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

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Banrisul's Conference Call. This conference call will discuss the results of quarter 3, 2021. Today, we have with us Mr. Cláudio Coutinho Mendes, CEO; Mr. Irany de Sant’Anna, VP and Risk Officer; Marcus Staffen, IFO and IRO; Osvaldo Lobo, Credit Officer; Wagner Lenhart, Institutional Director; Nathan Meneguzzi, Executive Superintendent; and Werner Kohler, Executive Superintendent for Accounting. We inform you that this meeting is being recorded. [Operator Instructions] The replay for this meeting will be available soon after it ends for a period of 7 days. Before proceeding, we would like to clarify that any forward-looking statements that are made during this conference call relative to Banrisul's business prospects, projections and operating and financial targets are based on beliefs and premises of the company's management as well as on information currently available to the company. These forward-looking statements are not a guarantee of future performance. They involve risks, uncertainties and assumptions since they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry-related conditions and other operating factors may affect the future performance of Banrisul, and may lead to results that materially differ from those expressed in such forward-looking statements. Now I would like to hand the conference over to Mr. Cláudio Coutinho Mendes, CEO of Banco do Estado do Rio Grande do Sul S.A. to start his presentation. Mr. Coutinho, you may proceed.

Thank you. Good morning, everyone, and good morning to all my colleagues from the Board and management of Banrisul. It's a pleasure to be here to present our company's results and prospects looking forward this year. Before I start to go over the data on Slide #3, I would like to give you an overview of the quarter, starting with the COVID situation and how the bank is treating this subject. With the good rate of vaccination among our employees, we followed the guidelines of our health consultant hospital, Moinhos de Vento, and the Ministry of Health and also the state government and the local government. We are now back to 100% in-person work in all our branches in our general office, which is located in Porto Alegre. In the main building, we have nearly 3,000 people working and people are going back to the office. Right now, we're working at 30% of our employees physically present in the office and the other ones are on a rotation schedule. And starting next Friday, this percentage will increase to 50% of our employees and to comply with the rules established by the state government regarding physical distancing, and the maximum capacity will be 54% of the employees physically present at the office. And we will reach that percentage and stay at that percentage until we see further improvement in the conditions. We have a very good status among our workers in terms of health, and we are complying with all the right measures and hospital Moinhos de Vento has the right protocols in place that allow us to go back to in-person work much faster. And this is all based on the guidance of hospital Moinhos de Vento and because now we have much more knowledge about the disease than we had in the beginning of the pandemic. In terms of midterm and long-term prospects for hybrid work or in-person work or remote work, our understanding here at Banrisul is that from now on, we will always have a portion of our employees working remotely due to the characteristics of certain locations. So we find it's very important for people to be physically present at the office because this is what helps keep the culture of the organization alive and strengthen the collaboration among employees, but there are different roles that will still have a good percentage of the staff working remotely. Hybrid work is here to stay, in our opinion. And we will make all the adjustments that we need in terms of technology and internal regulations so that we can do this in the most efficient way possible. We are also very advanced with everything related with the implementation of the work of the Mercer consulting firm. We've been working with them since last year to restructure our payroll. And we are now at the implementation stage, and this implementation will start effectively in 2022. So in the start of 2022, we will be implementing new standards according to the benchmarks of the national and international financial markets. I would also like to stress once again that we will maintain our focus and discipline and our focus on our objectives. Banrisul made a choice a few years ago, a correct choice to operate in retail, distributing risks in a very diversified way without focusing on higher risk areas such as large corporate for credit products and favoring credit lines, even in retail lines that have collateral, lines that are guaranteed. So we're always looking for a guarantee and profitability. So we didn't do anything like that in this quarter, and we won't do anything like that in the future, going after higher risk operations. This is not in our plan. Even if we have a small limit for this type of operation, there's very small limits in comparison to the limits granted to each of our customers. So we will maintain our focus and discipline, and we will follow this plan, which is to operate with guarantee and profitability. So we have our payroll loans, we have rural loans and real estate loans with enough collateral and very good safety. We will also maintain our discipline with costs. We will be strictly controlling our costs. This is something that we have been discussing with our suppliers about renewal of contracts and percentual price readjustments. These have been established based on the IGPM index. So we have very important discussions with our suppliers. And most of our suppliers agreed to revisit the index used to readjust prices or they are considering a reduction in the readjustment. So from now on, we are always trying to fix new contracts using indices -- official indices that are not so volatile as the IGPM. The IGPM has been very volatile lately. We are also advancing in the -- in our digital transformation. We are digitizing all our processes. We will start the month of November with refinancing of payroll loans, and this is done 100% digitally through the app. We have no need to come to a physical branch. So in the state of Rio Grande do Sul, when any of the local municipalities, customers will be able to refinance their loans through the app without the need to physically visit one of our branches. Also, we are also focusing on the reformulation and nationalization of the customer service in our branches. We closed 19 branches and this work will continue, we are working at the fastest