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

Hello, everyone. Welcome to the ABC Day. This is a very special event, mainly in the year ABC is celebrating 35 years of history. This journey was built from partnerships that were unique with clients, shareholders, stakeholders, and with you who are today watching us. And it is this close relationship that builds and generates the results of ABC Brasil that you will see here with some of the bank's executives. For those who are watching the broadcast via Zoom and want to see the interpretation just click on the bottom of your screen. [Operator Instructions] And those who are on YouTube you can also send your question through e-mail and the Investor Relationship department will get in touch. Now I have the pleasure to invite the CEO of ABC Brasil, Sergio Lulia.

Hi, Lulia, how are you? Welcome, Vanessa. Thank you, everyone. It's a great pleasure to participate in ABC Day and show you our unique way of doing business, building long-lasting relationships, which promote sustainable development and enhance the transformation of business and people. Today, we will present the results of the third quarter of 2024 and talk about the actions of the year as well as our view for the future. In 2024, we completed 35 years, and we have a lot to celebrate. We've achieved this age in the best of our shape. health, profitable, creative and relevant to our clients. We harvest the fruits we planted in the future, and we still have so many plans to accomplish in the future. In this meeting, we are going to talk about the positioning of the brand, our work we performed with organizational culture, and we will bring information of our ESG actions. We'll also talk about the customer segments. I can tell you that in CIB and corporate, we amplified our product portfolio, we grew the participation of revenue with low or no capital allocation, and we reduced the concentration of our portfolio. In the middle, a promising segment in which we are still developing well that we have the greatest number of clients in the bank. We have restructured ourselves to offer a more guided offer for financial services for transactional products as well as structured products. I would like to thank the partnership of APIMEC, the institution that complies with efficiency of forming financial professionals. And this is another moment to restate our commitment with transparency and the high levels of governance. I invite now Thiago Brito, the IR Manager, to share an overview of the corporate credit here in Brazil. Thiago, the floor is yours.

Thank you, Sergio. It's a great day to be here in my first ABC Day. Last year, we showed some data from the market based on the Central Bank historical data. This year, we would like to bring some of these pages, but with a different point of view in 2 issues. First, the seasonality of this market as well as our view of where we are in the corporate credit cycle. First point, talking about seasonality. Here, we bring data from corporate credit in which we do not consider credit to individuals, neither to legal entities. We created an indicator in which in the numerator, we have the originations, the gross originations plus the interest accruals and also in the denominator, the due dates. And when it reaches more than 100%, we have an evolution of the portfolio as well as below 100%, we have a reduction in the same period. To observe a longer series, we can observe some standards in this data. So first of all, the first month of each quarter tends to be a weaker month, naturally with the indicator below 100%. The same way, in the last month of each quarter, we have this trend of having a stronger number. And when we look to the history throughout the year, we have the view that the last quarter is the strongest one, believing that there is a seasonality in this growth of portfolio in which the second part of the year is the strongest one. And now paying attention to the corporate credit, we would like to see the credit demand in free corporation. So in this bar, we have 12 months of credit and we had around 16%, 17%. In 2023, we had this indicator reducing, reaching a value of January 2024. And from that point on, we started to see a growth in 2024, reaching the end of this period with 7.2%. Another way to see that from the credit demand is when we observe not only the evolution in percentage, but also the variation billion BRL, 1 year in face of the other. In this page, we have the variation per line of product. And historically speaking, net capital and we have the promoters of this corporate portfolio growth. That is not true in 2023, in which we have a reversion of this event. We have this movement that was reverted from April 2024 on. And we can see now in the last data that this is a promoter. Another element that really help us what we have here is the risk perception. We have ratings of the system. The total rating throughout 2024 has been working in a reducing trend, reaching the end of the series with 5.9% when we compare a longer history. It's important to observe that despite the total index presenting this reducing trajectory, when we isolate small and middle-sized companies, this indicator is a little bit more persistent in relation to the total. Another way to observe this is besides the EH ratings to observe the nonperforming loans. So the cases in which we have past due over 90 days with billions and the percentage of portfolio. Along 2024, we have a trajectory that is also reducing, finishing the series in September 2024 in 2.9% once again, a historical level that is amazing. And the third element would be pricing. And here, throughout 2024, we have a trajectory that is also declining, finishing with historically low levels. This drop in the spreads is due to the elements we've mentioned before, the growth of demand and also the reduction of the risk perception, but also based on ANBIMA data due to the high volume of issuance in the primary market of these cases of fixed revenue. If we add 2024, we can see a volume that is above the complete years of 2022 and 2023. Last but not least, we would like to show a page that brings a summary of the expanded market portfolio in which 2/3 are concentrated in loans, the 2 portfolio, private equity and also guarantees. With this information, we've finished our panel for corporate markets. And now we will talk about the results of the third quarter of 2024 of ABC Brasil. Sergio, the floor is yours.

