Banco BMG S.A. (BMGB4) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Second Quarter of 2023 Earnings Conference Call of Banco BMG. I am Danilo Herculano and responsible for Investor Relations, M&A and New Business area. With us today, we have Felix Cardamone, CEO; and Flavio Neto, VP. Please note that this video conference is being recorded and will be made available on our IR website. After the presentation, we will have a Q&A session. [Operator Instructions] The disclosure material are already available for download on our website in the Results Center section. Before we proceed I would like to clarify that forward looking statements made during this conference call regarding the Bank's business outlook should be treated as forecast. Investors and analysts should understand the general conditions, industry conditions and other operating factors that can affect the Bank's future results and may lead to outcomes that differ from those expressed in such looking forward statements. Now I will give the floor to Felix to begin his presentation.

Good morning to everyone. This is my second earnings results, and we have had very intense months in the bank. Here, you can see our first slide, I would like to highlight number one that this first semester inflation and the high interest rates affected the purchase power of the population that is our target population. And this strongly impacted our NPL. You will see that as of the second semester, with a more stabilized economy with reforms and interest rates curtailed, I believe that we will have a better period in our business. Now when we talk about the highlights, our customer base increased 80% year-on-year and 1% quarter-on-quarter. Our credit portfolio 19% and minus 1% during the quarter. And it's important here to highlight that currently, we are prioritizing the quality of origination and the profitability of this portfolio. We do understand that it is not positive to grow portfolio to consume just for the sake of volume, so we have prioritized the quality of the origination. We are reviewing many of the origination filters and criteria. And therefore, during this quarter, we dropped in volume of portfolio. Nonetheless, this was a conscious decision from the bank in order to see a change in the profile of our portfolio. Now credit income increased 24% year-on-year that it's a result of the strong growth during this period and 4% during the last quarter. And now we are presenting a negative net income. Nonetheless, this is not a factor that concerns us in the mid and the long run. In reality, we do understand that this is a process to strengthen our balance. We want to reposition ourselves strategically. And as of now, we will see positive results. Our focus, I would like to strengthen, is profitability, efficiency, and we want to bring back a sustainable, positive result. The market where we work in is a market where we can achieve good results and provide good returns to our shareholders. So why did we have a negative result? We lowered the rate of payroll products. And with funding, it was higher. There was a slowdown in margin. And obviously, there were -- there was a high level of NPL. These are the 2 highlights. And what are we doing within the bank in order to adjust our organization for the upcoming months and years? Number one, we are focusing on cost reduction. We do understand that we have to recover our margin. We are strongly working on costs, highly focused on a good execution so that we improve processes, products, services and as a consequence, our customer satisfaction. We are reprioritizing a number of businesses. Flavio will focus on this, but we're analyzing our portfolio. And we want to see what results these each portfolio can bring. And while we will prioritize focus on increasing the bank's profitability. We are also strengthening our distribution channels. Our help stores and own stores. We have 210 stores amongst franchisees, and we want this to be a sound channel of business origination as well as our bank correspondent partners. And together with all of this, more and more, we want to improve and simplify our customer experience. We believe that this has to be a good experience, totally transparent, and if it's digital, better. And I would also like to highlight that within the bank repositioning process, we have 3 new executives, Luiz Henrique Guimarães, Technology Director. During the first quarter of this year, João Consiglio as VP, accountable for products and the commercial area; and Ricardo Takeyama, that is responsible for credit and retail collection within our company. We've segregated these 2 areas. So we can focus on a sound origination on a credit process, fraud prevention and a highly efficient collection where we do understand that there are great opportunities of improvement within the bank. Before handing it over to Flavio, I would like to highlight that we do understand that the bank is totally able to give good numbers. We have critic mass, and we are doing our homework, and this is something that Flavio will describe. Flavio, you have the floor.

