right? Although this number has been impacted, the coverage we have here still leaves things very healthy. And as we sit here, we begin to see a better credit cycle from here on. Perhaps we're going to have some months with a half-and-half situation where you still have a little bit of the old situation, but still having something that -- the denominator that is not so bad. You begin to form assets and have better production here.

Now we will hear Yuri Fernandes, JPMorgan. Is Yuri with us here? I think as we wait for Yuri's contact, I have a question for Izabel as we establish this contact with Yuri. In terms of business, we received this question from the audience. The bank is in a very challenging moment, right? So when we look at people, what do you consider today is the strength of the ABC bank?

I think it is the combination of things here. The first is the vision of the owner, where people talk about this in the market, but it's difficult to see this to happen. Here, decisions are taken considering the long term. So career decision or business decisions where you look at the long term. But I would say that it is a combination, as I mentioned before in my presentation, because our availability to change is very high. So when we combine accountability with long-term vision and opening for change, this makes it a very characteristic of the bank and helps us with constant evolution we go for.

Now we have Yuri from JPMorgan.

Congratulations for the presentation and the results. A question on capital. We saw that you growing 4% your ROI. And I believe that because of the resolution 2 to 9 things would improve here. So the portfolio grew 1% WA 4%. I want to know the capital. Tell a bit, so what happened here? Why did you not use the benefit of 2 to 9? I thought this would help in terms of limit or corporate credit here. I thought this would benefit you. And then I'll ask my second question.

Thank you, Yuri. [ Rica ] do you want to answer this?

Thank you, Yuri, for your question. Yuri, here, we had some operations more turn to treasury. There is a little bit of RWA. Also, you have very treasury very short-term operations and also a drop of subordinated debt which removed from the regulatory capital. And there was this variation, the Basel variation. Now what's important to say is that this number still does not capture the re-capitalization of JCB, which is going in. So there should be a pickup in terms of increase of capital of another 35 basis points.

Anymore? We have one more question.

Yes, I would like to ask you about [ the fees ]. I know it's not going to be easy because this is a very volatile line, but we are in November, perhaps you have some things in the pipeline. What should we expect here for PTs and the IB line, which was very strong this quarter?

I would like to answer this. Thank you very much for your question. I think that obviously, this was a very strong quarter, and the pipe until the end of the year seems to be very good. So what's happening is that we are increasingly penetrating regions that we weren't penetrating before. So when we look at our customer mass in the corporate, increasingly, we have the IB areas going to regions where we were not there. So naturally, we, as well as traditional operations in the large centers in regions where we did less. We're doing this in regions where we had less operations. And in the pipeline, we have more conversion of IB operations. I think that the trend is to continue seeing this number grow with times. Obviously, this depends on the market. But in terms of pipeline, the pipeline continues to be very good.

Yuri Fernandes, JPMorgan. I want to know if your questions have been answered, Yuri?

Yes, thank you very much. And congratulations once again for the results.

Now we have another interaction. Our next question comes from Brian Flores from Citi.

Congratulations for the results. Perhaps a question to Sanchez. I would like to understand the leverages that the levers that will help you improve profitability in the Middle. Also, I want to know how this links to what you said, wanted to get to 17,000, 20,000 customers in the future, just to link this thinking of long-term strategy here.

Thank you for your question, Brian. All the initiatives that we have taken in terms of efficiency gains for our commercial teams and process to have customers reducing CTS cost of services. These are elements that will lead to this place. These processes that we have worked with, tools that we have developed ever since we began in the segment and have had a strong emphasis in the last years, and they're beginning to present results now. So these are the main drivers for us to be able to have this efficiency gain in this segment, have an increment of the account loaded in the office, as Sergio said. We need to have this element in order to be able to continue having processes and tools that allows us to have the office to have greater readiness and have a customer to be able to serve -- be served in a more autonomous way with efficiency and quality recognition. And also, we should give time for offices to be able to have time for other demands and elaborated interface here with the firm. And this is what we're putting into practice. This profitability of the segment, which is still beyond the Banco Global. There was a differential. We've been reducing this gap. And the trend here is to continue reducing this gap allowing for the scalability that we have as an objective.

