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

Good day, everyone. Welcome to BMG's Fourth Quarter of 2024 Earnings Conference. My name is Danilo Herculano and I'm responsible for IR, M&A and institutional distribution. Today, we have with us Felix Cardamone, CEO. Along with us, our Vice President, Flavio Neto and Joao Consiglio. Please note that this video conference is being recorded and will be made available on our Investor Relations website. [Operator Instructions]. Before we proceed, I would like to clarify that statements made during this video conference regarding the bank's business outlook should be considered as forward-looking statements. Investors and analysts should understand the general conditions, industry conditions and other operational factors may affect the bank's future results and could lead to outcomes differ from those expressed in such forward-looking statements. Now I would like to turn it over to Felix to begin his presentation. Felix. You have the floor.

Good morning to everyone. It's a pleasure to be here with you to announce our fourth quarter and the closing of 2024. This is a year that was challenging nonetheless, I do understand that we were able to fulfill our mission evolving significantly when it comes to our results. When we compare it to 2023, as you can see in the chart, we were consistent in our deliverables. We've seen this since the beginning of 2024 until Q4. I would like to highlight for the results evolutions BRL 125 million during Q4 and the generation of more than double regarding the net result when we see 2023 which is BRL 441 million and the double of return on equity in 2023 was 5.2% ROI and now 10.7%. Now this demonstrates how asserted we have been in our strategy, our execution, discipline, this within a very challenging scenario, especially when we see the consignation market or the payroll market. Now on Slide 3 here on this slide, I would like to highlight the main strategic priorities. And I would like to remind you that how much we have evolved. So we've strongly focused on the improvement of customer satisfaction. And you will see this throughout the presentation. We improved our position regarding the Central Bank complaints, we -- we've dropped -- now we are 32nd in the ranking improvement of 19 positions. We focused on improving the client experience with greater cross-selling for these customers. We carried out a number of surveys during 2024 with sales team, customers trying to understand their needs, their profile, what we have to adjust within the sales process or adjusting products so that they -- so that we meet our customers' needs. This is a C, D, or even E class, some are even illiterate. Therefore, we have to strongly understand this customer. And we have been able to evolve our cross-sell rating, you can see this throughout our portfolio. I would also like to remind you that 2023 was a year where we reviewed our onboarding actions to be absolutely sure that we were going to grow in 2024, BRL 8.7 billion to BRL 10.6 billion in origination was the result from one year to the other, this is with a lot of quality. Here, I want to just to underscore all our benefit cards and payroll cards. All the actions are confirmed through a video call where we speak with the customers so that they are absolutely sure and that we are absolutely sure that they are buying what they see, what they buy is exactly what they want. And this is why we have a portfolio with great quality. Now cost the last point. Our bank is a retail bank. Our average tickets are low. We have a tight margin. Therefore, we have to be very careful with our costs and our efficiency rate shows this. We went from almost 58% of efficiency rate ratio to 52.8%. Now our costs are flat. They even dropped in 2023. Regarding 2024, nominally. So although there has been a production increase, an increase of portfolio, an increase in our customer base. Our bank is growing in scale, and we have delivered 10.7% of ROE, which we believe is a sound figure, and this demonstrates that we are on the right path. I would like to highlight that there is still a lot to do, the bank can grow even more. But this figure now this is an ROE of two digits, is a motive of proud -- pride to me. I would like to thank core banks, our franchise, our partners and our entire team of employees. Now to our next slide. Now deep diving a little bit on our customer view. I would also like to highlight that this bank has over 10 million customers and 70 with credit product, we have an activated base and profitable base and a lot of them with insurance products. And this is an area where we're growing. We understanding the needs of this public, and we do believe that we can grow even more with new products of assistance, covering a number of needs of our customers so that they feel more protected. And here, the other charts, as I mentioned, regarding our production that has grown in cross-selling. And I would like to highlight the creation of a new management. We have Bruno Capelin. This is a professional with over 20 years of experience in the market and is in charge of the digital and growth department and new customers. So this shows our commitment in becoming a reference bank and customers service and the