speed possible, and we will rationalize our costs by using our network of our chain of branches with new prejudice whatsoever to our customers. Here on the first slide, we see the redirection of our commercial incentives, focusing on the growth of our credit portfolio. This has enabled a very relevant growth quarter-over-quarter. We see an increase of BRL 2.1 billion over 3 months. And if we were to do an annualized calculation, this would mean a 25% yearly growth. In rural, quarter-over-quarter, we see a 31% growth -- And for companies, also an 11% growth and payroll 2.4% quarter-over-quarter. So we're very confident that with these new incentive rules, we will be able to continue to see these very robust growth rates in our credit portfolio, which allows us, once we increase our portfolio we can also offer our clients many other financial products that the bank offers, such as insurance, consortium, pension, capitalization, acquiring. So credit will just be an entry door so that we can offer them more products. On Slide #4, Slide 4 shows the very conservative policy that we have and very accurate policy that we have in terms of credit granting. When here, we show the collateral, we have a delinquency rate after 90 days of 2.2%, which is very low, historically speaking. The coverage ratio is very comfortable at 315%. And also here, we show that the risk distribution in our portfolio has improved. In 1 year, we had an improvement of 2 percentage points from 88.8% in September 2020, 1 year ago, and now 90.9%. And we will continue with a lot of focus and discipline to expand our portfolio but keeping the same risk distribution that we have had so far. On Slide #5, here, we have payroll loans the origination is partly from branches and partly from other channels through a partner company, Bank Promotora. Through Bank Promotora using air ancillary channels, we originated 35% of our -- or the origination of payroll loans and branches accounted for about 65% of the total origination. And credit granting through the app before we had this functionality in [indiscernible] --, they had grown by 182%. And right now -- well, and at that time, concession credit renting was just new credit. But we know that a great part of the expansion of our portfolio comes from refinancing activity. So we believe that with the integration of the app -- integration into the app of the refinancing feature. We will see an expansion of our portfolio through the digital channel, which means cost reductions and easier operation or more friendly operation to our clients. And so 182% through the app. In 1 year, our payroll loan portfolio grew by 5% and a highlight to state payroll loans and local payroll loans. And this all with a default a 90-day default rate, very low rate of 2%. On Slide #6, here we see a snapshot of rural credit. We've been growing very relevantly in rural credit. In rural, both for credit and also other related products is -- the growth in this area is a mission of our bank. And we are seeing solid growth, and we will continue to see solid growth in the future. The state of Rio Grande do Sul has a relevant share of the GDP and agribusiness, so this means that this is our mission to grow our presence in agribusiness credit so that we can have a share that is consistent with the share in the GDP of the state. We saw very relevant growth year-over-year, nearly 40%, 38.8%, and quarter-over-quarter 31.3%. We are now moving to a new customer service model for agribusiness customers. We are creating specialized areas in our branches for agribusiness in regions where agribusiness is strong. So we are implementing 10 of these agribusiness areas. 3 of them are already inaugurated and 7 of them are now being implemented. So we have 0.05% in 90 days for companies and 0.26% of credit quality for individuals. And part of this success is due to the exceptional momentum that we're seeing in agribusiness in the state of Rio Grande do Sul and all throughout Brazil. But despite this very good momentum, this doesn't mean that we are in a comfort zone or relaxing whatsoever in terms of our credit analysis and risk assessment because we know that we are going through a positive time but this could change at any moment. So we have to be prepared for any changes that might come and we may have a scenario that's not so favorable. And we need to have a resilient portfolio because of that. But anyhow, right now, we are going through this very good, very positive time and expanding our portfolio. So BRL 5.2 billion were [ destined ] to agribusiness credit in '21 and '22 in the '21/'22 plan, a 27% increase compared to the previous plan. And recently, we had the largest meeting of the agribusiness industry here in Rio Grande do Sul. We had a very expressive presence in this meeting. And we made BRL 441.2 million in business in the 44th edition of the Expointer. Slide #8. Here, we see our adjusted net income over the first 9 months of '21, BRL 732 million, a year-over-year growth of 47.9%. The total loan portfolio is growing at 6.7% year-over-year. And I reinforce that this quarter, we already see some acceleration and we believe that maybe it will not continue to accelerate in the same magnitude, but this is a trend, and this is due to the changes that we made in the variable compensation rules that we have linked with credit for our employees. So 3.9% increase year-over-year for a payroll loans and 3.4% for funding. 5% for banking fees. The highlight a very important highlight here is a default ratio of 2.2% and coverage ratio 315.3% and highlights to rural credit, which grew by nearly 39% year-over-year with a portfolio of BRL 4.4 billion. On Slide #9, here, we have our profitability-related numbers. In quarter 3 '21 compared with quarter 3 '20, there was a 45.6% increase and year-to-date, nearly 48%. Our ROAE for the quarter was 7.9% annualized. This is a 5.2 percentage point decrease year-over-year. However, it is a 2.2 percentage point increase quarter-over-quarter. Now if we look at the variation between the net income of the second quarter '21 and third quarter 2020. We can identify the elements that led to a lower net income compared with quarter 2 '21. The financial margin due to the accelerated increase in the standard interest rate. So in a very short time, we have to reprice our portfolio. So this repricing effort is now ongoing, and you can't do that overnight. We also had higher loan loss provisions and a reasonable part of these provisions come from the expansion in our portfolio because you need to make provisions for 2022. And in that quarter, you haven't yet received enough spread to compensate for the provision, which acts as a reducing factor in your net income. For administrative expenses, we see the effect of the annual collective bargaining