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 first quarter of 2023. This video conference is being recorded, and the replay may be accessed in the company's website at ri.banrisul.com.br/en. The presentation will also be available for download at this platform chat. Initially, we will have a presentation with the highlights and financial information for the quarter, and after that, we'll have a Q&A session with interaction between analysts and investors with Banrisul management. [Operator Instructions] We have here Mr. Cláudio Coutinho Mendes, CEO of the company; Mr. Irany Sant’Anna ’, Deputy CEO and Risk Officer; Mr. Marcus Staffen, CFO and IRO; and Mr. Osvaldo Lobo. Credit Officer. I would like to turn the floor over to Mr. Coutinho, CEO of Banrisul, who will start the presentation. Please, Mr. Coutinho, you may carry on. Thank you very much.

Well, good morning, everyone. I would like to thank your participation at this presentation of our results for the first quarter of 2023 of Banrisul. Well, first of all, let's talk about our highlights. Let me tell you that Banrisul has an expense agenda regarding environment, social, governance, ESG. And let me talk about a change in our statutes to contemplate diversity in our Board -- the Board of the company. So the top management, we plan to have at least 30% of senior management role for women, black or brown people or LGBTQIA+ people or people with disabilities. This is one to do starting now, so we'll reach 30% at least by the year 2030 -- sorry, yes, 2030. Now regarding our impact businesses, we thought about innovation public notice with a line of BRL 50 million for companies that bring projects supported by Banrisul. Consequently, they will have credit for that. Besides that, we made a change which will be enforced to the end of the year, we'll open Banricompras. It will be accepted at vending machines across the country. It will be a nation-wide card, not only at VERO machines, but it can be used in other machines or vending machines. By the end of this year, this will be available. On the other hand, let me talk about the renewal of staff. So by looking here since March 2020 to March '23, we had 1,433 collaborators, employees who left us, and we are now renewing our staff. In the first quarter, we had more than 218 IT professionals in training, and we'll be replenishing this lack -- this gap after they are tested. And those who opted for the agreement -- the dismissal agreement, will leave the company this year. Now let me talk about the loan portfolio that we have. It continues to grow at robust changes in 12 months. Quarter-on-quarter, it grew 18.2%. And let me also remind you that this portfolio is collateralized and it has robust guarantees. 80% of our portfolio has collaterals for individuals. It is like payroll loans. So our portfolio is very, very safe in terms of credit risk. Now looking at the growth vectors, let me talk about the rural credit. Rural loans portfolio with 69%, reaching BRL 8.4 billion. This is a portfolio that is growing in an accelerated and healthy fashion that you can see here in terms of risk and default. We want to talk about the increase of working capital and that accounts, now they have a small base. Total of the portfolio in this area is not so big, but these are very robust growth, 21% in credit -- in working capital and debt accounts in 18%. In rural and real estate, we have growth year-on-year. In rural, we grew 69%. In real estate, we grew 14.7%. And this is according to the several products that the bank offers. In terms of rural loans, we have BRL 8.4 billion in March '23 with a 69% growth. And in the crop plan, we had BRL 7 billion in credit, 88% have been already granted, and the quality of credit is exceptional. We have -- in the 90 days period, we reached 0.5% of our portfolio for 2023. This is an excellent portfolio. And this portfolio is predominantly has to do with costs financing, which are renewed every year. In terms of our default -- of our asset quality, this slide clearly shows the excellent quality of our portfolio and how important it is to maintain the principles in terms of diversification and collateralization and the discipline of our bank in terms of continuing to operate in a diversified way with its clients. We can see that our 90 days default ratio is very, very low, 1.7%, very low. And we also have a portfolio with AA and C ratings. I mean, 93% of this portfolio are within this interval of ratings, which is very good. And in terms of portfolio concentration, I would say that the 50 largest debtors only have -- or only account for 6.5%. This shows how diversified and guaranteed low-risk portfolio it is, also with a low default rate. In terms of loan loss provisions, we continue to be conservative in terms of provisions. If you exclude the recovered credit low risk and the portfolio growth in low-risk lines with solid guarantees mitigate potential risks of credit deterioration. And also, we can see the numbers and percentage here. We continue with credit costing 2% and provisioning 5%. Once again, this is a new look showing our portfolio has solid guarantees, and this gives us safety, so we can expand the credit portfolio, given that we are safe in terms of risk. Now let me talk about our highlights in this quarter. Our net income in the first quarter of '23 reached the BRL 213 million in 12 months. It grew around 30%. And regarding the previous quarter, we had a drop of 15%. It's important to notice here that we cannot disconsider the season. We have to consider the 30% of growth because the last quarter of the year is very significant. The economy is heated. The companies are producing to sell over Christmas. The use of our equipment and means of payment like VERO increased. So it's in test during the end of the year. And from January, February and March, and there is this vacation period. Most people are on vacation, during the month of January, February. The day is longer here if compared to the rest of the country and the temperature is high. People love going to the beach and they travel. So the economical activity decreases as a whole. And we try to make some activities to move to the beach areas to have presence in these beach areas to counter that. But