relationship that we hold with the low income public. Now our next slide, now we are reaping the results. It's not that we started this trajectory now. This is a bank that has been recognized as a pioneer of that receives this customer, this for 100 years. And we've also achieved significant results regarding the quality of customer service, the amount of complaints from the Central Bank dropped almost 60% when we compare Q2 of '24, of Q4 of '24. This is a significant drop and call sector activations dropped 31%. So what have we done? We work with customer service with the product area, with the operation area where we are constantly identifying why our customers activating us. And through this raw material, we carry out reverse engineering in order to improve the product, the application, the journey and also improve the communication text, our sales script like our video call and with this, the customer knows exactly what they are buying, what they're using in our bank. And as a consequence, they call us our call center. This increases satisfaction and drops the cost of service as our NPS is 77%, which is a very good figure. We, of course, want to always improve. And here market recognition, we received the Reclame Aqui award as bank category and an award from Mastercard regarding fraud prevention. So we have been growing and we have been growing safely. And enchanting more and more customer base and creating more loyal customers. This thanks the partnership that we have with our franchisees, our stores and our correspondents. Now here you can see how we work when it comes to relationship with customer relationship here, you can see the results, the priorities that we've delivered as well as how we have been improving our customer service and how we have improved our distributions. So currently, we have 23 branches. We are present through in all the country 825 help! stores. And the stores, well, we intend to increase 75 stores, and we want to have 900 or even more stores by the end of the year. We also have partnerships with our bank correspondents. And also, we have a digital channel that is extremely powerful. Through our app, and our customers connect to us through the app. So what we want here or what we are developing is something that is multichannel how we integrate physical and digital channels, how we can grow with low cost. Here, our help! stores, our franchisees are the ones that open the stores, we have approximately 150, the rest belong to our franchisees. They are strategically located and they are reference of customer service. And what we have realized is that many of our customers do business through our app, when they want to hire a product, but sometimes they prefer to go to the store to be absolutely sure that they are preventing fraud. So we do have to respect this and broaden our channels being more productive, more efficient and more integrated. And this has been a great differential that the bank has presented, and we will continue investing in these partnerships. On our next slide, now here, you can see our platform, how we want and how we are going to evolve. These are a number which are in drivers to grow in scale with good risk management, with quality and at low cost. First point would be this efficient cloud evolution, over 40% of our platform is in the cloud. We intend to evolve quickly in this sense. Now in order to evolve toward cloud service, we also need -- we need a micro service architecture. So we are rewriting all of our solutions and applications in order to migrate subsequently to the cloud. This has been done rapidly. We started this process in January of 2024. Now simultaneously to the architecture, we are also digitizing and automating our operational processes and all front. This will provide safety for the bank to grow and also a lot of scalability. We're implementing and there is a rollout of a new formalization process. This system provides nimbleness to our sales process, where you only have one registry and the offers is underscored so that our sales force can work in an efficient fashion. And so our customer is able to visualize all the opportunities for them. We are reorganizing our database creating a unique registry, which is strategic in order to have an efficient CRM and to understand clearly our customer needs. And so we're able to offer the products that they actually need. And last but not least, we are using AI focused on the bank's operational efficiency. We still have not externalized the AI apps for the front or for the end customer. But yes, there are a number of initiatives. There are 18 initiatives being developed within the bank to provide more efficiency to the bank. The name of the game is operational efficiency, it's customer focus. And as a consequence, we will achieve better results. In a demo, this is the drop. We will have lower service costs. This means how long does it take to [ hire ] our loans? Or approval time for payroll loan. All the infrastructure that is being redesigned is providing good results with almost BRL 1 million monthly proposals. The time has dropped almost 90%. So this means that we are going to be extremely competitive at the end. And now I will give the floor to Flavio, so he can continue with the presentation.