If I can have a quick follow-up here. Your target for profitability for the Middle, do you have a number in your mind?

As I said, we don't have a number specifically for profitability of the segment. The objective is to very quickly surpass the average of the bank and begin to be an aggregator here in this rather than a detractor here. So I believe we don't have a target on. We have efficiency gains that we want to capture. And we don't -- we can't give a size to this number to this. Perhaps it will be even greater than what we believed. We do feel very comfortable with these deliveries. Everything we did in terms of investment, how we coordinate these investments, how we put this into practice, we've gained great maturity in this process. I think we began with a process with trial and errors and we are maturing this with a series of errors involved an alignment of stakeholders, and this is making us increasingly ready to get to this place. That is our target.

Now who is going to ask you is Pedro Leduc, Itau BBA.

Congratulations for the presentation. I really like Ricardo's presentation. And it's ABC's shares in debt bond operations in capital market. You seem to be increasingly present here. Can you give us some numbers here? And what has allowed this interest, a stronger commercial strength, distribution channels, for example, it seems that this was a large part of services contribution in the IB.

Thank you, Pedro. I think that going back to my previous comment, I think a little bit of this answer are client base or core client base of the bank, which is corporate and very soon will be the Middle is still not very explored with regards to IB. We have done an increasingly greater work to explore more of this space, right? We're talking of 4,000 customers and only in the Corporate and C&IB. Here, we're talking about 2,000 customers. So the greatest presentation of this space explains a little bit of this result that we've had in fixed income. These are operations where we have the corporate more than our fair share of the percentage we have in terms of credit. But we certainly have operations in structured operations. In this presence is larger than with other products. And this has allowed the IB pipe to grow much more. Also, we've done work to have experts closer to the areas away from the large centers. And so this has led other operations away from the Sao Paulo area to come with more intensity. So to have greater amount of customers and greater assertiveness has allowed us to have more success, specifically in income -- fixed income operations. And I think next year also with M&A operations.

Excellent. A second question. With regards to SG&A, there was a revision of the guide, costs going down for the second quarter. But Lulia showed us that there are pain points here in terms of growth, right? And with time, they will adjust themselves. So for next year, perhaps we should see a reinforcement of people in the systems in order to have this greater experience here in SG&A. Now we've talked about efficiency. I'd like to know how you're compensating. How you're thinking here with regards to this line?

So, as I said in my presentation, we always prepare ourselves for growth in the bank in an escalated and organized way. Sometimes, we become victims of our success. The number of transactions grew very quickly. The average ticket in the Middle is lower than the corporate. Also, we had the number of transactions from other products that increased. This has led, although we have invested in technologies to increase our delivery capacity of these operations. In some products, we had bottleneck year in the year. The investment here has to be done in technology, not in people. In people, we will continue growing the headcount. Our headcount was 600 people in 2020, to-date, 1250, right? There should increase continue with the growth, but marginally lower. From here on, you can expect that the operational leverage, which comes from an increase in revenue, specifically the Middle customers in comparison to the increase of cost of people and systems will begin having an increasingly larger gap. We have important deliveries happening in terms of technology this year. And next year, as we said, we have Leopoldo Martinez, the Vice President of the Bank that has been with us for 6 months and has been organizing the manufacturing processes. For example, backup processes, onboarding processes, guarantee control processes that are manufactured. These will be done in a much more scalable way. So just to say that our cost, we are a bank, because of the cost increase, we're not at 0 cost segment, but they will grow at lower rates than the growth of revenue. Have I answered your question, Pedro?

Now we have an international audience. Moura, as you always do, the earnings release, we're going to have a question, and I'm going to ask you to interact for our audience to be able to see the content. Welcome to [ Jitendra Singh ].

So could you please talk about how has been the expansion into the smaller companies so far versus your initial expectation? What you could have done differently, if anything? And second, maybe on the risk, what do you see the key risks for the bank for next year?