Thank you, Felix. Good morning to everyone. We are going to start on Page 4, and we are going to talk about our business and our product. But first, we're going to talk about clients. We continue with 6 channels for our client, WhatApp, digital bank, our help franchises, our bank correspondents and are also our banking agencies and call centers, as Felix mentioned, we have over 13 million clients and 57% of them with credit product. It's not only a customer that opens an accountant doesn't use the products. So we do have profitable customers and more and more. We've tried to optimize the value of the bank's customer. We've reviewed the customer journey to guarantee greater monetization and greater efficiency when we deal with these customers. We have also reviewed a number of credit policies and structure pursuing greater quality within our portfolio. Now on Page 5, you can see the evolution of our portfolio. It grew significantly throughout the past year and during this quarter, slightly dropped, and we will talk about this. But basically, the portfolios that grow more is the Benefit Card that was launched during the third quarter of 2023. And also here, we have personal loan. But what is increasing is the anticipation of the FGTS. I also wanted to highlight the drop of payroll loan. There was -- there were a number -- we had some problems that impacted our growth together with a weaker origination. Now on Page 6, we will talk about Payroll Credit Card. And here, we observe something that we will see in the other payroll products that is loan. Here, the origination was lower than the past quarter, and this is mainly connected to an April action where the government placed interest rates, limited interest rates and this impacted origination throughout that month. And during the subsequent months, we saw a recovery of origination because the limit was loosened, and we could originate in better rates. So the portfolio after good trimesters, it slightly dropped to BRL 8.9 billion, and this also affects us with a slight deterioration in state and municipal agreements and the drop of the portfolio went to 2% to 2.7%. Now on Slide 7 here, you can see our Payroll Loan, as I mentioned, it was a very small origination of BRL 82 million highly affected by April. During the subsequent months, we see a recovery of this origination. Now the per portfolio dropped BRL 660 million credit assignment with our retention of risk and benefits and these increases affects the over 90 because you take out of the portfolio, the soundest part. This is a matter of nominator and denominator. Now on Page 8. Here, we're talking about Benefit Payroll Card. There's a slightly lower origination. This had a lower drop than the other cards. This portfolio is growing, achieving over BRL 2.2 billion. We have issued almost 1 million cards with an over 90 or P&L indicator that appears. And we expect this indicator to converge to a level close that we see with the payroll card. Here, we have the operation as Personal Loan. And within personal loan, we have payroll card. And we have the anticipation of the FGTS with contained NPL and when the mix of the portfolio increases this increases our credit from the BRL 3 billion over BRL 2 billion account for the FGTS anticipation. We also have the traditional card as Felix mentioned that there was a change in strategy. There were -- we had origination through the digital bank as well as partnerships with retailers. We decided to strongly reduce the origination because of the challenge of the macroeconomic scenario. Because we wanted to maintain a good quality of credit. If we see in terms of cards issued during this quarter, it was 43,000. And this is because of this -- the discontinuation of partnerships with retailers and also a more strict policy in digital bank. Nonetheless, we have a relevant base of active cards. So right now, it's BRL 773 million that we saw during the second quarter. Now on Page 10, you can see the main product that is not credit that would be our insurance products. During the second quarter, we had in terms of equity equivalents, BRL 15 million. And we have #1 the insurance brokerage that in premium had BRL 185 million BMG Seguradora that deals with retail insurance, a coinsurance together with Generali. So finally, we started, we've issued premiums within the coinsurance agreement during the second quarter. This totaled BRL 57 million in BMG Seguros. This deals with the wholesale operations and the premiums were almost BRL 50 million during the second quarter. Now Page 11, you can see our wholesale operation or a structured operation portfolio that have accounts receivable guarantees. They are stable around BRL 1.7 billion in terms of the size of the portfolio and the quality of this credit. Now the company credit portfolio, this involves working capital guarantees. Many times real guarantees is highly stable and close to BRL 670 million. And also with interesting credit quality our capital market, the marketable securities, and we focus on the synergies together with Araujo Fontes our investee. This totaled BRL 508 million. These are operations that can present liquidity. We could buy or sell these bonds and we have the noncredit revenue that are based on tariffs of some operations where we receive fees and also our customers where we work with major hedgings and derivative operation and there was a gain of BRL 7 million. And with this, I give the floor to Danilo so he can continue.

