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

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the earnings conference call for Banrisul to discuss the results referring to the fourth quarter 2021. We have with us today, Mr. Cláudio Coutinho Mendes, the company's CEO; Irany Sant'Anna, VP and Risk Officer; Marcus Staffen, CFO and IRO; Osvaldo Lobo, the Credit Officer; Nathan Meneguzzi, Executive Superintendent for the Investor Relations Unit; and Werner Kohler, Executive Superintendent for the Accounting Unit. We would like to inform you that this event is being recorded and all listeners will be listening to the presentation. [Operator Instructions] Please bear in mind that the forward-looking statements made during this conference referring to the Banrisul business outlooks, projections and operational and financial goals are based on the beliefs and assumptions of the company management, as well as on information presently available. These forward-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances, which may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating 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 turn the floor over to Mr. Cláudio Coutinho Mendes, the CEO of the Bank of Rio Grande do Sul, who will begin the presentation. You have the floor, Mr. Coutinho.

Thank you very much. And before I begin, a good morning to all of you who have joined us in this conference call. We have prepared a presentation and -- but before I go on to the presentation, I would like to give you an overview of the year 2021 and the fourth quarter. In 2021, we had different semesters. In the first semester, we had realities that were diametrically opposed. Unfortunately, when it comes to the COVID epidemic, we had a growth, especially in Rio Grande do Sul. Most of the state was classified as having reduced services, although we did have some employees working. And because of the difficulties, we had to close down and we had very limited operational capacity for most of the semester. Therefore, our reaction capacity was very difficult, and it made it complicated to attain the expected performance. In the semester, we had a drop of our credit portfolio of 25%. In the second semester, where we had mass vaccination and we lifted the restrictions with a certain return to normalcy, we were able to comply with our commercial goals. We were working at full service with the bank. And of course, our performance was completely different. The portfolio grew at a pace of 20% to 25% a year. In the first quarter, there was a drop of 25% in the second of growth. And further ahead, when we speak about the guidance that we published, we will implicitly state that because of the growth of the second semester in 2022, we should have a growth of 24% to 29% in the annual credit. And of course, this depends on our resiliency. So we will continue on with growth. The resumption that was carried out in the second semester is leading to a change in the way the bank will variably remunerate its associates, not only in its network of branches, but for its general management. This year, we have successfully concluded the beginning and approval with signature of a participation in results based on variable remuneration. And we are working with an indexation title with the units in the order of 28% increase for our personnel. Now, beyond being a more efficient way of managing the corporation and the taxation aspects, it also has ramifications for the management and the labor market that will receive variable remuneration. And of course, this is the way the bank will compensate its personnel, following the process that it has set forth. We also hope to continue in 2022 with a growth in our credit in the second semester of 2022. Once again, amounting to 25% and the growth of the portfolio of 28%, which is what has been foreseen. Now, in 2021, we have an enhancement in the digitization of the bank to finally obtain a fully digital process. The customers can open an account that will be fully digital. It will no longer require in-person visits to the branches, and we're working with credit payroll -- credit that can be done fully in a mobile way and digital way and will be offered digitally -- wholly digitally as payroll credit. Now, when we speak about the investments of the bank, the customer, once again, will be able to do this in partnership with other groups. And we are the founders of the Caldeira Institute, as you well know. And we're counting upon a group called NAVI that works with artificial intelligence, which is very important for the bank technology. Regarding the payroll credit and to ensure that our portfolio will grow, we're trying to expand the standards to grant credit with several groups, with the government of Sao Paulo, the city hall of Sao Paulo, the state of Santa Catarina and the City Hall of Rio de Janeiro. Once again, we have all of these interactions underway to open up the range that will sustain our continuous growth. We also continue with a process to recover our physical network. We have begun with a new management. We have closed down some branches. We have paid off all of the taxes. We have closed down some of our service centers. We have 77 physical points that have been altered through this process. Now, beginning in 2022, we will have a new health protocol put in place for our personnel. We will have the reopening of branches, of course, if we have no COVID and if we are forced to close the brand, we will be able to resume operations very quickly, always following the guidance given to us by the health authorities and to ensure that we have in-person service for our customers in terms of sustainability. Once again, we have been working with very sustainable protocols. We have had a significant growth in terms of sustainability. We have had 7,000 interactions as a whole through our portfolio. And we're focusing strongly on low carbon or zero-carbon business. Now, in 2022, this is our goal to achieve zero carbon in our digital channels. We have 451 million users, 20% more than the last year. We have $300 million for a 10-year term, and this has already been authorized by the Central Bank of Brazil for our operations and of course, with the approval of Banrisul. Another highlight is a growth of the portfolio of 42% since December and we're inaugurating specialized service centers in Passo Fundo, Grosso and other cities. Well, with this, I would like to return to the presentation. We begin on Slide #3, that shows you very clearly the growth of our credit portfolio. In the first quarter, we had a drop, and in the second semester, an acceleration with a growth of 28.9%. And there, you see the different incentives in the commercial area and others. The highlight here is the growth for rural credit, real estate, as well as others. Real estate with significant growth and a growth of 40% in credit vis-a-vis the second quarter, enabling us to catch up on our pace of growth. On Slide #4. Here, you see our payroll loans. The grants have been increased once again in the second semester vis-a-vis the first semester growth of granting of 60% and the annual growth of our portfolio, with an acceleration in the second semester vis-a-vis what had been planned. We have new agreements with payroll