Thank you, Thiago. Let's tell you now the results for the third quarter of 2024. The net profit reached BRL 255 million, once again, an ROE above 16.2%. The expanded portfolio reached an important milestone, BRL 50 billion in the expanded credit portfolio with more than 5,000 corporate clients being served by the bank. BRL 50 billion represents a growth of 14.5% compared to 12 months ago. The financial margin overcame BRL 600 million, BRL 622 million with a growth of 5.2%, representing a NIM of 4.4% and we reached a very proper level that is pretty consistent in the last quarters. A discipline in expenditures, a growth of 4.4% compared year-to-year with an efficiency level of 37.8%, both within the guidance that were provided to the market. The expanded credit portfolio reached 14.5%. It's pretty proper. It was below that. It reached 14.5%. Our guidance is from 10% to 15%. So we are almost at the top of the guidance and with a positive performance of all segments, 15% of growth in CIB, 14.6% in corporate and 10.8% in the middle. So the major highlight is what we call cash portfolio, that is the addition of loans and private equity with a 15.4% growth in 12 months. The sectorial exposition is pretty diverse. We have been showing that. We don't have a lot of oscillations from one quarter to the other. Agro business is still the greatest segment of the bank with the participation of 22.2%. The service segment is in second for the first time. And usually, it was energy. But now services overcame for a little bit, but those are 2 pretty important segments to the bank. And then we have trade with 7%, civil construction with 6.8% and the financial segment. That had an addition that is quite meaningful in the quarter, 0.7 percentage points, reaching 6% of participation. And here, it's something that we bring that is new. And it shows in the view of the last year, what is the participation that the operations with high capital consumption and low capital consumption have in the revenues that come from clients. So here it's not those from the market, neither the compensated CD results. So here, we have the results to be more present in the life of clients, more solutions to have more products. Products, not only for loans that are clearly represented here, but also products with investment bank consultancy, cash management, insurance, and also interest rate oscillation protection, derivatives and everything, and it has a low capital consumption. This proportion of high consumption and low consumption of capital, if we look to the past 2019, 2018, 2017 and '16, it would be around 20%. So it grows to 30% and they keep on growing 38%, 39%, and they reach in 2024, 9 months, 44% in participation compared to 58% of high capital consumption. And this is a very satisfying level, and we will keep in the next quarters. The financial margin, the net interest income here, if we compare to the quarter, there was a growth of 4.1%, 5.2% in the year. And it's interesting to see 9 months because we see that the business levels, they have the numbers with clients or with the market, both had quite relevant growth. The equity is due to the Selic rate. The NIM, we thought it would recover. It recovers and it stabilizes at 4.5%. And we believe that in the close future, it's going to be around that. Here, service revenues. Once again, I would like to highlight the positive results of the bank. After consolidating BRL 100 million, now we are searching to consolidate BRL 120 million. It's the second consecutive quarter that, that happens. An important highlight to the investment bank, BRL 48.9 million, the best third quarter in 2024. So guarantees, well, it's pretty relevant when we compare to the previous quarter. So the second quarter was the highlight. And when I take the snapshot of the year, comparing 9 months with 9 months, we can see that the cases of guarantees issued, it's pretty dynamic. It has a stability and it's pretty interesting to the bank and it's stable. In other parts of this revenue, investment bank and also the cases of insurance broker, we have increases, and we are pretty happy because of that. And the quality of the credit portfolio around the end that we work with 0.6%. We have a business model in which in regular conditions, these expenditures, they go from 0.5% to 1% in relation to the expanded portfolio. As it's close to 0.5%, it's more benign, close to 1%, a little bit more stressed. So it's closer to half. So the market has had more cases of judicial reorganization. We are present in some of them, but the quality of our portfolio is pretty good. So this is a level of provision that is pretty proper. And operations with past due over 90 years. We can see here CIB with that major case of CIB that we solved in the third quarter of 2024. It goes to a normal level with a ratio that is close to 0. The corporate segment is 0.7%, pretty constant. Middle is showing some recovery here after a peak of 4.7% in the first quarter, there is an improvement for 4.3% in the second and 4.1% in the third. There is a more positive trend here in the bank as a whole with past due over 90 year of 0.2%. So in this CIB, we want to show a little bit about that. So here, the past due over 90 days operations go to 1.2%. That was the level if this operation was not considered. In relation to the operation per se, we received, well, this can be divided in 3 parts: cash received by the organization, and it's pretty close to 30% we had that were not provisioned. So we had a provision of 20%. Those 30% that were not provisioned, they were deducted to the resources that came. The other parts are a long-term loan, another one, some shares from the companies. They are not relevant, pretty provisioned. So with an impact trend that is not relevant. Talking a little bit about the credit portfolio quality. The PDD balance is 2.3%. Once again, the effect of this operation, 2.3% is pretty similar to what we had before without that specific operation and the coverage ratio reaching 195%, a pretty satisfying level. The evolution of expenditures. Here, pretty positive result. So the expenditures reached in 9 months, 6.4% comparing from 2023. And the revenues grew 9%. That means that there is an increase in the efficiency level of the bank that reaches 37.8% in our guidance that is 35% to 38%. And that continues to be a very strong point for the bank, and we continue to have a very favorable moment. Our rates today are among the lowest, I remember, both for the internal market as well as internationally. One example of that are our perpetual securities or subordinated bonds that we issued recently. I'll talk more about the impact on our capital, but not only that, the traditional bonds, CVs and all presenting volume terms and pricing conditions that are really appropriate. Regarding capital, we are closing the quarter at 16.1%, meaning 13.6% of Tier 1 and 2.4% of Tier 2 capital. For Tier 1 or the 13.6%, we are not considering the impact from the BRL 500 million of perpetual subordinated bonds I just mentioned. As soon as approved by the Brazilian Central Bank, the impact is expected to be of 100 basis points. And here, we see the evolution of the results of the third quarter of 2023 compared to the third quarter of '24. We start at BRL 228 million last year. You can see there is a positive contribution from the business lines, both business with clients and with the market. Our equity attached to the CDI has a drop because of this drop in this rate. There's an improvement in provisioning, a more benign scenario this year than last year and an increase in expenses and a little bit more of income tax. In the end, a net profit of BRL 255 million, which is 11.8% superior to the same period last year. And finally, our guidance. It's quite satisfactory to see that out of the 4 guidances we provided for the third quarter, we are in line with all of them. So in the growth of our expanded credit portfolio, the guidance showed 10% to 15%. We are delivering 14.5%. In the growth of our middle segment, the reviewed guidance gave us 10% to 15%. And for the first time, we are within the guidance with 10.8%. Growth of expenses, technically, we are outside the guidance with 4.4%, but because we are superior to the information provided in the guidance. And in our efficiency level, close to the top, but already within the range. And that shows that we are on the track that we have outlined for the organization. The fourth quarter is only starting. We still can know what is going to happen. But usually, this is a good business quarter for the bank. So our expectation is to deliver the results that were shared in the guidance in the year. So these were the results we wanted to share with you. But now we continue with ABC Day. Now we're going to welcome Izabel Branco, Joao de Biase and Antonio Sanchez, who will be discussing how these results were built. And for that, they will be talking to Ricardo Moura, our Director for Investor Relations, M&A and Strategy. I hope you enjoy this.

