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

Good morning, and welcome to the Results Call for the Fourth Quarter and the Year of 2024 at ABC Brasil. My name is Ricardo Moura. I'm Director of Investor Relationships, M&As and Strategy. As usual, we'll start presenting the results from the period from our CEO. After that, there will be a moment for Q&A. [Operator Instructions] Now I'll hand the floor to Sergio, who will be conducting the presentation. Thank you.

Thank you, Ricardo, and good morning, everyone. It is a pleasure to be here with all of you to talk about our results in 2024. Starting with some highlights of the year, when it comes to profitability, our net profit reached BRL 971 million with an ROAE of 15.7% in the year, representing a growth of approximately 14% in comparison to the previous year. Our expanded portfolio reached BRL 53 billion with a 14.6% growth versus the previous year, which is pretty much at the top of our guidance. Another highlight are the revenues coming from services with a 23.5% growth in the year and our Investment Bank alone with a 64% growth in comparison to the previous year. As a final highlight, we have the issue of BRL 500 million of perpetual bonds that were authorized by the Brazilian Central Bank to be part of our Tier 1 capital in the fourth quarter, adding about 100 basis points to our capital -- Tier 1 capital, making it even more. Our expanded credit portfolio, like I mentioned before, experienced a 14.6% growth in the year, close to our cap in the guidance of 15% with a double-digit growth in all segments, CIB with 11.7% of growth; Corporate, which is our main segment, with 16.7% growth; and Middle growing 11.5% growth. If we look at the quarter specifically, the growth was also very impressive, 6.3% growth in the quarter with growth in all 3 segments, especially on Corporate. And based on that growth, we closed the year in terms of distribution of assets per segment with CIB representing 31% of our portfolio, Corporate close to 60% and Middle with 10%. The industry breakdown continues to be very diversified. We have a very protected portfolio. We are present in pretty much all the different corporate industries in Brazil, the 3 main ones being the same, Agribusiness representing 23.1% Energy, 12.5% and Services with 7.7%. Now in this chart that has been presented in previous occasions that somehow reflects all the efforts made by the organization when it comes to the growth of our revenue with customers in the past 5 years. So if you look starting in 2019 up until 2024, revenues from clients grew at an annual CAGR of 15%. And capital-intensive revenues, pretty much loans and securities, grew at 11%. And the low capital-intensive revenues, and by those, we mean those that have a weighted risk factor that's below 25%, they grow with a CAGR of 24% a year, reaching in 2024 45% of the total revenues coming originated from clients, which is in line with the best banks in the market, not only in Brazil, but also international. We have reached this important level and we plan on keeping it over the coming years. And this means not only we are making better use of capital in the bank, but it also represents a stronger presence in the clients' life. We have more products being offered with that, which translates in lower volatility in our results over time because the service products somehow complement the capital-intensive products, especially over different economic cycles. Our managerial financial margin ended the year with BRL 2.376 billion compared to BRL 2.245 billion from the previous year. And here, we can see that when we compare both at the quarter level, but also at the annual level, the different business lines, meaning the financial margins with clients and the financial margins with the market, both areas grew. If we look at these 2 components in isolation, which are the business components, we had about 11% growth year-over-year. And the detractor is our CDI equity, which went down from BRL 560 million to BRL 504 million mostly due to the reduction in the Selic interest rate. In 2024, the Selic interest rate was about 2% below the average interest rate in 2023, which of course, also had an impact on our net interest margin. The NIM was 4.6% in 2023. It went down to 4.3% in 2024, so a 0.3% drop. And there are 3 components in place here. The main one that I have described, which is the drop in the Selic interest rate, which had the biggest impact. The second one, some pressure in the margins, especially in the second half of 2024 we saw tighter spread that was really noticed by the capital market that affected our NIM. And the third component was the small growth in the Middle segment. We started the year with a higher perspective for the growth in the Middle market, which didn't happen, mostly due to the risk landscape presented by the companies in the year since the Middle segment has a higher spread that had an impact on our net interest margin. But we see this with a positive bias when we think of 2025. It's too soon to tell, but it seems like the spreads are reacting starting last December. The Middle segment with a default level that's under control has a better perspective. And again, the interest rate is. Revenues from Services, like I mentioned in the first slide, were the biggest highlight of the year. So we have revenues both in the quarter, BRL 132 million, the best quarter in the history of the bank when it comes to Services with our investment banking representing BRL 63.3 million in fees, which added to almost BRL 200 million in fees. So we are at a new level with a 64% growth a year. Insurance brokerage and tariffs also had a good year with BRL 25 million in the quarter and we closed the year with BRL 117.8 million. And of course, here, the less dynamic component, but at the same time, a capital-intensive component incurred the guarantees that remained pretty much constant when you compare both years. The result from this growth is that we have reached -- we have 2 lines here on top for you, one representing how much the Services revenue represents out of revenues originated by the clients. So in the year, from all revenues originated with clients, 25% came from Services. And in the bottom graph, we see how much of these Services revenues represent of the total revenues in the bank, considering not only revenues originated from clients, but also from the market and also from the equity that's paid by the CDI. These are very good numbers. So in the quarter, we got 26.9% from revenues coming from clients and 18% of the total revenue coming from Services. And in the year, 24.9% and 17.1% respectively. When it comes to the quality of our credit portfolio, we remain with a credit portfolio that's absolutely safe with liquidity and a credit