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

Good morning, everyone. Welcome to the Third Qurter 2023 Earnings Results Conference Call of Banco BMG Bank. My name is Danilo Herculano. I'm responsible for the Investor Relations, M&A and new business area. And today with us, we have Felix Calimone, CEO; Flavio Neto; and Jean Conseg, our Vice President. We would like to inform that this video conference is being recorded and will be made available on our IR website. After the presentation, we will hold a Q&A session. Questions should be asked via this webcast platform. We would like to inform you that this release material is now available for download on our website in the Results Center tab. Before proceeding, we would like to clarify that any statements that may be made during this future conference regarding the bank's business prospects should be treated as forward-looking statements. Investors should understand that general economic conditions, industry conditions and other operating factors could affect the bank's future results and could lead to results that differ materially from those expressed in such forward-looking statements. I would now like to give the floor to Felix to start the presentation. You may proceed, sir.

Good morning, everyone. Who is attending our video conference. I would like to start showing you the presentation. Oh, there we are. So I would like to move on to the next screen, please. I would like to draw your attention to, as we mentioned in the previous quarter, that the quality of the results that we posted this quarter was a result of the team to improve the quality of our assets in our continuous search for operational efficiency and our focus on products with higher returns and looking at the satisfaction of our clients. As we see it, we believe that we have started a virtual cycle of results with financial margin growing at sustainable levels with a credit portfolio behave in a healthier way. We managed to work on our costs, improving our efficiency ratio as well as our Basel Index, that presented significant growth. Even though the market is so competitive with more challenging margins in the segment where we operate, we believe we are well prepared to start a good journey and bring about sustainable results to the bank. Next slide. We're able to manage a quick internal mobilization of our team. I would like to express in this conference, my gratitude for the trust that BMG team has been placing on this new management. We implemented a simple strategy with clear leaders from work of internal communications, getting closer to our commercial partners and our franchisees. And that brought about the results I showed in the previous slide. We created some topics which are fundamental to our business such as client satisfaction, simple, agile, quality actions and a search for sustainable growth, engagement of our employees and work in an ethical and with a lot of integrity. We had some critical results that include reduction of costs. Okay, I'll go over the last paragraph. Our results levers is to bring positive operating results, work on cost reduction in order to have a higher operational efficiency, digitalizing our processes that bring in more security to our business, reduce the number of complaints from our clients and the goals that we define as our priorities in the short term or the elements related to credit and collection. All the area and processes have been restructured. We are always in the search for operational efficiency, and we will always be developing our teams. That brought clarity to our everyday [routine] so that all growth in versatilities could be well defined and that was well mobilized so that we could reach those figures and numbers and targets. On the [indiscernible] the tactical vision for 2023. And this will also lead to good results, not for this year alone, but also in our search to build a sustainable element in the medium and long term growth. So there are some points that I would like to [indiscernible]. We made adjustments to our structure. So the theme is ever stronger, and we can also see in the results, we redesigned our strategy of credit and collection. We have been very diligent in managing our costs and expenses. We are making the network help and our core brands have been having an ever stronger relationship. We understand that the closer we are to our partners, the more sustainable company will be, and we have gained relationship as to this element. And we also have strengthened the digital origination. As for profitability, we have been working on the final product to have the full originated and also [indiscernible] portfolios. We will discuss this more detail in the future. And we have been discontinuing businesses that do not add value to the bank. So we have already set with to see the results of this lever. And from the viewpoint of efficiency -- in the viewpoint of client experience, I would like to say that we have been reviewing our clients' journey, and we have been working so that we could have a better formalization in a simple and practical ways so that we can build a customer base business portfolio, which is less susceptible to negative actions. And this is something that had been a problem for us. Before this, I'm going to turn the call to Flavio.

