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 2023. This video conference is being recorded, and the replay may be accessed in our company's website at ri.banrisul.com.br/en. This presentation also be available for download at this platform chat. Initially, we'll 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 the Banrisul management team. [Operator Instructions] Today, are present in this video conference, Mr. Cláudio Coutinho, CEO; Mr. Irany Sant’Anna Junior, Deputy CEO and Risk Officer; Mr. Marcus Staffen, CFO and IRO; and Mr. Osvaldo Lobo, Credit Officer. I would like now to turn the floor over to Mr. Cláudio Coutinho, CEO of Banrisul, who will start the presentation. Please, Mr. Coutinho, you may carry on.

Well, good morning, everyone. I would like to thank you for your participation. I'd like to thank our employees and our managers and also analysts who are here and everyone who is attending, everyone from the capital markets who are with us for this presentation on results. Please, Nathan, can you play our slides with the highlights, please? Well, here are the main highlights related to this semester. Net income was BRL 226.5 million with a growth of 12 -- of 6.3%. And also the loan portfolio is to be highlighted. It grows above the average of the national financial system, growing 15.5% in the previous year. And growth drivers regarding the portfolio in this period was due to rural loans, especially real estate, credit and also legal and corporate funding and credit. It's not so big but this part has grown very importantly. Another highlight is our financial margin or net interest income. We were waiting for it -- react and it had the expected improvement with 25% year-on-year. And regarding credit alone, it grew around 30%. I'm talking about in the semester-based -- half year-based. This, in terms of total funding, we grew 7% year-on-year, always maintaining, as you'll see later on, the diversification of this funding and also a rate of funding that is extremely competitive, extremely competitive rates. In terms of fees, we managed to maintain in the past 12 months. When you look at the semestral figure, we had a growth of 2.7% for the previous year. And regarding half year, we are maintaining our level of fees aligned to the inflation rates. Considering the extremely competitive environment regarding fees. And we have to celebrate these results, which is favorable in the sense of maintaining fees in actual terms in such an environment is already a positive result. Next, please. Well, regarding our loan portfolio, as I mentioned, it has grown almost 16% in 12 months. Above, what we can see in the national portfolio credit services. In terms of -- let me tell you that we have a pretty conservative portfolio. 57 -- I mean, 79% of our portfolio is composed of collateralized individuals portfolio as of June '23. And we also have payroll loans for many reasons due to INSS and a setback regarding the obtaining of margins in the payrolls considering plenty of credits, which is very high and due to several other factors made our portfolio to be relatively stable in terms of payroll loans. In our growth drivers or other lines of consumer loans, working capital for small and medium-sized companies but especially rural services and real estate credit. In rural credit, I will show it to you later, we grew extremely year-on-year, very good growth rate year-on-year. And in real estate, we grew almost 13% year-on-year, which is also very important in terms of growth. Next, please. Well, now talking about our work in the rural area in the rural credits. Since the previous management, we have been investing in the capacity building and improvement regarding all of our infrastructure to meet the demands of Agro business, which was continued in this administration by this management with excellent results from these strategies. Our strategy was to train our teams and at the same time, getting our structure of service specialized in Agro, improving systems and tools that use cell phones and other tech systems to gain efficiency. At the same time, we also worked with funding which is fundamental in this case. We are a bank that has resources -- that gets resource from the treasury. We have lines from rural loans, banks that do not have capillarity for -- that we have for family agro business cannot do that. So in terms of activation or funding, these 2 lines of actions made us achieve exceptional results. So we have grown 83.4%, and in 4 years, the growth is almost 400%. This shows that our strategy was right in all of that with NPL above 90 days, very, very low, around 2% (sic) [ 0.46% ], very low default rates. You have -- we have additional BRL 5.8 billion for family farming, small and medium producers. And this year, we'll have, with the crop plan, we will surpass our estimates compared to our original plan. We have BRL 11 billion for this '23-'24 crop plan, but we are expecting to surpass this amount. We once again believe we'll be able to deliver what we want to do and even more. We need to also highlight our work in terms of participation in the main fares. Next, we have Expointer, which is a very important regional fair. We are evolving the teams of Banrisul and we attended Expodireto and other important events of the sector. This has been an