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

[Interpreted] Good morning, everyone. I'm Ricardo Moura, Director of Investor Relations and M&A owner and Strategy. This is the Banco ABC Brasil Second Quarter 2024 Earnings Conference Call. Welcome. If you are watching the broadcast via Zoom and want to follow along in English, please click on the Translation button on the right below your screen. All content, including the presentation, is available on our website. To better follow the presentation, I suggest you download the content in the QR code that is on screen. And after the presentation, we'll have our Q&A session. I would like to call to continue, our CEO, Sergio Lulia. Sergio, the floor is yours.

Good morning, everyone. Thank you for being part of our conference call for the second quarter of 2024. Let's start with the highlights. The net income was BRL 250 million, representing an ROAE of 16.1%, a growth of around 100 basis points in relation to the same period of the previous year, even with a lower Selic ratio. The financial margin was BRL 598 million, BRL 9.8 million of growth in relation to the same quarter in the previous year, the largest one, and it's going to be bigger. NIM of 4.5%, recovery for 4.1% we had in the first quarter of 2024, and a level that we consider pretty consistent with our business model. The revenue with clients reached BRL 501 million a very important point, expanding 23.3% in relation to the second quarter of 2023. And the discipline in expenses, as you all know, we come from a period with high investments in the bank. It was around in the last 3 or 4 years, and we have been announcing that despite the investments are still on the risks are higher as the -- the greatest part of the structure was wise, 8.9% in expense growing and the floor of the guidance announced at the beginning of the year, and we are going to comply with that, with an efficiency ratio of 36.9% within the guidance for the year. And now as the last highlight, I would like to talk about the evolution of our brand. In May, we launched the bank's new brand positioning, which is anchored in the relationship with our clients and partners and restates our solidity and transparency, creating lasting bonds of loyalty interest. I'm very happy to be able to share with you this milestone in our story. And I would like to show you our manifesto video that marks our special moment. [Presentation]