Thank you, Felix. So let's talk about our products and businesses, starting from Page 6. I think it's very important to introduce and mention who our client is. BMG nowadays has more than 13 million clients. And 57% of those clients have credit products that shows a very interesting penetration of the banks and 22% have products of insurance and shows the avenues that we have in terms of penetration and growth that have been growing in quarters. Among those clients, obviously, there's a diversity of portfolio. However, we can now able to make sure our main clients is the consignable client are older, usually older than 50 years. And we offer a portfolio, which is very compact complete this public with a very relevant line of products, especially for credit. And we have a very good relationship with those clients using our channels to help store the demands, the digital channel such as WhatsApp and the bank app channels such as the -- of centers and bank branches. And we see the digital bank as a channel of relationship and not necessarily only a channel for the [NVO] client. They might get into the bank through different channels and then they are directed to the digital bank. Moving on to the next page, Page 7. I show you the vision of our credit portfolio. We see that our portfolio is decided through block without a doubt, the most important one is the consignable one, which is subdivided into three other blocks of projects, and [Joao] will provide more information about it during the presentation. And this is a very conservative file in terms of credit risk and we are going to see this in the next slide. We also have a relevant portfolio that we refer to as retail debt. And inside the business, we see a solution on for some products, I can mention the anticipation of FGTS the personal credit and also traditional credit cards, and there's also the whole annual segment where we work with companies, the medium and large sizes. And [indiscernible] portfolio is informative has represented a slight drop compared to what we had in the previous quarter. And there is go forward strategy of [indiscernible] will provide more details. Moving on to Page 8. I would like to say, talk about the quality of our assets, talking about FGTS and consignables. And we look at those assets, we see that we reached our peak level was the [indiscernible] and now we see that the default rate out to be lower result of the futures that we made to the credit and collection and also the policy changes that allows us to have an ever more healthcare portfolio. I would like to say that this we were not for the assignments that tend to improve this indicator, see there, considering that it extracted from the denominator which should be at 4.3%. Now moving on to the next slide, Slide 9. Here, we can see the quality of our assets, considering our total portfolio, our computation of [indiscernible] and what I would like to bring what we all [indiscernible] learning bank and when I divided these portfolios. When was the runoff? I would like to say that in the previous quarter, we had communicated to the market that we would be discontinuing our operation of traditional credit card with retailers, and this is what we did. It's a portfolio that is moving downwards. It's a portfolio that affect our cost rate indicator when we see the indicator would have been close to 4.4%. And below, we show the quality of the portfolio. We show that more than 90% of our portfolio are classified as A and AAA is very positive compared to the years in the market. And I turn the floor to [Joao] to talk about the product.

Thank you, Flavio. Let's move on to Page 10. I'm going to talk about the payroll products. And this is our core product. And this is where we operate or this is where we have focus more intensely on the bank [indiscernible] increase the operation, use a payroll products. And now we decided a new dynamic for originating and assign in a way that we are going to have a better use of our balance sheet and better profitability. So our origination has already doubled in the other quarters. We have payroll loan and payroll credit card and the benefit payroll card. We have been searching to equalize the benefit pay record and pay growth at the card so that we can make the understanding better for our public, our clients. We use our products every day. We are trying to create a easier and more fluid in our originators, maybe them be our banks or our franchisees. If we move on to Page 11, we can also see the dynamic in the PF retail, where we -- you can have the loan credit and also [indiscernible] loan credit card. This has been to create origination of FGTS, which is greater using all the channels that we already use and increase the participation of the direct sales by means of digital channels where we can reach a very interesting number of clients. And this has been showing to be very efficient in the past months. Clearly, we have a very important reduction of what was used to be a portfolio credit card with retailers. And this is something that we had announced in the past. And we have been reducing this business. And this is what we refer to as runoff, in order to focus on what would provide more profitability and safer and more secure products. If we move on to Page 12. We can see how we operate in terms of insurance, this is BMG Seguridad. We had a good evolution in the brokers, insurance brokers, we can see a very interesting opportunity here to increase the revenues with each client. So we have been operating ever more completely with our clients by offering products that would meet all the needs of those clients, creating better activation, enhanced loyalty and bringing in more profitability. We launched a very interesting product to our public which is BMG Med, where we can see benefits and the products that are used by the clients and it can come closer to our everyday operations. Those are very important projects in order to incur more loyalty. I think it's important to mention that we have an increase in the premiums of our BMG Seguridad insurance. If you move on to -- if we look at Page 12, we can see that there is a strategy on Page 13. We can see that the portfolio is very conservative because we make this concentrate on clients whose ticket is not so high in a very profitable way. And we always look at how we are going to make operations that would bring profitability to the bank in all segments where we operate by getting to lose clients more deeply. And this portfolio has been supported by means of operations that we also work with Araujo Fontes And this has been allowing us to operate in the capital market. We are leaders in some operations, and we are improving the allocation of our capital and making the wholesale portfolio ever more profitable. Now I turn the call back to Danilo.

