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

Good morning, everyone. Welcome to the Conference of Financial Results for the Second Quarter of 2025 of Banco ABC Brasil. I'm Ricardo de Moura, Director of Relations with Investors, Market Analysis and M&A. I'd like to start with Sergio Lulia. Later, we are going to have our Q&A session. If you want to follow this broadcast in English, please click on the interpretation button at the bottom of your screen. All the content, including the presentation, are available in our Investor Relationship website. To follow the presentation, please download the content through the QR code on screen. Now I hand the floor to our CEO, Sergio Lulia.

Thank you, Moura. Good morning, everyone. It's a great pleasure to be here with you to release the results of the second quarter of 2025. As always, we are going to start with our highlights. First, profitability. The net income was BRL 244 million, an ROAE of 15%, a recovery in relation to 14.1% from the previous quarter. The portfolio reached BRL 52 billion, a growth of 7.9% when compared to the second quarter of 2024. In relation our portfolio quality, it was pretty good in all indicators including the coverage ratio that reached 307% in relation to provision balance divided by past due, over 90% and 93% when we consider the total provision divided by Stage 3. The expenses were also a highlight, a growth of 1.2% nominal from the second quarter of 2025 compared to the second quarter of 2024 bringing an efficiency level of 38.4%. Here a little bit of details in relation to the portfolio growth. It grew 1.8%. The highlight was CIB that had a growth of 5.3%. The Corporate segment was a little bit stable and Middle 3.7% in growth. In the yearly comparison, the growth was 7.9% that considering the exchange ratio. If we remove that, this growth would have been 8.3%. In the yearly growth, the CIB is flat less 1.5% nominal; Corporate, a growth of 13.5%; and Middle, 7.8%. In relation to the sectorial exposition, it's a graph we have been showing to all of you. There's not a lot of movement here. This quarter there was an increase in the energy sector of 1 percentage point and services also around 1 percentage point. The rest somehow are constant. It's a portfolio that is pretty diverse with better exposure to segments that is less cyclical, more defensive. The bank is present in almost important all sector of Brazil. The revenue with clients had a recovery. In relation to the first quarter of 2025, you can see that total revenue with clients had BRL 486 million and once again with a participation of low capital consumption revenue of 46%. It's a level that is pretty healthy and that shows not only a better presence with clients as well as a better diversity of products that make client revenue less volatile. The managerial financial margin, the net income margin was BRL 567 million, now at BRL 604 million and highlights was the margin of clients from BRL 341 million to BRL 373 million. Here in the margin with clients, the 2 major effects are: the first is spreads that are higher. They grew around 30 basis points and that was something that we brought to you in the previous quarters that after a low spread period not only practiced by the market and also by ABC Brasil, the spreads in 2025 of originated revenues started to recover and it takes a while to be reflected in the banking portfolio. This effect is here now and we expect that this will continue in the second quarter and here a mix of products. Products that have better margin and had a better performance in the second quarter considering that the first quarter is always seasonally weaker. Now with market revenue, we had a reduction below the history average of market revenue. This is a little bit because of 2 things. First, a lower appetite for the risk due to the volatility we have, mainly the interest market and the cash market, and that bring us here in relation to all that. And the second reason is the lower liquidity; liquidity has a cost, we believe it's reasonable. But anyways there is a perspective, a perspective of an improvement of revenues throughout the second half of the year. And finally, the equity revenue had a good performance, CDI had a good moment and the revenue will be constant throughout the second half of the year. The revenue performance was reflected by a net income margin that reached 4.1% recovering from the reduction in the first quarter and we expect that the NIM will be above 4% at least for the following half of the year. Now service fees, they represented 23% of the entire revenue from clients with the dynamics that was pretty good from guarantees issued, BRL 45.7 million. And as we always mentioned, the part here it's the more stable. It's a portfolio that has a certain duration, customers that have worked with these products for a while and in the last quarters, it is improving quarter after quarter. The investment banking with a performance similar to the previous quarter, BRL 32.9 million versus BRL 34.1 million, but below the same period of the year when it was 48.9% (sic) [ BRL 48.9 million ]. This is a behavior that we have seen in the entire market. We have a concentration of fixed income revenue. Fixed income is pretty dynamic