I think both questions was the evolution of the bank in the Middle segment until the moment. And looking retrospectively speaking, what the bank could have done differently? This is the first question. So I think that if you look at the Middle market evolution, this question, what could have been done differently is a question that is difficult because you already know once you know the past. For example, we began Middle in 2019. It grew very well in 2019. February 2020, we had the pandemic, so cards were unshuffled. In the beginning, you have a setback of the growth in the second moment, the government implemented support lines for the companies and for the Middle market companies, FGI and PAC programs. And this allowed the segment to go back to grow. But with different historical parameters because in parameters where these companies had access to funding with terms of deadlines that they've never had before, banks with a positive aggressive new line here. This led the segment to grow not only to us, but for other banks with conditions out of the normal in the market. Once this moment is over, in '22, you have a return to the normality. So governmental lines reduced their proportion. Interest rates is higher, customers who benefited from demand an excessive demand also coming from the amount of money circulating the economy. Here this begins to drop and then you begin to have problems. I think for us, if you consider because of everything that happened here, I think we had a very satisfactory execution. And also, we had a lesson that was very, very wealthy. Every time you went to a new segment and you acquire a new customer, you are behind the competition because the competition has been there for a long time. They know the customer, the behavior and the history here and segment too. So these changes that happened from pandemic leaving the pandemic, this led us to do a master's degree in the Middle market very quickly, right? Today, I believe that we have a credit model that is much more robust than we had 2 years ago. We have a better understanding of the commercial dynamics. We develop tools to grow so that I believe that this is a segment where we are very optimistic, and we certainly are comfortable here. And the second part of the question, considering next year, what would be the main risks I think the main risks continue to be macroeconomic risks, Brazilian and global. So when you consider resource flows to Brazil and from Brazil because of the international interest rates, this is important. So here, we're talking about interest rates from the United States. I think Chinese activity levels is certainly a concern to everybody. We've seen the economic activity weakening month after month, everybody knows it is the greatest commercial partner in Brazil impacted a series of customers. Macro is these tools and allied is the execution of monetary and fiscal policies in the economy. Micro from the micro, I think we're very well prepared. In case the macro allows us, we will have a year of growth that is more expressive for the bank. Is it okay?

Yes.

Now we have Gustavo Schroden from Bradesco BBI.

Now I'm going to use this forum that is a little more strategic leave results here. I'd like to talk about liquidity. The liquidity of the shares of the bank, we talk with a lot of investors. We talk with portfolio managers in Brazil and away from Brazil. And with the point sometimes that we have somehow to explain or some points we've received questions about is about the bank's liquidity. And you know that sometimes this is an obstacle because of the size of funds or investment strategies. We know that this is an obstacle. When we look at the numbers of the numbers of the bank, 55 million shares, $3 million DTV. So do you have anything in mind to think of a strategy to try to increase this liquidity, perhaps expand the array of the group of investors that could invest in the bank? Could you share something about this with us because we are in a more strategic forum? Congratulations for the event.

Thank you, Gustavo. I can begin and then Ricardo can help me. This problem, in fact, exists. You define this in a very precise way. However, when you look at our DTV as a percentage of the free float, this is an adequate liquidity because we circulate at 1% a day. And this is a higher level than the average in Bovespa. So the issue of the fund, we have to reach more investors. We have, for the last 2 years, more than 2 years and considered the CIB without the CIB, we have been for 7-8 quarters delivering results above the cost effect defined here. We know that the cost effect here, they have different criteria depending on how it's calculated. But within its range, the return today is over the cost here. Once investors understand that this is sustainable, not only sustainable, but we are not satisfied with this. We're going to go after a larger levels here, I think that investors begin to position themselves. The price of the share can begin to react here, and you have a positive cycle. And because of the increase of the market cap, we'll bring about more investors. I don't see any other path here. We're being transparent. We're present in all the events, and we're trying to create this bridge here.

I think you've given the whole spoiler, but I think it is this you trying to increase the float with the increase of the price of the share. And here, do you know the detailed work where we go after a greater number of funds in our story, deliver results, capture the results here in the price of the share and try to have people that are more distant here and have this base of new investors here?

We have somehow been able to do this. If you look at the volumes in the recent months, it has been fantastic because of the market. But we have tried to in terms of have new names to help here with the turnover. However, we are always open to any idea that can help us too with regards to liquidity. And then afterwards, we can talk about this in private if you have an idea. Is your answer question answered?