Good morning, Felix. Good morning to everyone. It's a pleasure to talk to you. We will start with Slide #9, where you can see our credit portfolio. As you can see, we have the we have the orange part. We have the payroll products. Here we have payroll credit card, light orange payroll loan. These portfolios together with the FGTS anticipation like the purple, which is rain, these portfolios represent 60% of the bank's portfolio and the profile is extremely conservative with reassures us within an environment of high interest rates where there is a scenario of defaults. So we're growing soundly with quality. Here now we are going to reclassify the past. So basically, the portfolio that we had of retailers that were considered runoff portfolio, they are placed within the portfolio. Now we believe it will become stability. Other portfolio that was with another portfolio that is payroll -- U.S. Payroll portfolio. This is no longer a strategic portfolio. This is the U.S. Payroll. We're exiting this portfolio throughout a runoff during 2025, '26 or perhaps selling this portfolio, we are already talking to potential partners that are interested in buying the U.S. Payroll. So throughout 2025, we will continue focused on our core business, on our payroll cards, on our payroll loan and in the retail of companies, retail individuals with the FGTS anticipation. And we have products that have gained momentum during the quarter. We have the wholesale portfolio during this quarter presented a growth of almost 10%. Now on Slide 10. Here, you can see the quality of our credit portfolio. Due to the conservative profile that is 68% of our portfolio, we have a good level of NPL. Now our coverage ratio has been stable around 110% during this quarter, it was 108.9%. And regarding our provision expenses, net of recovery as NPL over 90%. Now it is 5.4%. Therefore, we are reassured to continue developing our businesses and our strategies. Now when we go to Page 11. Here, you can see our products, starting with retail insurance. As I mentioned beforehand, we sold the wholesale insurance products. So we are more focused on retail insurance. And here, you can see growth from the insurance brokerage point of view and our insurance point of view. Now BRL 980 million of premiums sold vis-a-vis BRL 814 in 2023. Now issued premiums from the Seguradora BRL 355 million this year, BRL 270 million last year. And this is an operation that is growing and it's profitable. Our combined ratio is 72%. This shows that the company is very profitable. We compare it to other insurance company. This revenue is almost BRL 200 million and almost 10 million insurance policies. And in terms of policies, we're amongst the biggest insurance companies of Brazil. I will hand it over to João so he can talk about our products.

Good morning, and thank you, Flavio. It's a pleasure to be here. Now I would -- now speaking about our strategy regarding payroll loan that is our core product. And we've strongly invested in this product throughout 2024 in order to resume the natural position that is the position that we should occupy. We have been very timid in our payroll products. And throughout this year, we grew from 2% of origination to 4%. This is less than what we should have achieved as market share, but the figure is higher than what we had in the past. And it is part of a strategy to be present with our partners and bank correspondents. We want to originate profitable customers and to maintain within our portfolio, the operations that makes sense and provide us revenue. And within our strategy, we have well -- and everything that is not part of our strategy, well, it is assigned. Now as you can see, the number of assignments that is a strategy between what we originate and what we assign. And during the last quarter, and because of the -- there was a paralyzation in December due to the low INSS ceiling rates. Now we have also focused -- we've worked with this product trying to achieve cross-selling. We've tried to work with cross-selling with this portfolio, although we've had the lowest historic spread of the last 15 years. We have -- and as we have lowered our service costs, we have had reasonable returns because we were able to reduce the offer to the customers that presented lower risk, and we are working with higher tickets to enable this portfolio. Our strategy continues the same. Even with the rate of the INSS rate ceiling that is [ 1.66 ]. This is very tight, but we will continue working to be efficient. unfortunately, offering less than what we could offer to customers. So can we go to Page 13. And now we will talk about our payroll credit card and our benefit payroll card that is the main payroll portfolio that we have, which is strategic. And we have been growing time after time in a very consistent fashion. Here, you -- we've improved all of our processes, the formalization. As Felix mentioned, we have formalized through video calls with all customers that buy our products. And here, we want -- they want to identify if the sales was done properly, if the customer knows exactly what they are buying, identifying the different needs of the customers. And this has provided a lot of satisfaction in our customer -- and the customers, and this is reflected on our NPS ratio. Now this portfolio, and we've encouraged the use of card as payment means and the origination is high. This portfolio that has been growing organically is one of the core products of our bank. Now page 14, please. On Page 14, we have retail for individuals. And within this portfolio, there are two products that are core, and we have encouraged. Here, we have the FGTS anticipation. During the first semester of 2024, we assigned BRL 1.2 billion. This is why there is a drop. This is a portfolio that after this assignment, we grew once again consistently. And our direct debit loan, the share of this product within the bank strategy is shy from what is ideal, but this is a product that is growing consistently and providing profit to the bank. Now Page 15. On Page 15, here, we have the wholesale side. This has -- we have reorganized the teams here. We have grown in a consistent fashion, a bit slower, but with safety, with good customers, and we have guaranteed operations. Our structural operations practically reflect stability. And although there has been a lot of growth in origination together with our partners, the anticipation hasn't increased at the same speed. What we have here, just to underscore, this is together with Araújo Fontes, our investee, the bank has stood out in the origination of marketable securities portfolio and not credit revenue participating in 44 offers as a coordinator and 30 offers as lead coordinator. Now I will hand it over to Danilo. Thank you, João.