And now we are going to deliver Seal. And for here, we have Sergio Lulia, the Executive Director of APIMEC.

Thank you. Thank you, Vanessa. Thank you, Sergio Lulia, and all executives and Investor Relationship team. I'm here to congratulate you for the 35 years of your foundation and delivered a platinum RCDT Seal award to ABC Brasil that value APIMEC as a forum for analysts, shareholders and investment professionals. APIMEC Brasil will celebrate 55 years since its opening next year. And it came from this need of a meeting like that, analysts, financial institutions, companies searching for information and transparency to really evaluate its values. So here, we have our RCDT Seal, and it's a great honor. Thank you.

Thank you, Ricardo. It's a great pleasure to receive this. It reflects our commitment with shareholders, investors and stakeholders today and throughout our history. I would like to thank all ABC employees that make this history possible every single day. Ricardo, I thank APIMEC and the partnership that is celebrating 18 years today. Thank you very much, and we are always available.

Now we are going to finish ABC Day, and let's go to Q&A. We are here for Q&A in 2024. Then we have Joao de Biase, VP and CIB and Corporate; Sergio Lulia, CEO of ABC Brasil, Izabel Branco, VP of Talent, Brands and ESG; and on the right, Antonio Sanchez, VP of Middle. Welcome. And together with us, Sergio Borejo, the CFO of ABC Brasil.

Good morning. Good morning, Vanessa. Thank you. Thank you, everyone, who's watching us. It's a great pleasure to be here with this team once again with this amazing event.

Now continuing our ABC Day 2024, I'd like to welcome Izabel Branco, Vice President for Talents, Brand and ESG. Izabel, I have a first question. This year, ABC is celebrating 35 years in Brazil. We have had a significant growth in the number of employees. Today, we have almost 1,300 people with us. We have a more complex structure with a number of companies under the same brand. We talked a year ago on ABC Day 2023. Can you tell us a little bit about the evolution that has taken place in the past 12 months?

Well, when I got here, we had just finished an organizational restructuring of the bank with the growth you just mentioned. So our first approach was to look at culture and the question, what has brought us here is enough to take us beyond. So that was our first action. We analyzed our internal culture and the brand, of course, is external. So we also did a deep dive in our brand positioning to understand what sets us apart in the market. And we got to the core of this story. The idea that relationships build value. And that became how we would position ourselves. The return on relationship. Exactly. You like ROI. Now for marketing, we have our ROR or return on relationship. And the third area that I'm responsible for is ESG. We created that area last year, and we chose 2 priorities: climate change and diversity. And for the past 12 months, we have been positioning ourselves in a more robust way to support our clients in their sustainable development journey. So a lot has taken place in that sense.

It's interesting to hear you say and understand that you are leading a couple of areas. And the impression that you gave us is that there is a good communication or coordination between different areas. Can you tell us about that?

Everything is connected. If you think about these 3 big themes, culture is about who we are and the way we do things. The brand is how we present ourselves. And in a bank that has such a great relationship power, ESG is essential to support our clients in this journey.

Now talking specifically about culture, such an important topic. When we look at talent, how can we envision talent supporting the business of the bank?

When we talk about culture and actually taking a step back, the work that we did was to analyze our purpose. And we often say that our work was more connected to revealing our purpose and not created. After all, we are a 35-year-old institution. So when we remember our purpose, we drive business, we build relationships and we grow together. We tell people the way we want to progress in the bank. And that is the cultural fit. People are attracted by this way of working. And the cultural work also discuss the different behaviors that people need to develop and express in order to support the bank in our bank strategy. And all those factors are put together in a continuous development movement. And what is important in this journey? Because every time we talk about transformation, we have to wonder, are people really buying this idea? Are they boarding the ship? And our engagement survey tells us, yes, 92% of our employees say that they are very proud to work here, and they are willing to go beyond what they currently do in order to make the strategy come true. When we look at our NPS, we have a 74% NPS, which is a very good indicator for us. And when we look at the intention to stay when we think about a world where talent tends to migrate, 80% of our employees say they want to spend at least more than 5 years with us. And that is extremely important because, again, we have grown a lot in fast. So a lot of people have recently joined us, but they already relate to our culture. They relate to our working environment, and they decide to develop their careers here. And when people develop themselves, the bank progresses. It's a continuous evolution cycle.

