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

Good morning, and thank you for waiting. Welcome everyone to Banco do Estado do Rio Grande do Sul S.A. Earnings Call for the Second Quarter of 2021. Today, with us, we have Claudio Coutinho Mendes, CEO; Marcus Staffen, CFO and IRO; Osvaldo Lobo, Credit Officer; Nathan Sassi Meneguzzi, Executive responsible for Investor Relations; Werner Kohler, Executive Superintendent of the Accounting Unit. We would like to inform that this event is being recorded. [Operator Instructions] A replay of this call will be available for one week. Before proceeding, please be advised that forward-looking statements during this call related to the projections of Banrisul businesses as well as financial and operational forecasts and goals are based on the beliefs and assumptions of management and on information currently available to the company. Future considerations do not ensure performance. 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. Claudio Coutinho Mendes, CEO of Banco do Estado do Rio Grande do Sul to start the presentation. Please, Mr. Coutinho, you may now begin the conference.

Thank you. I thank you all for being here. Let's get started then with our presentation of our earnings results for the second quarter. Hopefully, you all have the presentations on you. We have here Slide #2 so that we can talk a bit about the economic scenario. But even before that, I would like to go through the semester to make sure we're all on the same page. We started this semester -- the first semester of 2021, we had in the horizon that with the beginning of the vaccination and the current social control of people with less socializing, we would have a pandemic that would start to be reduced. Unfortunately, that's not the case. From February and March, we see a peak of corona virus, even over what we had in 2020. And that brought to the state of Rio Grande do Sul the closing down of the economy in a way that was quite drastic. Nearly all municipalities of the state were under the Black Flag rule. And in our case, we were working on only 25% of our commercial professionals in the branches. I am referring here to March, April, and this definitely brought a harm to our sales capacity. So we were frustrated slightly when it comes to the commercial sports we had for the time was hindered because of the restrictions. And also we had a great concern with the health of our employees and our customers. And we followed strictly all the recommendation, not only of state and municipalities, when the municipality was more strict than the state, but also with a hospital customer of ours who gave us information on health care practices. So it hinder our commercial goal. So I wanted to give this background to tell you the story of how the semester went in terms of our approach. Today, we already are back to normal when it comes to have all our commercial force back to the branches, except for those employees who are in a risk group who are still home-based. Otherwise, all the others that are not in risk groups are back working in-person at the branches, which is very important for us to reach our commercial goals, but definitely following strictly all the protocols of Moinhos de Vento that told us in terms of distancing, mask use, sanitation gel to be used. So we are following strictly all the recommendations, but we have our commercial force back to the branches. So now the economic scenario. As already mentioned in other presentations at end of last year, beginning this year, we have seen with optimization with the economy in our states, because the increase of soft commodities around the world has brought to us this. And as you can see what the central banks of the developed countries. So that brought the commodities and including the -- I mean, agricultural ones and even meet at high levels, together with an exchange rate that has been depreciated in result. So this shows a rare condition. And at this point, it favors greatly our economy in our state, as we had expected. So this slide shows clearly that as we have the growth of the state economy more than what the country has today. And we still believe that we will carry on this way where agribusiness pulls it up and the industry in terms of manufacturing, it is also bringing an increase to our economy in our states. So this is the background scenario. So now let's go to Slide #3, and talking a bit about what we're going through. We all have been right from the beginning of this management with great concern in terms of managing our costs and be able to have our price structure settled that we can be competitive. And at the same time, we need to adjust our credit portfolio, be very conservative not only when it comes to the different classifications, but also in terms of not having credit concentrated, we went from the corporate, now we have a diversified portfolio with very low credit risk as you'll see in this presentation. So we are prepared to capture the opportunity that we have. As you know, we have a bank with all the products available for service. So we have the capacity to offer all products as we have on our shelves that any bank can offer. We have that all. And we also have a service channel with omnichannel, branch network, digital channels and also office banking, Internet banking. And we also have a [indiscernible] also in our own state. We have been also able to commit our teams to our work, and we are working with [indiscernible] HR consultancy in international company, and we already have part of the outset of their work being shown. And this has made us aligning in a more effective manner the incentives to our employees in a way that it's more adherent to our corporate goals. We have focused on our core business, which is basically credit, as a way to really reach greater possibilities of selling other products of our bank. So our goal today, it is to expand credit and as a way to reach other products in the commercial area. So