loans, as I have mentioned, allowing for an increase in our portfolio. We're working with the armed forces, states and municipalities. And the 100% digital granting of credit with 37.5% volume increase. And this was a growth that we had in the fourth quarter vis-a-vis the third quarter, a significant growth. And we're going to expand our sales on corresponding channels. And we have a sales promoter, which is a minority partner. Well, in terms of rural credit, we have had a growth of almost 43% year-on-year for the portfolio to BRL 8 billion at the end of 2021, with extremely low default for 90 days. And the agribusiness, more particularly, is at a very good moment. The price of commodities and dollars and the high investments have allowed the real to remain strong vis-a-vis the dollar. Now, these facts are occurring in a simultaneous way. Generally, we have an appreciation of the Brazilian currency and the drop in dollar and vice versa, but in this case, the quotes have been very favorable in terms of dollars as well as in the local currency. And this, of course, will grant spectacular profitability to the sector. This has been underway for more than a year already, and in the state of Rio Grande do Sul, we have had a trough now to attenuate this. We had a very good previous harvest in terms of volume and profitability because of the rising prices. But presently, they are facing this situation based on a very high profitability basis. Now, we have had significant agricultural insurance because of this drought. And in Rio Grande do Sul, we have a diversity of regions with different impacts to the drought, not all are similar. So once again, it will depend on the region. We can have better or worse results because of the drought that is prevalent. We move on to Slide #6. Once again, we'll go on to Slide #6, where we will speak about our default ratio. Now, as you can see, the levels, historically, are extremely low, 0.7%. And what is important here are the companies, and we have a very comfortable cover ratio that allows us to remain very comfortable. As mentioned in previous presentations, this is due to the quality of our portfolio that is very robust in terms of credit quality. The collaterals, the payroll loans, as well as the real estate loans that we have for companies, we have a very large operation of collaterals carried out through SGI. Now, the bank has a large number of operations, most of which are very robust. And as you can see, the coverage ratio is one of the highest in the industry for a retail bank and we have had an improvement in the credit rate that is -- last year, was 90%, and has obtained very high levels. In Slide #7, where we speak about our guidance. Once again, we're speaking about our credit guidance. We're going to maintain the same pace of granting very similar to that of the second semester of 2021 between 24% to 29%. The growth was 25.5% and the other indicators, therefore, are the ones that have been expected. On Slide #8, we have our digital penetration and transformation. You can observe a growth of almost 40% in 2 years from 2019 to 2021, a growth of 39%, daily hits 1,234,000, a growth of 64%. And in terms of digital transactions, 80% growth. As mentioned previously, during the opening, it is very important for us to be part of the innovation cycle and that is why we have the first BanriTech start-up for the acceleration cycle. On Slide #10, the highlights. A growth of 20% in adjusted net income, a growth of 30% year-on-year. Our loan portfolio reached BRL 41.0 billion, but we did have a drop of 5% annual rate and 10%. The payroll loans reached BRL 18.4 billion, a growth of 8.1% and qualitatively, it is the same as the loan portfolio. And once again, we refer to the coverage ratio that is one of the highest in the industry and the lowest default ratio in the industry of 2.07%. Profitability, a growth of 20%. 30% was in terms of accounting, and in the fourth quarter vis-a-vis the third quarter, a very large growth for the fourth quarter. Most of the increase in this fourth quarter is due to a reduction in credit lines because we are focusing more on the quality of the portfolio. In Slide #12, the financial margin, the change in adjusted net income. As you know, we're receiving 10 percentage points in terms of our adjustment in net income. This, in a certain way, impacts our financial margin. We have practiced a new price on our margins. And here, you can see our movement of repricing and payroll loans and throughout the year 2022, we're going to continue to focus on this portfolio to receive the previous financial margins that we were receiving. Funding and capital, here you have the total funding cost, 78% of Selic. And in terms of CDB, it simply reflects Selic and the cost and the 78.9% makes it a very good asset that is highly diversified and of course, competitive. And on Slide #14, you can see our banking and fees that we have the adjusted administrative expenses still with a drop in the cost of personnel of approximately 3%. And this happened during the first quarters. And we have the collective bargaining that takes place in November. It represented almost 8%, but despite this, we still have a 3% drop, once again, due to the collective bargaining agreement that we signed with the union of banking workers. Our banking fees are still under control. They're below the IGPM and IPCA, and we will continue on with this cost reduction going forward. You see a growth in the last quarter, where we had an increase in our acquiring operations. And this is what justifies the increase at the end of the year. Now, in terms of the cost of personnel and our rates, we continue to have that reduction, as I mentioned, of 3%. On Slide #15, we speak about our provision expenses. Given the robustness of our portfolio, it is worthwhile mentioning that we're going to continue to grow our credit portfolio in a very robust way. But once again, maintaining our discipline, we're not going to take a leap into more risky lines. We're going to continue working with the collaterals that we have up to present. What you see here is a portrait of that excellent portfolio, where default, historically, has been extremely low, and we're going to persevere on with this when it comes to credit. And when it comes to the economic scenario, the Central Bank, once again, is challenging us to be able to comply with our goal when it comes to inflation until the year 2025. We know the interest rates will remain at very high levels until the inflation is controlled. And the expectation is that the monetary policy will end up complying with the goal. Credit will continue to expand with a focus on individuals, agribusiness, real estate and companies, of course, which are our end users. And we will count, once again, upon collaterals. We will continue to engage and participate in the second start-up acceleration cycle, promoted by BanriTech and strategic partnerships with fintechs. We will continue enhancing the experience of our customers through the digital channels and use artificial intelligence and customer service and zero carbon footprint, indirect emissions, which is a sustainability goal for the bank. This ends the presentation. We are now at your entire disposal for questions and answers.