the salary increase based on the collective bargaining for banking employees and you have to apply that and you have to make the right provisions for vacations and [ 13th salary ] and then you make the [indiscernible], which leads to an increase in our administrative expenses. And other expenses, you also have an important relevance of the provisions for labor-related lawsuits. So these are the 4 items that explain this decrease in our net income compared with quarter 2 '21. On Slide #10, here we have our financial margin. Our managerial NII, as I just told you, we had a certain increase in the standard interest rate, and you have to reprice your portfolio. That's why the managerial NII had a 3.8% decrease quarter-over-quarter. Comparing the first 9 months of '21, with the first 9 months of 2020, the decrease was 7.4%. When we look at its compensation we see an increase in the treasury NIM, which practically doubled in this quarter from BRL 0.41 to BRL 0.80 in -- And we start seeing the effects of the repricing of our portfolio. And if the standard interest rate continues to increase -- This will only be truly seen when the level of the standard interest rate starts to stabilize. On Slide 11, this is an overview of our funding, very polarized and very low cost, BRL 87.8 million of the CDI, very polarized, as I said. Here, we have some -- We have a very large funding -- we still have a lot of space in funding to continue to expand our credit portfolio. Here, we have the breakdown 68% time deposits, 17% savings. And here's the level of trust, the level of confidence of the investors from Rio Grande do Sul. We had an important evolution in terms of price we are favoring the price of this funding. And we don't really have any pressure to pay more for fundraising. We have a lot of funding. Now on Slide #12. Here, we talk about administrative expenses. When we look at the year-to-date comparing 2021 to 2020, there's a 0.2% drop in our adjusted administrative expenses. The people area has a drop of a larger drop. But when we look at when we compare quarter 3 '21, with quarter 2 '21, there's an increase from [ BRL 453 million to BRL 487 million ], which is the effect of the collective bargaining agreement and the salary increase, the -- sorry, the mandatory salary increase that I talked about in the previous slides. So that's why we have an increase of our administrative expenses quarter-over-quarter. Year-over-year, we see a decrease of about 6% and in our personnel expenses. And for other administrative expenses, there's a 7% increase. This is in line with the IPCA index. As I said, most of the contracts we could renegotiate to IPCA and no longer IGPM. So this was expected. We will continue to strive to reduce our administrative expenses -- The adjusted efficiency ratio is very close to what we saw in quarter 2, 55 -- 54.5% against 54. We see a 5% increase in our banking fees year-over-year and year-to-date comparing 2020 to 2021, there was a 1.6% increase. And we are covering our personnel expenses with our banking fees. On Slide 13, here, we have our loan loss provisions quarter-over-quarter, it goes from BRL 217 million to BRL 284 million. The provisioning index decreased to 7% coming from 7.3% in quarter 2. And our 12-month provision expenses decreased to 2.67% coming from 2.92% in quarter 2 this year. Here, we have a large effect of the provisions over credit recovered -- provisions for written-off loans recovered. So for these provisions, we understand that the recovery -- the credit risk remains the same. That's why they are 100% provision. So this is represented by the blue bar, the difference and [ 189 million ] is for other provisions that exclude these provisions for written-off loans recovered. And we see an important growth here. And the most relevant item here is the growth of our portfolio, which entails new provisions. On Slide 14, here, we show our very comfortable situation in terms of capital which makes us really confident that we can expand our credit portfolio without any concerns with funding as we saw before in the funding slide. And we also don't have to worry about capital. We had authorization from the Central Bank for external funding to compose Tier 2, and that was starting in October '21, so it's out of the quarter 3. But this is a pro forma simulation of quarter 3, including the Tier 2 capital, raising our base to our Basel ratio to 17.9%. And now I would like to briefly go over our labor provisions. We've been striving and working internally to tackle the root causes of this increase in labor provisions. So here, if you remember, in 2020, 900 employees left the company when we made an agreement with the union that was approved in our general assembly meeting. So those 902 dismiss employees cannot sue us. And remember that the -- and for the two previous voluntary dismissal plan, the percentage of former employees that [indiscernible] was very high. So in this case, we had full settlement of the employment contract for these [ 902 ] employees. So this is a mitigator in terms of new litigations. The fact that we had approval from the union, this reduces any future growth in our lawsuits. We also have a chart here showing the provision in history since the current management took office here at Banrisul. And on the right side, we see a historical indicator. This is an indicator of the possibility of future lawsuits. If you see in 2017, we had 1,179 lawsuits and 351 were collective lawsuits. Then from 2018 on, also because of the new labor legislation in Brazil, you see a sharp drop. And then we also have the negotiations in collective wage agreements that also have mitigation clauses for the labor liabilities referring to the seventh and eighth hour. And we also have this rule that there has to be a negotiation of a collective bargaining prioritization clause prior to the filing of collective lawsuits by the union. That's why we see this huge number in the numbers -- this huge difference in the numbers for 2020 and 2021. And even for new individual lawsuits that were filed, we had more than 800 in 2017 and 542 in 2016. Now the numbers are significantly lower in 2018, 2019, 2020 and '21. So we believe that this is a good indicator of what we should expect in the future in terms of labor provisions. And these are the provisions made quarter after quarter. And one of the reasons for that drop is that in 2021, we had in quarter 3, BRL 148.6 million of provisions. Another highlight of this slide is that in quarter 3 '21, we completed the analysis and provisioning for all collective lawsuits referring to the seventh and eighth hour. So we are now fully provisioned. So that was basically what I wanted to share with you today. I thank you for your time and attention, and we can open for questions now.

