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

Good morning, everyone. Welcome to Banco BMG's Q2 of 2024 Results Video Conference Call. I'm Danilo Herculano, responsible for the Investor Relations and institutional funding areas. And today with us are Felix Cardamone CEO, Flavio Neto; and Joao Consiglio, our Vice President. We inform you that this video conference is being recorded and will be available on our IR website. After the presentation, we will have a Q&A session. Questions should be asked through this webcast platform. Please note that the presentation material is already available for download on our website in the Results Center tab. Before proceeding, I would like to clarify that statements made regarding the bank's business prospects should be treated as forecast. Investors and analysts should understand that general conditions, sector conditions and other operational factors can 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 to start the presentation. Felix.

Well, good morning to everyone that is participating here. This is our earnings result. I would like to thank all the audience and to salute my colleagues. Now, I would like to go to Slide 2. Here, you can see the situation of our profitability this year. Our net profit was BRL 105 million. This is an ROI of 10.8%. This is an increase of 12% vis-a-vis the past quarter. And more than this, this clearly shows when we analyze the perspective that the bank quarter-on-quarter has been evolving in its results. I do believe that this strengthens our commitment with the constant delivery of results and our bank step by step is going to another level with no major shocks. This is a result of the focus on the satisfaction of our customers, the simplification of our strategy. Yes, we have strongly focused on the core of the bank, eliminating any type of businesses or activities that are not part of our greater strategy. And an example was when we sold Granito, that was a good asset nonetheless currently. We are not focus on legal entity business. So, we believe that this didn't fit our business. This is why we sold this asset. We've strongly focused on operational efficiency and also in the quality of our payroll portfolio, our credit for portfolio. So, what has been the consequence? The result shows a higher revenue that you will see a strong cost control. And as a matter of fact, we are highly concentrated on the bank's core business. Now, to our next slide, that would be Slide #3. I believe that this slide is very important. And I would like to do a retrospective. When we compare it to the first semester of last year's figures, clearly shows that although the market is difficult with tightened rates, our team is putting our bank on a new level when we compare semester by semester. This is very clear. And I would like to underscore that in addition to these indicators, we have profitability, asset quality, capital indicators. Our capital has increased from 12.5% to 13.9%, which is substantial. The asset quality has improved, the result different from what we saw last year. Nonetheless, there were other aspects that strongly contribute. I would like to highlight one, which was the result in the Great Place to Work survey because we've been investing a lot in our structure, human capital training. So, I believe that this team that works totally engaged, encouraged and with greater training because we have a deep training program. Our team hasn't only delivered these results, but they are strongly prepared in order to place the bank in another level. I always like to highlight that this is a journey, although the result is good when we compare it to the past semester or the evolution quarter-on-quarter, this is a journey, and this is a long paved to that. And we have a greater mission more than what we have delivered. Now, on Slide 4. I would like to highlight that the growth of margin and the reduction of expenses, this demonstrates how this has been properly done, how this has been powerful. And with this, we are reassured that the bank is already in another level, we still have a challenge to stabilize the bank in this level and to place a strong foundation so that in the upcoming years, we're able to grow in our evolution. That is one of our ambitions. Now, our next slide. I believe that on this page, I would like to underscore our capacity to generate business. The bank has an impressive image before the market. I would even go out on a limb to say that we're a synonym of category. So, our evolution in origination and Consiglio will talk more about this, has provided us good results. We not only produce and sell part of our portfolio that is part of our business. And now, I would like to thank the partnership that we have with our health franchisees. I believe a number of you are here and our partner, core banks that allow us in this production and also highlight the excellent evolution in the cross-sell indicators. So, yes, we have studied more and more customer base. We have reviewed our product portfolio. And when we review the sales process and formalization because we want good quality in the origination, we want securities through the new formalization process. We want properly done sales. We want this to be robust. And with this we have realized a significant improvement when it comes to mitigation of actions or lawsuits. What we do understand is that the consignee is a door or payroll credit is also a door, and we can evolve and cross-sell. We have a good cross-sell indicator, good customer base. The origination has demonstrated its growth strength, thanks to the bank's brand and all the long-term partnerships that we have. And we have an evolution process that when we review our products, improving our processes with a formalized sales to avoid any type of lawsuits. These are extremely important points in order to evolve in our results and to continue providing better results in the bank. On Page 6. It's important also to say that in addition to everything that has been delivered and mentioned, we will never waver the level of satisfaction of our customers. This is something that we've reviewed regarding our journey, digitalization of process quality sales and constantly reviewing the sales team training. We do have a team that is always helping us to disseminate the best practices, to stabilize our app and all the evolution that we can see in our app. This is an asset that bank already had. And we are very satisfied on how we relate ourselves to our customers and having them more loyal. We had a drop of 54% in the complaint to the Central Bank. This is extremely important. Now, our call center activation, be it for human service or bought dropped 34% and our NPS service was 77% with more business and with a greater customer base, I believe that we cannot contest the number of sales, service and the products that we are delivering. This is undeniable. And finally, here, we received 2 awards during this period when we received the RA1000 CEO from [Indiscernible] and also excellent customer service award, which is a mode of a pride. This means that we're taking care of our teams, our customers and we are focused on the financial soundness of the bank. Here, you have a general view of our second quarter and which are the foundations that we are strengthening so that we are able to grow sustainably. Now, I hand it over to Flavio, so he can continue with the presentation. Thank you very much.