anyway, the level of business decreases. I am making this statement because we must consider the season -- the seasonality, which is very important and has a special impact during the South [ Summit ] Brazil. So we make us consider that the prognosis for the rest of the year is good. Our loan portfolio reached BRL 50 billion with a 18% growth in 12 months. In the payroll loans area, it didn't grow so much compared to the end of last year. We had seasonality and also the INSS, which changed its rate and led to a paralysis in the system. Banrisul didn't stop working even with a 1.7% rate in its business, but there was a certain turbulence in the market, and we didn't produce so much over this period in which the rate is 1.7%. Anyway, we expect a growth around 6.5% in 12 months. The rural loans grew 69% with a BRL 8.5 billion portfolio. And in 2019, this was BRL 2 billion -- this portfolio was BRL 2 billion. So we multiply this number by 4. As we have said in other calls, our portfolio has been recovering, and we had -- in credit net interest income, our prognosis is that it continues hovering all the year, and we maintain in real levels, our fees and service revenues in a field that has a lot of competition with institutions like digital banks that do not charge fees. And even so, we managed to keep this levels. In terms of fees, we did grow of almost 6% in 12 months, very bigger. In terms of default ratio, very, very low percentage -- sorry, 1.73%. This encourages us to keep on with this behavior -- with this attitude, I mean, of being conservative granting credit with guarantees and diversified credit. And the cost of risk is around 2%. In terms of profitability of our bank, in 12 months, as mentioned before, net income grew 29.8% with the result of BRL 213 million in the first quarter. Adjusted ROAE is 9.0%. We need to consider seasonability. So we expect to have good results for the year. The main growth is the financial margin, which accounts for the growth in our profit. And we hope this financial margin recovers more and more. And as we have a drop of Selic fee -- the Selic rate, we don't know when. But when the Selic rate drops, will -- this will certainly benefit our financial margins, our income. Here we are looking at net interest income. Specifically, it grew 11% in 12 months. And it's for legal -- people, legal, for companies and also rural credits. And also in treasury, the interest rate that is higher, and it makes you have a value -- a figure that is important and relevant. Now in terms of funding. It shows one of the main points of pain of Banrisul. This is extremely diversified with a very low cost. The average cost of funding -- the average funding cost -- only funding cost for CDBs, our average cost is 85.8%. This is very important. We have a funding that is very cheap. And at the same time, it is diversified. You can see here in terms of the concentration, you can see the bar showing that the sum of the 100 largest -- large companies account for 6.3%. So we have a large number of individuals, 65.3%. This is one of the main points for Banrisul. Looking in a more general way, I would say that Banrisul has a funding structure that is cheap, diversified and with a lot of individuals and small and medium companies investing and you have a portfolio that is diversified and guaranteed. This is our structure, and this is our basis to have a pulverized, diversified and cheap funding and low risk. This is a slide showing our expenses and banking fees. From the adjusted administrative expenses, we grew 12%. We had the collective wage agreement of 8% in wage and 10% in benefits. The difference of this 12% has to do with the IT professionals admittance and who entered the company in the first quarter. Until this first quarter, there was no professionals left the company due to agreement -- dismissal agreement. So probably in the future -- in the near future, we'll have a result based on these professionals who make a lot of money in terms of wage. They are in the superior layer of the payment pyramid. And then those who are joining the company now, they have a lower income if compared to people who have a larger experience. And the IT professionals have a slightly higher wage as they enter the company. So in this quarter, we have this 12% figure, which is a little higher than our collective wage agreement. But throughout the year, this figure is expected to change with as our professionals decide to leave the company. And another item that is with 11% is the promoter of sales that generates payroll loans. And this number, the higher it is, the better because it's a variable cost. It's not a fixed cost and [indiscernible] growth business [indiscernible] base. So -- and we had some expenses with IT in terms of cards and consulting. And it reached 7.2%, which is close to the inflation for the past 12 months. Now we have seen the revenue from business services. We maintained this around inflation, in spite of all the competition that is there with digital banks and fintechs that generally do not charge any fees. Finally, this shows that we have a lot of room and safety in terms of infrastructure to keep on growing in terms of credit. We have our basel ratio around 17%. Even if you consider the 12-month period, it's the same, 17%, almost the same coming from 17.61% going to 17.13%. This shows that we have a lot of safety and capital, so we can continue growing in our credit portfolio. This is our very well done capital provision and plan to move forward. So I would like to thank you very much for your participation in this event once again and now let's move on to the Q&A, including the other members of the Board. Thank you very much.

So initial, we will start the Q&A session for investors and analysts. . [Operator Instructions] Let's start our Q&A session now with the participation of Mr. Nathan Meneguzzi, Superintendent of Investor Relations. [Operator Instructions] I would like to invite Mr. Nathan Meneguzzi to run the Q&A session.

Hello. Good morning, everyone. Thank you so much for your participation in our video conference to talk about the results of the first quarter of 2023. We are ready for the Q&A session. I would like to start opening the floor to Eric Ito from Bradesco.