important strategy and we'll keep on doing that. Next, please. Now talking about our assets and asset quality. In default rates, we had a slight deterioration of default, but even so we keep on very close to our low record, historic low record. In terms of corporate clients, it [ accelerated ] upwards a little. So these delays are related to companies which were already seen as [ H ], a provision of 100%. So it went from 2% to 2.8% with a 90-days delay or 90-days default. As I said, we had already accrued and provisioned for these companies. But taking an aggregated look on our default, our default rate is very satisfactory yet very close to what it was a year ago. As you can see on the slide, there was a slight deterioration, much smaller, much more reduced if we -- if you compare it to the national financial services, our coverage ratio remains very positive. And we've been monitoring very closely the evolution of our portfolio. And if necessary, we will take proper measures to tackle default so we continue with this low rate of default. Next, now considering our profitability, our net income has grown year-on-year in 12.1%. And our adjusted ROAE is a little above 9.3% compared to 8.7%. And basically, the main contributor to -- the main contributing factor was the improvement of the net interest income or financial margin and also credit services that have reduced the growth of our profit margin. These effects combined made our results grow but not as much as we had expected. So provision was a little above expected. And as I mentioned, in corporate, these were companies that were 100% provisioned for, and with the delay that they had, our default rate above 90-days increased [indiscernible]. Next, as I mentioned before, this is a positive variation of the net interest income, which has grown 25% year-on-year -- in the quarter on a quarter basis. And we expect Selic drop, which will give positive results and increase our net interest income, so the Selic rate drop will help us do that. And if you consider this, the total net interest income, considering public bonds and treasury bonds it has grown around 30%. This is a very positive scenario, which is ongoing. Next, please. Here, I would say that these slides shows one of the main points of Banrisul regarding its structure and funding strategy. Very, very diversified based on 66% are individuals and 25% small and medium-sized companies. Very diversified, very low cost. Aggregated cost is 78.7% of CDI. And if you consider the cost of CDB alone, excluding savings account, it's 86.6% of CDI. So we have a very diversified bases. The 100 main clients account for 11% of our liabilities. This shows the strength of Banrisul and its ability and its capacity to attract investors who can bring assets at an extremely competitive cost. And our passive portfolio grew BRL 73 billion that were funded by July. In terms of expenses and banking fees and administrative expenses, they are well adjusted. They have grown 7.9% on -- in the first half of '23, driven by renewal of staff, which grew. This has an effect of the voluntary resignation program, but the dynamics of a voluntary resignation program and cost is that, first, you need to hire the people who were approved in the tests. And then you need -- and then you let the voluntary resignation program participants go. So you need to welcome the new staff before you can let the older people go. So this period of this transition that is associated with the hire cost and that is a collective wage agreement around 8%. So if you consider all of that, with a collective wage agreement of 8% and also renewal of staff and this overlay of costs, and we grow 7.9% in administrative expenses before the wage agreement. If you consider all that, I would say the situation is positive. So when this transition is completed, we'll have a lower growth in expenses. We'll decrease expenses. So in terms of revenue from fees and services, this percentage of 4.3% in our fees revenue, I believe that considering the competitive environment with fintechs and digital banks offering services with even 0 fee, I would say that this shows our ability -- the business ability of the bank to maintain a stable and recurrent income and revenues. We see this object very optimistically, considering this highly competitive environment. Next, please. So this is our capital structure. In fact, we keep on -- with a comfortable level of capital. in spite of the adjustments we've had to do resulting from pension funds and programs adjustments. Even so, we have a capital rate which provides us with a lot of safety that we can keep on growing in our credit portfolio. Next please, Nathan. Well finally, these are some adjustments that we've made, slight adjustments that we've made in our guidance. In terms of total loan portfolio, we dropped 1 point in the ceiling and in the floor level as well, considering individuals which has led to this reduction, the financial margin was also slightly reduced. Our ROAE also reduced in both ends, so this is more adjusted to the scenario we see in the semester. In terms of loan loss provision is 2% to 3% here in terms of our expectations for loan loss provision. Nathan? Nathan? You can go on, Nathan. Okay so now I'll give the floor over to Nathan, RI head. Okay, thank you very much.