portfolio that makes us comfortable to start the year of 2025 that can be more turbulent, but we'll start with a very well-adjusted portfolio. The provisions were a little bit higher for the quarter, BRL 91 million compared to BRL 72 million, BRL 73 million from previous quarters. And here, we have 2 things. One are some specific cases that actually pushed the provisions in this quarter, but these are normal cases, it's part of the business and it's totally inside expected. And also, we had a growth of the portfolio. It grew 6% in the semester. So if you look at the provisions as a proportion of our expanded portfolio, we are talking about 0.7%, which is absolutely in line with our business. We work with a business model where we expect for these provisions to be between 0.5% to 1%. So 0.5% is right in the middle of this range and it is a number that is in line with our business model. Operations with overdue more than 90 days, a number that has remained constant, 1.2% and 1.1% with a small improvement of 0.1%. But I would like to highlight the improvement on the middle. Now our overdue more than 90 days is 3.1%, an improvement that started in the beginning of last year. We started at 4.7%, 4.3%, 4.1% and we ended the year with 3.1%, reaching a level that is expected for the Middle segment the way we have designed it. The Corporate segment experienced a small increase from 0.7% to 1% because of what I have already mentioned, all cases that have already been provisioned for. When it comes to our LLP balance, 2.3%, very much in line with the bank has already experienced with a coverage rate of close to 200%, also a comfortable level. And I don't think I have many more comments on this slide. Here, we see the evolution of our expenses. We were able to deliver a good work when it comes to cost. We had a growth in expenses of around 7.8%, which is close to the lower level of the guidance that had already been reviewed downwards. Our revenues grew 9.8%. So we have a positive jaws of 2 percentage points, meaning our revenues are growing 2% more than our expenses. And over the year, that of course, gives us an increase in profitability, which reflects in our efficiency level. It used to be 38.6% in the year of 2023 and we ended 2024 with 37.9%. If you look at the quarter specifically, we reached 37.7%. So within the guidance provided to the market, but we still believe there's more work to be done and we expect to see this number evolving over the next quarters. Now talking about funding. Funding, like I've mentioned in the previous presentations, we are at very comfortable levels. When it comes to terms, volumes, diversity of instruments, diversity of participants, we are at the best levels we have ever seen. So we have funding from institutional investors, individuals, corporate, all different types of local and external fundings at very competitive rates, which is an important competitive factor for the bank and something that the bank is doing quite efficiently. Capital, I've mentioned briefly about the perpetual bonds. But here, you can see the whole picture. So we went from a Brazilian index of 16.1% in the third quarter. We went up to 16.5% in the end of the fourth quarter despite of the significant increase in assets. And these are the components; 0.3% coming from generated profits, 1% coming from the Brazilian Central Bank and the issue of our perpetual bonds and part of that was consumed with our increase in assets. It's a very comfortable Brazilian level that makes us confident to keep growing with our expansion project for a long period of time without any capital constraints. And finally, we have our profit. Seeing here the evolution over the year, last year or in 2023, BRL 851 million and this year BRL 971 million with a 14.1% growth year-over-year. And here, we see the different components of the profit in the different business lines. We have seen improvements in pretty much all of them. So our margin with clients increasing BRL 6 million to BRL 7 million; margin with the market BRL 120 million improvement, a reduction of our equity to CDI because of the drop in the interest rate that I mentioned before; provisions BRL 49 million lower; and revenues from Services, the biggest highlight of the year, BRL 90 million above the previous year. This is consistent profit, robust levels, but still below the potential of the bank and below what we expect to deliver in future years. Now a little bit of our guidance for 2024, just for accountability purposes. Some of the guidances were reviewed over the years, some were not. When it comes to our expanded credit portfolio of 14.6%, very close to the cap of the guidance. Growth in the Middle segment, 11.5% was delivered within the target, more at the lower range. But like I said, this segment over the year had a risk scenario that was not really beneficial. We saw some improvements over the year. We started the year with a very proper portfolio. And now we have to understand the impacts of the higher interest rate on this segment of businesses, but we are prepared to grow. Expenses 7.8%, close to the lower level of guidance and our efficiency rate within the guidance close to the top with still some room of improvement for the coming years. And finally, our guidance for 2025. We are being more conservative when it comes to the growth of our expanded credit portfolio in comparison to previous guidance. So we are guiding 7% between 12%, growth in expenses between 6% and 11%, efficiency level the same as the previous guidance, and of course, we're going to be looking to be close to 36%. We are being cautious due to the macroeconomic scenario in Brazil. We are going through a moment of increasing interest rates by the Central Bank. We have this expectation that the economy is not going to grow as much this year, which leads us to be more conservative in the guidances that we provide to the market. However, our bank today is under control. The bank is fully prepared to adapt to the macroeconomic changes at a very high speed. So if you look back in the beginning of 2024 where we imagined the country would grow more with a drop in interest rates, probably decreasing the spreads, which happened, we are prepared to accelerate and we can do that in a very agile manner. Today, the scenario is a little bit different. We are seeing an increase in interest rates with a smaller growth perspective, which makes us more cautious. And of course, these can be re-evaluated at any point in time. But it's important to highlight that our bank is prepared to serve its clients in both -- for both scenarios and is also prepared to provide consistent returns to shareholders in both scenarios as well. This is what I had for you. And now I'll give the floor back to Ricardo so we can start our Q&A session.