Well, thank you, Felix. Good morning to all the participants in this call. Now, we will talk about our products and businesses. We will start with Slide #8. And here, we have our portfolio, 71% made up of security loans that would be secure products with flow guarantee or cash guarantee like the payroll and the FGTS anticipation. This is why the profile is secure in terms of credit quality. Our portfolio ended the quarter totaling over BRL 24 billion. Within this portfolio, the main portfolio would be the payroll product that was driven by the payroll products and although recurring sessions with payroll products, this has grown a lot. Retail, here, we see a relevant drop because of an important portfolio transfer that was BRL 1.2 billion that were transferred. If it weren't for this portfolio would have also presented growth and another highlight in the other portfolios. Here, we have a significant variation, but this was basically explained by the exchange rate because this is a hedge portfolio, and this does not impact the results. Now, we go to Page #9. Here, you can see the quality of our credit portfolio, and we have favorable indicators when we see NPL indicators over 90%. This is 4.6% that would be running bank with 4.2%. This excludes portfolio in the runoff. This probably will be the last quarter where we present this because we are very close to the remaining part of this portfolio. We are incorporating the retail portfolio. So, as of the third quarter, we will see one line of NPL, and it will not be divided in 2 segments. We also have a coverage ratio of 109 and provision expenses net of recovery, 5.6%. I would like to highlight that, obviously, as I mentioned in the past line, the portfolio transfer of BRL 1.2 billion was a rating portfolio and a portfolio. In addition to have a low provisioning level, the over 90% was even lower. So, the trends for the assignment of this portfolio affects all these figures. But despite this assignment, we have been able to present positive figures during this quarter. Now, we go to Page #10. Well, I would like to talk specifically about our businesses. Here, we have Seguridade retail insurance showed evolution. We've seen this evolution quarter-on-quarter. During the last quarter regarding premium sold, we have BRL 244 million. When we see issued premiums, we're talking about BRL 86 million. These are record numbers when you see our history and highlights about the operation. Number one, an increase in sales penetration. We increased 9 percentage points in our penetration, which is significant. We successfully launched BMG Med that provides you access to telemedicine discount to medications that since its launch in September of 2023 has sold more than 220,000 qualities. We have FGTS protected, that is life insurance that is sold together with our customers that work with anticipated FGTS. We've reached more than 750,000 policies. Now, the entry of compulsory insurance and payroll credit card, this is also compulsory. And with this the number of insurance policies is 8.4 million. This is significant, and this positions us as one of the most relevant insurance companies, especially when you take into account the low income in Brazil revenue from insurance operations, BRL 52 million and 71.2% of combined ratio that is extremely relevant when we compare it to the market. Now, I will hand it over to Joao Consiglio, and he will talk about our payroll products.

