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

Good morning, everyone. I'm Ricardo Moura, Director of Investor Relationship (sic) [ Relations ], Proprietary M&A and Strategy. This is the results conference for the first quarter of 2024 from Banco ABC Brasil. Welcome. If you were watching the broadcast via Zoom and wanted to follow in English, please click on the translation button on the right, below of your screen. Before we begin, I would like to share the following disclaimers. Any statement that may be made during the conference relating to Banco ABC Brasil business perspectives, projections, operational and financial goals constitute beliefs and assumptions from the company as well as information currently available to Banco ABC Brasil. Future considerations are not a guarantee of performance and involve risks, uncertainties and assumptions as they refer to future events and depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operational factors may affect the future results of Banco ABC Brasil, and may lead to results that differ materially from those expressed in such future conditions. In compliance with the general data protection law, we also informed that this presentation is being recorded and broadcasted in our social network, LinkedIn and YouTube and that by continuing, you are aware that personal data like image and voice may be shared without any harmful or breach of the law. All contents are available in our website. To follow the presentation, I suggest you to download the content using the QR code on the screen. After the presentation, there will be a moment for Q&A. I would like to call our CEO, Sergio Lulia, to follow the presentation of the results. Lulia, the floor is yours.

Thank you, Moura. Thank you. It's a great pleasure to be here today with our presentation for another quarter of Banco ABC Brasil. I would like to start saying how sorry we are to all who live in the south of Brazil, who suffered this terrible tragedy and say that us, as an organization, we are giving all the support to our employees in the region, our clients, their families. We have 407 clients there, sending necessary input and material and also financial support that comes not only from the bank, but all employees. So here is our support. So the situation will be solved as soon as possible and the lowest cost to everyone who lives there. I would like to start our presentation showing a small video with the highlights of our first quarter. Check the highlights of the first quarter of '24. Net profit and ROAE. A net profit of BRL 223 million in the first quarter, a growth of 17.4% in relation to the same period in 2023; an ROAE of 15.1% with an expansion of 64 basis points. Investment bank, a revenue of BRL 41.6 million in the first quarter of '24, the highest historical value in the first quarter; a revenue almost 3x larger than the first quarter of '23, and 12.3% larger; increase in the volumes of the DCM operations and also the closure of advisory services, regulatory. We reinforced our capital days in the first quarter with the emission of capital Level 1 and 2 instruments. Highlights for the local emission of BRL 500 million in perpetual subordinated bonds. We increased our capital Level 1, is 13.8%, and our Basel ratio is 16.6%. Those were the efforts to create a base for our active growth with a structure that is optimized. Well, those were the highlights of our first quarter. Let's continue here our presentation. Going through the profitability of BRL 223 million and ROAE of 15.5%, that's not what we want. But considering the seasonality, including January and February, those are good results. The investment bank, as it was highlighted in our presentation, with BRL 41 million in results, the best first semester in the history of ABC Bank. The credit cost of 0.4% from the credit portfolio, this is pretty good if we consider our history. It's something between 0.3%, 0.4% and 1.1%. So we can see here that it's in the lower part. And the regulatory capital, good conditions for the funding of competitive ratios given these numbers. In relation to the expanded credit portfolio, there was a growth in 12 months of 5.3%. And here, we have the CIB (sic) [ C&IB ] and Middle segments that grew 7%. The Corporate, a little bit back, that had a good growth along last year and in the first quarter. That is some due operations, and we expect to resume soon. In the quarter, minus 0.9% seasonal, pretty common in the bank activities in the first quarter of each year. A highlight I would like to bring here is the growth of what we call the Cash. So it's an addition of the loans plus the bonds, and they have all the securities also. And that comes from 10%, minus 6.9% off of the guarantees issued. The guarantees issued is an important business for the bank. It's something that we