You mentioned something that caught my attention, which is the power of relationships. and how our relationships can help us build new businesses. This year, in May, we repositioned our brand. And in that work, we used exactly that as a differentiator. So how is that influencing the way we interact with our clients?

When we worked on the core of our brand and define our return on relationship, and when we say that relationships build value, the big challenge is expanding this view, considering that the brand is also at the service for new businesses. So we talked about new companies, new segments, and this bank has always been really acknowledged by this. This recognition that our differentiator is not what we do, but how we do it, that all came from our clients. But the brand works as an amplifier. So more people who are still not our clients acknowledge our potential and our differentiator.

And thinking about this new branding, how does this vision contribute to the bank's strategy?

The new brand positioning brings new outlines and expressions that reflect and amplify this vision of relationship with our clients. Relationship is usually connected to an individual to an officer. And the brand now shows everyone that at every point of contact, we can deliver our differentiator. Our rebranding translates our purpose. Again, going back to what we said in the beginning, all these elements are connected. So it translates our purpose, and it amplifies this idea to our stakeholders. Our purpose is more internal and the rebranding work help us showcase to the world who we are and give us more scale. So we are known with a lot of coherence and cohesion with everyone on the same stage.

Speaking of ESG now, a big challenge for the market today is sustainability and the climate agenda. And again, this is a reality for everyone, for us and all the players. So the big question is, how can we support our clients in their growth journey, but at the same time, helping them transition to a low-carbon economy in a sustainable way?

That is a great question. When we talk about climate change, initially, we started looking at our own emissions. The idea was to reduce our emissions first. And after that, the emission of our funded portfolio that represents more than 98% of all emissions. When we look at the emissions of this funded portfolio, and we can have a real-time follow-up that allow us to offer our clients personalized solutions so they can evolve in their own transition towards decarbonization, providing them with a complete solution exactly that is connected to our proximity to the client our need to understand them and our desire to grow together.

Can you give us some examples on how we have been helping our clients transition to a low-carbon economy?

Sure. Offering them sustainable products. For example, if you think about fixed income products, we have the certificate of deposits and green and social financial bonds. For assets besides our own resource lines, we are able to operate with the BNDES credit lines like FG Energias, the Climate Fund, the low carbon FENEMI and others. And for the capital markets, we are ready to support our clients structurally blue, green and social securities. And now in September, we started offering carbon credits to neutralize or offset residual emissions in our clients' operations.

And do you have some numbers to share with us?

Sure. Our portfolio of assets connected to ESG criteria has reached BRL 19 billion in September '24, which is an 8.3% growth in comparison to the same period from the previous year. Talking about funding in September '24, we reached BRL 1.7 billion. And this evolution was reflected in our rating in the ESG rating agencies. We were upgraded in our ratings in 2 of the main agencies. And that shows that we are on the right track in the sustainable development journey.

Now let's talk to Joao de Biase, Vice President of ABC Brasil in charge of CIB and Corporate, which are the segments where the bank started acting on 35 years ago. Joao, I would like to start by asking, how would you summarize the CIB segment and the corporate segment inside ABC Brasil today?

The CIB segment represents large corporations. We're talking about corporations that have a revenue above BRL 4 billion. We're talking about 390 economic groups with a expanded credit portfolio of around BRL 16 billion. Now the corporate segment includes companies that have annual revenue between BRL 300 million and BRL 4 billion, and it represents 60% of our portfolio. And over time, it has been the most relevant segment for the bank in terms of revenue and assets. The average ticket for this segment is around BRL 20 million. If we were to compare both segments versus what we had when we talked last year on ABC Day 23, what would you say were the main changes that have taken place since then? I joined the bank 2 years ago. And the feeling that we had is that these were mature segments and that eventually had growth that could be below growth seen in the market. But since then, what we had seen was both segments growing with more than 150 clients. and a growth in portfolio of more than 15%, while the market is around 12%, 13% of growth in their portfolio. So even in more mature segments, exactly precisely different from middle, but these segments still represent a very robust growth rate. We're talking about growing above market average.

The impression that we have is that we have seen a quiet evolution in some of the areas or perhaps some parts of CIB and corporate.

It's actually true. Despite the fact that we talked about this a year ago, several products, we had a much greater penetration and development like our investment banking. One year ago, we did a reorganization. We created a partnership. And if we look at the results for the past 12 months, we are above BRL 170 million, which is a revenue that's free of risk. So in 12 months, it's the largest in the history. Yes, it's a record level. So that was a great advancement we had in our investment banking. And when we think about new initiatives that started in the last few years, we have our insurance broker that's now relevant in the market, our energy trader that even with a low energy price has proven to be a great business, but we also have Visio, which is a credit recovery that's also more recent. And all of them have presented major evolution. I want to mention derivatives where we are becoming more and more relevant to our clients.

Still on the quiet revolution topic and going beyond products, I think we have other quiet revolutions that we have had in the period.

This is true. If we think about it over the past year, over the past few years, actually, we have been increasing a lot our cross-sell revenues, meaning revenue coming from products that usually use less than 25% of risk attributed by the capital. And that brings a huge advantage in terms of profitability for the bank. And the other highlight would be the way we have scattered our portfolio. So we were able to do that with very little movement on the past due rates, even with the changes we saw in the interest rates. So I think the combination of these 2 factors made both the profitability and the quality of our portfolio to have evolved in the past year.

So just as important as having high returns is to have this risk or credit at healthy levels over cycles?