We begin this new chapter in the bank's history, now that we have celebrated 35 years, because building the future we want for our institution is the best way to honor all the history that has brought us here. Well, now let's see the results for the second quarter. Our expanded credit portfolio, it had a pretty robust growth of 5% in relation to the previous 6 months, reaching 11.4% when we compare with 12 months. The growth happened in all segments, highlighting for C&IB that grew 16.3%. In relation to product families, we have 2 families. The one with cash that represents the addition of loans and private loans that grew 16%, while the portfolio of guarantees issued had a reduction of 0.6%. The sectorial exposition has a great diversification. The bank is present in the most representative sectors of the Brazilian economy, sectors that are anticyclic and with a diversification that allow us to have a stability in relation to the results and losses throughout the years. Agro business is the largest one with 22%, an increase of 0.2% in 6 months. Energy, 12.7%, more concentrated in generation. Then services with a good performance in the quarter, 12.2%, a growth of 1.7 percentage points. And then we have trade with 7.6%, civil construction with 6.7%, and also logistics and transportation, 6.1%, and financial with 6.3%. The revenues with client reached BRL 501 million. Which are they? They are the addition of the margin with clients plus service revenue. Here, we divide a little bit differently. We have revenue with high consumption of capital and those with low capital consumption. The ones with low capital consumption as here in the footnote are those products as the cash management products, insurance brokerage, derivative, exchange rates, merger and acquisitions, among others, that represent a larger presence in the life of clients, a great array of product offers as well as optimizing the capital of the bank as it uses low capital. This relationship of those with high and low capital consumption also has the best relationship in history. And those with the low consumption of capital represented almost half of all the revenues from clients. The managerial financial margin reached BRL 591 million, with a good evolution in both product business. We have the managerial financial margin with the market that also has a good performance, reaching BRL 98 million in a quarter that was pretty strong. A small reduction in revenue compensation due to the Selic rate. In NIM, it reached 4.5%. As I've mentioned in the beginning of my presentation, we believe this is pretty consistent with what we have been planning for the bank, recovering from 4.1% that we had in the first quarter of 2024. The annualized spread with clients. Here, we show you 2 numbers. The upper is the growth and the lower, it's those reduced the provision. So it's the risk-free. And this has had an improvement from 3.3% to 3.5% per year. And one thing that we really like to show here is the revenue. What is the revenue with the clients, the [indiscernible]? And here, we see a constant evolution that comes from a long time. So it was BRL 256 million in the second quarter of 2023, then BRL 261 million, BRL 278 million, BRL 285 million, reaching more than BRL 307 million. And that shows that we have activities that are pretty solid, pretty consistent, and evolving. The service revenues, as I've mentioned, are the greatest highlights of our quarter. We see here in those 2 families, the family with insurance brokerage and fees and the ones with investing bank -- investment banks. If we see insurance brokerage and fees, it reached BRL 39 million, way ahead the best quarter we had on this product. In the investment banking, another solid 6 months period, BRL 43 million. And we see that we have a service revenue that is more balanced between those 3 pillars: Guarantees, they were flat, we haven't seen a great increase in the future; and investment banking, and insurance brokerage that we believe that will continue on growing. This effect is pretty clear when we see the 6-month period. The comparison between the 2 of them. It comes from BRL 32 million in the first half of 2023 to BRL 85 million. So of course, 2023, the market was harder, but it's a pretty meaningful revenue for the bank. Brokerage revenues and fees, BRL 44 million, and it goes to BRL 63 million. And in the future, we are going to have good news about that. The quality of the credit portfolio, here we can see the expanded provision expenses over the entire portfolio, there is an increase to BRL 73 million, higher than we have shown in the last 2 quarters. But anyway, it's pretty reasonable. We say that our business is -- assumes a PDD level that goes from 0.5% to 1%, 0.6% pretty reasonable. We are pretty comfortable, and we don't see any perspective to have a worse number, at least