Now going to Slide 17. I would like to strengthen the margin of our financial margin driven by our product markets and also personal credit. This is within a payroll scenario, which is challenging. What I would like to highlight here is the financial margin after credit card in addition to the PDD costs, we have commissioned. This grew 17.9%. It went from 8.5% to 9.2%. This increase was post -- was due to focus on core products and of course, because of the better quality of the bank's assets. Now our net provision expenses have grown year by year. Now on Slide 18, talking about operational efficiency, this is very important as Felix mentioned throughout the presentation. Now the efficiency gain of our bank has been seeing something very significant. Our expenses when we compare year-by-year dropped 0.3%. Now when we see the increase of processing of 10.4% of percentage. This is an increase of 15% in PIX transaction, portfolio growth of 10.5%, and this shows the scalability percent. Our efficiency ratio went from 58% to almost 52%. This we are pursuantly focused on this. And here our personal, administrative and operational expenses, there is a drop. Now within the quarters, there can be a variation. But when you see the forest, you don't only look at the trees. And we've also dropped net operation provision expenses year-on-year. Now the result of the operational result. The result on the net profit is significant. Although profit almost more than doubled this year, our operational margin and result grew almost 4x from BRL 180 million, we've gone to BRL 678 million. And this was dropped due to our operational roles with there were no tax losses. And this shows the quality of our results and when we talk about capital. Now going to slide, funding. As we have been strengthening throughout the quarters, we have a conservative liquidity management improved assets and reduce this cash as expected. This is because of the average time of funding that went from 21 to average term funding of 26 months. Now we have 675% in short-term Liquidity Coverage Rationale. Now we resumed our position in the institutional market. And here, we had institutional funding grew 87% and accounting for 29% of the total. Now this is thanks to time deposits, especially when we see retail funding, the bank had already had its thresholds of compulsory. We have the FDCs. So most of our operations have allowed to reduce risks. Now speaking of capital going to Slide 21. Now the Basel ratio, Slide 21, Basel ratio during this quarter was impacted by the NTM of public bonds and because of the -- we were in December above 10%. And regarding there are the regulatory impacts now Basel, the impact shares quarter -- the Basel Simulation on January 1 was 12.8%. And also here, when we see the Law 14,467 and MP, that this means that the bank has the capacity to absorb the acceleration of tax credit. So the main impact here is regarding the 4,966 maintaining comfortable capital levels. Now when Flavio spoke about payroll USA as a nonstrategic portfolio. I want to show you how the bank Basel condition will remain when this exits. Our total Basel would be 14.2% and 10.14% for Q4. Now I would like to hand it back over to Felix for final remarks.

