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

Good morning. And thank you for holding. At this moment we would like to welcome you to the Banrisul Earnings Conference Call to discuss the results referring to the first quarter 2021. Today we have with us, Mr. Cláudio Coutinho Mendes, the company CEO; Irany Sant’Anna, Vice president; Marcus Staffen, the CFO and IRO; Osvaldo Lobo, the Credit Officer; Nathan Sassi Meneguzzi, Investor Relations Superintendent; and Werner Kohler, the Accounting Superintendent. We would like to inform you that this event is being recorded. [Operator Instructions] The replay of this event will be available soon after conclusion for a period of 7 days. We would like to clarify that the forward-looking statements made during this conference call referring to the business outlook of Banrisul, operational and financial forecast are based on the assumptions and beliefs of the company management as well as on information currently available. These forward-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions, as they refer to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect the future performance of Banrisul, and lead to results that differ materially from those expressed in such statements. We would now like to give the floor to Mr. Cláudio Coutinho Mendes, the company's CEO, who will begin the presentation. You may proceed, sir.

Good morning. Thank you to all who are present with us. We are here to present the results of the first quarter '21. The result was BRL 278 million, the second-best result for the first quarter since the IPO carried out in 2007. This of course, despite the restrictions of the pandemic and an exacerbation with the second wave beginning in March, and this limited several economic activities in Rio Grande do Sul. We continue on with our discipline, with our agenda, focusing on efficiency, on our service network, closing down some branches and PAs. And we are working with our associates with a career plan, and we are resigning the incentive rules for the long-term. We're also focusing on the [ digitation ] of processes to enhance the experience of our customers. And we're improving our digital channels this quarter. And we will see this further ahead in detail. We had 77,000 transactions already carried out through digital channels. In terms of credit, we're reaping the benefits of a very assertive behavior last year and this first quarter, that led to a very low default rates even for customers that underwent renegotiation with credit cards. At the height of the pandemic last year, we continued to focus on our vocation with the retail market. We're moving away from large corporate and focusing on individual people, on payroll loans, on medium and small companies and the real estate market and of course on our sustainability issues. I hope that you have the presentation that we sent to you. I would now like to begin with the presentation on Slide #2, mentioning our initiatives and the ESG front. The bank and most of the leadership positions are occupied by women 39%. In terms of the social activities in communities, we have a variety of social programs that have been underway for quite some time at Banrisul. And in the state we have 50 programs that are supported every year. I would like to highlight some of the main social actions, the Seeds programs that has delivered seeds to families. The Pescar Project where we support young people in a situation of vulnerability. The apprentice program, we have 300 young people that are undergoing professional training with the sponsorship of Banrisul. Besides the significant support to action in communities and family agriculture, events, fairs, cultural events, working with agri business as well and supporting sport for the vulnerable youth. This is just a glimpse of the programs that we support every year. We also offer credit support to universities, to regional hospitals and philanthropic hospitals. This is a very important avenue of support. In terms of the environmental area, our highlight is the CDC Sustentabilidade, basically used to finance the purchase of solar and wind energy equipment. We have had a great deal of growth and success with this credit line. In the last 12 months, the number of contracts increased almost 20%, 19%. And the volume disbursed grew 100%. It's BRL 200 million in this portfolio. And because of the environmental importance, the economics context is one of top efficiency. When it comes to solar and wind energy for small businesses, small farmers or even the small industries in the hinterlands. In Slide #3. I would like to refer to the highlights of our work and agri business. Of course, this is one of the focuses of the bank, allowing a growth of credit lines for farmers in Rio Grande do Sul. I would like to pause and refer to the scenario that we foresee based on the global and national outlook. Presently, we're undergoing moments with an unequal combination. We have had a record grain harvest in Rio Grande do Sul, but at the same time we have international prices at historic levels. Historically, they were very steep and a very rare combination. Besides having the international dollar rise prices that are very steep, they real-dollar ratio is depreciated. The dollar is extremely steep when compared to our currency, the real. Now this