in the short term. The operations past due over 90 days, 1.3%, a little bit higher than what we had, but anyways, low level. We can see in C&IB this ratio improving due to the portfolio increase. We see stabilization in the middle market that comes from a growth trend. And now we have a small drop. So we can imagine that the top has been reached and a worsening the corporate sector. What is important here is to keep in mind that this ratio represents only the past due in relation to the loans portfolio. As we see, it represents BRL 23 billion of BRL 48 billion that we have in expanded credit portfolio. We are not talking about neither securities or securities and guarantees. This will be solved from next year on the accounting standards will be changing, getting closer to the international accounting standards. And that will bring more clarity to everyone in this analysis. The PDD is around 2.3%. This is considering the retail, and that's for those who are due for 90 days. Pretty consistent in relation to the previous quarter. The coverage went down to 128%, and it is pretty comfortable and adequate. And the expenses evolution, as I've mentioned, they grew 8.9% in comparison to the period of 6 months of the previous year, 7.5% when you compare 6 months period. And that shows once again our commitment and our discipline, our cost discipline. What made us review the guidance as I'm going to show you. Revenues grew 18.4% quarter versus quarter, or 11.4% comparing 6 months periods in relation to the previous one. An efficiency ratio that improved for the quarter, 39% to 36% as well as every 6 months period, reaching 38%, and it's according to the guidance from the beginning of the year. Here, funding. Funding is a pretty strong point for the bank, and it's important to be like that. It's pretty abundant in relation to client diversification, deadlines, rates. And in relation to rates and all the deadlines, well, it's the best moment since I can recall here at the bank. And the diversification of investor sources is pretty important. We have 35% from institutional investors. 16% are individuals, 16% also our own corporate clients that invest their resources in the bank. And then we have BNDES transfer and 11% from the net revenues -- the net -- the shareholders' equity and coming from multilateral agencies and so on. So at the end, we have funding of BRL 53 million. The Basel ratio, pretty constant, pretty comfortable, reached 16.3% at the end of the quarter, and 13.8% was Tier 1 capital and 2.5% Tier 2. If we pay attention to this quarter specifically, there was an increase, not only in the profit generated by the bank, but also the approval from the Central Bank in relation to the funding of JCP that was made in the beginning of the year. And that was consumed with the increase of the equities -- the assets of the bank. So the financial marketing, so it reached BRL 250 million, and a growth of 23% in relation to BRL 201 million from the previous year. The ROAE is 16.1% compared to 15.1% a year ago. Even considering, as I've mentioned, a Selic ratio that was lower than we had. And this improvement come from all business lines. If we check, service revenue, BRL 42 million; revenue of provisions, pretty constant; a reduction coming from the Selic ratio, but a strong increase in the margin with clients and the margin with market. So we are pretty satisfied with that because it's not only the number of the results, but the quality of the results that is based on our strategy and our businesses. And to finish, I would like to show the guidance at this moment after the second quarter is a moment that is pretty important to see how the year has been performing and check what could be maintained or changed. In relation to the growth of the portfolio, we had 10% to 15%, and it's maintained. You could see that we grew around 11% in 6 months. And the second half is strongly generating assets, and we are pretty comfortable to keep it. The Middle segment portfolio. It is a portfolio that grows slower. This segment is -- doesn't have the healthiest position, but the stop of the Selic drop make us have more care in credit line approvals, and we have an expansion for the same level of the bank portfolio. The Middle, probably this year, will keep the participation in the portfolio that is around 9%. In expenses, there is a reduction that is positive. We projected growth in expenses from 9% to 14%. We are reviewing that for a growth of 7% to 12%, considering that we are presenting something in the middle of these numbers. And the efficiency level in the half year, we are in 38%, in the last quarter, we are in the middle, and we intend up to the end of the year to deliver something that is within all these criteria. So that's what I had to share with you. Now I will hand the floor to Moura. Moura, it's up to you.