Slide -- on Slide 13, we can see the financial margin. Mainly the mix of bank products allowed our revenue to increase in the beginning of the quarter with a light increase in the funding expenses. When we see the NIM adjusted to the cost of credit, it's important to highlight that the provision expenses and commission were higher. Therefore, the margin slightly dropped. The percentage and the nominal margin with the niche -- with the beginning of the drop of the Selic, we can accept compression of these margins. Now when we talk about efficiency, I would like to highlight that in the beginning of the presentation, regarding the important levels for profit. We have redimensioned resized our teams. Reprioritization projects aiming at profitability and effectiveness in the process of civil losses and civil lawsuits. You can see here in the lower part, we had a stable expenses and this generated efficiency. Great part of these actions throughout Q2 will have effects in the upcoming quarter, like the team resizing that in the first moment bring us additional expenses. Now on Slide 15, our investees. As a matter of the ecosystem enhances the value generation. On the left, we have our main investees like Araujo Fontes mentioned by Flavio, like an important wholesale channel and product and channel and help and CB that Felix mentioned as our franchisees and own store channel. And this represented almost BRL 12 million. The ecosystem of startups, Raro, iCertus, O2OBOTS and QGX ended at BRL 0.4 million. Now equity equivalents was BRL 27.4 million. Now on Slide 16, here, you can see funding and liquidity. The bank maintains a conservative cash level. Now total -- with the total cash evolution of BRL 5 billion. Now I would like to strengthen BMG's access to the institutional market. We have a conservative view regarding assets and liabilities. We have good terms and good currency credit assignments, our excellent instrument for this type of match for long assets like pay -- like personal loan. And I would like to strengthen our access to market capital. We make BRL 240 million through a debenture securitization totaling BRL 700 million. This was the first security operation with a personal loan and payroll credit card loan, benefit payroll loan. I would like to start talking about comfortable capital level for the growth of the operation. Now credit assignment of BRL 960 million. This doesn't only bring us liquidity, but this is an instrument of greater efficiency and capital base because this is a definite sale. And this comes from BMG bank's balance. Now we issued almost BRL 70 million in subordinate financial bills. This way we ended the quarter with a basel calculation of 14.3%. Now we will initiate a Q&A session.

[Operator Instructions]. Starting with our question, our first question come from an autonomous investor. How does the bank see the bank discussion by JCP and the drop of the ceiling of interest rate, INSS and consignment?

I can start. Thank you very much for your question. Well, number one regarding JCP, we have followed out this discussion regarding this matter. This is an undefined matter, and this can be part of a tax reform that is being discussed. Nonetheless, anyway, everything that is decided, well, the impact is felt during the next year -- this year JCP. Depending on the evolution of this discussion, this can affect next year. In the case that the reform is approved this year. Now regarding the INSS interest rate, what we've recently observed in April, has been the government exerting pressure on interest rates, it lowered to terrible levels. This affected the original origination of this market. And of course, now it's resumed to a more reasonable level. As you have Selic droping and we are just starting this cycle, there was a drop of 1,000%. We expect this drop to continue throughout next year. Now this -- we believe that there will be drops, but we don't expect anything in the short time. We're talking about 0.5% a year. We are talking about very slow movements in terms of Selic to offset any margin compensation. And there was something typical because when the interest rate reached its peak, they decided to drop the interest rate. So we don't see -- we don't believe that this will be repeated that will enable -- disable the product. And the result is clear for everyone. The government had to go back in their decision.

Thank you, Flavio. The next question from Lucas Rodrigues, a manager. Despite the increase of NPL, medium-size banks reported a stable results or even higher results. How are you positioning in order to deliver higher results? Felix?

We have to deal with the mix of products that we have in our portfolio. What we are is we are repositioning ourselves, as Flavio mentioned, dropping our risk appetite. Here we also have open water card where we are raising the bar, and we are being much more restricted in this sense. And on the other side, we want to focus on the origination of sounder products that are core of our bank that are connected to the payroll loan market. And they add value to the bank that would be wholesale Araujo Fontes partnership and insurance. With this, we do believe that we will have a sounder portfolio and a lower NPL. This being done, what is going to happen. This portfolio of greater risk is a small portfolio. Throughout time -- through a reasonable period of time, the portfolio tends to shape itself differently because it's a different mix. And as a consequence, our NPL will be even lower. And together with this, it is not that we are going to wait for the NPL to drop. We are implementing restructuring in our collection area because we believe that we can be more efficient when it comes to collection. We want to control credit to change collections so it is more efficient and to change the origination mix so that it is sounder. So these would be the main pillars. Now together with this, we will strongly focus on reviewing all of our costs in the bank, changing policies, changing the governance so that it regardless of any problem that may emerge with the drop of the ceiling of payroll loan. We will have sufficient margins to absorb this without affecting the general results of the bank. This is what we're doing by and large. This is a clear plan. And now our focus and our challenge is to improve the execution to capture these results as fast as possible.

Thank you, Felix. Our next question from Olavo Arthuzo from UBS.

I have one question about expenses. The expenses on personal dropped year-on-year and administrative grow. What can we expect on these 2 entries during the second semester as initiatives of better cost management.