have been doing for a long time. We enjoy this activity, but it has had competition with other products, including guarantee issued that we started to offer through our broker, and that explains partially this reduction. But when we look here, this is [ the crops ] that is better than we expect in relation to the portfolio growth for the next quarters, considering that guarantees issued will reach a level that they won't go down below these levels. The sectorial exposition is pretty good. Our portfolio is diverse. It still is agro business, is the main one. Even inside the agro business, we have some diversity with grains, 10%; sugar and ethanol, 4.5%; agriculture and livestock, 4.1%; agriculture input, 3.2%; energy, it's the second most important, had a good performance in the quarter, 14% of representativeness with a growth of 2 percentage points; and then services, trade and the highlight here for transportation and logistics that grew in the quarter of 0.6 percentage points, representing now 6% of our portfolio. Here is a new slide that we bring to all of you. So we show this silent transformation of the bank. It is a diversification that is way bigger of the credit portfolio. If we get the credit portfolio of the bank, it has some diversity with different metrics. Here are some, the 20 largest risks and divide by the bank equity, and it shows how much the major clients represent in the capital. But that would show different things. If we get the average ticket, it's down. If we get the representativeness of our 20 largest clients over the portfolio, it went down. So this is a health change and improves the resilience of the bank, the business on the long run. But what this number shows? It shows that in the first quarter of 2022, the 20 largest clients represented 1.7x the size of the bank -- the equity of the bank. And today, it's 1.1x. We believe that's a proper level. We don't expect that to be reduced. So this is a work that we have been doing. So here, let's talk now about the financial margin. The behavior here had a drop of 5.3% when compared to the previous. And also, when -- 3.5% with the same quarter. So it's easy to understand. There is a vector here of the Selic ratio. It comes from 3.75%, 10.75% today in the first quarter. And that causes some pressure. We have a good behavior of the financial margin to the market. We practice with consistence since the beginning of the bank, and it's reinforcing more and more. And you also have a drop in the gross margin with the client. That's what's here, activities with clients, we have the revenues in the origination of operations and provisions that are not here. So when we see in the next slide, we will see that there is a drop in the gross revenue. But in the net, you have a good level. The financial margin is reflected here in the NIM. So when we have 4.5%, 4.6%, it goes down to 4.1%. We believe in the first quarter, this is a seasonality, a seasonality that comes from a commercial activity that is a little bit weaker growth in the portfolio that didn't happen and a mix of clients that is pretty important. So NIM, the major factor here for the net interest margin and this increase is the mix of our portfolio and -- that didn't have, and the mix of products that is better, products that work better, we capture throughout 2023 and that may continue. And we believe that for the next quarter, not going to 4.8, but not even 4.1, something around between those two numbers. The spread with clients, that's what I've mentioned before. Here, we get the revenue less all the -- and then we have the [ net ] spread. It grew from 3% to 3.3% and it's constant. And here, in the blue bar, we show the behavior of this revenue without losses. So it goes from BRL 240 million in the first quarter of 2023, BRL 256 million, BRL 261 million, BRL 278 million and now it reaches BRL 285 million in this higher trend that we believe it's going to continue throughout the years. The service revenues third quarter, above BRL 100 million. This is besides NIM, another source of revenue and operations with clients that changed in the -- in its level. A great highlight for the investment bank, BRL 41 million in the first quarter, in which it's weak for this activity, the entire industry. We have a good provision for the next quarters. And the revenues coming from brokerage and tariffs, they are good, almost 8% compared year by year, pretty good. And the only reduction here is in relation to the guarantees issued. As I've mentioned, there was a reduction in the volume, but it's a stable product. Besides this spot reduction, we don't foresee any change. It's a line, a constant line that has less volatility to our revenue with services or service revenues. Talking about our portfolio quality, 0.4%, as I've mentioned. In the graph, we can see the evolution