conjunction rarely happens when the price of commodities goes up. Normally we have an appreciation in the real. And of course these are known as commodity currencies, both the Australian currency and the Brazilian currency, for reasons that we will not discuss here. The dollar is highly valuated vis-à-vis the real. When you think about the profitability of the business in reais, well, historically the result has been spectacular. So we have a very positive situation for agri business. We look upon this with great optimism. And we will see what this activity will convey to the rest of Rio Grande do Sul. They have had excellent performance in production as well as in profitability. Our portfolio grew 27.5% in 12 months, with more than BRL 500 million. Once again, with very low default rates of -- we will continue to enhance our model. We have had several improvements in terms of contracting credit. We have a digital system that will transform the granting of credit into a simpler process ever more and structural changes in the way of obtaining credit, which means we're creating more efficiency and agility. And we continue to gain market share in this field. This strategic option of the bank makes sense, considering the competitiveness that our agri business has vis-a-vis other sectors and economy. We now go on to Slide #4 to speak about digital channels, which I referred to in the opening. We had a growth of 20% on an annual basis. We have more than 1 million daily accesses through the digital platform, a growth of 20% vis-à-vis the year 2020. 97.7 million accesses are already done through this digital channel. And I think the trend is to continue to progress with digitization in our processes. We invest constantly in the IT area to be able to ensure that all our processes are on the digital platforms to ensure a simpler experience. We also have included our performance in the PIX transactions for the quarter we had. In January to March vis-à-vis '20, we had a growth of 119% in the use of this channel. And transactions, BRL 3.8 million for March 31, compared to 1.75 million transactions in January. We will refer to our vision of PIX. We deem it to be highly positive. And in the average term, this growth in terms of instant payment means will be a benefit to the system also in the field of profitability. If we look at systems that are more advanced in this process, such as China. China, well, their share of WeChat. Well this makes it so that the currency is no longer used in China. There is a QR code in WeChat to receive the money. So the use of paper currency should drop or plummet. Now we see that the PIX transactions are growing. Part of this does cannibalize other transfer systems. But basically, the transactions in check and money are all migrating to PIX. And this allows us to forecast that in the medium term the handling, the transportation, everything linked to checks and other transfer systems will be reduced. And this will completely alter the banking system. So we have a positive assessment of the PIX transaction system. It is of course enclosed with a great deal of security. And they will gain a great deal of meaning as a channel. We're very optimistic with the growth of this instantaneous payment system, and also with the entry of WhatsApp in the country. We now go on to Slide #5. Now this quarter we would like to highlight the companies that are under the control of Banrisul. One of the main companies is Banrisul credit cards under the name of Vero. We have had very positive results with this company. The annual transacted volume, despite the pandemic and the restrictions of commercial establishments and restaurants had a growth of 7.7% in the last 12 months. And our share of receivables had a growth of 6.7% to BRL 1.1 billion in terms of share in receivables. We have focused on servicing the customers, making new offers based on the pain points of each of our customers. Some of our customers are very concerned in terms of paying monthly fees and of course with anticipation. Others are concerned with [ NDRs ] and with paying monthly or annual fees. And we adapt our offers to the profile of every customer to be able to offer specific service. And this has grown our customer base. Our app at present offers solutions that facilitate the management and information solutions. This is a very important element in terms of our customer base. In Slide #6, other businesses. Despite the difficulties of the pandemic, we had a growth of 12% on an annual base in our consortium. And net income also had a 9% growth year-on-year. We have an insurance company that works with a brokerage. At present, the intention is to integrate other companies working with insurance. Our premiums had a growth of approximately 10% year on year, and our commission revenue reached BRL 64 million. In Slide #7 we have a description of our initiatives in the field of innovation. Now despite making enormous investments in-house in IT, it is also very important to be connected to innovation ecosystems to bring innovations from the outside inward to Banrisul. Here you see a few of our initiatives. The open innovation systems that we are sponsoring, we have BanriTech. We also have an initiative called Caldeira. It is -- Banrisul is one of the founders of this institute. It connects companies, universities, startups, with