Thank you, Lulia, for bringing the overview of the bank's results in the second quarter of this year. I also thank everyone who's following the broadcast. Now let's open your participation in our Q&A session.

At this moment, we have Sergio Borejo, CFO of Banco ABC Brasil.

Good morning, everyone. It's a great pleasure to be here another part with you, and I'm available to answer any questions.

Great, Borejo. To everyone who's following us, feel free to ask questions. To participate, just raise your hand in the chat in the icon that is in the bottom of your screen, and we are available to answer questions. The first question we have is from Antonio Ruette from Bank of America. Antonio, thank you for your participation and feel comfortable to ask your question.

Good morning, everyone. Congrats for the results. I would like to hear a little bit about the Middle segment. So following the guidance review, I would like you to show some points of views. So the environment with higher interest brings some challenges. So I would like to hear about the middle from industry and what has changed since the beginning of the year, maybe going through the competition. How have you seen competition behaving since the beginning of the year? And also with ABC point of view, how throughout the year, the strategy in the -- of Middle evolved? What is the approach that has evolved?

Thank you, Antonio, for your question. First of all, I would like to answer restating the importance of the Middle segment in the bank's strategy. So this is a segment that we believe is quite promising. We still see that. And it's a segment that enters for 10% of our portfolio, and we intend that to grow throughout time. So I believe that in a couple of years, the middle market will reach around 20% or 20-something of our portfolio, then would be a moment in which it would be balanced. However, this growth has to be dosed due to market issues, and I believe it will answer your question as internal aspects of the project maturity inside. In relation to the market, companies, Middle companies, first, there is a certain concentration, mainly in the industrial and service sectors. And then you have different situations. You can have the GDP growing 2%, 2.5%. And that would affect those more dedicated to a certain market and they are not beneficial from the agro business. So you have industry -- transformation industry, those dedicated to suppliers of larger industries. So it's a dynamic that is worst I would say. Second point is that the quality of the funding available for these companies is not the one with those funding available for major companies aftermarket. We've seen how much companies, middle-sized, large-sized companies had access to capital market. We, ABC Brasil, took part of that every time we feel the appetite of the market. We prefer to bring our clients to this market because it's helped for them then to place the assets in the portfolio. So those that had access to the market, they had the chance to elongate the debt profile with competitive ratios and the duration would has never seen before. Middle market companies, they do not have access to that. They had during the pandemic access to the [indiscernible] lines. They still exist, but in less attractive conditions than in the past, I may say, in a way that the funding of companies is in the short term. So they are more affected by the economic cycle. They are more exposed to the Selic ratio. And throughout time, they made us have more here with the credit approval in this segment. Of course, it's not only that. We have a great homework to be done here. So I'm not trying to avoid our responsibility. We have a learning curve in the segment that has moved forward a lot since 2019, 2020, since we started until now, but we have a long way to go. We have products maturing, products that are more convenient, that are easier to be accessed by companies that respond in a better way, the needs the companies have. And we also have challenges in operations. Those are all things we know, and it's in our investment plan, and we are executing in a good way. In relation to the competition that it was part of your question, banks have different positioning. Many banks that are mature in this segment, well, and even let me open [indiscernible]. We talk about middle market. It's the same name used for different things. Our middle markets are those that have a revenue from BRL 30 million to BRL 300 million. The market calls it upper middle. We have more consolidated banks and the -- we had across the board that and many banks we work with, they are careful this slide as with the middle in this half year. And it is a scenario that is temporary. It trends -- the trend is to improve, but we will speed up only when we feel that we can do that in a safer way. Credit segments. I've always mentioned that in other results calls, credit has to know when to speed up and when to reduce the speed. So on the long term, we want to have a larger middle portfolio. We have a small penetration. Our shelf wallet is small, but we have a good mission, but we are going to respect the economic cycles.

Thank you, Antonio. Our next question is from Brian Flores from Citibank. Brian, can you hear us?

Can you hear me?

Yes.

Great. Thank you for the opportunity, and congratulations for the results. I had 2 questions. You've mentioned about the branding of the bank, and I saw in the release that maybe you would increment the addressable market. Could you explain a little bit the strategy, how it's going to be and how it's going to help the growth of the portfolio from now on? And the second one is about the -- as far as changes. Is there any change in the capital for you? Are you facing any provision? Just to understand a little bit what's going on.

Thank you, Brian, for your question. I will answer the first one, and on the capital, Borejo, will help us. This rebranding is an update of the brand that more than the visual aspects that I really enjoyed, a fact, because it couldn't be different. Well, it emphasizes our market positioning. A market positioning that will change because I believe it belongs to us, but we go from a concept that we call internally, return on relationship. It's pretty much a job with return on equity, but we are a bank of relationships. We established relationships and relationships that create this relation on the long term and promote a mutual growth from the company, the bank, obviously, the professionals who work at the bank, the shareholders with dividends they receive and the growth of the society as a whole from a bank that funds business that are the base of the country's prosperity. When you look at the corporate market, you have competitors that are pretty strong with powerful weapons, pretty competent, pretty equipment, and we are one of them. In our case, I believe the singularity that we have and that we bring is, for sure, this matter of close relationship. It's pretty common, pretty frequent. In the last 3 weeks, I had meetings with 2 clients that I can recall by heart. They mentioned, now we are major companies, we are accessing the capital markets, many banks, but you were the first bank that followed us when we were smaller, who believed on us, who gave us loans, and then later, brought to the first capital markets negotiation and now we have a larger visibility, and we are pretty grateful for the bank. This is something that really pleases us. It's not only 2 names. I'm just talking about those 2 because they are pretty recent. But that allows us to have an importance in the life of clients that is bigger than our size as a bank. We do that in the corporate and the CIB, and we are proposing ourselves to do that in the middle because it likes a bank that has this perspective and this point of view in relation to the long term. As I've mentioned, we still have a long way to go to reach that point, but we are pretty eager to go forward, and we believe that we will reach a market that is way larger than the one we have today. Today, we have a participation in the market when we look at our market share. In loans, there is something that is limited because the data available from the Central Bank is just for loans. And sometimes they have more bonds than loans. But we have a share of 1% to 1.5%. So we have room to grow even if the market as a whole do not grow, does not grow, and I believe it will. And what about capital?