Thank you Danilo. Thank you to everyone. Before we go to our perspectives, I would just like to provide you a brief summary. In 2024, we practically doubled our profit. Our margins increased despite all the market difficulties because of interest rate, the lowering of the ceiling rate, we were able to manage our costs. We practically did not increase our costs. We had a marginal cost, our operational results fourfold year-on-year. We maintained a Basel above 13% and the Q4 above 10% and very strong balance. These figures actually demonstrate the level of engagement and the level of responsibility from the bank because we want the bank to grow sustainably. This is our moto in-house, we want to grow on sound foundations. And now on our next slide and speaking about perspectives. What does all of this mean to us? We have to continue growing point number 1 would be that we need a sound foundation. So we are strongly investing on a technological platform that is stable, that is scalable and that is flexible because the market is an extremely dynamic market. Therefore, we need agility to capture the best opportunities, number one. The same thing regarding our operational area that has to be totally digitized and automated. We will enable low cost and a lot of safety to control risks. And pillar #3, we are reorganizing all our database. We are creating a new data lake so that we are able to have a much more assertive CRM that will strongly help us when it comes to work commercially through our apps, through our help stores or to think to help our banker respondents and increase the satisfaction of our customers. These are the foundations where we're strongly investing, we have started in 2024, and we will reap the results in 2025. And speaking of other points. Number one, the bank has decided to focus on class C, D, and E, this is the population of low income and public civil servants and retired publics. These are almost 40 million retirees and pensioners from the INSS, 50 million people will retire in the upcoming years. These are 13 million public employees. This is one of the priorities that we have for 2025. And there is still the private sector employee, and we are interested in this area. This represents almost 50 million people, but we have to understand how can we create a strategy for this. We are doing our homework, but clearly, we still need more clarifications in order to create a clear strategy to approach this public. Our addressable market is broad, as you can see. And today, we have 10 million customers. Therefore, there is a lot of room to expand our growth. Another point, which is about most importance is our product mix. We have high adherence of the products to this audience, be this credit products, be it investment products or insurance products. Today, we do not have an insurance company focused on the low-income public. So we have to understand their need. And yes, there will be a potential. And we have to offer the right products to this public. And we have the distribution channels for this, like our help! stores, our franchises that are 825 and we have been expanding strongly our stores. We do understand that this is what -- this is our competitive differential, not only because of the physical presence, but because of the location and the service quality and the low cost to serve. We have a good app, and we will invest more and more on this app. So we have more frequent WhatsApp approaches to our customers to have more loyal customers. And our bank correspondents that are part of our DNA and we will continue growing with them and preceding them. In a nutshell, we're strongly focusing on extremely modern and stable platform so that we can grow with safety. We also have an audience that we know and we can service them better and better. We have products and services that are right for this product. But of course, we want to evolve in this sense and at last but not least, extremely powerful channels in order to distribute all that we have. And going to our next slide and showing the details of our strategy for 2025. Number one, as I said, increase the addressable market with the different payroll products, we can increase the number of clients. We have INSS, we can improve efficiency, cost management. Throughout the past 2 years, we have been able to show you how we can properly manage our cost. And this should be one of the banks being competitive advantages, digitize our customers and our processes. So we are nimble to grow with quality to expand product offerings according to our customers' needs now to leverage the differential that we have to our channels and into great customer view or insight without the bank. We need to develop customer insights. And this will help us to make decisions. And we also intend to continue evolving to deliver more results to our shareholders in a sustainable way with quality of assets, quality of capital and a sound balance and profitability and predictability in our results. This is the backdrop for 2025. I do understand that there is still a lot to do, but with my spectacular team and with the support of our Board and the partnership with our channels, I'm absolutely sure that we will make great strides in the bank. And now I hand it over to Danilo once again.

Thank you, Felix and we will initiate the Q&A session. [Operator Instructions]. And the first question is from Pedro Ávila. Congratulations for your results when we compare the end of 2024 to the end of 2023. We see the NPL from 2023 to '24 and -- can we consider that these portfolios reach maturity and the level of NPL will not change? Can you help us with this?

These are regarding the direct debit loan cards and the payroll cards. Well, these are different questions when we see payroll card and the benefit payroll card. The payroll credit card is a portfolio that has matured for some time. This is a robust portfolio that grows slowly. And with this, as it had lower NPL, this was connected with delayed cards sales, and this is why now, the level is higher than what it was in the past. Now the benefit card is different. This is a newer product. This product was launched less than 2 years ago. And therefore, this portfolio is still growing. And as the portfolio grows, the NPL tends to increase a little bit. It will -- still -- we will still see a moment of NPL stability. We expect the benefit payroll card to represent an NPL, slightly below from the payroll credit card because the average age of the benefit cards as it's a newer, it is below the age of the user of payroll credit card. I spoke about NPL, but we should also speak about net provision expenses here. The dynamic will change in 2025 with the implementation of 4,966, this is not an incurred loss, but an expected loss. So the expenses of net provision expenses are connected to the growth of a portfolio -- portfolio that is stable like a payroll credit card. You have a net provision expenses that is controlled now in the benefit card. So let's see, in the net provision expenses affects a little bit more. In a nutshell, I believe that these products from the delay point of view and NPL, they represent different dynamics.

Okay. Thank you. Thank you for your answer. Our next -- Ricardo [ Mendoza ] from [indiscernible]. How are you positioning self for the slowdown of the economy in '25 with high interest rates and inflation?