Thank you very much. I believe that Felix...

Can you repeat the question again?

The next question from Olavo Arthuzo from UBS.

I have one about expenses. The performance of personnel expenses dropped year-on-year and the administratives growth. What can we expect in these 2 entries during the second semester as improvement initiatives for cost improvement? And what about the growth of each one these entries throughout the year?

Olavo, I believe that Felix in the past answer provided many of the elements connected to our expense control. Flavio, would you like to add something to this question?

Yes. Thank you for your question. I will not give you figures or guidance. I will just mention what we have been doing. When we analyze our pursuit to present an operational result better than what we have presented and to take it to a positive level. Of course, expenses have been a front that we have tackled strongly. Regarding personnel, recently, we dropped headcount. This was a drop of headcount that was significant. And of course -- and as this was carried out throughout the second quarter, the -- of course, the initial impact is the cost of contract termination. So we believe that we will see a drop in personnel expenses. We are renegotiating with suppliers looking for new efficiencies. So expenses is something that we will strongly tackle and we will start seeing the results during the second semester this year.

Our next question from [indiscernible]. He's an individual. How does the bank see the rotation -- the drop of the rotation rate established by the government?

This is still uncertain. We are following closely as the government talks about dropping -- the drop in revolving rates. Our main product is the payroll card and the rate here is very low, lower than any other credit card. So we have an open credit card where there could be an impact, but I believe that the positive news is that our origination is lower than what we had in the beginning of the year. So the impact, when we compare it to other banks will be lower, if they establish a drop in the revolving interest rates.

[indiscernible], XP investments.

Your controllers find the use to -- find ways to use your funds profitably like buying Granito companies like you grow in the nondistribution of dividends and losses. Should this concern the investors?

Flavio or Felix, would you like to answer this question?

I can answer this question. The nonpayment of JCP and the loss during this quarter is not a reason of concern. As Felix mentioned in the beginning of the call, we do understand that the loss was a one-off. If we see NPL and funding cost, we do understand that this quarter, probably it was a quarter where we reached the worst level. We expect to see a recovery throughout the second semester of the year. And the nonpayment of JCP was specific -- was a one-off. We continue with our strategy of maximizing the JCP. This is not a result that will remain. During this quarter, due to low results, we decided not to do it in order to preserve more capital because when you -- because this can affect our equity. It improves our net profit. But until there is a distribution, this can cause losses. So this is something that if we don't see it during Q3, we will see it in Q4, and our dynamic is not going to change.

Another question [indiscernible]. Which are your expectations in terms of growth in insurance? Do you want to concentrate your performance on this segment? Felix, could you talk about -- could you give us more color regarding this point?

Yes. Well, we do understand that insurance and insurance products present synergies with the retail bank. We -- this segment has been growing. And more and more we want to increase not only the index of penetration of these products in this space, but to complement them with new product modalities that will meet the needs of our target public. We do have products that are being tested right now and focused on our public that are the people above 50 years old and people that are retired. We want to add value to our customers and to increase the bank's results. This is a strategy, and this is a critical pillar for the bank.

And the next question from [ Filipe Fara ] from Ito Assets. In July, the payroll credit card had an event. Do you -- were you exposed? Any exposure to the structured portfolio?

Thank you for your question, Filipe. In reality, there was a problem, but this isn't something that concerns us. Fortunately, for some time, we haven't been operating with this promoter. Therefore, our exposure was extremely low, and there are partners that have taken over the management of this portfolio. And therefore, this is no -- this should not cause any type of concern.

Thank you, Flavio, Felix, for your answers. We have no further questions, we will end the Q&A session. Felix has the floor for his final remarks.

I would like to thank everybody and everyone for their participation and strength in that BMG Bank is a Centennial Bank is a traditional bank. We have a highly competent and engaging team. A solid capital base. This is a powerful bank. And we have a clear strategy from here on, focused on profitability and our customer satisfaction. So now we are implementing a plan, a project that is not a short-term project. It is a journey. But as an ambition, we want to bring return over equity and efficiency index according to our size and positive for our shareholders. I would like to thank all the employees of BMG. I would like to welcome the new officers and also thank the officers that have already been here. And we are on the right path. We must focus on our customers. I am totally reassured that we will bring the positive operational result that we will see in brief. Thank you very much.

Once again, thank you for participating in our earnings call. I would like to strengthen that the IR team is at your disposal. Thank you very much, and have an excellent day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]