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

Good morning, ladies and gentlemen. Welcome to Banrisul video conference to discuss results relative to the second quarter of 2022. This video conference is being recorded, and the replay may be accessed in the company's website, banrisul.com/ri. This presentation will also be available for download. We would like to inform you that all participants will be only watching this video conference during the presentation. And after that, we'll start a Q&A session when further instructions will be provided. Before moving on, I would like to reinforce that forward-looking statements are based on assumptions and beliefs of the company's management. These statements involve company's business outlooks, involving risks and uncertainties because they are based on future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should be aware that events related to the macroeconomic environment, industry and other factors could cause results to defer materially speaking from those expressed in the respective forward-looking statements. So we have with us Mr. Cláudio Coutinho Mendes, CEO; Mr. Irany Sant'Anna, Deputy CEO and Risk Officer; Mr. Marcus Staffen, CFO and IRO; Mr. Wagner Lenhart, Institutional Officer; Mr. Nathan Meneguzzi, Head of Investor Relations; and Mr. Werner Kohler, Head of Accounting. I would like now to turn the floor over to Mr. Cláudio Coutinho Mendes, CEO of Banrisul to start his presentation. Please, Mr. Coutinho, you may carry on.

Good morning, everyone. I would like to thank you all for your presence in the video conference. And -- let me start my presentation to you. Thank you very much. Well, as you know, we rebranded Banrisul's brand last May. And this is our new brand. This shows the evolution of our brand since the funding of our banking 1928 and this brand was adapted to new social and economic environment that we faced. Next, this is our brand. It has a lighter lettering, which is more adequate to new times and our symbol, which is, in fact, a continuity of the 3 cubes that compose our brand. This is an evolution of that first brand, if you will. It has to do with the sturdiness of this bank. And it's also a symbol of what Banrisul has become. And here, you have the 3 colors representing this brand. Blue that has to do with history and the strength of Banrisul and its Essence. Purple, which translates into modernity and technology. Banrisul is an extremely technological bank, which counts on digital tools, 81% of transactions are done digitally. Nowadays, this is a picture of our APP of our application, several functionalities. and Turquoise, green, which represents sustainability. Banrisul has been trying to be more and more environment. We've been buying carbon credits in the market entered the bioenergy market, and we'll be working with renewable energy in the future. We have a policy for solid waste. So we have a commitment towards sustainability. And regarding this new brand, this translates what the bank has become. And it shows this image to clients and employees. This is a picture of one of our brands located in Porto Alegre, and we are in an accelerated way, transforming all the other branches which will have this visual communication that mirrors this concept of Banrisul. Next, well, the main highlight of this quarter, obviously, is the evolution of our loan portfolio. We've been managing to grow in a robust way. We believe we will be able to reach the guidance, which was an extremely challenging one. But this past 6 months, we can say that we are keeping up with the guidance. We have a growth of rural credit, which grew annually in 61%, very good growth. In real estate, a very steady growth 18.5% annually speaking. And working capital for companies of more than 30%. Credit cards and debtor accounts also show growth as well as payroll loans. Also, we have new credit, new loans, BRL 21 billion will be granted this semester in credit. We are remanaging our portfolio. This will be important for what we see ahead to have better costs for our portfolio vis-a-vis what we see with Selic, which is growing in an accelerated fashion and which has impact on credit fees. So in these new loans are given under adequate fees now. This is -- the main highlight is the growth of our portfolio of almost BRL 95 million. In the second semester, we believe we'll keep on in this pace. But all of this growth maintain the credit quality of our portfolio. Our default ratio above 90 days is 1.8%, very good -- a very good rate, maybe a record in terms of Banrisul credit quality. We believe, never in our history, you had below 1.8%. This is exceptional. And it also is a statement of our robust growth. The robust growth of our portfolio in an annual basis. It has to do with credit granting, approval and constitution and guarantees. Besides that, we also have a covered ratio which is probably one of the largest in the -- in the market, 319.7%. This is ultra conservative for over 90 days coverage. Our portfolio is improving in terms of ratings. In 2 years, we went from 88% in the AAC ratings, and now we are in 92.2%. And in the area below, we also show the portfolio diversification. Even