since the first quarter of 2022. You can see what I've mentioned, 0.4% up to 1.1%. And if we get years before, we will see that that's the behavior. That's the level of provisions the bank operates on. And we are in a good cycle of credit, the opposite of the beginning of last year in which we had some cases. And this provision has recovery levels that are pretty low. So we had a better one, but this is the level of provisions, gross one, without taking into account the recoveries, and that was good. Operations, past due over 90 days, 1.1%. If we reduce that retail case that we all know, 2.9%, if we consider that case. So really aligned to what we have in our historical level. Good results, no deterioration here. Here, once again, there was a deterioration of the Middle segment that reached 4.7%. And that due to the crops -- past crops -- crops [ passed ] in the second quarter of 2022. In 2023, we had a bad behavior from the crops. And here, it's what we call the denominator events. Because when you are growing the activities, growing the portfolio, you hire operations with good customers and no default and you grow the denominator, the number of operations, and then you have the results. And I believe that when we have this uptake of the Middle, and this is something that is already happening, this will improve. Here, in relation to the balance of provisions, 2.4% without considering the [ retail ] or 3.6% considering. And that has a coverage ratio of 270%, pretty comfortable, a well-provisioned bank. We don't have a lot of cases of default in the markets today, and that tends to be a positive factor in the bank activities. And here, the expenditures evolution. There was a growth of 6.1%. Keep in mind that we have a 9% to 14%, that's our guidance. So 6% is below what we projected. We are not saying that this is going to be the dynamics for the entire year. We have the 9% to 14% guide, but the investment cycles in which the bank went through from 2020 to 2023 is in a way or another, concluded. We will keep on investing. All banks are investing. There's no way to stop investing. But in relation to the size and impact in expenditures, here, the worst moment has passed. Efficiency ratio goes from 37% to 39.4% due to some revenues that were a little bit worse. The first quarter, we had January and February that were pretty smooth in activities, the credit demand was not strong and the operations that were paid, but March was better. April, also a good month. So we believe that throughout the year, the expectation is that the expenditures will be in control, the revenues will be better and the efficiency level will improve and we will achieve what we proposed to the market. And here, we have funding, a pretty strong point in the bank. It's pretty diverse. We have access to investors from different categories in the domestic market, international market, companies, investors, individuals, and we also have agencies, international banks. We are going through a moment that -- in which the rates and funding are the most competitive ones. We have good rates with good deadlines. And here, an example that I showed in the highlights. When we have the subordinated Level 2 bonds or perpetual, there was an increment of BRL 800 million due to an issuance of BRL 500 million of perpetual subordinated bonds, Level 1, and BRL 300 million of 10-year bonds capital Level 2. And that made our Basel ratio to reach 16.6%, and 13.8% comes from Level 1. I don't have to talk a lot about that. Those are pretty comfortable levels, more than enough for the bank to continue in its trajectory and also deliver as committed. And here, the evolution of the result. We go from the first quarter of 2023 with a profit of BRL 190 million. Here, a negative contribution with the margin with clients. But keep in mind that the losses were smaller, so when you add both numbers, the activity with clients added value to the bank. The margin activities added also, and it comes from the equity. We had revenue with services increased and then expenditures mainly with administration, taxation and personnel is a negative contributor, reaching 225 -- sorry, BRL 223 million and an ROAE of 15%. That's not what we expect. We want more and more. For the first quarter, that's pretty good. And to finish, I would like to highlight about our guidance page. We keep all the guidance for growth in portfolio from CIB (sic) [ C&IB ] and Corporate. The guidance for Middle growth, also a reduction and efficiency level. We are pretty confident there was at beginning of the year, January and February with smoother activities. March and April, we will see a great improvement. We are prepared. Our teams are here. We have capital, we have funding, and we are pretty confident. That's what I had to share with you. Now Moura, the floor is yours.