Exactly that.

And when you look at this evolution over time in practice, what is the advantage that our clients get?

I think the advantage and what we are observing is that we are much more part of their cycle from their daily operations doing more transactional operations, investment banking operations like M&As and capital market operations up until cash management and others. So I think in the past few years, we became a relevant player for our clients for their daily operations and for strategic operations as well.

So the fact that we are so close to our clients, in some cases, we have had year-long relationships. How do you see that contributing to the development of our relationship?

It really helps because with the knowledge that comes not only from our database, but also from the 35 years of history we have, allow us to have much more an advisory profile with our clients. Usually, when we present an alternative to a client, this alternative was built in partnership with them, and we are able to present what we call an ROR or return on relationship that is at a completely new level that generates positive results to the bank.

And to end this conversation, let's talk about the future. How do you see the future of CIB and corporate for ABC Brasil?

I'm very excited about the next cycle. Our ambition, and I'm sure we can deliver that, is to continue to grow in both segments above market average. And when I talk about growth, I'm not only talking about assets. I'm talking about the share of products, especially products that are less intensive in capital that, of course, impacts our profitability. We know these are highly competitive segments. But we imagine that on this track, we will be able to have a biggest participation in our clients' lives.

Growing together?

Exactly. Growing together with them.

Next up with Antonio Sanchez, VP of ABC Brasil responsible for the middle segment. I would like to ask you and moving to the past a little bit, what took ABC Brasil to decide entering the middle segment?

Mainly our intention to expand in a relevant manner our portfolio of clients. We wanted to be capable to serve this segment of companies from BRL 30 million to BRL 300 million. Besides understanding that the service offered to the segment, we could do better, reproducing or adjusting what we already did to the services and products we offer to this segment. Obviously, that brings challenges for scalability and everything that you operate. And we need to rethink some measures and restructure that since the initial phases from approaching clients, prospection, onboarding and also operations and also credit approval and so on, always adding service quality in a more consultative manner to the client, and that's what we understand that makes a difference.

And if you were to add that, is there any other learning point that we could learn from the middle to the bank?

Well, we have developed many things and things are being used in other segments. And as I've mentioned, many phases of the process had to be rethought and restructured. Onboarding, I've mentioned credit approval, the way we approve credit, the mechanisms we use to approve. And all that are being incorporated to other areas, credit monitoring and also disimbursement of products that were adapted to this greater scale need and they serve and they give more efficiency to the service in other segments.

And what does the middle segment represent at ABC Brasil?

2,600 clients. It's the segment with the greatest amount of clients, a portfolio of BRL 4.6 billion. It is around 10% of the portfolio. And it brought what we really expected that is to diverse our working market to spray the average ticket, and you can expand the margin. At the same time, yes, the financial margin is different in this segment, and we are able to do that.

Well, Sanchez, we know that we have many banks acting in the middle segment, some way before ABC. So how can ABC position itself and defer itself in the segment?

Well, we want to offer a very consultative approach so the client will choose us by option, understanding that we have an option to offer a complete package of services from the more transactional and convenient part, everyday products, guarantees and everyday actions, helping the treasury department, even to more strategic transactions that can be in relation to the first issuance to the market or following issuances. It can be accessories. It can be the consultative to buy an asset. So to be present in the life of these clients. In practice, we are going to offer a great array of services. The bank already have that. And now it's specialized to serve this segment, offering things that we call non-banking services like broker to contract insurance, also energy, we can have some help for the energy demand, all structures that come from the energy sector going into credit recover for the purchase of portfolio or any consultancy service there. So we offer this consultative approach with a great array of services.

Besides the service, but helping the client to choose the best pathway.

Yes, exactly. And building a relationship throughout the process, being perceived by the client as the best option is the first connection. And that's what built the history of the bank in other segments. That's what made us to have loyalty from our clients, a high NPS, and that's what we want here in the middle segment.

And thinking about growth, which are the major challenges?

Well, the macro scenario with an increase in the interest rate, and we have a high interest rate, but nothing that we haven't been through before. We've been in the market for so long, and the bank understands and knows how to go through that, understanding that it's better to have more tactic movement, dosing things to assure quality growth better than just growing.

Because you have to grow, but you have to guarantee results in a sustainable way?

Yes, in a sustainable way. But also, we are not fixed. We have a guidance for the segment to grow 10% to 15%, and it's bigger, larger than what the sector projected. And the last quarter show that we can do that with quality. We can add to the growth. We have added margin, and we can put both things together with return and growth. Well, third quarter is an example.

Yes. And how do you see this delinquency of the segment?

We had a peak due to crops that we booked in the second semester of 2022, and we held the growth pace, growing more than the market, but we hold that a little bit. But we had a coverage for these crops that were pretty proper with all the collaterals with guarantees as receivables and others as well as the coverage of the insurance. Yes, we have this safe net. So the bottom line would affect as we had with the past due we had. And in a more sustainable manner, we will assure that these past due days will be reduced throughout time.

Thinking about the middle, how can we think about the future of middle inside ABC Brasil?

One word, opportunity. We have a huge growth avenue. Our presence in this market with the number of clients, our portfolio is still shy. We have a small share and a huge potential to be explored. And we are doing that, developing our shelf of products, services and making it more adequate to the audience, to make the life of our clients when transacting with the bank easier and also to have some time release of our officers, so he can work as a consultant. He can understand the client vertically, be close to the client, be propositive, and close to the client. So the bank throughout these years had a solid base, system, people, it created a client base.

