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

Good morning, everyone. Welcome to BMG Fourth Quarter Results. My name is Danilo Herculano, I'm incharge of Investor Relations, M&A and new business. Today, we have Felix Cardamone, CEO; Flavio Neto; and Joao Consiglio, our Vice Presidents. Please note that this video conference call is being recorded and will be made available on our IR website. After the presentation, will start a Q&A session. Questions should be posed via this webcast. Remember that the presentation material is already available for download on our website in the Results Center tab. Before I go any further, I would like to clarify that any statements made during this video conference call regarding the outlook of the bank's business should be treated as forecast. Investors and analysts should understand that general conditions, industry conditions and other operational factors may affect the bank's future results and may lead to results that differ from those expressed in such future conditions. I would now like to hand it over to Felix, so he can begin the presentation. Felix, you have the floor.

Good morning to everyone, welcome [Technical Difficulty] with this extremely robust [Technical Difficulty] Here we go to our upcoming slides. Please let's go to our next slides. Now the first highlight that I would like to show all of you. It's that during 2023, we mentioned this before hand. We strongly worked with cost control, contract reviews, structures, processes and this clearly appears here in the result of Q4, where we -- our operational costs were below the last quarter of 2022. And certainly, this has helped not only in the bank's result of 2023, but it gives us a baseline for 2024. That is extremely robust, so we can continue delivering good results in the bank. As you can see here is not only a very important result for 2023, but it's also extremely important as a starting point. Regarding what we will see in 2024, I would like to highlight that there is room for improvement. There is a lot to do. We are pursuing digitalization of our process. We want a leaner and more efficient structure focused on our customer. Therefore, this cost curtail, it doesn't damage our operation. It has helped us to grow our top line. It has helped us to improve the satisfaction of our customers as well as the complaint. So it is extremely important to recognize the effort of the entire team that helped us throughout this process. Now on our next point, another important point that we have focused on was to improve the quality of our assets. Our portfolio has been improving in performance month-on-month because of better credit performance, better collection processes, and we adopted a decision of exiting a number of businesses that were not strategic and did not provide value to the bank. Therefore, it's important to highlight that [Technical Difficulty] are running the dotted line of 4.3% and 3.5% of fourth quarter is due to the selling of a portfolio, and we will give you more details about this. But clearly, we are strongly working on expenses. We're strongly working on our portfolio focusing on our capital very diligently and at last [Technical Difficulty] going to our next slide. And the consequence of everything is that we have been able to turn around the situation of the first semester that was negative, and we ended with the positive result around BRL 20 million by the end of the year. And this should become a reference for the bank so that we can continue with these trends from here on. Be it on our bottom line, be it on the operational result, the quality of the portfolio, cost control this whole ensemble has provided us good results. And obviously, while we will talk about the growth of our business, the growth of our revenue through greater production through greater business diversification that Joao Consiglio and Flavio will provide you details in brief. Now I give the floor to Flavio so he can continue with the presentation.

Thank you, Felix, and let's talk about our products and our businesses. Now on Page 7. Well, we ended Q4 of 2023 with 10.4 million clients and something that I would like to highlight is that 71% with products of credits and for the first time, we're amongst the 10 major banks and customers with credit. In addition to credit, we have a good insurance penetration, 28% of our base has insurance products, and this shows the cross-sell capacity. And at the same time, it shows that we have room for growing in this line. And as Felix already stated, we're strongly focused on a customer satisfaction on the journey on the experience of the customer in the bank. Therefore, I believe that the consequences seen here on our complaint figures from the Central Bank that plummeted from Q1 of 2023. It went from [ 813 to 341 ]. Now Slide 8, you have a portray of our portfolio. This is an extremely conservative portfolio, 63% is exposed to consignable products that showed a slight growth. Joao Consiglio will give us more details there. We could have grown more but we decided for a strategy of spin-off of portfolio and in addition to this, we have our retail and wholesale portfolio that provides good diversification because there's an interesting mix of products from personal payroll and open credit card, also the FGTS anticipation card, which is an extremely safe and conservative line. Now when we see our other portfolio, there is a slight drop mainly due to the operation that we have with Granito that no longer anticipates with BMG and anticipate its operations in the market. So this is why there's relief in this portfolio. And as you see our portfolio as a whole, you can see a slight drop from Q3 to Q4, mainly due to the reduction in addition to Granito, but our runoff that was a partnership with retailers that in the beginning of the year was stronger. And now gradually, it has been dropping because now we only have good operations. This portfolio is cleaning. In addition to this, we have a portfolio out. Here, you can see this on Slide 9, where we can see the quality of our portfolio, our portfolio level was AA-A always above 90%. But now we achieved 92.2%, which demonstrates the quality of our portfolio. Now when we analyze these different segments and default, we reduced all the segments where we operate. This is over 90% default consignable retail, wholesale and other portfolios. This is our result of the -- we carried our credit assignment with a retention of risks and benefits of BRL 462 million. So with this now, I give the floor to Joao Consiglio, so he can continue with the presentation.