different people interested in the digital transformation of business. The Caldeira Institute is a reality. It has been located in an old plant of Porto Alegre. And there have several innovative companies that have settled. And Banrisul will join them as one of the founders. And to make connections with these innovative companies we also support Inova RS with the aim of connecting several regions of Rio Grande do Sul with global innovation systems, with civil society, the academia, the business sector. And finally, we are master sponsors of Navi, an innovation hub using artificial intelligence as a competitive differential in the business. In Slide #8, I would like to speak in more detail of BanriTech, which is an innovation hub of Banrisul. And we have a partnership in the acceleration of startups. We have already included 30 fintechs. And we are concluding the adaptation of the physical installations at the headquarters of Hipólito Costa Communication Museum. So we have 30 fintechs that will support us in BanriTech. We will then go on through another cycle of 30 fintechs with the aim of bringing from the outside inward innovations that can accelerate the digitation and digital transformation process. We now move on to Slide #10 where we have the highlights of the presentation. Now the net income BRL 278.9 million with a growth of 8.3%. This is the second highest result since the IPO held in 2007. Now if we put aside nonrecurring expenses, which is the forecast of BRL 77 million for labor suits we have growth ROI of almost 16%. Now this is very close to the ROI of the larger retail banks, several of these banks. The result is BRL 16.9 billion. And without this adjustment, we would have an ROI of 3.2%. Our credit portfolio has remained stable in the last 12 months, with almost BRL 37 billion. Funding, growing robustly, BRL 66 billion. And payroll loans with almost BRL 17 billion, a reduction of administrative expenses with personnel because of the voluntary termination plan. A drop of 9% in expenses. And a drop in our default rate, thanks to our very assertive and conservative policy in credit we are now at stable and comfortable levels, 2.4%, with a very favorable coverage of 303%. We now go on to Slide #11 to highlight our profitability. I had already spoken about the return on investment of 13.2% and the growth vis-à-vis the first quarter 2020. Thanks to our very robust portfolio in terms of credit lines. Since last year, during the repacks, we were already referring in our calls to the fact that our portfolio was highly robust because of the low default risk. And because of the profile of our portfolio, almost 50% of our portfolio is on payroll loans, credit with warranties, a very robust portfolio that is able to withstand the situations of stress. And of course, this is something that needs to be underscored, the robustness of our credit portfolio. This of course has a positive impact on our results. In administrative results because of the voluntary termination plan, we have significant control, and our teams have been working diligently on maintaining these indicators. We have a drop in services and fees revenue due to the beginning of the second wave of COVID-19 at the beginning of March, with an impact on acquiring systems. And because of competition, we have had a minor retraction and also taxes on profit of course. In terms of ROAE, it is 1.2, which is extremely comfortable. We now go on to Slide #12 to speak about net interest income and net interest margin that was mentioned formerly. This of course based on an annual basis, with a slight drop, a drop of 1 percentage point. And here, I would like to give you an explanation on the managerial net interest income. We have excluded the revenues of the recovery of credit. And this simply for analysis without an impact on the final margin. Now this is the recovery of credit. And we see that in 1 year our margin of profitable assets had a drop of 1 percentage point. And the total, also with a drop of 1 percentage point. And impacted by the drop in the Selic rate. And the credit margin that includes some elements of competition in terms of payroll loans with a reduction of 1% in our margin throughout the year. We now go on to Slide #13 to speak about funding. We see that funding continues to have an excellent cost. 87.5% of CDI. We had a increase of 9.5%. And in the quarter, a seasonable normal drop because of demand deposits and automatic CDBs that are normally growing at the end of the year with a partial reversion at the beginning of the year. But this is something that is expected, this on a pulverized base with individuals representing 66%. And of course, an extremely appropriate cost. On Slide #14 we speak about expenses and banking fees. And initially, I would like to refer to the pillar where we restructured our service network. Since we began this process in March of 2020, we were faced by the pandemic. We had to take a pause and then resume the process. We closed down 14 branches and 30 PAs as well as 2 agencies that were transformed into PAs. And 7 of these PAs were refurbished into business rooms. These are rooms where we use cash. And of course this increases the cost of these agencies. Now this is work that has been lengthened out. It will not come to a standstill. We are reviewing our network