[Operator Instructions] Our first question comes from Flavio Yoshida from Bank of America.

Hello, good morning to everybody. Thank you for taking my questions. I would like to gain a better understanding of the guidance you have published for 2022. A point that draws attention is a strong growth of your total credit portfolio. And as part of your individual credit portfolio, I would like to understand how the growth takes place, which are the lines that will have greater growth or lesser growth, and why the financial margins don't follow up on the growth of this portfolio. Another question, regarding guidance and the provision expenses, the cost of credit, the range that you gave of 2% to 3%. If here, you are considering an eventual reduction of your coverage ratio, which is at a very high level.

Hello, Flavio. I'm going to begin speaking about margin and then go on to the credit portfolio, where we will speak in greater detail about provisions. As was mentioned during the entire presentation, there has been an impact of the increase of Selic to possibly beyond 12%. And this impact has been verified through the second semester. We have the Selic rate leaving for the quarter at 4.5% and ending the year at 9.25%. In the fourth quarter alone, we had a 300% increase, which probably will be repeated throughout the first quarter of 2022. Now, if we look at the dynamic of margins and if we divide the year-end quarters, we will still have a first quarter under pressure. Second quarter, we imagine with some stability and a reaction throughout the semester and this condition will remain during the second semester of 2022. That is why our forecast, obviously, do not accompany the growth of our credit portfolio. Another highlight to respond to the question on individuals. We imagine that this will continue to grow, especially in terms of payroll loans, given the expansion of new agreements and the possibility of exploring new markets. We have a funding cost that is as or more competitive at the market. And this will enable us to enter into new agreements. These are portfolios with a lower risk and lower margins as well when we compare this with other lines for individuals that have a higher cost. In terms of commercial credit, we imagine that the growth will continue to focus on payroll loans. Of course, the real estate portfolio will have an expressive potential to continue to grow. We have resumed this portfolio that has had greater growth throughout the fourth quarter, so much so that the figures show a growth in the quarter that is greater than for the rest of the year. And the dynamic of the sector itself in the state may be somewhat different, we still have a very strong sector throughout the year 2022 and a greater abundance of funding coming from the savings, which will give us a competitive edge vis-a-vis the other players and this is a good sector for growth. When it comes to our provision expenses on the portfolio, I would like to give the floor to Osvaldo Lobo, to remark on this.