Slide 4, strategy. First, we have a large customer base. So we want to monetize the customers in terms of getting opportunity to have them acquire our products that have not -- have been offered in that way to increase penetration of this product and our customer base that is quite expensive in the state of Rio Grande do Sul. And we also have a great concern with the biller efficiency where we have had adjustments in our employees where we have a great reduction of 7% in personnel. We have been very strict in all the hiring. So all the other aspects where we have reached a point of concern to make sure our costs did not rise. And for digital transformation, we have used the agile methodology with the digital transformation. So we're working to make our customer have a more positive and simpler experience to bring their life to their hands with their phone. And lastly, we are also very much committed to a sustainability agenda. We have now a sustainability department. We have been implementing new procedures, and we will also be heading to be fueled by clean energy. So we have more and more an energy grid that we will be supplied with clean energy, wind energy, photovoltaic. So the ones that do not issue green gas. So in terms of monetizing our relationship with customers on Slide 5, there's a very interesting data. So we're talking about that most of our base are the 2 products, and this is not much. So there is a wide range of products and definitely that do interest our customers. So we have much space to grow our sales of products for these customers and that it's suitable to their needs. So we see this as a great opportunity to increase highly our revenues by the products that we can sell to these customers. We have here a strategy that's very strong on key distributing products in terms of affordability of payroll credit, personal credit, real estate credit, which were very competitive. So the idea is to grow credit portfolio using the portability with payroll credit and real estate. And at the same time, we have completed the test that's from August on we'll have 100 percentage digital onboarding for our customers to get their accounts up and running. So with the phone in their hand, they will be able to get an account in Rio Grande do Sul. So also next Slide #6. So when it comes to what we have and some highlights of what we've seen because our track record has shown great innovation in terms of technology. Just to remind you, some recent innovations, Banrisul has released the very fast bracelet, which authorizes payment through near field payment. And there's more than 14,000 requested bracelets, 100,000 transactions already and also management of credit limits using their own smartphone. They can enter that on their own phone. So 7.5% -- excuse me, 77.5% of our transactions has already performed on digital channels, 1.1 million average daily hits. And today, we have a growth of 13.9%. And we now, for our acquirer, we are implementing a technology that is quite disruptive when it comes to being able to have a term for POS for our [indiscernible]. We'll have the app store Android and iOS app where the smartphone alone of the margin will become a POS. And it's through the credit card near field payment, and it will be a POS in that way. I mean, they will not have to pay rent. They won't have to get any type of terminal. On their smartphone, they'll be able to have a pay through card, and it will just be through near field and their credit card. So this will be quite disruptive. So we'll be able to have that throughout the country using this technology. And we see that there will not be -- no need of maintenance of terminals. So this will be a revolution and its [indiscernible], and it will allow us to get scalability when it comes to distribution of our product. Now let's go to #7. Here, it is made clear our efficiency pillar, where we talked about the branches. We're still working on having the right number of branches. We've already closed 16 and also our service stations, 30 have already been closed and 2 were transferred into service station banks or turn into business rooms. This work will carry on, and we will be permanently working on it and revisiting the branches so that we can carry on with the reduction of our brick-and-mortar structure without any damage to service and through suiting our network according to our customers. And on the other hand, in terms of personnel, we can see here that from the same basis of last year, we have 135% growth where our personnel we see the drop, personnel expense of 5%. So we see that because we had a downsizing of 1,000 employees from last year to this, so we have reduced our personnel to around 9,100 employees. So now Slide #8. So when it comes to sustainability, we have many initiatives, and we have adhered to the Carbon Disclosure Project, and also we have many actions in terms of planning to our customers so they can have a photovoltaic solar port so that they can have clean energy. That can be small merchants, individuals, agribusiness or plants. So 88.5% in the last 12 months of growth. And also we have our sustainability committee so that we can have a transverse approach in our bank structure. This sustainability department is directly linked to me, so that I can follow up on it and take on the transverse agenda through all our different departments in the bank. So now Slide #9. Here, we still have a great parity in the agri business and specifically because the agri business has a great importance in the economy of our state, and we launched this June this year, the biggest -- dedicated to rural credit. And we also have an AgroInvest 4.0 to find new technologies, in agricultural production. So we should highlight the great quality of spread that our portfolio has. Our default of companies of over 90 days is at 0.54%. And even under of our defaults that we have overall. So now Slide 10. We have because of our projection for loan loss provision expense from 