Good morning. It's a pleasure to be here today. Now speaking about the repositioning on consignable, this is a resumption of the place that we deserve historically as a very important player in the consignable market. This is why we adopted a number of actions since Q2 of 2023, improving systems reviewing our flows, the equalization of the commission payment method with the market. And finally, approach and selection of originators based on quality and production and also the approximation of our franchisees. Our portfolio, our market share of INSS payroll loan concession was a reflection of our repositioning, and we've been rapidly growing occupying the space that BMG always belong to. Now going to Page 11. Now payroll products, when we analyze origination, our payroll credit card, payroll loan, we achieved 3.9x origination than that of Q3. All this effort to reposition our products is also -- is valuing and providing more revenue to our balance aligned with what we had already anticipated that would be our strategy for the upcoming quarters. In this market, we see many challenges. The market is suffering pressure from spreads, but this bank is more and more efficient. And we have operated in segments where we can achieve good revenue regardless of what we see in the market. Now the credit portfolio, just 1 minute. I have an observation back to the 11. Now this is about our benefit cards and our payroll credit card, we've equalized all the procedures and features from both cards according to the new determinations of the INSS. Page 12. Now retail here is a great highlight and this is direct debit loan, traditional credit card and FGTS anticipation. This portfolio is of excellent quality and is responsible for being important clients that become B2C clients. Now in our open credit card, it is a very good portfolio because some businesses exited. So -- and it is extremely conservative. So that we control default and to achieve the figures that we have achieved now in default. Now on Page 13. Now our Seguridade is extremely important to mention because within this business, our penetration is extremely significant in terms of insurance and we are reviewing products, making an effort to have a better penetration index and to achieve better revenues from our customer base. Now if we go to Page 14, now speaking about wholesale. Our wholesale business presents a portfolio here, a middle portfolio has excellent guarantees where we are basically testing how we operate together with this segment, and this is safe with low default. Now when we see corporate wholesale we've carried our operations together with Araújo Fontes trying to use the investment bank structure offered by Araújo Fontes to have better revenues together with fees and I believe that with this we are using our wholesale business to improve the revenue with our customers here. I would like to give the floor to Danilo that will continue with the presentation.

Thank you, Joao. Now when we go to Slide 16, we can see our financial margin growing for the second consecutive quarter. This is important for sustainable results. As we mentioned at the beginning of the presentation, Joao just highlighted an opportunity that would be to pay in installments credit card, and we mitigated the effect of the interest rate of the payroll credit cards and products, by and large. Here on the right-hand side, the margin has been benefited by the improvement of the quality of the portfolio due to the evolution of all the lines. Now when we go to Slide 17, here we have operational efficiency. Here, we can see the drop of nominal expenses, but as Felix mentioned and something that I would like to highlight. This was a direct result of cost management, on a nominal drop for the first quarter in 2024 isn't as expected, but we will gain efficiencies and improve our operation. The expectation for 2024 will allow us to gain efficiency and to drop unit costs. Now our costs are -- our net operating provision expenses are stable. Our efficiency ratio is growing, and we can see a trend of improvement for 2024. Now when we go to Slide 18, it's important to highlight the funding diversification strategy that accesses all the instruments on the left according to the liquidity need and the Resolution 514 was important to strengthen the strategy back to have recurrent access to the capital markets, but to build -- not only to build the curve, but after this resolution, we will strengthen our strategy of a recurrent -- being a recurrent issuer in the capital markets, we had 2 issuance, one of CRI and another one, a debentures issue of BRL 750 million in 2 structures and profiles that of similar investors. On Slide 19 here, we have the adequate capital level for the growth of the operation. This is Basel, the credit assignment provides us a capital benefit but not only capital, I would like to strengthen the profit and this without doubt is improving, we are reaching capital one and distributing tax credit, so Basel ratio is more benefited because of the positive results and the bank has access to a subordinate at the end of the third quarter, we had access to an emission we have an MTM 58%. The accrual of this mark-to-market occurs throughout 2024. And we have a number of bank instruments. Now I give the floor to Felix so he can end our presentation.