[Operator Instructions] The first question is from Flavio Yoshida Bank of America.

I want to better understand what we can expect in terms of your financial margin looking forward? You said that you're focused on growing in safer lines such as payroll loans. And very often payroll loans, there will be a ceiling for payroll loans. And also there is a pressure on the funding cost with the increase in the standard rate. So can you please tell us what we can expect for your financial margin next year? Because on one hand, we have the funding cost increasing, and we have the spread pressure, not just because payroll loans have a shorter or smaller spread, but it is limited in many cases. So do you have any visibility regarding the readjustment of the ceiling for payroll loans for the main agreements that you have?

This is Marcus. Regarding the margin, it requires a very in-depth analysis considering that we are looking at the market in October. And until September, we had a very clear dynamic. I have data here that's very interesting, comparing September this year with September last year. We have the standard rate curve that is the base, and it's a difference of BRL 580 billion and our credit granting rate also grew by [ 460 ]. So we've been seeing success in the passing on of this difference. And of course, it is not the entire portfolio that turns during this period, as these new grants finish. There will be an impact on our margin. In our last conference calls, I had already told you that we were still expecting some impact still in 2021 and things should go back to normal or closer to previous levels in 2022. With the change in the interest rate that we saw in the market, you saw that the interest rate curve we increased by up to 300 bps depending on how you saw it. Of course, the size of the adjustment, particularly for future rates, this is putting some pressure and economists themselves foresee some pressure, but it's a matter of magnitude. We already readjusted our price stable. So you see some impact in the first quarter of 2022. And then it will go back to normal -- start going back to normal as of the second quarter next year. The market is still working below the cap, below this ceiling. And for other lines, there is no limit. So we don't have that problem. The Bank Federation is already expecting a return to the previous limit. The current limit is about [ 80 ], and we will work closer to [ 2.30 ], which was the previous limit for INSS. I hope I answered your question. And another interesting perspective in terms of expansion of our business is through our partner. In some cases, we are at more advanced stages, negotiating the reestablishment of some of our agreements in some states that have a favorable tax condition right now, and we expect a good expansion of our portfolio with interesting margins and with a good level of parity.