Well, thank you, Brian, for your question. In fact, the bank, we have an international controller. So we work with IFRS when we send to the controller, and we have been doing that for 5 years. So we are pretty familiar with the concept. They probably will not have any material difference in capital or provisions. So we see with good eyes the implementation of 4966 mainly for this issue that Sergio mentioned, to see the portfolio in a more complete way. You add loans in this concept, but also you add all the securities. And we don't expect any material impact, Brian.

Next question, Carlos Gomez-Lopez from HSBC.

Hello. Congratulations for the results. I would like to ask you first about the demand in the market. You said that you are careful with the middle market, but we are -- you are improving. What is the perception that the market is improving as the year moves on? And what is the perspective of the market if things do get worse, but you intend to improve? And once again, the IFRS. Do you have anything about the taxes and things like that? Could you comment on that?

Okay, Carlos, the demand. Well, if we look at the history, usually, it's stronger in the second half of the year. We started with 2 months, January and February, they were pretty weak. We have seasonality. But this year, January and February were weaker than historically speaking. March was good. May, June speeding up in the second half. We'll see this volatility. Sometimes there is an impact or not. But the expectations, well, they are good because due to the seasonality, the GDP that is stronger than we expected. We have stronger strengths. We have 200 relationship officers considering all 3 segments we are present in a pretty expressive way of the country. So I'm pretty updating for the second half of the year. Let's see if it's going to happen.

Yes, about the IFRS. Well, Carlos, in relation our deferred tax assets, it has a low level, 15% in relation to our equity. We don't have any loss, fiscal loss, any goodwill or anything that is different. Well, the idea is to be capped as such, no impact. And this is a good level we have, and this is one of the strengths of the bank. We understand there is a negotiation between FEBRABAN and the government to extend 3 years right for banks to regulate their -- those taxes. So I believe -- do you believe it's going to take 3 years, or how is it? Well, you have this discussion for sure. We are following that [ mostly, ] in fact, but we generate results enough to absorb that in 3 or 6 years. For us, it won't matter. But we are paying attention. If it's 6 years, it's also okay. There's no problem at all. It's the normal course of the business.

Our next question comes from Eric Ito from Bradesco.

Sergio, Borejo, Ricardo, congratulations for the results. I have 2 questions. First one first, about the client, the spread with clients. The quarter showed a good evolution, the reduced treasury with CDI. And you also talked about the product mix, middle loss representative. So I would like to understand if you could comment on that, which are the products that really helped here. And Sergio was pretty vocal with the NIM. Is that the level we can expect for the future or something different with the Selic drop? Well, just to understand a little bit about that. And the second question is in relation to the cost of risk. We see a small increase every quarter, reflecting the deterioration of the corporate segment. Anyways, we saw coverage going down with that. So just to see that, thinking about the continuity of results, expectations for 2024 and maybe 2025, what can we wait with the coverage level and everything that I mentioned?

Well, Eric, thank you for your questions. I will start and then Ricardo, Borejo will add on my comments. Well, the spreads -- let's say, we can separate in 2 major groups. One, it's the credit operation spread, and the other one is the total return that you bring from that client due to the group of products that are sold to that client. The spread, there was a compression of margins. When we look only the credit spread without taking into account other products sold throughout the year and even due to a perception of risk that is smaller, the spreads were smaller also. And in our case, that was more than compensated by the cross-sell of other solutions that are available to clients and are increasing the participation in the bank's portfolio. Some are in the net interest margin. The exchange rate, the cash management, the derivatives -- well, they are all in NIM and they are performing well and helped the recovery for the 6-month period. And the insurance brokerage tariffs and so on, they go into another account of revenues from clients. And half of them came from transactions that consume little or no capital and only half came for those that consume a lot of capital. I believe this NIM level is adequate, but it could be a little bit more, a little bit less, but around that is what we believe it's consistent. And that's what we forecast for our business models. What was the other question? The coverage. Sure. The coverage, I believe, for banks like us that operate only with companies is a consequence more than a cost. You know how the model works. The model is the resolution. And by the time you rate credit, you attribute a rating. And based on the rating, there is a provision, an anticipated provision of that client. And throughout the operation life, the client may suffer an improvement in the rating or a worsening of the rating in which the provision is adjusted. And in our case, what happens is the following. Most of the time in the clients that will deteriorate, we can anticipate that because we are following the life of the client, of course, and provisions are starting -- well, ratios start to be lowered, provisions are increased even before there is any due operation. And well, after it is overdue, you reduce the denominator, and the ratio goes down. But we are pretty comfortable. We believe that the portfolio has a good provision. We have all -- little new cases, the one that comes from corporate, they were identified, they were provisioned. That's why you can see the provision and the coverage ratio, but they do not impact the results. The provisions had been done before anticipated.