in relation to volume of operation in relation of diversification of the receivers; the diversification of products, FIDCs, [indiscernible], debentures and also commercial; and the commissions charged for such business are below than they were a year before and that corresponds to a lower number. And in the classification, we have a small increase in relation to the previous year. And insurance and fee revenues, they had a good quarter. It recovered in relation to the first quarter reaching BRL 33 million. When we compare every half of the year, it's pretty similar. We have an improvement in revenue coming from guarantees issued, we have a reduction in investment banking due to the reasons I already explained and a certain stability for insurance and fee revenues. Well, the quality of the credit portfolio, it is a highlight from the bank. The provisions made in the quarter were BRL 79 million, an increase in relation to BRL 63.5 million from the previous quarter, but a level below our historical average. This quarter 0.6% in relation to the portfolio compared to 0.5% in the previous quarter. It's important to highlight that the gross provision level was pretty similar to this quarter because in the previous half of the year, there was more credit recovered than here reducing the final number of net provisions from recoveries. The credit loss allowance are constant. They were around 2.1% of the portfolio. They go to 2.2%. In relation to segments, a provision in the Middle from 6.4% to 6.7%; in the Corporate from 1.6% to 1.7%; and in the CIB constant is 0.8%. The operations past due 90 days had a behavior that was pretty good. If we consider the last first quarter had BRL 485 million that were past due 90 days. That volume was reduced to BRL 382 million and it made the total percentage over the portfolio to reduce, 0.9% to 0.7% of the portfolio. Here you have by segments: 3.8% in the Middle, 0.6% in the Corporate segment and CIB, they are flat 0. Now next slide, the past due we just mentioned. It’s important to highlight the balance of operations in Stage 3, it's constant around 2.4%. It's another sign of quality of our portfolio when we compare with the competition. The coverage ratio was reduced and the reduction due to past due 90 days. Another indicator that is the provisions divided by 3 operations is pretty good and increased from 90% to 93%. The expenses, as I've mentioned in the highlights, it's a strong work that we have been doing to control expenses. There is a nominal reduction of 2.4% when compared to the first quarter of 2025 and the yearly comparison is 1.2%. And if we get the entire first half compared to the first half of 2024, there will be a growth of 5%. And now on revenue due to the points like spreads and things hired in the past revenues coming from lower markets, there is a recovery in the quarter. So when we see the first quarter compared to the second, the growth was 6.8%. Those 2 factors, they had an improvement in our efficiency ratio that after going up in the first quarter to 42.1% goes back to 38.4%. And the funding: the funding is pretty comfortable, the funding is diverse, the funding has very good deadlines always above the active funding. They have competitive fees in a way that is since we did our IPO in 2007, we repeat that. It's one of the strong points of our institution. In relation to capital, the Basel ratio closed in 17.3% out of those 17.2% that were the previous Basel ratio and 50% of dividends were paid. So it is 10% [ deal ] per year. The capital Tier 1 goes from 14.7% to 14.8% and the core equity Tier 1 goes from 11.7% to 11.8%. We haven't included the partial recovery of lifetime bonds that will reduce to 2.5%. It is a comfortable capital, it is a quality capital and it is a capital that allow us to speed up our growth as we believe that the scenario is able to do that. Here we have the net income from the first to the second quarter. So in the first quarter, BRL 225.6 million and an ROAE of 14.1% and a net income for BRL 244.1 million and ROAE of 15% and we have a contribution with margin of clients, margin with the market and a higher contribution of PL to CDI. And here we have 1 compensating the other and there is a growth of 8.2% of profit from one point to the other. We finish our presentation remembering our guidance. All of them capped and in the expanded portfolio we have in the last 12 months, a growth of 7.8%. Within the guidance in the second half of the year as it is a more dynamic year in relation to the portfolio growth, we expect this year to be like that despite the fact that we are a little bit more careful due to the macroeconomic risks we have. But see today, our expectation is that this growth is closer to the floor of this range. In the expenses, due to the performance we had in the cost control, we have a guidance of 6% to 8% and the expectation is to be closer to the floor with a good performance. And the efficiency ratio will depend on the behavior of the revenues, there is a positive side and we expect it to be like that and probably we are going to be on the upper part of the range. That's what I had to share with you in our presentation. So now I hand the floor to Moura so we can continue our presentation. Thank you very much.