Just another question. I remember we talked about a new strategy on the strategies, perhaps the consigned. But then you had the default the bank had to look at default. So with individuals as a whole. So I don't hear so much about the consigned here. So can you tell us about the consigned? Can we have an evolution here? Can you give us an update here?

Well, it's not linked to default. We began the initiative of a private consigned credit, which is offered exclusively to employees of companies that are our customers. So this is a B2B, B2C. And here, the experience in terms of performance of the portfolio, we haven't disclosed amount here because they are very small. It's small, but it's profitable and healthy. What we have discussed internally is just how competitive in the long term is to have individual customers offering just one customer. So when we compare our supply to other banks, we see that we capture this customer, but we offer him consigned credit problems plus investment. But for obvious regions, the customer that is taking this credit does not invest in banks. So it's a mono-product customer. So we're thinking of the ways for us to have a more extensive supply offered for this customer. Perhaps with partners with others can offer here. Through our channel, we can offer third-party products and thus have something that is more extensive for the customer that's here in the bank. It's a little bit of this that we're discussing. We're looking at alternatives to have this. And if we find a solution and when we find it, we will communicate this to the market. Any other consideration here?

No. Congratulations once again.

We have another question here from audience but they were in writing. So I'll send them to you. Pedro Avila, Tavares Research. He wants to know if the Laloni having left the investment bank, does this mean a change in strategy in the area?

No way. Laloni, we would like to pay a tribute to him. He's been a colleague of 35 years, right? One of the founders of the bank, member of the Executive Committee and decided to go to another moment in his career and do different things. The investment bank of ABC Brasil, the way it is today, Laloni is the brain. It was his idea. He was the one that organized, and constructed it. And he continues with us as an adviser here. We constituted the investment bank as a subsidiary of ABC Brasil with a partnership system where executives do this have a share and the investments of the bank was the governance where there is an advisory committee, which comprises Laloni, [ Torres ] and myself. So we would like to thank Laloni. This current design was implemented by him, and he continues with us. He wants to know if the capital will result in an alteration because of the 2 to 9 resolution. It is already incorporated as the Yuri, I think that he asked that question. There was a certain benefit already incorporated. What has not been incorporated recapitalization of the interest the capital we've already requested this for the Central Bank. This should start, we believe, in the next quarter, and then there should be an increase something between 03, 04 benefits in the bank's capital.

Okay. Well, that's it. We are reaching the end of the questions and answers. We thank you all who sent questions interacted with everyone. Before finishing our transmission, Lulia has a final message for us.

Dear friends, shareholders, investors today, once more, we dedicate some hours this afternoon to share with you the progress of ABC Brasil. Myself and my specialist team, the executives that are committed with the vision with the values, with the goals of our company, we presented to you the evolutions of our business plan, the market analysis and our commitment with the future. Ever since our new organizational design and the increase of our portfolio to attend to our clients even better. For over 30 years, we've been on this journey. And today, more than ever, we are present in different segments and in different companies, whether it be large ones or middle size with partners as in your business. We want to be your reference bank, and we want to be more and more recognized by the excellency and the commitment that we deliver for each one. We are innovating. We are growing, and we are sustaining a more plural and large future with the challenges that the market presents. This meeting with you, shareholders and investors is one more reference of our commitment with transparency, and we hope that our partnership will always be close -- and it is with this familiarity that we believe in the day-to-day, we will have more success for all of us. We hope that you all have an excellent end of year, and we hope that 2024 will be even more prosperous. Thank you, all of you who participated in this day.

Thank you very much, Lulia, your words for sure, are an incentive for the future of ABC Brasil. Words of optimism for the future, which is so close. We are now reaching the end of this event. I would like to thank the executives for sharing with us information and analysis, which is so relevant for our business besides the perspectives of ABC Brasil for the future. I thank the participants who sent the questions the audience who connected to our event. Also, I'd like to remind you that the content will be available on the Investor Relations side of ABC Brasil. Thank you to everyone, and we hope to see you again soon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]