Thank you, [Joao]. We can move on to Slide 15, talking about the financial margin. I would like to mention of this new resumption after everything that we have been saying. So there was a mitigation of the effect of the payroll credit card. And we also had, when we look at the left, when we look at the information, we see there was a reduction or every cost of the liabilities. We do not consider the expenses, we reached a very high level with lower expenses related to the provisions and also related to the commission. There, we start a new level considering the net margin that has been adjusted cost of credit. Now moving on to Slide 16. We are going to discuss the operational efficiency. We can see the nominal expenses have been dropping as a result of the management of costs, as mentioned by Felix actions. But the processes that gain in efficiency and would make this efficiency more consistent. And the cost of service is improved in all its fronts. Its efficiency remains stable across all quarters. We see the efficiency ratio has improved as we see in the margin. On Slide 17, we can see that the impression is very important because it summarizes everything that has been discussed. We can see the recurring assignment strategy has been improving and all the policies have been reflecting of the assets, and we also have a very high efficiency of costs, bringing results been improved -- and we have this perennial construction of results for the bank. Now on Slide 18, we can see some growth both for raising capital, we can understand from what joao mentioned. We are going to do a perfect match considering the liabilities and assets and also reducing the credit costs. The bank has been working hard on the capital market. In the last quarter, we had two issuances, one of subordinated financial bill that was completed in September and the venture with Arrow credit card in the amount of BRL 150 million. That was completed in October. Now on Slide 19, talking about the capital structure, the financial bills bring robustness in our structure of capital as a whole, and we end with a basal index potential of 15%. We have a profitability review at all times, which also brings the benefit as the use of capital as a whole. As a whole, we see the [moderate] bills so relevant. And I would like to mention that without, we can see that the deferred credit has been consumed. And therefore, we have posted a growing results in our structure of capital.

[Operator Instructions] Our first question comes from [indiscernible], payroll Market was reduced a lot according to the Central Bank, and you started growing in terms of origination in this quarter. What's your position in this market? Joao?

Yes, I think as everybody knows, BMG has always been a very active bank and payroll products. In the last quarter, we had a lower share considering our potential. And we started to reposition ourselves with our originators and also considering our network so that we could resume to the size that BMG should have. The assignment initiatives would help us a lot so that we can be present at the size that we've always had maintaining the profitability of our capital. And more than that, we are preparing the bank for the future growth. and we make the decisions related to the profitability so that we can get those operations into our portfolio. What is happening in the market of payable products? We understand that the market is very challenging. There are different rates and establishment of ceilings, which does not necessarily have to do with but we have to make selections in our portfolio of our origination. So we made the decisions to reduce the origination or people who are older or also those that would give us less profitability and that -- our size is much bigger than what we used to have in the market. And now we are -- we are trying to resume BMG to the position you should have. Excellent, Joao. We have a question of cares of invest. And I'm going we can complement. How do you see the INSS considering the lower cap, is it still attractive? And does it bring profitability to the bank? Do you believe that those credits can generate more value to the bank. Can you provide more information about the magnitude as the bank ceased it? Also, there are many questions. I think that we have already mentioned the strategy of make the balance more profitable. Yes, we have. We have in the portfolio or not, that we have an ideal size that we want to reach as we move along with our decisions. But in fact, this is a big challenge. What we have also been doing is work on our costs so that the operation can be ever more efficient and fluid. And so that we can be even more attractive in the market where we operate mostly connected to the payroll products. In relation to the results generated, it amounted to nearly BRL 30 million for the quarter before taxes.