2.50 to 4.5 to revise 2% to 3%. And also efficiency, you can see that now it's at 54% to 59%. So Slide 12. So here are the highlights for this presentation. We had BRL 281.9 million, which is our results, and a growth of 35%. And our loan portfolio, it has reached BRL 36.6 billion. And also, we have reached a very low default rate, which is because of our portfolio that has been worked on. So we had 2.2 and 90 days. This is because of also covered ratio [Technical Difficulty] [The interpreter apologizes, I'm sorry, there is no audio feed. We'll wait for -- to work on the technicality.] [Technical Difficulty] So we expect that with the growth of what we expect, we can -- we were -- what we have here in terms of profitable assets. And we expect also this to be aligned into growth according to this [indiscernible]. So funding is still a liability that actually is an asset at very low cost and quite diverse to fight with individuals where we have a great number here. So we have an excellent year factoring that gives us the sight to increase our portfolio credit rate. So the 16, in terms of efficiency, we have here a drop of expense semester-over-semester of 1.7%. And this drop is a sum of 7% drop of personnel cost drop and also of other 5% drop of other costs. And we should say that this is anchored to the IGPM and also the [ BCA ] for the period. So this shows a great effort that we've had to contain the cost so that they don't go out of control, so that we can keep having it there and with our revenues with control costs. So we believe that this is important for our results. The good news is that we have a 5% already growth of banking fees where when we compare semester-over-semester we also have the expense of personnel that is being already covered easily with the banking fees. So that way, we already have them reaching a level that already gives us the level that we expect. So Slide 17. So our credit portfolio has a growth of 2% for the 12 months. So we should say here that the portfolio is one where we have individuals that -- which 60% of the portfolio and we're talking about payroll credit that is pretty much what we have from the municipalities and state. So it's a very solid portfolio. We also have here BRL 4 billion of real estate credit also with real state guarantee and also rural credit with nearly 10% also of the portfolio that is quite solid. We've seen this in previous slides that we have 90 days, 0.5% default at the most. So we feel very -- that we have a portfolio with a very low risk, solid that allows us to have an increase that is very positive. So in terms of what we had last year, we can see on the left, we have BRL 208 million of what we had renegotiated 2020. So 72% has already been seen. So the 90-day default were BRL 9.5 million with this 4.6% of this balance. But if we consider what was renegotiated with BRL 740 million. We can say that has evolved 1.5% as we think about what was considered before. So it's all under control, and we just have another 28% of what we negotiated that's already amortized. So now Slide 18. So here, we have a look into the details of payroll loans that has been growing 5% in 12 months, and for the branches of Banrisul shows an increase here of this portfolio. So it's a great performance of the ranges and the correspondent agent is at 0.3% in the last 12 months, so that is 5% of the payroll loan. So I should say, as I've already said, half of this portfolio is based on the national security, 1/3 is state and also the other one is municipalities. So Slide 19. So here when it comes to loan loss provisions, we have one more look into the great performance of our portfolio in terms of defaults. We have here an index of the provisioning of 7.3%. So we can see that from the last quarter of 2020 that is the same. So we see also an expense drop also because of the quality of the portfolio of 2.9% at the second quarter. So we also see a reduction in 12 months of 68%. So we have BRL 147 million for this semester -- this quarter, excuse me. So here, the credit quality here for default rate of 90 days, we have 2.2, one of the lowest in the industry. So our coverage ratio of 90 days of 227% of coverage and most likely the greatest that we've had in Brazil. So once again, this is another great indicator of what we have, which is very solid, and it gives us a basis so that we can have a growth in the next semester. Here, we also have a view of how is the breakdown of the portfolio. You can see here that we have 9% of the customers here in terms of the risk level. So you can see that going from large corporates and going to individuals and the retail has been very much right because we can see a reduction in risks and that way we have reached default rates that are very low. And in a certain way, is aligned with our policy of diversification and focus on retail. Slide 21, please. And lastly, here, talking about our capital, the Basel ratio. We feel very comfortable. There's much space to grow our credit portfolio, so very comfortable. So we're talking about 14.8%. Once we have the central bank approval of the use of our factoring of subordinate deals that we have from January this year, we will have 18%. And today, even without the use of this possibility we have a 14.8%, which is still very comfortable, so that we can really have a growth of our credit ratio. So looking to the future, we've had many possibilities of growth. We have, and we feel very comfortable in terms of our capital. And our portfolio today has been based on diversification. And we can make it grow according to our margins, and we feel very optimistic to be able to reach the results. So I believe that's what we had. I'd like to thank you all, especially our partners here, the executives, our employees, for all your dedication and especially in the toughest moments during the pandemic, to your dedication, your service, maintenance of our services. So thank you very much for your participation in this call. Thank you.