Thank you, Lulia, for bringing this overview in this first quarter. I would like to thank you all who are following the broadcast. Let's start our Q&A session.

Now we will open for your participation in our Q&A session. To join us at this moment, we count with the presence of Sergio Borejo, CFO of Banco ABC Brasil. Welcome.

Good morning. Thank you. It's a pleasure to be here in our teleconference. And thank you for the opportunity.

[Operator Instructions] Our first question comes from Brian Flores from Citibank.

In fact, I have two questions. The first one, you've mentioned a little bit that you are speeding up your portfolio. So I would like to understand a little bit if you have further details per line, and also how this would affect the provisions to the future? Maybe a cost risk that is a little bit higher in the quarter than it was pretty good. And my second question, you've mentioned some interesting comments on funding competition. But we've heard that the competition in the rate for Corporate segment is pretty high. So I would like to hear a little bit from you about what you see, the dynamics, and for this quarter, if we could wait a little bit more for this strong competition?

Thank you, Brian. I will answer and then my colleagues will be able to add on. From the dynamics for portfolio growth, it's interesting to say, and we have some work with [ RI ] and they can make it available. The market, the first quarter, that is a seasonality in which the volume of loans in the system goes down. That, due to the strong last quarter, a lot of anticipation of receivables at the end of the year and the first quarter has that balance. So during the first quarter, we had January and February, pretty smooth; March in which the portfolio went up; April, as I've mentioned, was a good month. The expectation is that this will continue. And that generates from provisions -- is a health provision because it's the provision you do based on the Resolution 2682, you do that upfront, and it's healthy because credits are originated with good clients. So that's something that we really expect. In relation to competition, competitors are here, you are right. And if we get -- most of the time, they ask us about the relationship of the Selic rate and the spread, we have a relationship here, and we see that more between the default scenario and the spread than the Selic spread. So now, we are going through the default scenario that is more benign, and that has caused some pressure in the spreads. The major effect has happened already, November, December up to February. So now we have some stability. And in our case, the major engine to improve the NIM is not the spread, but the mix portfolio change with Middle growing. That didn't happen the former quarter, but we are working hard for that to happen. We expect the Middle growth to take in a structuring way throughout the quarters gradually for the improvement in the NIM.

Please, please, no, it's perfect. Brian do you have an answer?

Yes, I do. Thank you very much.

Now our next question Yuri Fernandes from JPMorgan. I think Yuri, the answer was -- the question was answered. Well, I believe Carlos from HSBC.

Could you tell us your perspective in relation to the impact of the tax reform in this year and the following years?

Carlos, thank you for your question. This is a question that there's no clear answer. And now we have all the regulation of the tax reform. In general, what we see is a pretty good reform to the country. It's a reform that simplifies the tax system as a whole, and that brings competitiveness to companies. And this is pretty good for Banco ABC Brasil because we work with companies. So every news that improved the competitiveness of the Brazilian companies in relation to the world, we welcome with open arms, and that's how we can prosper as a country. It's a reform that the effect will be felt on the long term. The transition is long. It starts small. In a real economy, if we remove the expectations factor, every day in the cash, it's a reform that starts to have effect in 4 years. We are going to have to wait a little bit. In relation to the financial system, as well as many others, the ratios were not defined, not even the rules. So what was approved so far is a guidance in which the taxation of the financial system will be just like it is today, and that brings some comfort that at least there will be no increase. But the details, the mechanics, the rates, the ratio, that will be defined in the future.

So the tax reform is somehow indirectly adding an additional value. But the tax reform -- the direct tax reform is just for next year, right?

Over the revenue, the direct attributed taxation. Well, there were some attempts. In this government as in the previous government, it didn't happen. So from what we realize, at least the greater probability is for next year.

Thank you, Carlos. Now our next question, Yuri Fernandes, JPMorgan, please.

I got really confused. I lowered my hand at the end, so I apologize. I would like to ask a little bit about the broker and it's small line and the insurance broker. Well, things maybe -- and it goes through NII. So it's not something that is growing. It all depends on how you see year by year, 22%. I'm not saying very low, but well, as the base is pretty low, shouldn't it be growing more? I just want to understand your expectations. Because when we talked to the guarantees, as what you've mentioned during the call, it's pretty competitive. There are some other products competing. So I would like to understand on the top of the service revenue, if the brokerage could offset guarantees, so then there would be a service line that is more resilient? If you could comment, elaborate on that. Which are the business, how is the outlook of that? It would be great.

Would you like to comment, Ricardo?