Thank you, Joao. We have another question with an autonomous investor. Congratulations on the result. We can see an improvement in practically all lines. What's the prospect for the quarters to come? Are we likely to see improvements? Felix, yes?

Yes, without a doubt. This is what we do. This is our work. We want to look at a position of profitability, and that's what we are working on. As Ron mentioned, as Flavio mentioned, we are after a portfolio with better quality operations, which are more effective, compatible fund despite all the challenges that we face, we now close that the bank, not our idea, oyou're conviction is that the bank is adopting a sustainable growth path and this is going to materialize in the next quarters. And this is my commitment.

Thank you, Felix. Our next question comes from [indiscernible] HA Investment. Congratulations on the results. I would like to ask four questions. The first question, can we expect an ROE at 10%? Can we expect a positive result as of next year? Is there any possibility of having a [indiscernible] of BMG Seguridad? Dividends were much lower in relation to the income of the third quarter. Is this going to be the next dividend policy? Flavio, can we discuss those topics, please?

Yes, of course. First, thank you, for the questions. There are many questions. I will try to address them all. The first is in relation to BMG ROE, you asked if we could expect an ROE of 10% in the future. It is something that makes us a bit uncomfortable. We understand that our ROE is lower than this. And of course, we want to improve this index. We want to reach double digits next year, of course. But again, we are not going to give any guidance in this regard. In relation to Granito, Granito is one of our investee, using an inter that we understand it would undergo a period of negative results and investment in a very challenging market. But we understand that Granito has been building its results in the past month. And with this, we would have -- we could reach better results next year in comparison to what we saw in the beginning of this year. In relation to the third quarter, about the high [indiscernible] BMG Seguridad, we have not considered this. Of course, this can always be a possibility. We are always on the lookout and always making evaluations. But at present, we have nothing in relation to this topic. The third question is about the dividend only in relation to the income of the quarter. The answer is we have revised our dividend policy. We continue itemizing the rest of equity. So whenever we have way on FT that can be distributed, we are going to distribute along the year. But we always look at the index of the bank and how this could affect the future of business. So considering all this, we are going to maximize the interest on equity. So no changes were made.

We have a question from Pier steel with Company, Risk Premium. After everything that happened, are you more comfortable in relation to the evolution of profitability and with the drop of Selic rate, what to expect, could you complement the other question? And the downward results has impacted the bank. So it tends to increase our margins. What we have seen is that when Selic rates drop, we see a scenario that is more challenging because the payroll rate did not go up together with select rate. So we have to look for better efficiency and control of costs. If you see the [indiscernible] rate, that -- and we have to be aligned to this market and move these rates downwards even if our margin is compressed because of the combined product rates, we have to present growing results.

We end the Q&A session now. I would like to turn the floor to Felix for his final remarks.

Once again, I would like to thank everyone who has been with us. I would like to wrap up, I mean we are confident that we are on the right track. But obviously, it's a long journey, and we have lots of things to do. As was mentioned before, we have regulatory issues to be observed. But any way, we have to be prepared to all those challenges by means of adequate the capital is credit portfolio. Health, which is healthy and a constant focus on operational efficiency of the mix. I would also like to mention that operation generate a high social impact by means of offering services and products at the lowest rate of the market. And we both areas in our country and are sometimes that is not served by the regular banking system. So we have a social responsibility towards those people. And lastly, we have a bank that is nearly 100 years old. We have a lot of tradition in the market where we operate. We have a solid customer base, and we hold great responsibility to reposition the bank at a level of profitability, which is aligned with our mission that stands out in the market. I would also like to thank our partners, all those franchisees, core band, they have been helping a lot. I would like to bank to BMG team, who trusted our project. They put their confidence on us so that we could place significant results already in this third quarter. So I think our team has a lot of merit. I would like to thank all the BMG's employees for the engagement on this journey to place the bank in a significant position -- the position is deserved -- thank you, Felix. We would like to thank you for attending this conference call. Our Investor Relations team is at your disposal, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]