to be able to carry out new changes, structural changes in our network. This is to have a structurally adequate network. As I had mentioned before, we had a reduction in the administrative expenses, 3.9% on the annual base, thanks to the voluntary termination plan as well as in other administrative line items a drop of 1.5%. And we diligently continued towards maintaining our costs under control. We had a reduction in the service fees of 5% in the last 12 months. This is part of matching products to the needs of our customers, partly due to competition. And of course, includes the impact of the pandemic. There's a little bit of each of these factors, leading to a reduction of 5% year-on-year. We continue with banking fees and personnel expenses ratio, which is positive. Presently 104% of our payroll has fees and revenues covering the cost of the payroll. We go on to Slide #15 to speak about the evolution of our credit portfolio. We had a growth of individual loans of 1.4% and 2.2% for legal entities or corporate loans. We have several explanations here. Partly this is due to the results of the pandemic and difficulties relating to our network of branches, branches that were closed down because of contamination problems permanently. We had to close down some branches because of the contamination. They were later reopened. Also due to a lower number of people working because of the state regulations. This is also partly due to competition, and to our very conservative attitude when it comes to credit during the year. And at present, we have a vision to completely change this situation. When it comes to the economy, we now have a very optimistic outlook of what will happen going forward. If we look at the global scenario, the growth of the United States of 6%; China with 9%, a robust growth in Europe, in Brazil, although difficult to explain, a growth of 4% this year. And the bank is very well-positioned. The growth has been given thrust to by agri business as well as other sectors in the economy. We're highly optimistic when it comes to the economy going forward. And without a doubt, we will be reviewing our credit lines in all commercial segments, perhaps to be able to enhance the pace of credit granting, enhance the portfolio and especially focusing on segments that I mentioned at the opening which have ended up being the focus of our bank. Yesterday, we had a growth figure of 9.8% for the growth of the state of Rio Grande do Sul. Of course we're optimistic with this. We're going to deploy great efforts as we are. And we should be able to reap the growth of our credit portfolio in the future. In Slide #16, payroll loans. In the branch channel we had a growth of 7%. In the correspondent channel, 6%. Now we're optimistic with the growth of this portfolio. The margin has been increased to 35%. Now the growth of the margin at the end of the year, in a certain way, hampered our production during the quarter. And at present, they should facilitate the results with the possibility of giving a period of 120 days for operation. And we will have to make systemic adaptations. And I believe that in 1 week we will be ready and extend this to more than 400 agreements that we have in the municipality and the state of Rio Grande do Sul. And we should gain traction in this portfolio of payroll loans through the branch channel. We go on to Slide #17 to glimpse at our renegotiated loans. Last year we had a renegotiation of BRL 744.6 million. Part of this was amortized. 63% has been amortized. And as part of this, we have an NPL of 90 days of BRL 12.4 million, which represents 4.5% compared to the balance. If we compare this to the amounts released, it is 8%, which shows once again that our portfolio is a very sound one and with a good outlook. To conclude, the receivables of the remaining balance, that represents 1/3 of the credit that we normally grant. In Slide #18, our allowance for loan losses. A provisioning index of 7.3%. And this of course is what large retail banks do in the industry. It's one of the highest levels of provisioning. And thanks to our very assertive and conservative policy in terms of credit that began with the crisis and extended up to present, we have a provision expense which is much lower than what we had in the past. Despite the fact that we have one of the highest provisioning indexes in the industry. The provision expense and credit portfolio has a ratio of 3.6%. We go on to Slide #19. Our default rate for 90 days is practically stable, went from 2.31% to 2.42%. And we're very comfortable with our coverage ratio, with a growth of 303.1%. Distribution by rating, as you can see, is AA. And in terms of concentration, we have a very low concentration when it comes to credit. In Slide #20, we speak about our Basel ratio. With a funding of $300 million that we carried out in January with a subordinated debt we will obtain a Basel ratio of 18.6%, which gives us the comfort to grow our credit portfolio without any concerns about our capital. We will continue therefore increasing our capital without further concerns. Finally, our guidance. This is the guidance that we showed you the previous quarter. We're simply going to follow-up on this. This is the presentation. I would like to thank all of you for your attention. We will now go on to the question-and-answer session.