Thank you, Sergio. Thank you for presenting the landscape of the results for the fourth quarter of 2024. I also would like to thank everyone who is watching this call. Now we will open the floor for questions from the audience. So joining us, we have Sergio Borejo, the CFO of ABC Brasil. Welcome, Borejo.

Good morning, Ricardo. Good morning, Sergio. It's a pleasure to be here. Thank you so much for the opportunity again.

[Operator Instructions] Our first question is already in. It comes from Olavo Arthuzo from the UBS Bank.

My first question is about this year's guidance. I understand that my calculation is not perfect, but if we look at the average point for the expanded portfolio and we use the same ratio of the total revenue over that portfolio and also get the average of the efficiency rate and consider a flat cost of risk year-over-year and use the tax rate of 32%, which is quite close of the track record, I got to a net profit of this year of BRL 1.125 billion approximately, which would represent a 15%, 16% growth for this year. So my first question is this, does it make sense to get to this number just so we understand about the potential in the guidance? And my second question is about the sensitivity to changes in the Selic interest rate. When we started covering this bank in the beginning of last quarter, the interest rate was at 2, 3 percentage points below the one that's forecasted now, which is close to 15% for the end of the year. So just so we understand the size and the magnitude of this impact, can you give us some guidance in terms of how sensitive the margins or your NII will be for every 100 bps increase in the interest rate?

Olavo, thank you for your questions actually. As you know, we don't provide a guidance in profitability because we try to provide a guidance on the factors that are under the control of the organization, which include growth rate of the assets, expenses, and as a consequence, our efficiency rate. The return depends on factors such as spreads or LLPs that have the historic averages. So as we forecast as we provide the guidance, we prefer not to disclose those numbers. But regarding our calculation, it makes sense to use the average of the guidance. As I tried to highlight, when it comes to growth in assets, we have a guidance that's a little bit more conservative than previous guidances that were provided to the market even though we have funding and the team and the ability to grow at a much stronger pace. But at least for now, in the beginning of the year, the scenario requires us to be more cautious and conservative. And there was also an FX effect in the end of the year that grew the assets a little bit. The FX is recovering now in the beginning of the year. So the opposite effect is taking place. But we are prepared to deliver the guidance. We are very comfortable in saying that. And as a consequence, there is an expansion in net profit. I am not going to say if your number is correct or not, but that's that. And the second question?

Yes, the second question was about the sensitivity when it comes to changes in the interest rate. I can take that one, if I may. Well, just to give you some idea of the magnitude, for every 100 bps of change in the basic interest rate, we should expect a change of around 10 basis points on our NIM and about 35 basis points in our ROAE. Just as an idea of the magnitude, that's how sensible we are in terms of profitability versus changes in the interest rate. Did I answer your question?

