Banco do Estado do Rio Grande do Sul S.A. (BRSR6) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Banrisul's Fourth Quarter of 2019 Results Conference Call. Today with us, we have Marcus Staffen, CFO and Investor Relations Officer; Werner Kohler, Head of Accounting; and Alexandre Ponzi, Head of Investors Relations. We would like to inform you that this event is being recorded [Operator Instructions] The audio and slide show of this presentation are available through a live webcast at http://www.banrisul.com.br/ir. The slide show can now -- can also be downloaded from the webcast platform in the Investor Relations section of this website. There will be a replay facility for this call for one week. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banrisul's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Banrisul and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Marcus Staffen, CFO and Investor Relations Officer, who will start the presentation. Mr. Marcus, you may begin the conference.

Good morning, everyone. Before we start our presentation, I would like to give a few quick comments about our guidance. We [ expect the credit environment to maintain and see strategic ] growth in a better economic scenario in Brazil and Rio Grande do Sul. Payroll loans are growing fast and corporate credits should improve. On the other hand, with a more competitive market and our new rules about overdraft in loans, we believe that our margin and ROE can be affected earlier. Alexandre, could you make the presentation?

Welcome again. I'll start with presentation of our recurring net income that is being pressured by a more competitive environment in Brazil and in the state of Rio Grande do Sul throughout 2019 that is expected to be fiercer throughout the coming year. That's why Mr. Marcus just mentioned that our guidance may represent a slightly impact in terms of our margins and profitability. But recurring net income that increased 16% year-on-year was impacted mostly by: first of all, NII compression, given the competitive environment; lower provision expenses on credit; still increasing banking fees at a rate of 3% year-on-year and 2% quarter-on-quarter that eventually will be the trend for 2020 as a whole; controlled administrative expenses; and on account of the rate of the -- social contribution on net income, we had a lower effective interest tax rate in 2019. When we take into consideration also the events that adjusted our reported net income, those events that are treated as extraordinaries, we have seen an increase of almost 30% year-on-year. And those extraordinaries or one-off events were the restructuring of our postemployment pension plan that's offered to Banrisul employees that occurred throughout the first half of this year. We had higher labor provisions and the reversal of civil provisions as well. We have also updating of our deferred tax credits on account of the changing from 15% to 20% of the rate of the CSLL. Those events have produced one recorded reported net income of BRL 1.3 billion that shareholders will be paid at the rate of 40%. This competitive environment has had an impact in terms of our -- both NIM and NII. NII has seen a decrease -- a similar decrease year-on-year and quarter-on-quarter of a little less than 3% performance. This is what we are expecting on an environment that is ever challenging with the addition of this cap -- mentioned cap on our overdraft accounts. And -- but then again, in terms of return on equity, we produced, with the numbers of 2019 as a whole, almost 7.9% of ROE. Provision expenses on the other hand and as we had anticipated in the beginning of the year, we were expecting that those numbers would be reduced in comparison to 2018, and then we saw a decrease of almost 7%. And given the trend of specialty credits that were written off and were renegotiated, that is an ongoing process, which had a higher and more relevant amount average ticket in the third quarter, we have seen a reduction of 24% in terms of the provision expenses that were booked in the last quarter alone. Our funding structure has been maintained, a very positive driver for impacting and producing asset -- credit assets. We have seen increase in average of 6.5% year-on-year. But more importantly than the growth itself is the fact that we have maintained funding costs under control, and loans-to-deposit ratio very positive, meaning that we have all the conditions to start increasing our credit portfolio that currently is being mostly focused on payroll loans. And our guidance anticipates that we are expecting an increase in terms of our credit to companies as well that had a negative performance of minus 2.3% in the last year, and we are assuming that they shall grow at least 2% in comparison to the number at the end of 2019. Banking fees. They have increased year-on-year at a rate of 2.3%, and in the last quarter alone, when we compare to September, they increased almost 2%. This may be the -- quarter-on-quarter performance may be the trend that we are expecting going forward on account that part of the impact in terms of