The next question is from [indiscernible].

I have two questions. One is about your effective tax rates what happened this quarter? And what do you expect for the future? And when you think of your personnel expenses, there was a partial impact for this one month of the collective wage agreement. So do you have more positive prospects in terms of credit origination. What can we expect from this line in the coming years? And how are you seeing possible cost controls to be able to compensate for this growth?

This is Brunet. Regarding the effective tax rate, the bank actually uses the interest of our own capital and this is linked with the equity. So that reduces the tax costs. And our results are now coming from subsidiaries. For example, we have Banrisul Securities, our insurance broker that has a tax rate that is lower than that of the bank. So our results are coming -- the share of our subsidiaries in our results is higher now, and this is allowing us to have an effective rate, which is lower this year compared with what we had in previous years. However, last year, we were affected by the Central Bank rule, which limited payment of interest over own capital. So this prevented us from having the possibility of paying interest of our own capital up to the limit that was established. This should improve this year. And we also have the higher share of our subsidiaries in our results. So this leads us to a lower effective tax rate. About the personnel expenses, we think that for the current situation in terms of agencies and demand, in the short term, we are not expecting to see more reductions. We already have our payroll adjusted. So in terms of headcount, we don't foresee any reduction. There was an increase -- the wage increase, the collective bargaining, which will, of course, have an impact, not just for us but for all the financial companies in the financial market. We are also working with the possibility of turning variable compensation into profit sharing. And this will -- this can also bring some savings -- potential savings because we currently have variable compensation. And it will be a more economic auction. There has been no increase in our expenses when we redirected our sales to credit. This was just an effort to rebalance the comparative incentives of the different products that we sell, and we prioritized credit. But overall, this does not really mean a cost increase. It's just a rebalancing of where this incentive is going.

The next question is from Yuri Fernandes, JPMorgan.

I have a question about your provisions, Mr. Coutinho said in his presentation about the 6% increase quarter-over-quarter that explains the provisions. But when we look at your chart, we see that there has been a change there in your letters from level A to level B. So I just want to understand whether there was any change in methodology for any of these lines? So in addition to the PDD growth, can this higher PDD be explained by a change in the rating of any of the segments? And I have a question about the 13th salary in the state of Rio Grande do Sul. In the past 3 years, maybe we saw the bank anticipating the 13th salary. I think you will continue to do that. But the state government, because of an improvement in situation, it will not allow you to pay installments. And I know that in past years, this has been a contributor to the expansion in our portfolio. It's a BRL 1.5 billion payroll. So maybe this year, it will be smaller than that. So maybe in quarter 4, the 13th salary credit line should be less relevant to you.

This is Osvaldo. I will start with the last part of your question because it's the easiest part. I agree with you. There was an exceptional improvement in -- from the government. So we will no longer have this very important line that we had. But on the other hand, we are opening new fronts where we plan to expand what was expected with this portfolio, and we will even turn this portfolio into a recurring portfolio. Let me be more -- let me be clearer here. For example, if you look at the growth that we're seeing in our rural credit line and also the work that we are doing to promote growth for real estate credit. So we see -- we have many positive opportunities for credit expansion, and we are indeed focusing on switching from the 13th salary to other permanent good portfolios that can compensate for that negative effect that you mentioned. And regarding the first part of your question, we haven't had any change in our methodology. What we do is we follow the quality of the assets, and we make adjustments when needed. And I am personally very comfortable with the rating. If you look at that table -- if you see the good credit, the mix is still stable or it even improved compared with previous months. And I believe that with this expansion expected in credit, it will further improve.

The next question comes through the webcast platform and it's from Mr. Pedro Leduc, Itau BBA. Here's his question, how are you looking at the demand for credit now with the reopening of the economy? Do you see any space to pass on the highest cost to your final rates? What are your first impressions for 2021?

Well, I think that part of this answer was, we already talked about this before. We are seeing a very positive market both in agri business and also in real estate.

[Operator Instructions] This question-and-answer session is now closed. I now hand it back to the CEO of Banco de Estado do Rio Grande do Sul, Mr. Cláudio Mendes for his final remarks. Mr. Cláudio, you may proceed.

Thank you. I'd like to thank you all for attending this call today. And I'd like to invite you all to the [indiscernible] December 9 at 9:00. Please save the date. And I hope to see you there on December 9 at 9 a.m. Thank you all for participating.

The Banrisul conference call is now over. Thank you all for participating, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]