I have some questions. First of all, I'd like to understand a little what you expect to evolve -- the bank evolves? The financial margin, 11% is a little below because it's -- from '19 to '23. So how do expect this NIM structure -- this NIM relationship throughout the year? Looking at your ROA, in terms of guidance, you expect 11% to 15% in this quarter, and we ended up seeing our ROA of 9%. So I'd like to understand that if you maybe will be more in the bottom range in the ROA guidance or -- and how do you expect the bank to evolve throughout the year?

Thank you very much. Thank you, Eric, for your question. This is a fundamental topic. The first part of your question, I believe it explains the evolution of the second part of your question, right? Well, as expected, the recovery of the margin will happen throughout the year. If we separate -- I mean, if we -- maybe you could discuss the credit margin because it expands to 3.8% against the previous -- if compared to the previous quarter given that the final quarter is stronger, is more intense and considering the whole seasonality of the first quarter. And as Coutinho mentioned before, we need to consider the INSS market issue that caused some trouble during the previous period. This could have -- this could put pressure on the credit financial margin. There are some considerations we can make. Let me give you an example. If you triple this growth through all the -- and if you keep the treasury margin and the recovery margin -- credit recovery margin stable. And let me tell you that the [indiscernible] of this were the lowest level of the past few quarters. And only then we would have an expansion -- only considering that we would have an expansion of 15% in the financial margin year-on-year. You need to consider that maybe 20-- I mean, 19% to 23% would then be so out of reach. And then we had some premium in the financial letters of the treasury, nothing dramatic, but it compresses the margin. And in the treasury portfolio, which, in our case, is 100% in public deeds and public bonds are close to that. When we think about the future, I believe that repricing process will go on moving from -- moving to 58% of the portfolio in this quarter. There is a space, a good space for that. Another important thing to share with you that the payroll loan average weigh above 12% in terms of annual terms throughout 2022. In the first quarter, the inventory rate evolved 5 bps. If you annualize that, we would have a robust growth regarding the previous year. I believe that the main driver -- or the main drive -- and now connecting to the second part of your question, the main driver result is the recovery of the margin. So if we achieve the financial margin guidance, naturally, we'll get to the -- to this margin of the guidance set by the dividends. I tried to explain this and answered your question. I don't know if you have anything to add?

Now let's move on to another question coming from Flavio Yoshida from Bank of America.

Can you hear us?

Yes.

Well, my question has to do with credit for growth. I'd like to understand a little more from you how is the dynamic of growth divided between product lines because we have default that is still low, but growth has been found in more conservative lines. I mean, in terms of risks. I would like to understand if this dynamic will go on or if you expect to see the portfolio growing in more risky lines throughout the year?

Well, in our Board, we decided to maintain the strategy of diversification of risks and maintaining -- maintenance of guarantees. This applies especially to real estate operations, payroll loans operations and for credit -- general credit operations we have used the credit products. I believe this will be maintained -- this structure will be maintained. And we have competitors who have different results in terms of default ratio. And we believe this strategy is the best strategy to be maintained or to be followed by the bank.

I just wanted to add something to what you said to what Osvaldo said, Cláudio called your attention, to the growth in this agro lines. And along with this growth, we will have a much stronger capacity to aggregate other products, other services to this new basis of clients. So we have a possibility of growing the profitability in this area. And this has been shown in profitability where clients followed for some time now. Perfect. I think the strategy for these new clients is to have the best sales and upsells and bringing more and more clients, making them loyal clients, helping them grow and making them -- just to add something to translate this considering or taking into account the guidance, the agro side -- the agro business is very strong. There is a guidance closer to 30%. I think it's too early to think in any review given that in the crop plan that you have ahead. And regarding the other lines, there's no doubt that the guidance was created in a different time. And in the next few months, I believe we can think or maybe review it, given that growth rates were in a different environment, but it's too early to think about reviewing it, especially individuals. Individuals in reasonable performance, but with significant space for growth. Thank you very much.

Thank you, Flavio. Now we are getting some questions regarding dividends, repurchase plans. So let me make this question. Can you talk a little bit about the policy for dividends, bonus for investors?

As mentioned before and as approved in our general assembly, the dividend policy was maintained. The distribution percentage is 50%, the same as of last year, 25% according to the legislation and 25% additional. We have already set the dates for payment. This helps having a predictability. So this is the idea of dividends. It's clear to us that we are trying to work and live it more and more predictable for the market. Regarding repurchase, we have an open repurchase -- share repurchase program. We have public data. We have made -- we have covered 2% of this program for the quarter.

Perfect, Marcus. Now moving on to a question from [ Luis Hissas ].

Initially, I'd like to congratulate management for its transparency regarding dividend payment dates. Does management see real possibilities for increasing ROE in the short and medium terms? Also, what was the savings verified in the recent staff renewal? What is the expected target for the total number of bank employees? Is there a forecast or an estimate to reduce the number of branches? So several questions regarding costs and efficiency. And now I open the floor if you want to answer this.

Well, regarding the number of branches, we have a permanent program to streamline our network of bank branches. And then we evaluate return and we evaluate the size of the market where the branch is located. And we made some concentrations of branches, but there is no expressive program ahead. There's no specific program ahead. But there will be an occasional streamline in some points, but there is no estimate to have a significant change in this program.