Next question from Mateus Raffaelli from Itaú. Mateus, can you hear us?

I would like to explore services that has been performing pretty well. In this quarter, we had a positive surprise in the brokerage -- the loan brokerage. And I believe -- the insurance brokerage, sorry. And I would like to understand how ABC been performing? And then Lulia showed the improvement on the little intensive capital revenue. So how are you going to take that, the service revenue, in a more structured way in the middle term?

Thank you, Mateus, for your question. The insurance brokerage, we have to take into account that this is an activity that the bank performs since the last 2 years. So I believe it's starting its adult life now. So you have this expansion coming from 2 factors -- 2 vectors. One is the penetration in the portfolio, the bank portfolio. So as time goes by, teams are structured and the commercial team understands the insurance broker and everything is structured to serve regionally, something that didn't exist before. In the past, we were only Sao Paulo and then you increase revenue to then increase costs. So you have a penetration in the base that is larger. The second vector is the diversification of families, of insurance families provided. You start with life insurance and then you expand. And I would say that today, except health insurance, that is something different, and the car insurance of all companies insurance, we have almost all families of products being offered. Relationship with the vast insurance companies available for each product; strength, commercial strength that is more prepared to identify the product opportunity; and a sales force from the broker that goes together with the commercial force to make the product to be well succeeded. So we are not mature yet. We are not in full potential. It's an activity that will grow with the bank growth, but will increase in my perspective, the relevance it has inside the bank. Of other products, I believe this 40% to 50% of the total revenue coming from clients -- we are not talking about the market or the net equity compensation, but 40% to 50% of revenue that use no or little capital, what we see in the competition in Brazil and abroad, we are in a pretty good level. And there's no secret there. You have to have competitive products, sales force that is specialized in the commercial area, understanding better the product and offering to the clients and be present in the life of the clients every single day. This is one of the major advantages because when you are only a credit bank, you give a loan or -- and then you talk to the client after some months when it's overdue. When you are competitive in cash management, when you have exchange in a competitive manner, derivatives, insurances, when you discuss capital market operations in fixed revenue and you talk about M&A, electrical power that we are offering now in a very competitive way, well, first of all, you are more important in the clients' life. You have a subject from different companies with different profiles, even if they are not taking cash flow, but you increase the addressable market. And you are a bank that has interesting solution to any company despite the segment. And that's how the strategy goes.

Pretty clear. Thank you, and congrats for the results.

Thank you very much.

And now we are finishing our Q&A session. Thank you very much for your participation. So now we reached the end of our broadcast for the second quarter of 2024 earnings call. I give the floor to Borejo and Lulia to make their final remarks.

I would like to thank once again for the opportunity. Thank you for being part of our call. And I hope to see you soon. Thank you very much.

Well, thank you, everyone. It's always a pleasure to be here. We had the first quarter that was growing. We are pretty optimistic with the second half of the year. So we expect to see you soon and with good news. Have a great day.

Thank you. Thank you, too, for your presentation. I thank everyone who took part of our call. The presentation is now available in our website. And besides that, the video of the broadcast will be on our YouTube channel. If you want to listen to the broadcast in audio format, it's going to be available at ABC Brasil Spotify account. The [ area of RNI ] is available. And see you soon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]