So today, we have an operation in the middle, but with a profitability that is still below the bank profitability. So how do you see that checking what we have for the future?

Growth will make that, and we need to dilute that in a larger operation scale, more clients, a greater portfolio. That's why we are moving forward to that, adjusting the product mechanisms, serving better the client, retaining the clients, another important thing. There's no purpose to have a lot of clients and then they are not loyal to the bank. So we are in this process of incrementing the loyalty and increasing the number of clients naturally. And this gain of scale will dilute operational costs, all the investments done and will assure the return of the segment that will pull the bank.

If you check the return, it's a little bit below the return of the bank. Yes, a segment that has a potential that can be above.

Yes, above. And that's what the scale will help us. That is an element to aggregate value and pulling it up while we can implement our model with our clients that is that consultative model with the same perceived efficiency level and making the client loyal and growing together with our clients. And that's what we have been doing in other segments. That's the DNA of our bank, and we are applying that so far, very effective and expecting to do more in a larger scale.

Sanchez, thank you very much for your presence. Once again, your participation at ABC Day, it was a pleasure. Now Vanessa, she will continue our ABC Day in 2024.

[Operator Instructions] Now we are starting with our first question. We have one person here who's with us live.Welcome, Brian Flores from Citi.

It's pretty clear that you are still willing to grow in market share. And I thought it was pretty interesting what you've mentioned, CIB, corporate, middle. I just want to understand when we look and reconciliate the data that we see, the risk appetite is a little bit weak. So the growth from now on, how should we consider that? And what would you like to see concerning credit conditions? So maybe you are going to have more options in credit portfolio, maybe a longer growth.

We believe, Brian, that the growth has many factors that come before everything. So in order to grow with quality, you have, first, to have enough balance, enough capital, you have to have a quality funding. You have to have proper products, commercial strength that is also close to clients besides strong, and we have all that. But despite all these necessary factors, sometimes they are not enough. because you have to add market conditions, mainly risk and return. So as Joao and Sanchez mentioned, we have been growing above the market, but not so much as we could considering the risk return conditions. We have been seeing that in the last months, mainly this reduction of the spreads that on one side is helped because it helps companies, but the perceived risk is not reducing as the spreads. And it's pretty important to a credit bank to respect this cycle because if you go too fast and you decide to book operations in the bank, with a risk return ratio that is wrong in the future that will cost a price. So we are prepared.

Just to add what Lulia mentioned, we really see a year that is outside the curve and pretty strong in the capital market. And companies have access to a lot of credit with long deadlines and spreads that are decreasing along the cycle. And besides all that, we see an attentive point of view to the total spread. So this combination of what is the spread that is decreasing and what we have for service is what we follow and is what is guiding the growth of our portfolio. So starting too fast would be to increase the portfolio, not checking pro-cell and the total spread. So we will follow the market conditions, but with a very attentive eye concerning our penetration of other services. So we have a total spread that is better. Anything else?

Just to reinforce the comments of Sergio and Joao. The dynamics of looking the total spread of the client and then talking about expansion of your product portfolio apply to client relationship, it's even more important. So that guide us to grow a little bit above the average of the market besides the spread that was shown by Thiago. So it's in these dynamics that we look ahead. And more and more, we want to offer the extra alternatives and products to clients that will comprise the total return we have in the relationship.

And now we have one more question. Let's say good morning Ricardo from BTG Pactual.

We have seen that we are in a moment of high interest rates that could be more happening sooner than anticipated. So I'd like to understand what level of the interest rate would start to leave you a little bit worried about the quality of your portfolio, especially considering that the Selic interest rate is an important component in the total cost of credit for your clients. And if that could trigger an increase in provisioning on your expanded portfolio that today is a little bit closer at the lower range that you use than the top part of the range.

I don't think there is a specific interest rate that would lead to a reassessment because many times, the market anticipates future changes in the Selic interest rate. So when we look at the future interest rate curve, they're all around 13%. And that level, which was unimaginable a couple of months ago, quite the opposite. I remember that the market started the year estimated that in December, the interest rate would be at a single digit at around 9% or perhaps even below that. And that expectation was reversed. And that has already affected the company's planning. So the market always anticipates those movements. We are following the portfolio. I mentioned when we were announcing the results for the third quarter, we are seeing the headlines in the newspapers on the number of judicial organizations hitting records. So we keep a very close eye on those cases. For now, they are small, local. They don't have an impact in our whole portfolio. And we still believe that this is an environment where we can grow with a lot of caution, cherrypicking our clients, having good guarantees and being close to our clients so we can follow the impact on them. But clearly, we know it's not good news. But just like this, over the past 35 years, unfortunately, we have gone through similar cycles. It's difficult to operate in Brazil and have a low interest rate cycle that lasts for a couple of years for different reasons. Sometimes we have local reasons sometimes more global elements are in place. But this is the environment where we are used to operate. So once again, we will have to demonstrate that our expertise in credit analysis is valid.

Now we have Yuri Fernandes from JPMorgan.

I'll touch a little bit on the 2025 scenario because in the end, we can see that everyone is worried with the credit spread and how that eventually will impact you. And 2024 has been a very good year for FIS. But when we put both things together, the concern that at least on our side, is that maybe you would have fewer operations. Of course, the bank grows, franchisees are stronger. So perhaps you wouldn't go back to the levels from previous years. But I wonder if in DCM for 2025, we expect to see the same trend because I understand that in the spread, you can compensate that with trading, more hedging, the bank becomes more complete. My question is not only the spread should affect NII and perhaps creating a connection, looking at your average term that has been dropping. So perhaps I don't know if you should reprice the portfolio faster or not. So I know I said a lot of things, but I just wanted to understand from you, if we combine the spread compression with a very strong year of ECM, if for 2025, that wouldn't pose you with a challenge? And how is the bank going to try to overcome this scenario?