if you consider the 50 largest debtors, it's lower than the market average. So -- and we have 7.6% of our 50 largest debtors in the market, this rate is 12.4%. This is also a statement of the quality of our portfolio. Now rural loans, it has grown 61% in the past 12 months. And this is our new crop plan for '22 and '23. We allocated BRL 7 billion in credit for the crop plan, and this translates into a 35% growth considering the previous plan, we estimate that possibly we'll be able to overcome this goal. Also considering what we saw in the year that finished in June and NPL rate over 90 days is 0.36%. And we have over 50,000 farmers, which -- who will be reached in this crop plan. This is a very good marker of growth. Very good for credit, granting and also a possibility to open new businesses with rural clients. Now the highlights of our figures, our adjusted net income for the second quarter was BRL 227.8 million which is better than last year. Loan portfolio with almost 22% growth, BRL 44.6 billion, payroll loans, 15% growth BRL 19.7 billion, rural credit, BRL 5.4 billion, 61% growth. We also had a very -- a good growth 7.5% in fees and services revenues, but we still have a way to grow in this in the segments, especially considering regulatory framework. Default ratio in 90 days is a record, as I told you, when 1.78% coverage ratio in 90 days, 319.7% and our cost of risk is 2%. Now, looking at our net income, adjusted net income in the second quarter was BRL 227 million, and if we consider our role was 10% for the quarter. These are the contribution for this result -- positive results from credit provisions and taxes and negative contributions regarding the previous quarter, regarding operational expenses and also administrative expenses, which have grown. Here is our financial margin, our NII drop of 0.6% and here, we believe that we are reaching the end of our recycling process. And during the semester, we believe we'll be able to stabilize our margin in the sense of recycling what we still have in our portfolio in -- with lower taxes and lower fees. Selic fee means that we still have some reclassification of the portfolio to be more adequate to the new Selic fees. In this slide, we have one of the main strengths of Banrisul, which is our robust and diversified funding portfolio. The cost of funding for Banrisul on average is maybe one of the lowest in the market. In terms of CMBs, our average is 87% in CDI. And considering the total funding cost with financial letters and bills and savings, it's 88% of CDI. Very low fee and decentralized -- and 12% are for the top 100. Very diversified in low cost with a very broad range of individuals and also companies, small- and medium-sized companies as well. So it's very, very decentralized and diversified. And the total funding shows a drop of starting on December basically because we paid the Eurobond issued in 2012 with a balance of $526 million, and we paid that and we took this from the cash of our bank. So this is why we had this drop. So even making this important payment of over $500 million, our funding is moving up and about to reach the levels of December -- previous December. Here is the evolution of our expenses and banking fees. We have a very good control regarding the total expenses of our bank, our expenses grew 6.9% and below IGP-M and IPCA, which were about 12%. So our expenses only grew 7%. Four of funds below inflation. This is what it means. So the growth of personnel expenses in 12 months was only 4.9%. Very -- are much lower than IPCA and IGP-M. In aggregated expenses, we have administrative expenses growing 7.5%, basically because we have several contracts such as renting contracts, which are connected to IPCAs. But in overall, we can have a very good control of total costs. And we've been appropriating our staff. And we had -- we let goals of some of our employees in the previous month. And also, we had what we call PDV, which is a program in which the the staff leaves the company. And now we will have a new recruitment process for the IT area to hire 274 new IT professionals. IT, as you know, is the main challenge of all organizations in the world, not only in Brazil. So we need to train our IT department, our IT staff to deliver the projects that we want and so we become -- we become more and more digitalized in our processes. So we are opening this 274 spaces for new employees. We have over 3,000 candidates. And by the end of this year, we will have a test. And in the beginning of next year, we hope to have this new professionals in our IT department. And we also highlight that we announced recently, we will have a new PDV to -- for some employees to leave the company so we can implement new plans. And this will be a very important provision which is the provision to settle the whole employment agreement. We are still discussing this with the Union -- Employees Union, but this for us is very important. We have important 7.5% in revenue from fees and services, which is very important to. This is our loan loss provisions around 2% by the end of next -- last year and beginning of this year, we have operated policies, which are guaranteed constant