[Operator Instructions] Our first question comes from Tiago Binsfeld from Itaú BBA.

Congratulations for the presentation. I have 2 questions. First, referring to costs, with a very good performance this quarter. And any savings that you expect from the voluntary termination plan? And what will happen with your branches during this year? This is my first question. I will then ask the second one.

Well, the annual savings from the voluntary termination program is BRL 160 million a year. This is what we expect. Regarding our branch network, we have what we call the fourth wave. We're working in waves. And presently, the teams, the management teams are sending proposals to present to the Board to be able to undertake the fourth wave. They're checking the economic issues of our network so that we can approve this. We will still close a significant number of branches as well as PAs. And we're going to refurbish some businesses, creating thematic business rooms. One, for example, referring to agri business. Well, this is the avenue that we will follow, and this will enable us to have more adequate structures for service, reducing the points of service and of course enhancing the ones that remain. This is what you can expect. I can't offer you figures. We're awaiting the approval of our proposal.

And the second question, which does not refer to results, it is about the renegotiation of the payroll with the state. I know that you had a negotiation in April. Which would be the next steps?

Tiago, I can only mention this because it is part of a material fact. We created a group to assess this. And we are going to carry out a thorough evaluation. And true, there are no novelties that we would like to communicate to the market. We created a subcommittee from the Board to assess this situation.

The next question comes from Yuri Fernandes from JPMorgan.

And congratulations for the presentation, very good one. I have a doubt on your payroll product. We have seen several players digitizing this product, especially for social security. Now I would like to know if Banrisul has any plans in this direction, if you can digitize this from one end to the other through agreements, perhaps, so that you can have cost savings with this product. How difficult would this be? Do we already have this? Are you working on this? Simply to get more color in terms of digitizing payroll loans. Now to speak about PIX, it is not easy for traditional banks. There has been COVID, the problem of volume. But I would like to see what you foresee in this line, perhaps not for 2021, but in the longer term, if we can expect more problems. Can it grow over the inflation or not? Will there be a pressure during multiple years, such as special checks and other -- may grow. And other lines seem to be shrinking, being reduced.

Yuri, in our app, in our mobile app, you already have the possibility of digitally contracting payroll loans and the social security money for the state. What we're going to air in the coming 2 months is the refunding through a digital process, a new type of credit that is entirely digital for the agreements with the state and the agreements we have with the INSS. Now when it comes to refunding, this is more complex because we have some existing values. This is under development. And in 2 months, we should be able to start this up. And then the entire operation of refunding new credit or payroll loans will be done digitally. Now payroll loans can be contracted digitally as well as the social security, the INSS. We have a great deal of agreements that do not allow for this possibility. They're minor agreements with some municipalities. The gains are relevant, but these do not have scale. What has scale is the payroll of the state and the INSS. And we are going to work with the funding.

Yes. If you could refer to the end of the question, to speak about the payroll loans in the digital environment. You're using an app, very well, but do you have a back office? Can you originate this on a smartphone? Is the entire process digital? Don't you need a back office?

So it is 100% digital, fantastic. This is what I wanted to discover, fully digital. And we have funding that can be done in a fully digital way with several products to contract credit, all of this on our mobile app. The anticipation of the 13th salary, this is entirely digital, for example. Regarding your second question, you spoke about fees and special checks with revenues coming from interest rates. Are you referring to services to fees or to credit? I wasn't sure about the question.