I think I can start answering your question. And what we have been observing over the year is that many companies, especially larger companies have anticipated this cycle and they went to the market in quite a relevant way. So looking at 2025, eventually, the need for larger companies can be at a lower level. So I think this is a relevant point when we think about the activity of GCM. But on the other hand, what we see and speaking of a little bit of our client base growth, it's a bigger penetration in companies of a slightly smaller size. So I think this cycle of smaller companies issuing and investors understanding risks and the structure a little bit better will lead to a DCM cycle that will remain relevant in 2025. So thinking about structure operations, securitization operations and like I mentioned before, operations in companies that we didn't access before. Perhaps that is going to offset the smaller demand from companies that have anticipated the cycle in 2024.

That's a very good point. And there's something else we have been following in our credit committees, which are connected to infrastructure projects. So today, there's a pipeline of highway concessions for water and sanitation, airports that were privatized that are about to hit the market. Today, the market solutions are more competitive than the official lines like it was some years ago. And inside our investment bank, our project finance area has really been well developed. So today, we are advising clients from the participation in the concession auctions throughout the bridge loan and the takeout, whether we're using the DCM market or through development bank lines. And this business is not as cyclical. These sectors over the cycles, they remain active. So that could be a good source of business for DCM. Regarding NII, I think the reduction in the portfolio of the midterm is by design. This happened by default. So we try to elongate the portfolio when the spread conditions are better. When the spread conditions are not that good, it's the opposite. You try to have a shorter portfolio in order to make it longer at the right time. It's difficult to predict that. The market is extremely dynamic, not our ability necessarily at ABC Brasil, but the market's ability to forecast economic indicators is really not that good. Like I said, the market is expecting the real to value and the interest rates drop and the opposite happened. So we keep both feet on the ground. But at the same time, we have the flexibility that allow us to change directions as the economy evolves.

I just wanted to say that the bank has a track record of being very rational. You talked about the equation of risk return, and we saw that in many other cycles. If I may ask a second question to Sanchez about GSMA in middle. I think my question is, it makes sense when he talks about scale and the ROA should be accretive for the bank in the long term. On the mid- to long term, that should help the APC ROI. But I'd like to ask a little bit about some sectors. Some economic sectors, the bank has more competitive advantage than others. And I know you focus more on middle-sized company, not necessarily those smaller ones, but I want to know if you think payment methods make a difference in growing this segment or not.

First, talking about the sectorial component of your question. Our presence in the middle segment is a little bit different from what we saw for the bank as a whole. I think we have a larger concentration in some specific sectors. I think the agribusiness or the middle segment is relevant at the same proportion. But then we start to see more services, industry and transportation, perhaps at that order, not so different from the whole pie for the bank, but there are some specificities. But we don't have any specific presence in one or another sector that would determine our work, except for agribusiness that has always been important for the whole bank, where we have been developing our work with slightly smaller farmers than the one we have in corporate and CIB. And there is no other sector where we are doing such a specific work. So I think we have a positive diversification of our portfolio when it comes to different sectors. And the second part of your question was about payments.

Yes, payment methods.

Well, payment is embedded inside that concept of being transactional, like we said in the beginning. It's an essential path, an essential step so we can have a nice presence with our client and to retain them with us and also to have a better understanding of the cycles and financial flows going through the client, and it contributes in all the steps, whether when we are knowing the client from the credit perspective or when we're following them. And also, it's about serving our clients with payments and receivables in their daily operations as additional source of revenue for us with, of course, great perceived quality for our client. And we are able to do that with a lot of success. Of course, we can always improve, especially when it comes to scale, but we have been evolving quite well in that sense.

Now this morning, we have a question from Mateus Rafaele from Itau BBA.

I'd like to go back to a chart that Yuri presented on less intensive capital revenues. We saw in the last few years, the bank went from around 30% of less intensive capital revenues to the current levels. And looking at the data in isolation, we might consider an ROI expansion. And it came, but at a lower level than it could mainly because of the increase in the cost of credit. So I would like to understand from you. First, how sustainable do you think this level is for ABC looking ahead? And the second question, if because of this new revenue mix, can we consider a structural ROI that will be substantially higher than the current levels, considering that the credit cost might see a little bit of a drop, you're going to accelerate in the middle segment. Again, we already have 16% of ROI. So it seems like that there's more space for growth. So I want to understand, does it make sense and try to get your feeling on that?

I think there are a couple of things. Well, I think the answer is yes. First, there is room to increase our ROE, but there are many elements that can be part of this. Like you said it yourself, the cost of credit. Just like you mentioned, we can improve that. We can accelerate the operational leverage of the bank. We still work with a cost structure that, again, despite the fact that we have seen improvements, we still have more room to improve the ratio between cost and expenses. Our cost/income ratio should drop in the future. And the spreads themselves, like Sergio mentioned, we are in a moment where the spreads are below what we had been seeing some time ago. Eventually, that is going to return to normal levels. And like Sanchez mentioned, we will continue to have a bigger participation in our clients' life.

And how is that going to take place?