Now our next question comes from Brian Flores from Citibank.

Congratulations on your results. I would like to ask about provisions. On one hand, we saw an improvement in the composition of the portfolio, also on the quality of the portfolio. But on the other hand, we see an increase in provisions. So I would like to get a better understanding how can we think about the cost of credit 2025 onwards? Because at the level that we see now, Ricardo, you also mentioned that in the quarter, you had some specific cases that took place. But should we also understand that this level of cost of credit is going to be recurring from now on, a little bit of a higher end just to understand the dynamics?

Brian, thank you for your question. This question, obviously, has a strong component associated to expectations because we always have policy of provisioning in a very timely manner. So we noticed in any type of stress or any type of deterioration on the financial conditions of our clients, we are proactive in generating these provisions. And pretty much all the times, these movements, we increased the provision before. There are no overdues. And in the future, they might appear due to credits that we had already provisioned for. Now the portfolio is at a very healthy level. So we always have specific cases. We have 5,000 clients. So different from the past when we had just a couple of hundred, now we're talking about thousands. So it is expected for some losses to take place. Now if we think about the year, even though we are at a very healthy level in our portfolio, but looking at our past experience when we have an interest rate of 15%, that has an impact on the number of companies. We are seeing Brazilian companies over the past few years going through an improvement in their debt profile that was very evident, especially because of the biggest exposure to the capital market. So entering infrastructure debentures and other instruments. So we noticed that today, companies have that term that's more delayed in time, which makes them more comfortable. On the other hand, they are exposed to the CDI in terms of cost. So when CDI goes up to 15% and the results, they -- these companies end up suffering a little bit, which requires us to be more conservative. But like I said during the presentation of the results, we historically have worked between 0.5% and 1%. In the last quarter, we were at 0.7%. Considering what we have today, these levels of 0.6%, 0.7%, 0.8% seem to be an adequate level for a year like this with this increase of interest rates and subsequent reduction of economic activity can impact even though we are not seeing that in our portfolio.

Now our next question from Pedro Leduc from Itaú.

Congratulations for the results. My question is similar to the previous ones and the fact that you mentioned tighter spreads, the credit spreads got tighter over 2024. They opened a little bit in the end of the year that might had some repercussion similar progression on the DCM. So how do you see that impacting the different lines you offer, both in terms of NIM as well as capital markets and fees? Did the year start according to expected? I imagine it's very hard to do a guidance because things are changing so fast. I just wanted to get this idea on your view on that.

Pedro, thank you for your question. As you said it yourself, the spreads, there are 2 sides to this conversation because one of the main factors in the reduction of spreads that took place last year, it was the fact that the fixed income capital market was very active, fixed income bonds in general, but credit and infrastructure ones, especially with a lot of funding. As you know, these funds, they have a certain period for this funding. And in some cases, in our understanding, that led some issuers to issue them at rates that are not paying off the risk. So there are always exaggerations. We had a few cases of those. But in general, this was a very beneficial movement, which provides access to funding for companies at a much better level than we had in the past when they are pretty much dependent on banks for their funding. Now looking at our balance sheet, of course, that puts some pressure in our NIM as the spreads go down. But on the other hand, it also powers our capital market revenues and our fixed income revenues. We're very well positioned in that market. We have the expertise. We are recognized by clients and investors in that sense. And we took advantage of this moment. So one thing sort of offset the other. But more than that, what the 3 of us always say is that today, we have a business model that because it's so diversified in terms of products and industries where we work, we can perform well in different scenarios, either offering more banking products or more investment banking products or services and so on and so forth. Now starting December, the impression that we had -- not an impression, the spreads in the secondary market went up. The fixed income funds in December had an outflow of resources. I think these 2 things are connected. And in January, we started to see some recovery. So the funds are already with a positive funding, even though they still haven't recovered the volume that they lost in December. And the secondary spreads are the exchange rate, the dollar dropped a little bit. So the market has recovered. But if we were to try to guess the future, which is very hard to do, I imagine that with this increase in the interest rate and the retraction of economic activity to be expected, I think we can expect higher spreads. Perhaps the fixed income funds will continue to get an inflow because of the high interest rate, but I think they will be more careful when it comes to allocation because the scenario will lead companies to have a higher risk. So I think it's a strong year for the capital market, part of the origination of banking assets, smaller expansion than what we saw in 2024, but with a little bit higher rates. So that's the exercise we are doing here. Did we answer your question, Pedro?