We're not putting aside the quality of the portfolio, quite the contrary. The collaterals continue to be necessary for most of our operations. And because of the profile of our operations, we are including and using new credit mitigators that will improve of the future performance of the portfolio. If we look at the figures from the viewpoint of provision, my reading is somewhat different. The third quarter had a performance or expenses above what was expected. And in the fourth quarter, these expenses returned to what had been expected. And the growth of the portfolio, our strategy, if we consider what we are aiming at the agribusiness, companies and real estate, is already reflected in this expected future loss.

I understand. But when it comes to the coverage ratio, what is it that you expect in terms of behavior throughout the year?

The coverage ratio is a result. The result of our models of what is expected and the performance of the portfolio. And it is possible that it will remain the same or have a minor reduction If we obtain the quality that we expect. Now, in the future, should this analysis improve, there are other metrics to calculate the coverage ratio and we can look at it based on ranges of NPL or delay. We will continue to be very conservative and we observe that there is no problem with our portfolio.

Anything that will lead us to believe that we will have to improve -- increase our provisions?

No. The bank truly has very good provisions, and it is in a very comfortable position.

Our next question comes from Eric Ito from Bradesco BBI.

In truth, I have 2 questions. The first refers on the provisions that you have made. Now, how is this line going to evolve? And I would like to explore what you have done with other revenues and expenses and which are the estimates for your guidance? The second question refers to requesting more guidance in terms of the rollout of your expenses.

We will begin with Osvaldo and then Marcus, who will give you greater details.

Well, this is Irany speaking. When it comes to the provisions, we have been constantly updating and checking the amounts of provision with a permanent backup. And we have not observed any point of highlight that we could remark on. We simply have had an update on our methodology, which has granted us the results that you observed. I am here to also remark that we're making all of these adjustments in terms of backup and intelligence in management and in legal risks. We believe that presently, they are more adequate and more under control. And of course, there will be a decrease in risk, thanks to the work we have carried out in recent times.

Our next question is from Yuri Fernandes from JPMorgan.

I would like to go back to the guidance and speak about ROI and loan growth. The bank has a great deal of capital liquidity, which is good because you have grown a great deal but a growth of 9% to 13% in ROI means the bank is increasing its leverage, which is fine because you have 15% of Tier 1 ratio, and this, based on your own capital, what will happen with the dividend ratio if you grow from 25% to 29%, the bank will consume is 200 basis points of growth. Well, 13% is a good number, but will this change anything in terms of your dividend policy? Will you continue to pay out 40%? So what will happen with your dividends with a quick growth. And then, ROI, a low accumulation of capital. I do have a second question to go back to the question by Flavio. The cost of risk shows an increase vis-a-vis 2021. It's not a high cost of risk historically. 2 or 3 is a very reasonable cost of risk, but as your portfolio goes from 24% to 29%, will the provision have the same growth? If it's at the bottom of the guidance, it should grow at the same rate as your credit portfolio. And we perhaps think the provisions will grow more, which is not the case of the present because of the quality. Now, if you think of provision in your P&L, you will end up having a very large growth. I would like to gain an understanding of this.

When it comes to the payout, there has been absolutely no discussion at present of a change in payout. We had to make changes that were legal during the year of the pandemic, but we have returned to normalcy and we'll continue on with this normal guidance going forward. But we do have this in our bylaws, and it will depend on the decision that is made. So we do believe we will have a 40% payout. In terms of our provision expenses, I will give the floor to Marcus Staffen.

When it comes to our provision expenses, once again, I would like to underscore that we're not putting aside the quality of the portfolio. We're not putting aside the necessary collaterals. And evermore, we are introducing new credit risk mitigation metrics. And when you get to that moment where you grow, if you grow and put aside quality, you will tend to dilute all of this. And if the portfolio stabilizes, all of this will be diluted. But we continue to believe that these figures are possible and feasible. And simply, to complement the first part of my question on the growth of the portfolio vis-a-vis the return on equity. It is important to keep in mind that this growth is projected throughout the year, as well as our dynamic of financial margins. So we will have a first semester with greater pressure on margin and the portfolio growth will still not have generated all of the benefits that it will give us, let's call it like this in terms of net income. And we will have a second semester with a highly different dynamic. Of course, if we imagine a scenario with the interest rates as we have in the market at present. Once again, we imagine 2 completely different semesters in the ROI dynamic as well. Now, the guidance of growth from 9% to 13% is an annual return. And we believe, once again, there will be a difference between the semesters.