I'm asking about fees because in the fee line item, you have what is charged for these special checks. It was a line of BRL 5 million. It has had a drop of 50% year-on-year because very few people continue to use this. Now if you have BRL 500 million of fees per quarter, this isn't that much, but it will eventually become 0 in the short term. So perhaps what is more relevant are the fees in current accounts. Now for fees for bank accounts in general, which is your outlook? You perhaps adjusted the price of some products. Will this stabilize? What is happening? Will the drop continue? What is it that you foresee?

Our vision is that there is no free lunch. We are under pressure by competition and several players that are operating without positive results. And at a given moment, all of this will have to be more profitable. Now we don't know at which point we will be able to invert this trend. But I have no doubt whatsoever that we will have to have more profitability about new entrants. And of course, this will have to be through a collection, through fees, through the price of product. We truly do not believe in miracles. At this point, you cannot work without charging for it. And this is a movement that is still underway. But at a certain point in time it will have to be inverted. Otherwise, there will be no profitability for the investments made on these new platforms. Evidently, we're going to follow what the competition does. But at a certain point, there will be an inversion in this trend.

[Operator Instructions] The next question is from [ Antonio Huet ] from Bank of America.

I have 2 questions at my end. If you could share your expectation for margins throughout the year, especially in some line items with greater expenses such as special check and credit lines. And if you could share with us your vision of competition in the agri business because of the cooperatives.

I would like to begin with the last question. There is enormous competition in the agri business. But despite this, we have had a growth in market share in our portfolio. We have a strong foothold in the state with broad coverage, a very full product line. And as I mentioned at the beginning of the presentation, a social and institutional presence in all of these small municipalities, supporting the small farmer, family farmers, which means that we have a very encompassing approach and a great deal of strength in the country side and with this type of customer. Now despite the rough competition, we have been very successful. We have grown our portfolio. You can see the figures for this quarter and year-on-year. And the expectation is to continue to have robust growth. The other question refers to margins. We believe that margins and credit spreads are very close to achieving stability or an inversion. There was a great deal of competition. And we truly do not expect a second round of what happened. At least this is what we expect.

[Operator Instructions] The next question is from Yuri Fernandes from JPMorgan.

Coutinho, a follow-up on your guidance. We see that you have maintained an unchanging guidance. The line on ROE has very good tracking, but there are some moving parts. The margin below the guidance, offset by a better cost of risk. What is it that we should expect for the year? Will these line items return to the guidance? Will the margin be included once again in the guidance? If you could remark on those moving parts and which has been the result based on your annual projection.

We maintain the guidance because we truly believe that we're going to attain this. And what is below this, we will invert. That is why we have maintained the guidance. We do have that room for reversion, inversion. And we're working towards this.

I'm sorry; I did not understand your comment. Your cost of risk, your PDD will then go up? Is that the idea?

No, no. Absolutely not. I'm referring to the positive line items. What is good will remain. I'm referring to redressing what is not doing well. Margins, for example, we will reprice our operations. And the idea of course is to try to increase the granting of credit to redress those that are below the line. Those who have a good performance, very well, as long as they don't get worse, everything will be well.

[ Ana Hios ] from Santander Bank is asking. "The contraction in fees, has this been caused by a drop of volumes or drop in fees?"

A bit of both perhaps. In the case of acquiring during the more complex periods, the smaller customers, we suspended the collection of the monthly fee. So we had a marginal drop in volume in that case. So we stopped collecting these monthly fees. And well, competition in terms of acquiring, the competition has also impacted the commercial area, and we were forced to carry out a revision. And in the case of bank fees, we have matched the packages to the needs of the customers. When it comes to services, that is to say ensuring that our customers are receiving the correct product. So there's a bit of both in this formula.

As we have no further questions at this point, we will conclude the question-and-answer session. We will return the floor to Mr. Cláudio Coutinho for the closing remarks.

I would like to thank all of you for your presence. Thank all of my colleagues and the people working at Banrisul who work with a great deal of dedication, enabling us to attain these results despite the difficulties caused by the pandemic. Thank you very much for your presence. And for investors and analysts, we are at your entire disposal should you have additional doubts. Thank you very much.

The Banrisul conference call is concluded. We would like to thank all of you for your participation. Have a good day.