compression of fees, eventually, will be mitigated by the fact that all the lines of products shall increase. We were too dependent on MDR coming from our acquiring network that is a very compressed, very competitive environment to challenge. The new incumbents are disrupting the acquiring business as a whole, but we assume that there may be events positive in order to expect a slightly increase, 5% to 6% year-on-year in terms of our fees. And we shall consider as well that the comparison basis with 2018 most -- a discount almost BRL 51 million of MDRs that were recorded until May '18 coming from our card company in terms of -- card company booking together not only the MDR but interchange fee as well. Therefore, the managerial performance of our banking fees would have been higher than this 2.3%. It would have been almost close to 5% if we take into consideration this changing the way that MDRs were booked until mid-2018. I started by saying that we have a very well-behaved administrative expenses, and the proof is that they are at similar levels that we had in 2018, a slightly reduction of 0.4% regardless of the personnel or other administrative expenses altogether. Other adjusted operating incomes and expenses, they give reasons -- the performance give reasons of the impact, extraordinary impacts, that were recorded in terms of our reported net income, especially those related to the recognition -- the reversal of labor civil lawsuits provisions on -- civil lawsuits, I mean, I'm sorry, not labor provisions, and the increase of labor provisions that we booked in the last quarter of this year. In terms of our balance sheet altogether, assets increasing 5.3%. Banrisul now reached BRL 81.6 billion in terms of total assets, of which 22 -- almost BRL 23 billion are represented by our securities portfolio that increased 7% year-on-year and slightly under what we had in September on account of seasonal effects and the fact that by the year-end, there is a higher amount of money into circulation that's being used for all the proceeds. Credit portfolio is still driven by nonearmarked credit. They increased 6.2%. This nonearmarked market credit is mostly -- or 3/4 of that represented by payroll loans. But we are still seeing some increase in terms of earmarked altogether that is recovering the trend, especially coming in the last 6 months from our agricultural loan portfolio. The slide that is before you now represents the breakdown of our credit portfolio in which credit to individuals represent 60% of our total credit assets. And out of this, 75% are represented by payroll loans BRL 16 billion in terms of total balance that are increasing at more than 15% of our base year-on-year, regardless of the channel of production, with customers using our banking correspondents to produce credit that has been offered to civil servants and retirees from the national pension plan throughout Brazil. Provision, as a total of our loan book, has increased at a trend that is lower than what we produce in terms of credit portfolio, and this is the trend that we are expecting to see in 2020. Even though we are assuming that our credit portfolio shall increase in terms of guidance, provisions are not to follow suit at the same level. So provisions represent now 7.6% of our total loan portfolio vis-à-vis the 7.7% that were the shares that we saw in December. Shareholders' equity 7.1% increase in 12 months, BRL 7.8 billion in total. Main indicators of Banrisul annualized ROE for the numbers of the last quarter, 19.7%, but if we take 2019, we delivered almost 17% of ROE, and similarly, 1.6% in terms of ROA. Default rate increased on account of very one-off events throughout the last quarter, slightly higher than they were in the part -- in the previous quarter and almost 30% above December. But this 3.4% of 90-day default rate is what the retail banking industry in Brazil has reported so far. We are in line with the industry. Similarly, cover ratio is at the same trend that we are seeing in the banks that have reported so far. And we announced in the beginning of the year that the 300-and-plus cover ratio that we had, they would be reduced naturally and organically throughout the coming quarters, and this has happened and placing Banrisul at the similar levels as is its competitors. We are trying to improve our efficiency ratio. The guidance is from 50% to 54%. We believe that this 52% that we presented in 2019 shall be the point from which we want to improve the numbers. We are comfortable with fees, regardless of the competitive environment, being able to support in full, with some additional amount, our personnel expenses. We have very comfortable Basel ratios total -- and Tier 1 altogether. And you have before you as well the number of employees and current branches that Banrisul possesses. And this gave -- gives us some room to expect an increase in terms of our efficiency. Guidance was presented by Marcus at the beginning of our call. Therefore, now I'll shall pass the microphone over to Q&A session. Thank you.

[Operator Instructions] There are no questions in the queue.