Our next question comes from Antonio Ruette from Bank of America.

I have a follow-up on previous questions about provisions. It's very clear that you noticed or perhaps didn't notice, but you were more careful to decided to anticipate the provisions in one case or another. I'd like to get more color on that perhaps. Is this concentrated on a specific industry, those cases that you mentioned? You expect for the economy not to grow as much this year. So perhaps that's also connected. But again, is this a concentrated effort? If you could give us more color on that, it would be great. And I think that you had already mentioned that the impact would be small, you actually reported 0.1% of equity. But perhaps you can give us more color as well different for the moving parts. Was there a reclassification of bonds? Is that expected to happen? Do you have any additional provisions? What are the moving parts that led to that 0.1% in equity?

Thank you for your question. Provisions for the fourth quarter, they don't have a specific concentration in an industry. I think that from that BRL 90 million, if I'm not remember correctly, half of that is concentrated in 5 or 6 names and the remaining is the consequence of the growth in the portfolio. When you grow your portfolio, and again, the portfolio grew 6%, BRL 3 billion. If you imagine an average provision of 1%, 1.5% of the growth, that gives us already BRL 30 million, BRL 40 million of additional provision for the quarter. So there is no concentration on a specific industry. It's pretty much part of the business, part of the deal. It's our daily lives, it's what we always do. So every quarter, we will, of course, assess the scenario. We will assess every name. And again, it was not a generic decision, i1t was concentrated on specific names and there was no concentration on a specific industry. Regarding your second question, I'll hand the floor to Borejo. But since we are an institution that has an external controllers that already used IFRS 9 since 2018. So over the years, we have already been reporting -- not only reporting to the controlling based on IFRS 9, but we have also been migrating our practices considering that 496 is going to come, and that's why the impacts were not so relevant. But I think Borejo can give us more details on that.

Thank you for your question, Antonio. That's exactly what Sergio said. Over the years, almost 5 years, we have been trying to bring the concepts from what the resolution allowed, getting closer to [indiscernible]. So we try to anticipate some of these movements considering future losses, the economic scenario and other factors. So obviously, we still have a lot of operational work to be done. It's still in progress. We will be reporting the opening balance sheet for 2025 to the Central Bank only in the end of March because we still have a lot of work to be done, but we don't expect any type of meaningful impact. Everything that has already been provisioned both in terms of equity and in terms of results, we expect that we are going to be very close to those same amounts. And that's why we had a very small impact in our equity.

Okay. So just so I better understand this, so the adjustment in provision and the adjustments in possible securities were low, which led to this slow impact. One thing sort of offset the other. That's perfect. Very clear. And perhaps a follow-up on the first question. You mentioned the 5 or 6 cases that were responsible for most of the new provisions. These cases specifically, were they idiosyncratic or they're specific to each name or was that more of a common thing?

They were idiosyncratic. I do not see an impact from the macroeconomic scenario for those specific names. These are names that if you think in 2024, the economy performed really well. The GDP grew a lot, access to credit. But like usual, there are some companies that even with a good landscape cannot perform well. They got a little bit tighter. They are still not in default with the bank, but they were downgraded in their ratings, because in our understanding, they have a financial situation that requires more provisions. So that's what we did. But for now, nothing connected with the worsening of the macroeconomic scenario.

Now we are closing our Q&A session. Thank you so much for attending. And with that, we come to the end of our results call for the fourth quarter of 2024 and the year of 2024. And I would like to hand the floor to Sergio and Borejo for their final remarks.

Well, I just wanted to thank you all for joining us. Thank you for the opportunity. And we'll talk soon in meetings, conventions and other opportunities. It was a pleasure. Thank you.

I also would like to thank you all for attending our call. Thank you for the questions that were asked. They are always very helpful to bring more clarity to the audience. And I think we were able to cover the moment of the bank and our future perspectives for 2025. We are always ready for facing different scenarios. Like I often say, our bank today is fully prepared to grow. We have been growing. And the chart showing our revenue originated from clients over the past 5 years, we have had consistent growth in better scenarios, worse scenarios. 2025 will be no different. So thank you again for your trust, and we are available if you have any other questions. Thank you so much.

Thank you, Sergio. Thank you, Borejo, for the presentation. Thank you all for staying with us. The presentation is already available on our IR website and the video will be posted in our YouTube channel. If you wish to listen to this presentation, it will also be available on our Spotify. If you have any questions, our team is available to answer them. And we'll see you in the next results call. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]