Flavio. Good morning to everyone. It's a pleasure to be here. I believe that following Felix and Flavio's rationale, and we are well positioned in payroll products and origination shows this. Now, regarding Q1, there has been a slight drop because of the seasonality and the increase of the minimum wage and the benefits of INSS that are concentrated in the beginning of the year. But there is a trend for constant growth, and we have earnest in order to better allocate our capital. So, everything that is not allocated in the bank's balance have relevance in our origination. This is why our portfolio grows constantly. On Page 12, we can see the evolution of our payroll credit card and benefit payroll card. We have evolved in the origination of our credit card portfolio, something we have encouraged the use of the card as a mean of payment. And our portfolio has been growing because of this. We have approximately 70% of the production of portfolio based on cards that come from the purchase process and not only withdrawal processes. This is a very healthy portfolio, and I believe that we have been growing constantly quarter-on-quarter. Now, if we analyze Page #13, here, we have other products. And basically, personal credit here, we have debit direct debit low credit card FGTS anticipation. Our position has been direct debit loan, has resumed because it was lower in the past. We have been evolving in this product. If you verify Q2, and there is a significant evolution and you can see that the prospect for the second semester for all of these products is extremely reassuring. In July, we saw a significant evolution in payroll credit card debit, purchased direct debit loan. We have the FGTS anticipation and well, it has been transferred and it. You can see the results reflected on the FGTS portfolio. So, these are other products. Now, when we go to Page 14, here, we have our wholesale business. We have evolved. In our relationships, our operations provide value to the bank, which provide greater return and improve our relationship with our major clients and structured operations with correspondence and franchisees. We have reduced our exposure to this portfolio. That is our result of our policy to evolve on not deferred commissioning. If we see our partnership with Araujo Fontes and capital markets, we've evolved a lot. We've adopted posture to be main players in the market. This is for customers that allow us to lead the operation. We participated in '19 and offers as coordinator 10 offers as lead coordinators. These are operations where we have an interesting return without allocating capital. And this also allows us to participate in the strategic operations of our customers. And now, I would like to hand it over to Danilo.

Thank you, Joao. We will talk about financial margin. Now, page 16, Slide 16. I would like to highlight that part of the result of the FGTS Asana was used to strengthen our balance, and we normalize the FX. As you can see the release, and we will continue with the analysis of the normalized results. On the left, we have financial margin driven by the recurring revenues of core products. And on the right the NIM after the cost of credit. We have to highlight that this includes provision expenses and commissions, and they were benefited because lower expenses and commission and better quality of assets. On Page 17, here you can see operational efficiency. I would like to strengthen the efficient cost management and remind you that in the past quarters, we had already mentioned that these expenses, these nominal expenses would grow. But the margin that you saw in the past slide, which grew the efficiency ratio of the bank is stable. The operational provision, we closely monitor the provision models. Now, on Slide 18, the operational result shows an excellent trend, strengthening the quality of our figures. We continue evolving for a stronger, better, back and more profitable bank. Now, to talk about the ALM and funding on Slide 20, I would like to highlight on the left how the bank has been conservative, conservative liquidity management. No. We are conservative in liquidity management with free cash evolution, but will reduce the PLs. As you can see liquidity management between assets and liabilities have a maturity match and a short-term liquidity coverage rate, 347%. The improvement of efficiency of ALM has driven the institutional market. As you can see on the upper right-hand side, here, financial credit assignments and securitizations, CPGs grew year-on-year and at the end of the period totaled BRL 7.3 billion. And here, our pie chart has ended the quarter in time deposit of 78%. Now, the level of growth of the operations, and we've seen a significant improvement during this quarter, the Basel ratio of 14.7% is the best that we have ever presented. And this is level 1 above 10%. We have our capital leverage bid and subordinated debt. Here, we have CMTM, 40% of the 0.8% will come back by the end of the year, but the internal results that increases the Tier 1 of the bank. The core Tier 1 was driven precisely by the improvement of impacting the reference equity.

I would like to go to the Q&A session and reminding you that you can send your questions through our case webcast platform. Our first question is from Olavo Arthuzo from UBS. I would like to know about the contract with the maturity is for December 20, is it because of the resumption of the appetite for payroll loans, what can you say about this contract?