Thank you for your question. Ricardo, I would say #1, our balance is sound and our A&M policy conservative to undergo these moments. Now we have a payroll portfolio, which is safe because we're talking about operations with guarantee. So we are prepared for an economy slowdown. And with our strength and with our tradition, we do understand that we are totally aligned to face this type of situation because we have a good balance sheet because we have a good funding structure and because this is a safe portfolio that doesn't see an increase, a significant NPL as operations without guarantee. This is thanks to the strategy that we deployed of 2023. We exited risky portfolio because we want to be prepared for moments where there are high interest rates and high inflation that resulted in higher NPL. This means that we did our homework throughout 2023 and '24 and we are prepared to face the scenario being very conservative when it comes to providing credit.

[ Lamar Fontura ], an investor. Although the recent improvement in the consignment INSS rate, how are you maintaining profit?

Thank you for the question. I believe that we spoke -- our focus on efficiency, we have to work with the data that we have during the past year, we've been working with lower spreads and we have been able to improve our results. . In addition to this we are focusing on origination working with long-term partners and working in an efficient way with all of them and looking for alternatives with new agreements and everything that can provide us more earnings, especially when it comes to selling more products to our customers. Now this combination reassures us that our results will come in throughout time. But as I mentioned, we must restrict some publics that represent higher NPLs and to work with higher tickets. That are the ones that provide us more profitability. If there is a change in the ceiling rate, we would be able to serve more people, especially those that are in need that come to our stores, to our correspondent or reach us through the digital channels.

And our next question from Olavo Arthuzo from UBS. Could you elaborate over consigned about credit analysis? Will the individual or company risk, the rate would be lower than the current rate. Do you believe in the cannibalization of other lines? How would the distribution be done. Flavio could you give us color on this?

Now thank you for your question. Olavo. Let's talk about private consignment or private payroll. What is important to mention is that we must define things because we really don't know how this is going to work. And without this information, it is difficult to talk about this subject. And -- but as we already know that the subject does exist, this is an interesting product. We are deep diving on this product, and we are carrying out the credit analysis. And this is a double analysis that takes into account the individual risk, the turnover, the personal and even the enterprise risk because there is a transfer rate because the enterprise has to collect this from the employee. We do understand that if this operational dynamic if it works properly, well, it will mitigate rates. So this will enable lower rates than what we have today for personal payroll credit. Well, we don't work a lot with this public. What I have today is people that work in the private sector are that have contracts, we use FGTS anticipation and something regarding credit. So if this product is right, it presents great potential to increase not only our portfolio, but in Brazil, to increase the private payroll credit card in Brazil. And what is important is that through is social -- you eliminate the scalability problem that existed in the private payroll credit card. So once the scalability barrier falls, the other barriers that exist is risk management. But if there are no rate limitations, this product will not present lower rate as INSS but I believe that the rate will be lower than that, that is offered with personal credit. Now when you talk about distribution channels, this is something that we are discussing together with the government, if we limit the channel, if we increase, if we use the government's app, there is no vision -- total visibility for this. Yes, we are preparing ourselves to distribute this through our channels and are successful. And the success of a product goes through better distribution be it through the correspondents, the app or even the government's app. We -- I think it's too early to talk about our appetite, how aggressive we will be, but we are -- but certainly, it is a product that we're interested in.

And our last question from [ Elizelle Hessen ], he's an individual. Congratulations for the result. They are payroll mark with ROE for above 30%, exploiting the voice of customers with diverse product. I would like to know if there is a future expectation. And regarding the ROE, will it be around 20%?

Well, this is a good question. We want to become a reference within this market. I generally say that within our bank, the management of a bank has no shortcuts. So year-by-year, we have to improve our results. And we must avoid any type of distractions or any type of temptations because the name of the game here is consistency. And to pursue the best indicators and the best market practices, we do not provide any type of guidance. But bear in mind that our mission is not only to be a reference as we are in the market in terms of brand, but we want to be a reference in this market when it comes to results.

So our last question, we end our Q&A session. Once again, I would like to thank all of you for participating in the Banco BMG Earnings Conference Call. Our IR team is at your disposal. And have a... [Statements in English on this transcript were spoken by an interpreter present on the live call.]