monitoring, rural clients with real guarantee operations with small and medium-sized companies guaranteed by FGI. BNDES or other lines of [ CEF ] and also guarantee. And recently, we have an agreement with SEBRAE. I mean, many lines of guarantees. We look for structuring our credit. So we have a low credit risk associated to a low index of delay in under 90 days. So these are solid basis to make our portfolio grow. Here, this is a theme or topic we decided to discuss in detail, it's important to understand the whole move regarding assets -- I'm sorry, all the liabilities regarding labor provision. So since 2019 to the first semester of 2022, we have BRL 1.9 billion in provisions made. The amount paid was BRL 795 million, and they were paid -- we paid almost BRL 800 million in lost labor lawsuits. These numbers, these figures affected us during this period, affecting the result of our bank. But the news is that we've had -- I mean, in this period, we approved 2 credit provision policies. One policy to make provision on individual lawsuits, and another one is a policy to evaluate probable losses for collective lawsuits. So we started doing that in 2019, this project, and we completed this by June 2022. These numbers are pressified. We know about these numbers regarding these 2 approved policies, all individual lawsuits and all collective lawsuits as well. This resulted in this provision of 1.9 provisions made and a balance of BRL 1.6. billion. Out of this BRL 1.9 billion out of this BRL 1.6 billion or BRL 0.7 million. BRL 1.4 billion refer to provisions made for lawsuits filed before 2018. So -- we -- by the left area of the slide, we have in the provisions balanced by filling date in millions. So in 2019 to 2022, it was this difference BRL 111 billion, reaching BRL 129 million. And these numbers make up this BRL 1.4 billion. So what we've been dealing now and provisioning now and affecting our balance are referring to lawsuits before filed -- before 2018. They composed the majority of these provisions we made, just to make it clear. So regarding collective lawsuits, the result was BRL 912.5 million in provisions. So it was very important in our 2020 PDV, our voluntary severance program, we need to negotiate this agreement with unions. This is what we did for our voluntary severance program or PDV, as we call it, created by 2020. So in a way, we are attacking the root causes and avoiding new lawsuits in the future. In the previous voluntary severance program, the number of post voluntary severance program lawsuits was almost 60%, sometimes 70%. So 70% of people who left the company based on this voluntary severance program, would file a lawsuit against this bank. But now only 13% of these employees filed lawsuits. And out of this 13%, 85% lost in the first decision -- the first sentence. We are still waiting for the final and binding decision. But in this first stage of the labor court, most of them lost in this lawsuit. We are still waiting for the final sentence but we believe that we will maintain this rate -- this good rate. And 3%, 4% or 2% or 3% of them we hope to decrease. Still awaiting for a decrease, the number of successful lawsuits. And the root causes that gave cause for these provisions were already treated. Almost 70% of provisions, 69.2% referred to lawsuits discussing over time, I mean, the seventh and the eighth hour. This was already dealt with in the previous labor convention. This is no longer source of new lawsuits. This has been dealt with. And we also approached variable compensation issue. We extinguished this form of payment and we instituted PPR for profit participation program by the end of last year. So this is the first 2 year of profit participation program. we are paying this regarding also the new law, which was tested. And we also have 3.7% of litigations regarding new vouchers. This is an attribution of an indemnity in nature in 1990. This is a risk limited to employees hired before 1990. So most of the root causes that would give rise to lawsuits have been dealt with, our hope, our estimate is that the number of lawsuits is reduced. But in the previous 3.5 years, we paid almost BRL 800 million in indemnities regarding this present lawsuits with a provision of [ 1 3 ]. So we need to take this into consideration. Now talking about capital, that is -- there are some numbers regarding issued bonds 10 years ago. Even with these bonds, we still have room to grow in terms of credit. And this is our guidance, which was reviewed. We are changing some aspects in terms of -- in the -- our corporate credit has grown 30%. We will continue growing for companies. We are educating the center of guidance to this expectation of 30%. So 33% to 38%. We are also growing in terms of rural loans to almost 50%. This is our revision. We are reviewing our guidance for provision expenses, moving it from 2% to 3% and reducing it, we expect to reduce this provision expenses to 1.5% to 2.5%. Our funding will remain unchanged as administrative expenses and return on average equity. In our NII, will also be changed as you see on the slide. So thank you for your attention. Now we'll start our Q&A for investors and analysts.