Thank you very much, Danilo. It's important to end thanking all our team, everybody that is present in all the BMG team that has been making an effort to build a better bank, a stronger and a more profitable bank. This is our mantra within the bank and these results are only possible due to the effort of our entire team for 2024 what do we expect? What do we imagine? What do we need to do or continue doing? Number one, simplifying and improving the client journey. It is fundamental to review their processes to interact better with our customers. And this should be done in a simple, clear way, relatively with good transparency extreme with a lot of digitalization to provide safety to the bank for our target audience. Point number 2 would be more products per client. We need to generate. We've been doing this. We've brought sustainable results for the bank and the opportunity of offering new products that mean the needs of our customers is of extreme importance. We have a complete array of products and services. And when we work with more data if we work, if we understand the life cycle of the customers, we do believe that reviewing the journey and the products are important. And when we work with data and with robust CRM that is proactive as well. With this, we will be able to increase the sale of products to our customers. This is a priority for this year that obviously allows us to diversify our businesses and also to generate business that generate tariffs, services and that allocate less capital. Point number 3 would be to continue growing our production and market share. We had a very strong evolution in the production and market share in 2023. And this trend is here to stay. We are a bank that has the DNA of the consignable market. This is a market that is undergoing concessions, the number of concessions throughout the year have been dropping because of regulatory matters. But anyway, we must be solid in order to weather this period. And through our proximity with the bank and the franchisees from health with good products and good services, we will be able to come out stronger from this challenging scenario and to continue working or focusing on opportunities and to improve the efficiency of the bank. This is something that we have to do through digitalization of process and improvement of internal control this -- we've created a management of internal controls, we're doing this because we want to be absolutely sure that everything is secure and aligned with market practices. And our target here is sustainable generation of results in the mid and long run. In 2023, we operated with 2 digits of ROE. And our intention is to stabilize ourselves in this level and to continue growing our results. Therefore, I would like to thank all of you for participating once again I would like to thank our shareholders for their support, the effort of all our employees. And now we will entertain questions. Thank you very much.

Felix now we will initiate our Q&A session. Reminding you that you can send your questions through our chat. And our first question is from Olavo from UBS. I have 2 questions here. Number one is to know the approval by and large with the core bank product? And what about the percentage a year, the other distribution of profits can we expect to work with Tier 1, 10% and a payout similar to 2023.

Yes, I can start. Now regarding your first question, the approval rate had dropped, and it dropped in our products with open card where we discontinued a segment and we ended the origination as well as the consignable product with all the drops that we have seen every month in the interest rate, you have to be restrictive when you provide concession operations with lower tickets with customers that are more risky. We have to be more restrictive due to the limitation of interest rate. And the second question level of capital and pay out our Tier 1 capital is around 10%, 9% something. Tier 1 capital does increase unless or could be through profit or dividend payout or capitalization. We will continue with our strategy to maximize. The interest rate on our own capital, we're going to maximize it like in 2023, also in 2024. We have used since the last quarter, the -- this we can grow spinoff of our portfolio. We don't need to burden our balance. We can -- we don't need to allocate capital so we can grow without depending on capital contribution that would be interest rate on our own capital.

And our next question. Congratulations for the result. I would like to know of Q4 of 2023, it's a good proxy for 2024. The expense drop and the cleaning of our portfolio that has reached an end and how do you intend to work in order to expand your revenues. Flavio, if you can start, Felix can help us.

Well, I can start here. I will start talking about the result, the expectations for 2024, and Felix can talk about the revenues. But in order if you analyze Q4 of 2023, we delevered a ROI of around 13%. And there is a point that is not recurrent throughout 2024 that is interest over their own capital because there was a concentration of the payment during the last quarter, and this favors the result. But even if we dis-consider the JCP that for 2024, it will be diluted throughout the year. We already -- during Q4, we had a ROI of double digits above 10% considering this effect, so we minimally expect to continue this in 2024. I don't know if Felix would like to say something.