Thank you. We have a contract with Itaú. It's a 10-year contract. It matures at the end of 2026, and we have to respect this contract. What we have been doing is, we've been working closely with Itaú that is a partner that we admire respect and are proud of working with them. Developing other types of products and services that could be sold in our stores. I believe that a good example, mentioned by Flavio was BMG. We totally reviewed our product portfolio, the insurance products as well. We have reviewed our processes the coverage when we see a number of insurances. How we communicate with our customers, we have helped our sales force improving the quality of leads and CRM, et cetera, discussing commissions for productivity has grown a lot, and this is a matter that will be approached in the future. This doesn't only depend on BMG Bank. This also depends on Itaú bank. And we do have to respect this contract. We have to fulfill we have in the contract, but simultaneously, we have to think how can we value our sales force and how can we value our franchisees? How can we better service our customers? How can we do more business? We have a competitive differential with our health network with almost 800 stores. And our focus is how to improve the store. How can it be more efficient? How can it better service our customer? How can the BMG products meet better the needs of our customers and be profitable at the same time. So, this is something that we have been focusing on.

Thank you Felix, our next question from Pedro Avila from various research I would like to understand how the bank sees the new INSS auction. Do you believe that the current rate will allow BMG to participate?

Thank you for your question. We see the INS as auction as a market evolution. This market of credit connected to INSS payment is a big market. And the INSS option will provide us greater capacity to achieve an even greater number of customers than what we reach today. Now certainly, we know that these are tight margins. They are already tight now with the existing business model and in the INSS option, we're going to have to be very efficient. Our main objective is to be efficient with operations that provide return to the bank regardless of the origination channel. We believe that in this auction, we will be very competitive. We can be very competitive.

Joao could I add something? Joao underscored the auction that will take place through the site and the app of the INSS. This is not through bids. Our proposals now parallelly, we have the benefit auctions that takes place every 5 years. And it will take place during the second semester of this year and a number of banks participate in this auction. Now, regarding this auction, BMG will absolutely participate now with a scenario with tight rates, this diminishes the appetite, not only from our bank, but other banks regarding the bids, but our participation is discerned.

Now our next question from Pedro Calisto from Lovely Investment Club. Good morning and kudos for your result, what is the level of payout that we can expect this year? Flavio, can you help us with this question?

Well, thank you for your question, Pedro. We will not change what we have been doing. We continue in maximizing interest rate over capital. This will be maximized. If we have the limit available, we will do any payout above this level. It will depend on growth opportunities on our funding process. And also, the availability of partners for credit, the assignments that has allowed us to grow at a level above. Simplifying the answer what we're going to do, we will continue maximizing interest over our own capital within our limits.

Now, Haffaio Hay from BB investment Kudos for your results. I have 3 questions. Which is the rationale the seasonality in terms of profit? When will we see the reversion of IR? What damage the net result of insurance that remained flat?

I will start answering. Number one would be seasonality and results participation. We see this provision as a target. Therefore, it oxalates quarter in quarter. And what we see is precisely this amount during the year. To now IR reversion, we have already consumed the tax credits wings or base the tax credit has dropped in the sense. Nonetheless, this trend has improved during Q1, Q2, and we expect that during the second semester, especially Q4, we expect to see a complete reversion and insurance and retail, the result was flat despite the good results and the reason was BMG Insurance, the wholesale insurance, which affected the results. We know that wholesale isolates more than retail. This is why we had a negative result in.

And now in our Q&A, Gabriel Marge, a manager. We see a relevant player with civil lawsuits. This was a problem that you faced in the past. Could you give us a color how you see this matter? Do you see any negative surprises in this area?

Certainly. Thank you, Gabriel, for your question. No, we do not expect any negative surprises regarding civil lawsuits. This emerged years ago in the bank. Since 2019, 2020, this is on our radar and we have been adopting measures in order this matter. And I would like to separate this in 2 things. Number one would be the volume of lawsuits. This is a problem for the banking industry. Some players suffer more, some suffer less, but the banking industry as a whole suffers with lawsuits. This is public data. So, if you go to the CNG side, you can see what my current lawsuit stock is that of other banks. So, lawsuits are still a problem for the industry. Now, on the other hand, as I mentioned, we have been focusing on this for the past 4 and 5 years. So, when I see our success, our success quarter-on-quarter, year-on-year has improved and our success rate is 70%. I believe as our success increases, we see a drop in the pace of lawsuits. That is at a level similar to that after years growing, we see this more stabilized. And if we maintain improvement in our success, we will see a drop in our expenses with civil lawsuits.

Our next question from Fernando Gomez from Angus assets. Kudos for your results. Could you comment on the loss provisions because of civil lawsuit?