Well, through the offer of services, they become more frequent users of our services. So you combine slightly larger spreads a slightly lower cost of credit, our bigger presence in our clients' life with more services and a more efficient cost structure, without a doubt, this ROE tend to expand in the future. That's what we expect. And it's not just about expansion. Another thing that we have been observing is that the fact that we have a larger product offer allows for the product cycles not to follow in confidence. Eventually, the investment banking is doing quite well. And in another moment, the energy trading business is stronger. Sometimes the credit spreads are increasing more. So it's not just about the ROE level, but its sustainability over economic cycles because, again, the more segments or the more diversification you have in terms of products, more stable your ROE is going to be.

And now let's go to Antonio Ruette from Bank of America.

I actually have 2 questions, if I may. One on regulation. We are about to see the implementation of IFRS 9 next year. I know it's a little too soon because we still don't have a lot of clarity from the Central Bank on how that regulation is going to go. But perhaps if you could share us some estimates, especially in terms of provisioning and capital, that would be excellent. And perhaps a second question, again, if I may. In this last comment on ROE, you mentioned that possible efficiency gains that could serve as a driver for the improvement of ROE. So speaking about efficiency improvement, is it more about keeping costs under control with a growing revenue? Or is it more about additional cost reduction because that is a challenge. For example, middle is a segment that is expanding. It's a very competitive segment. But at the same time, it's very important to have a commercial team to keep expanding this segment. So I think that's my second question, how to balance growth and efficiency improvements, especially in the middle segment.

I'll start on IFRS 9 or 4966. Actually, this regulation, we have somehow been practicing for over 5 years. Our controlling shareholder is international. They have implemented IFRS 9 5 years ago. So somehow, we have already gone through this migration process 5 years ago. Obviously, we have been following the differences that exist between the 2002 resolution in IFRS 9. But today, what I can assure you is that we cannot really see any major impact in the bank, whether we're talking about provisioning or capital. And again, we were already practicing those expected losses and the maximum allowed by the regulation inside 2002. And the second question is a question we are often asking ourselves, what is the best way to gain more efficiency? And like Sanchez mentioned to us, we still have a lot of services where we are investing, not only in the Metals segment, but also in corporate or CIB. Our business or the banking financial business requires investment. And the bank has been investing for quite some time. But more and more, we are able to dilute these investments within our expenses. The number of clients has increased. Our level of revenue has increased. So again, the investments that we continue to make and will continue to make tend to be diluted. So that's not going to come through cutting costs. That's not what we expect, but we expect efficiency so we can grow more in services and revenues and a proportionately higher level than the growth of expenses because expenses will continue to grow.

And now with us, we have Carlos Gomez-Lopez from HSBC.

I have a question for Antonio about the middle segment. In reality, the portfolio has been at BRL 4 billion for the past 2 years, and you have been investing a lot. So when do you believe we can see the growth that you expect from this segment in the next 1, 2 years? And perhaps if you can also comment on the competitive landscape. What else are you trying to do or what ABC is doing in the middle?

Well, if you pay attention, we are achieving the guidance we had around 10%. We are almost 11% in the third quarter. And we've seen in the last months, and we've seen in the beginning of our presentation, the second half that is stronger, the end of quarters a little bit stronger. And we understand that we will have a short-term horizon '24 in the guidance we have. If you look to the last months, we have sustained our growth in a more consistent way. So despite all the macro aspects that Sergio mentioned, we have done a positive selection of new clients, the understanding of where we are operating, and that has sustained the growth in the guidance. So the horizon is what Sergio mentioned. We will adapt to the macro scenario. Of course, we have a higher interest rate, higher than expected, and that slowed down the growth, but the growth continues, and it continues to be a goal that we will achieve. What we are doing this year, we will move forward in this sense. We are not talking about the guidance for the following year. That's a little bit ahead, but we are betting in important growth and gaining market in the following year. In the differentiation of our value proposition to the segment, it comes from what we mentioned in the beginning. To have the proposal in a more consultative manner of understanding deeply our clients, adding value from the everyday operation, transactional and serving with quality until products and services in a more consultative and strategic manner. So we have talked to the middle clients. We have made business in this line, reinforcing what Joao mentioned as an additional value for the investment bank and the capital market. We have hired some consultancy. We've worked as consultants to this client besides serving in what is transactional. As Borejo mentioned, investments are being done. They aim at facilitating the journey of the client, improving the quality of the journey in self-service and operational easiness to have access to products and services of the bank. And we are moving forward on that. So that has a lot of quality, the transactional side, the everyday life, the services of standard operations up to the more strategic side. That's basically our value proposition, and that has had a good effect with our clients.

Well, we are reaching the end of Q&A. Thank you all who took part of our ABC Day, you asking and you, our executives answering. Besides finishing, Lulia would like to give a final message to all of you. Lulia.

Well, thank you, Vanessa. Well, today, we dedicate this morning to share with you all our results and our vision for the future. Here at ABC Brasil, we believe that nothing is done alone, that prosperity is built together with our clients, shareholders, partners and employees. So me, on behalf of the entire team that we have here, I thank you for your trust in the operation that we have been building in the last 35 years. I thank our clients for giving the opportunity to be part of our business. I thank the shareholders for trusting and supporting us. And I thank especially the ABC Brasil team, this amazing team of ethical, talented, committed people who are the soul of our organization. We are pretty excited and very committed with the future, certain that the best is yet to come. Thank you very much.

Well, we thank you all for your participation. And if you want more information, the content are already available at the IR website of ABC Brasil. Thank you, and see you soon.