Now just an add-on to Flavio's comment. The result of Q4 is extremely sound. And as Flavio said, it is above 10%, and we do understand should be our baseline for 2024. Now point number two, regarding costs and the cleaning of our portfolio, our portfolio still has to be improved as we mentioned. On one side, this is a reality, but on the other side, be it the portfolio of the digital bank or the retail, it's a short portfolio. The trend is to see stability during the first semester of 2024, and I believe that this is properly managed. We -- I believe that we will not run into surprises here. Now expenses. The expenses are always observed and we are extremely disciplined when we control expenses. There are always opportunities. We will always review our expenses, be it through the digitalization of process of better controls. Currently, the technology is something encompassing that can help us a lot. We also have an eye that can be applied to some of our process. Now the service to our customers, it's still a cumbersome or a burdensome process that we can improve. We still have opportunities. These are not major opportunities as we identified in 2023, but absolutely, this has to be within the culture of the bank. All the officers of the bank should always be pursuing alternatives in order to work in a more efficient way. This is a retail bank to control cost processes has to be part of the bank's culture. Therefore, we will always pursue new opportunities. And last point regarding revenue. Today, we have profitable products despite the pressures that we suffer in terms of regulation, nonetheless, this is an extremely sound bank. Just in a nutshell, we do have our consignable products, and we also have our insurance businesses that can grow and can increase their penetration. And this is the main product of the bank, where we have major opportunities even recycling portfolios, selling our portfolios that is a good practice and we do understand that this exists because this can bring more relevance together to our partners or something that can also give capital relief to us. Now we also have our wholesale business, and we intend to underscore this business and to grow. We still do have a modest operation. This may grow. And if we are conservative in credits and in capital allocations, but there are opportunities mainly due to the partnership that we have with Araújo Fontes because with this, we have an investment bank in-house, which is important for us and another thing that we implemented in 2023. We don't want treasury to take care only of the ELM, but we want it to be a business center to carrying a structured operations and working with a proprietary portfolio. With this, we will have more revenue with more diversification and more sustainable in the long run. Now the portfolio will improve due to the runoff and other things. So it may flatten throughout time. Our expenses are always being reviewed. The name of the game here is efficiency, and we're focused on this on 2024, but the major differential will be the growth of revenue. And I am extremely reassured that the bank is prepared for this new challenge.

Thank you, Felix for the explanation. Gabriel Marques, Manager. How does BMG see the constant drop in the consignable rate? How does this reposition the product that you mentioned? Could you please give us an answer ? Joao?

The drop of the consignable rate is always a challenge. It has exerted pressure over the entire market and we have to be more creative and to pursue more products per customer. That is our mantra here. We originate customers in the consignable market, and we want them to become profitable in our bank, and we want them to use our digital platform as a relationship platform. We have our products, payroll credit card and direct debit loan, all of them received the support from our digital bank so that we can have a better relationship throughout time. The challenge of the drop of the rate, but with this we need to have better relationship with our customers, create more revenues from them and to be more efficient in our processes. The name of the game is efficiency process, fluidity and to be able to work with tighter margins. Well, unfortunately, we -- well, we could extend the credit to other publics if we would have more space in these rates. Within what is profitable for the bank, we've been able to grow and to become a relevant bank in the consignable bank world.

Now we have 1 more question here from Denis Pimenta. This is an Individual Investor, which sectors of the market, BMG Seguridade performs and what market segments does BMG Seguridade performed?

Well, we do have a number of insurance products that are connected to payroll, credit cards, payroll loans that would be lenders in life that this is an operation of bancassurance that is the main business of Seguridade. This is highly connected to the bank business.

I don't know if we have more questions. I think it's so extremely complete. We have our last question here. From Araújo Fontes congratulations for your results. I would like more color regarding the Basel appetite of the bank.

Now the Tier 1 is close to 9%. I would like to understand the ROE of the quarter. Do you believe that it's recurring regardless of the transference and the JCP do you expect to deliver something similar in 2024. So I think that this has already been answered, but we can give more color now regarding the core Tier 1. We imagine core Tier 1 closer from 10% to 9%, we're not comfortable because we want to reach 10% or slightly above that. With this, we will feel more reassured in order to grow the bank operations, and we do know that we have opportunities. Now regarding the ROE once again, I would like to highlight what I had already mentioned. ROE during the last quarter was above 13%. There is a matter. There has been a concentration of the JCP during the last quarter that allowed us to increase our ROE. Nonetheless, our recurrent ROE would be 10% and recurring. With this, I mean portfolio transference because this will be a recurrent practice of the bank. We will have agreements of portfolio transference. The bank has been creating agreements with other 2 banks. This is a dynamic that we will see throughout the year of 2024. And this is something that you can consider as part of our recurrent result. And as Felix already mentioned, yes, we have done our homework throughout last year. We need to do this in 2024. This was done since the beginning of 2023, we reduced our costs. We cut our cost if you see the level of cost of Q2 and you compare it to Q4. There was a drop of around BRL 300 million throughout the year and we are stopping the operations that don't work like the retail operations. And this is why we have a better portfolio in 2024 with excellent prospects for this year.

Flavio, Excellent. Thank you very much. And with this, we bring an end to our Q&A session. I would like to hand it over to Felix for his final comments.

I would like to thank all of you for participating once again. I would like to congratulate the entire team of the bank. I believe that we faced a challenging year, but we were able to reap robust results during Q3 and Q4. And I believe that we have a sound base to continue our journey into improving the results of the bank. There is no doubt that 2024 will be a challenging year. Nonetheless, we do understand that we're extremely prepared to meet or even exceed the expectations of the market. Thank you very much until our next call.

Thank you very much, Felix. Thanks to everyone for participating in our earnings results of the BMG Bank. Our team is at your disposal have an excellent day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]