Yesterday, there was an article about civil lawsuits. Yes, the article had a bad freight. There are no provisions regarding civil lawsuits, nothing beyond normal. Many of you remember news from the past regarding the change of understanding of the Federal Supreme Court. And when you already judged, there was a lawsuit that had already been tried. There was a favorable ruling towards the bank. And therefore, this from the tax point of view regarding social contribution, where the likelihood of loss was remote became a probable loss. So, this was a relevant provision for this lawsuit. No, this provision is a relevant provision, but it did not consume all the gain that we acquired with the assignment. When you see an assignment, you have revenues, but you also have taxes that consume part of these gains and that result, there is still one part. And what we did was, we adjusted our expense, commission expenses entries because we have policies that are more aggressive. We pay commissions, cash and it's not deferred, and this consumed the difference between the provision to a lawsuit already tried and again with the assignment of BRL 1.2 billion in FGTS.

Our next question from Lula Silva. Congratulations for your result, the origination of a payroll loan drop. What can we expect?

So, if you compare the first to the second semester, there will be a drop in loans connected to the INSS benefits. They increased during the beginning of the year. This increase results in an important evolution of the portfolio during Q1 because it's seasonable and the second Q is lower than Q1. If you analyze the trend and compare year-on-year, you can see a major evolution. The second quarter comparison to Q2 last year, July had strong origination, and we have been able, through all of our channels, be it banker respondents help or networks or digital channels, we have been able to originate more operations than in the past. And apparently, the second semester will be even better than the first semester.

Thank you, Joao. One here, we have the Felipe of Autonomous Investor. Congratulations for the reason Banks are growing in credit card bank, does BMG want to grow in with these products, credit cards?

Well, thank you for your question, Felipe. In reality, we already have a relevant credit card portfolio can hear connected to the payroll. In open water, we believe that this is unnecessary and it's risky. We saw this in the past. Today, we believe that we have a payroll and the benefit card with the lowest rate in the mark and also the revolving interest rate is low. So, what we're doing right now is we're leveraging our product, not only for withdrawal and partial use as a card. And customers that don't need to withdraw money can be interested in our guide today from the volume between these 2 products, 68% are in purchase. We have a significant volume in purchase. We have 78 million customers that use our card. And the plan that is in execution is to increase the sale of these cards. Here, a credit card that would be a payroll card that is part of our core business. We have our commitment with the shareholders and our team investors is to continue focused. This is what we're doing, yes. We already have an interesting portfolio of credit cards and the idea is to evolve more and more with these products.

Now, as our Q&A session has come to an end Felix, I hand it back for your remarks.

I would like to thank all of you that participated in this video conference call and highlight important points of the bank. Number one, we have a strategy and we do have to follow our strategy. Strongly, we need a lot of capital discipline in order to provide good results, focus on the results. We have strongly worked on the culture of our employees and we've been training because we want an engaged team, a functional structure that is vision. Another point that I would like to highlight is that we are modernizing our technological area, we're reorganizing our database. We know that this is important to continue evolving in the bank so that the bank reaches a different level. We have increased our sales. We have improved our customers' experience and product flows. This is extremely safe because we don't want to create liabilities regarding lawsuits. So, I believe that our indicators have demonstrated that we have been successful in terms of lawsuits. We've seen better satisfaction and our customers better product penetration, index, efficiency index. In a nutshell, I do understand that, I know, that we are within our journey. We have to continue evolving, always improving our bank. The bank has a great potential. It has an untapped potential but pillars are clear to us and the results show this. The operational results are our port of quality capital structure, the engagement of our team and the satisfaction with our customer, and better relationships and increase of relationship with them. As we always say here, it's a long path. The bank this month celebrated its 94th anniversary. We have almost a Centennial Bank. And I'm very proud, and I believe that our entire team is proud of being part of this bank and conducting this bank so that it reaches a better level in the market and with more profitability. This is a difficult market. It's not easy from the point of view of competition with rates that exert pressure, but the bank has the muscle, the team, the knowledge, structured brand so that we continue evolving positively. I would like to congratulate the entire team for the results of the first semester. This is an excellent evolution. So, let's continue focusing so that we are able to deliver better results to our shareholders. Good morning to everyone, and thank you for participating.

Thank you, Felix. We thank all of you for the participation in our earnings call. Our IR team is at your disposal have an excellent day.