Thank you, Sergio, for bringing an overview of the results for this quarter of 2025. And I also thank those who are following the broadcast. Now we are counting on you for our Q&A session.

And now to be with us during our Q&A, we have the presence of Sergio Borejo, our CFO. To everyone who is watching us, please ask questions. In order to participate, just raise your hand, it’s in the bottom part of your Zoom. And now we are going to start our Q&A session. The first question we have is from Ricardo Buchpiguel from BTG Pactual.

I have 2 questions here with me. Looking at the indicator, there was an increase in the average spread in relation to CDI in the beginning of the year, but it went to the levels that were a little bit tighter for the second half of the year. Thinking about that, does it make sense to expect this result will contaminate the NIM of the bank at the end of the year or next year as we saw that it happened. Well, these effects happened last year in the first half. And my second question is the ABC Banco, they follow the interest and everything. But in the last years there were some investments in order to make this ROAE more elevated in scenarios with low interest. If we are going to a scenario in which the interest rate will go down next year, does it make sense to expect that the bank will keep the profitability levels and which would be the triggers; maybe a growth in the Middle portfolio, another investment banking options or an opening of spread in the Corporate and CIB? What would be more relevant to think about this inflection point that we are going to see with the interest ratio going down?

Thank you for the amazing questions. The first one in relation to the spreads and the impact of that in the NIM in the second half of the year. Well, there is a permanent fight in our everyday business between volume and spread. So if you get our volume as we said. In our last 12 months, the total volume of our portfolio, it went up 8% in this specific year. If we compare to December, almost no growth so due to the fact we have been pretty persistent in relation to spreads. If we were a little bit more loose in this requirement, probably the portfolio would have grown way more. And this fight will continue in the second half of the year. We see the situation of companies that are a little bit better, at least most of them, that is reflected in ratings. The spread is also related to the return risk. So if there is an improve of rating, the spread is a little bit smaller because the allocation of capital is lower. So that's what we have been doing. So far the position is capped with the same number of spreads we saw in the first half. Let's follow the market and see how it is. At least today, we don't have an expectation for drops, but volume is a concern. How much can you grow in volume keeping the spreads in a higher level. About the other question that is more structural of ROI, the question itself, you showed a good understanding of the organization. We have today an organization that has revenue sources that are diverse and also products that perform better in a scenario of higher interest ratio and some other with lower interest rates. So if you get project financing that it is an area that has high income tax rates due to projects that are not implemented when that happens. The variable part of investment banking also suffers from this problem of being retracted when we have high interest rate and M&As that are mainly M&As of middle-sized companies, they also have valuations with problems and we have a higher number with higher interest rates. But cash management benefits from this point. In relation to segments, we are prepared and we have been prepared for a while. We are improving the credit rulers. We didn't speed up so far because we believe it is a segment that when we have a higher interest rate, it will suffer more. So we are more conservative. When the interest rate goes down, you can expect an expansion of the middle market with accelerated ratio. So our ROE is resilient and there is some [ dissatisfaction ] of our management office with the numbers we have today. We are positive that we'll be able to print higher ROEs than this one.

Next question, Olavo Arthuzo from UBS.

I have 2 questions and I would like to explore this margin with clients and then with market. In the first topic, I understand the entire repricing of the portfolio, higher spreads and I compare with the window we had in the second half of the previous year. And what I saw from the Central Bank data and what you reported in the second quarter, July is pretty strong. It represented a little bit more than 40% of the total result of the bank. So in this first part to understand the margin with the client, I would like to understand which are your expectations for the second half of the year. And on the other hand, we have to consider what we saw in the data from our call showing a certain flatness throughout the last months. So what I wanted to understand is basically the following. We have half of the portfolio that will receive a new pricing, this new level from the beginning of the year to today. And considering that, my point is would it be possible to expect that the margin with clients to grow above what you are forecasting for the expanded portfolio that I imagine it's going to be around 7%, 8%? So could we say that we expect a margin with clients expanding 9%, 10%? Would that make sense? And then I will ask my second question.

Olavo, thank you for your question. I will try to answer in a qualitative manner. So Ricardo will answer the quantitative part. Well, in fact as I've mentioned in Ricardo's question, we emphasize a lot the spreads. Always take into account the expectation of losses. It's a risk return method that we have always done. There are moments in which we see even with higher spreads, if the risk increased even more, this is not worth it. So today, we have a situation in which we have a risk return that is proper for the portfolio we are booking, but we cannot expand a lot the portfolio in a speed that is higher keeping the risk return in the adequate level. That's what I see for the second half of the year; a higher challenge, a bigger challenge. And that's why I indicated during the presentation that we possibly see the floor of the guidance as something more visible, but we keep higher spreads and such higher spreads, as you've mentioned, it has a cumulative effect because as older operations are due and new operations are hired, you have an impact in the accumulation from the margin with clients. Anything to add, Ricardo?

Well, you explained it pretty well. The only point I would add is that if we notice the data you get from banks in general. Central Bank reported to all the banks from the end of last year up to the first half of 2025, there was a detachment from this data and what we saw in the capital market spread. So this don't work. This doesn't happen always, but the market had more discipline in relation to how they classify operations. And in relation to the Central Bank, there was a small increase of spread while the capital market didn't have this increase. So paying attention to the second half of the year, we should have this trend and the banking market would have care when classifying operations as a result for an environment that requires more care.