[Operator Instructions] So we have a question by Flavio Yoshida from Bank of America.

Hello. Good morning, everyone. Thank you for this opportunity to make a question. I'd like to understand -- what about the appetite to make credit grow in more risky lines? I mean, looking forward because you have a very low default rate and this is the lowest in history and a high coverage rate. So we can make your margin grow and think about more risky credit.

Well, this is an excellent question. We have -- I mean, we have been discussing this since the previous quarter. We will probably address the possibility of operate in lines with more risks and more return. We have a very comfortable balance which allows us to marginally operate with more profitable lines and more risky lines. I mean, this is what we've been doing, and we hope to implement this in the near future.

Well, and regarding labor provisions, as far as I understood, we no longer have provisions for older lawsuits, right? And do you see a reversion in this provision or a change in this provision? Can you envision that?

Well, let me make a disclaimer here. We created labor provisions policies for individual lawsuits and collective lawsuits. And according to this new [ polic ], we measured -- I mean we also hired external law firms to help us with that, to understand the expectation or the estimate that loss we wanted to estimate our losses with these lawsuits. So this number I showed you is our best hope for these lawsuits. But this is not rocket science. This is not exact science like math or physics. It depends on the courts and the court's judgment and sentences. The final saying, but we hope that this legal sentences will be according to our expectations. This is our best expectations today. Just let me complement. It's important to stress that before 2017, there was an anticipated demand in the judiciary due to a loan -- sorry, to labor reform, which was passed in Brazil. And this stock of lawsuits -- we try to [ pacify ] this based on our methodology can be reviewed. But I would say that the stock right now is understood.

Our next question is by Eric Ito from Bradesco.

Good morning, Coutinho and Marcus and team. I have a first question regarding -- I mean, regarding your NPA and this increased risk due to the comfortable level of provisioning you have. What about the NPL for the end of the year, [ 1.8 ]? What do you think? And maybe in the future, what would be a comfortable and sustainable or sustained NPL rate for Banrisul? And by the end of this year, what do you expect? I mean, what about the dynamics?

Well, regarding NPL, we are in a very comfortable level. We -- I mean, associated to more profitable lines that could support this level of NPL. Yes, we could work to 2.5% to 3% -- 2.5% to 3% would be comfortable. Yes, it's closer to a historical average of Banrisul -- of the bank. I mean, [ 1.8 ] this rate is somewhat lower than the average. I mean, -- this is a virtue, of course, but it's below the historical average. Yes, could you repeat the second part of your question, please?

Well, sure. regarding dynamics of deferred prices, what do you expect for this year? And what about this 2.5% to 3%? Is it for this year or in the long term? I mean, this expectation that you have.

Well, 2.5% to 3% would be long term. This year, I think it's impossible. I mean, according to the portfolio dynamics and if you -- if you look to a table, we presented on the concentration based on risk -- it moves up to 92% in a short period of time. So the portfolio will not be changed in such a short space of time. And NPL, I mean there is no concentration on borrowers. We had more a bigger participation of these clients. Before, but not today.

Well, regarding the deferred income statement, we have these provisions that were constituted, especially the labor provisions and also credit based on the [ probability ] of operations that completed that cycle of the deductibility. These 2 items provoke or lead to the increase of tax credit and also the issue that the bank approved up to 50% of the results in owned equity. And this generated in the last line, tax loss in the current income statement, but it can be compensated in the next few years, but they also generated tax risk. And by looking at the set of issues, the subsidiary is -- I mean this is the first year in which you have a full year of Banrisul Security in the first semester of last year, it was -- he had its portfolio transferred to Banrisul Seguridade, Banrisul Security and taxation is more robust now in our subsidiaries. And regarding the bank, we had this issue. I mean, -- we've had the constitution issues based on the variations, the additions, the intertemporal additions and the tax loss generated in the income state area.

[Operator Instructions] Now, Mr. Pedro Leduc?

How do you see the rhythm of origination for the second semester of next year in these lines? Low default is giving rise to an acceleration of the portfolio growth. Payroll -- regarding payroll credit regarding [indiscernible] Brazil -- is it something Brazil -- sorry, Banrisul should take part in?

Well, we believe we will reach the guidance this year. This is a very positive scenario for us. We are very -- we believe that. Regarding [ Aucelio ] Brazil payroll loan, we are not going to do that.

Now Eduardo Nishio from [indiscernible] will make a question. Nishio, we cannot hear you, maybe your mic is off. Let me read Mr. Pedro Leduc question. The financial margin continued dropping. Thus, this has to do with the funding more expense in funding, as you pointed. So with Selic going up or stopping to -- stopping going up, can we say that the funding is already pressuring less than -- I mean, in the second semester? Is there a space to reclassify portfolios in a way that this helps the financial margin?

Well, with portfolio management and this Selic issue, even payroll loans in practice. We have 2 years periods for them. So we believe that this reclassification of the portfolio will continue during this next semester and -- and with the reclassification in the Selic stopping going up, we can help the financial margin. We believe that this reclassification will help the financial margin, Yes. And an additional issue -- additional thing is that when you look at one of the charts, presented the evolution -- showing the evolution of the financial margin in the past quarters, it showed that it was being reduced in the level of BRL 40 million, BRL 50 million per quarter. And -- but in this last quarter, we have a drop of BRL 7 million. So this clearly shows that we are almost reaching stability, and we remain confident in this guidance that was published that talks about the growth of financial margin annually. This has to do with the management we did on the portfolio and also with the Selic change, I mean, it's 3.75% now. Maybe we could adjust it a little bit. Also, the relative cost of funding which was changed. This Selic moving close to 14% will also help.