[Operator Instructions] Flavio Yoshida from Bank of America would like to pose a question.

And my point here is related to the growth when we look into the future. From this quarter to 2022, I'd like to get more detail when it comes to the growth of the portfolio in terms of individuals. If you have greater growth, more robust, do you see where there's a greater spread or greater risk, because since default rates have been quite controlled with the coverage that is very high, I believe you could have a more robust case with spread to be able to recover margin growth. And also I see that there is a recovery of growth when we compare year-over-year in the second quarter. So I'd like to understand what's your mind when it comes to looking to the future, when it comes to growth, and also when it comes to what service line do you expect to have a better performance?

Thank you for your question. Well, first we need to look back to understand what we're doing into the future and why we feel confident about the growth. First, as I mentioned, when it comes to the difficulty of service in our branches in the first semester, this made our growth of portfolio hindered by that. Just so you can fathom, we just have 25% of our professionals, our employees in the branches [indiscernible] just one. So a branch with 20 worked with 5. So this did highly hinder the commercial force, which is not the case now for the second semester. That's a fourth point. Second, when it comes to the first semester, we were working with our customers through scheduling. And this made us have a slowdown in offering service to our customers. So they couldn't schedule, they couldn't get service, because we could not have many people in our branches, because there weren't many people. We don't have that anymore. Now, we have 100% employees in our branches. And lastly, we made some adjustments to our systems of incentives, a variable short-term compensation. And that is how the corporate goal has been [indiscernible]. Sales and growth -- and in terms of the incentives that they get a variable income in the short term. So this is a strong mechanism. So what are the avenues that we see as on the growth? The same that we have been working on, and we operate and we are falling on. So we want to grow when it comes to what we have for payroll loan, agribusiness, grow also in real estate credit. So this is for individuals. For agribusiness, we are talking about small farmers, small, medium, large, they're all individuals. Obviously, you have the co-ops. But for the most part, we're talking about individuals. And that allows us, in this case -- and as you had in the last part of the question to be able to work more with these customers. So if you have their credit or investment to be able to commercialize some business, they can sell insurance, [ consortium ], other credit. So with payroll loan, you can sell insurance as well. So we believe there is quite much space to have cross-selling once customers find it interesting and suitable. Real estate credit, we've been very competitive as the full real estate credit industry. We see that we have been working hard. And with the relationship of individuals, we have a reasonable spread there and also at the same time, it allows us to have cross-selling that would leverage our return. So basically, those are the points that we are working on to be able to reach the growth agenda and reach our profitability.