Another question. But just to make it clear, could I understand that we will see margin with clients is still growing above the expanded portfolio? Just a follow-up question.

Well, that's our expectation considering the information we have today. So there is a trend of moving up slowly and gradually as we can classify our portfolio. And the mix of products of course, there are products that they have higher margins than others and you have to take that into account. So the answer is yes.

Quickly the second question in relation to the market. I've heard about the appetite to risk in the liquidity. I understand that here you also go through in the same energy. So could you elaborate what made this contraction we saw in the quarter? It was pretty strong. And if you could input in your answer how was the contribution of the energy market in this?

Well, we'll start with the end of your question. The contribution, well, we have energy marketing business that started 3 years ago and it's performing pretty well. It allows you to offer solutions from the efficiency point of view, energy efficiency and energy consumption for major clients. In the past we couldn't do that. But a great part of that is in the margin with clients. Why? Because those are not trading operations. Those are operations in which you buy or sell energy from clients and to clients and you take the risk of the client. That's why it is in the margins with clients and not margins with the market. We have a trade with energy that is necessary for you to have liquidity to offer good stuff to clients, but it's very small and it's something that won't move the needle in gains with market. So what we had in fact was that the market had a stress in November and December last year related to the tax situation of the country and throughout the first half of 2025, there was an improvement in the sentiment. But in a way or another, we haven't seen that as an improvement that was supported by macroeconomic data. They are still pretty similar and that made us have a higher activity even with markets and liquidity. Our liquidity was high, but the rates were compressed. We have funding in which we have with our clients even when we don't need cash and that made our cash increase. In some moments, we had a liquidity of BRL 14 million, BRL 15 million and we have as our equity, BRL 6 billion. So it's a huge liquidity. We are adjusting that to the bottom. And at the same time looking ahead, I believe the markets are stable. We can start once again to build a position. It's not state's position, it's a banking position with a longer duration, and we can recover a little bit. But that was a reduction due to a disagreement with the market dynamic and vis-a-vis what we see as a risk.

Our next question from Brian Flores from Citi.

I would like to ask about capital allocation. I know that you have mentioned about the Tier 1 appetite 11% in the previous quarter. Now a little bit more solid. And I know you need some movement with the live time bonds that you've mentioned in July. But anyways, I want to ask with the growth dynamics that you just mentioned maybe in the lower bottom of the range, what should we expect in relation to capital distribution? Because there's still like a buffer to share among shareholders. And then I ask my second question.

Brian, thank you for your question. Our policy for dividend distribution will continue as a full distribution of what JCP allow us to. This year the CJLP went up and as it increased, our own capital also increased bringing this dividend due of almost 10% that I've mentioned during my presentation. For the second half of 2025, we can expect the same policy. Keeping in mind that in previous years, we always kept this policy and in moments in which the bank sees a perspective of portfolio growth in a faster manner, we proposed to the Board and the Board has agreed a recapitalization of the dividend and each shareholder will decide if they will reinvest or not. At this moment we paid the dividend, but we didn't go for the second part because we saw that this is adequate to allow the growth we have in the future. If ahead in next year this perspective changes, we can go to the previous mechanism we used in the past.

Great. And I would like to ask also you did a provision of BRL 190 million. I understand that there is a description, but maybe not according to the model. I would like to understand what happened. What happened that it made you to 0 that additional provision and should we think about any macroeconomic aspect if this is going to happen in the next half? Just to understand the recurrency of this item.

Well, we always work. We always have that vision for credit provision considering the current situation of clients and the credit that is prospective. With 4966 directive, the methodology of calculation due to factors that are macroeconomic made us have a provision that we call prospective provision that it is not cyclic that will protect the bank when there is longer past dues. And as you saw, the portfolio has a good quality. We were afraid in the beginning of the year that if the interest rate at 16%, the economy as a whole would have a larger depression. And at least now in our portfolio, this didn't happen. But I know that when and if that happens, then this provision of this prospective option would be used. Well, we always had that and we used in relation to that retail when we had a loss that was unexpected and it was outside the bank accuracy. Considering the macroeconomic scenario, the growth ratio of the portfolio and the portfolio quality; we believe that these numbers are adequate and we are not going to have some movements in relation to that at least not in the close future.

Just to understand, could we have any reversion if it is maintained as it is? Could we have a return to the previous numbers?

Well, at a certain moment, yes, but it will depend on the vision and the methodology that was implemented about prospective risks that involve mainly macroeconomic data as mentioned. So far now what you can expect for a close future is stability. No new allowances, but if the scenario changes, things may change also.