Thank you, Marcus, that was very clear. You have capital, you have liquidity and you will create a benefit for your credit portfolio. Now, it was a surprise for us to see this accelerated growth guidance, and we simply wanted to understand these different movements.

Now, to add to this, for 2022, we want to maintain the pace we had in 2021. We're going to continue on with this rhythm.

Our next question comes from Carlos Gomez from HSBC.

I have 2 questions on my side. The average payroll loans that have had a consistent rate and a drop in the interest rate for state or municipal loans. And they seem to have decreased throughout the year. What is it that you expect will happen with these payroll loans?

Carlos, I'm sorry, could you repeat the last part of your question? We did not hear it fully. If you would be so kind.

I would like to know about your expectation in terms of the interest rate in payroll loans for 2022.

I see. Very well. It is interesting to hear that question and that is why we wanted to explain the price dynamic that we use for payroll loans, breaking it out in line items throughout the year 2021. We have had an advance made strides at the beginning of the year. It changed levels. After this, the market continued to be highly competitive and very strong, especially with the cooperatives that are very active. In the state of Rio Grande do Sul, this exerted pressure in the second and third quarters. In October, there was an expressive change in the dynamic of the interest rates, we carried out a strong adjustment that the market accompanied in November. And by looking at the market in this first 1.5 months, it continues to have a slight increase in interest rate above the roof of 12% and the market is also making adjustments. So we believe that the INSS will continue to grow, will exert pressure. We will have greater pressure in some regions, and it will grow, perhaps, not at such a representative pace at 140, 150 a month. But the INSS should reach a point of balance at 60 or 70 perhaps, which is the same as the granting rate. This is average when we look at the NSS generated in our branch network and our correspondent network. There is a difference, but the dynamic will be of an increase in the extremely short term. I hope that, that responds to your question.

At the end of the year, the product had higher interest rate than it did at the beginning of the year?

Yes, yes. Indeed. At the end of the year 2020, it was 40 of NSS, and I'm sure it will be different in 2022. We will be working with rates 30 bps above this as the average rates. And the granting -- for granting of course, this is important. This is our granting rate for the average portfolio and throughout the entire year. I'm sorry, we didn't hear your last comment.

And your competition mainly comes from the cooperatives?

This is a very important point. And in NSS, I think competition is global and we have a more uniform price dynamic. Now, the cooperatives sometimes work with differentiated rates at the municipal and state levels. The main players and competitors in Rio Grande do Sul have been the cooperatives working at -- with a lower level of representativity.

[Operator Instructions] We have a question from Internet from Mr. Carlos Herrera from Condor Insider. Have you had any news on possible M&A transactions or spin-offs referring to Banrisul credit cards? Is there any other subsidiary where you're thinking of doing a spit-off? And have you had a stable line item in terms of banking rates and which is a view of competitors in this segment?

There are no news in terms of the possible consultancy given to us. In case of this transaction, absolutely no novelty and nothing that should be reported. When it comes to the services, I would like to give the floor to Marcus Staffen.

When we speak about services, there is a dynamic of pressure on the current account tariffs and some impact relating to the picks. Although in our case, this is less important for the bank on the whole. It is important to highlight when we look at the comparison on an annual base, that there was a movement of migration of the insurance company. And this could cause distortions when we carry out this annual comparison. When it comes to the competition, yes, doubtlessly, the new entrants or banks are a stronger threat in this sector. And we think that Banrisul has a good position in terms of the bank and services that are ever more appropriate for the needs of our customers.

[Operator Instructions] As we have no further questions, we will return the floor to Mr. Cláudio Coutinho for the closing remarks.

I would like to thank all of you for your presence in this conference call. And we have been able to attain the rates that we were aiming at. We continue to be very focused and motivated with the growth that we have set forth. Once again, thank you very much for your participation. I thank my directors and officers and the Banrisul team. Thank you very much, once again. Have a good day.

Thank you. The Banrisul conference call ends here. You can now disconnect. Have a good day, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]