[ Julia Nunez ], [indiscernible] would like to ask a question.

I would like to get my question answered when it comes to the [indiscernible] of provisions that you have and when we talk about dividend and understanding the possible taxing. So how do you see that in terms of also the revenue fees when we talk about all the digital banks in our state?

Thank you for your question. Well, we have a relevant fact that JPMorgan will be doing the studies with the transaction offering. We have not brought in the message to release that information. So we can't really even talk about it, because we don't know exactly how that will be. And if it will be leased, and if so the regulatory agency will have to invest to collaboration. So at this point, I don't have any information in terms of that. So I believe once we do have that issue, we'll have to go through that, and we'll have to get the right decisions of the executives. But at this point, I can't say much. When it comes to the bank fee revenue, if you look into quarter-over-quarter in the last 12 months, we already have a growth of 5%, and if we compare with the semester, it's quite stable. So obviously, there's a pressure when it comes to what is being offered with a product that is being subsidized. I mean, there's always some type of impact there. But in any case, I would say that at this point, we don't have any great impact. Maybe what we start to have in -- that's something to be studied, maybe -- perhaps 2 accounts, one in the bank to use the full-service bank like us. And then we have also one of the digital banks. So I don't know that's the case. So that's something to definitely be researched. But at this point, we don't have a pressure when it comes to that. And as you can see, there has been quite a stability with bank fees.

Gustavo from Bradesco BBI would like to pose a question.

Two questions here and mostly related to the guidance. You have reduced or improved your estimates for cost of credit. I want to know if that is based on some type of control default or if you're considering provision for this guidance update. And if this would bring a drop? I just want to understand how that is. And how should we think -- are we talking about the control default and dropping? And that's where you can improve the credit cost? Or how do you expect in terms of provisions to work with? And the second question is related to the efficiency. You now have a range further up. I want to know if that's something that stems from an increase of expense with the efficiency ratio? Or if it's some income that you expect to be weaker because of the loan estimate? Well, I would like to understand the efficiency ratio, what took into consideration that need to have this possible growth?

Okay. Staffen will talk about default. And after that, after Marcus gives his remarks, then I'll talk about the efficiency ratio.

Actually, this guidance update is to mirror the behavior of our portfolio for the first semester. If we take into consideration the provision rates for 12 months, it is already taking that into consideration of 2.9%. And if we just take into consideration to realize for the semester is under 2%. So without any other abrupt or reverse or additional aspect, we already have the reality of our provision within our new guidance range. So we do not expect any other abrupt revision, but just to head towards another reality. In terms of efficiency ratio, well, because of the growth of the programs that I mentioned about the first semester, so despite knowing that we will grow in the second semester, we do not see that it will be offsetting the growth of the first semester. And that's why we revised the guidance update of the total portfolio and taking in consideration that effect. And also growth of cost of personnel, as you have a 2 year expectation for bankers that have been taken or -- this is a 2-year adjustment of salary that is quite high, and this will have an impact in terms of personnel cost. So it has a possibility of -- to replace inflation, but there will be an impact. That's basically it.

Perfect. If I could just have a follow-up question about provisions, and quality of portfolio. From what I understand, you are assuming that with data you have and the figures you presented, you see a low cost of credit. So I understand that you do not see an increase in default. Is that right?

We do not expect an increase in default ratio, it's under control. And also, I mean, as I mentioned before, our portfolio is very solid when it comes to having guarantees that are ones with liquidity, many are through payroll loans. So we have the conviction that we will have very low default and under control. And we should remind you that in the last 2 years, we completed our work that start with the previous management, which is not to have large corporate portfolio. So we are basically [indiscernible] the price retail portfolio now.

[indiscernible] Pactual.

Could you tell us the intention of the bank to have the monetizing payroll, any update when it comes to that?

Well, there is no information that has been updated in the [indiscernible] fact.