Thank you. Mr. Coutinho. Thank you for your presentation. And now we will start our Q&A session. I will call our team here. Just I will ask you to be patient. We will get our structure ready and we'll be back for our Q&A session very shortly.

We're back for our Q&A session. Thank you for your patience. [Operator Instructions] I'd like to ask -- start with Ricardo from BTG Pactual. You can start, please.

I have 2 questions with me here. First, could you talk a little bit more about this worse scenario on default and rating? Was something in the -- related to payroll loans? Now according to the revised guidance, we have a total risk for the second semester of 2.5%. Does it make sense to consider this number as being well for 2024, a good rate for 2024?

Osvaldo, could you talk about the initial part of it and guidance will be discussed by Marcus?

Well, regarding provision, we're constantly reviewing the models and the products as a whole, including individuals and corporate. As the CEO told us, we've had basically 3 events, 3 companies that increase this rate considering the corporate clients. Apart from that, our levels would be even better. And as mentioned before, I would like to say that this new guidance is still within historical levels as one of the best ever presented by the bank and also considering the sector. We have no highlight regarding products more than saying that we're still monitoring and improving our credit portfolio. We haven't reviewed anything in the sense of letting go of guarantees and a good structure to maintain our commitments.

Just I would like to add something to what Osvaldo said. We do not have a guidance for 2024 yet, not published yet. But this level of 2% to 3% is behind if you compare it to the bank history in the level of asset quality, credit quality. It's behind. And this review was necessary, given the different scenario in the market since the original guidance was published by the end of last year. So as Osvaldo said, and I agree with him regarding the dynamics, the portfolio and mix of growth, there are no big changes.

Well, super clear. Can I make another question regarding a different topic? In the second quarter, we have seen a good improvement in NIM regarding prices of the portfolio. And aligned to that, they will have a drop in interest rates which will also benefit you. Can you help me understand what we see in the second semester and what we could see in the next quarters, maybe even into 2024?

Excellent point, Ricardo. While I believe the dynamics of margin has followed what we have seen in the market, the portfolio has gained in traction in the reclassification process. We achieved 62% of the [ reclassified ] portfolio by the end of June. And the gain we've had so far was strictly regarding the variation of the asset and revenue growth. Now with the process of regarding interest rate drop, this will help the margin, of course. It's -- Let's remember that we have Selic that was accumulated above 12% in 2022. In 2023, it will be above 13% regarding accumulated Selic rate. And when we consider 2024, maybe it will be 10% and 10-something in the accumulated Selic rate. So that will be a positive thing. Good opportunities connected with interest rate drop. So every 100 bps of interest rate drops, BRL 150 million [indiscernible] in our NII. So obviously, this will help us grow for the next year.

Thank you, Ricardo. I would like to open the floor for the Q&A session for Gustavo Schroden from Bradesco BBI. Gustavo, the floor is yours.

Hello, Nathan. I have 2 questions. One, regarding the evolution of payroll loans. The bank has always had a strong presence in this segment with a portfolio that was a highlight of the bank always. In this quarter, it was a little weaker, not only considering Banrisul but all other competitors have presented weaker payroll loan. Is it related or still related to the cap? There was a cap. And then there was another cap and people started -- everyone stopped originating and is still gaining traction. Or is that any business setback understanding that the fees have decreased? And what do you expect for this quarter in terms of payroll loans? Now the guidance on ROAE, you have reduced from 11% to 13% (sic) [ 11% to 15% ] to 9% to 11% (sic) [ 9% to 13% ], but it's going below the guidance. If you get the run rate of it, do you agree with that? Or should we expect an improvement in profitability for the second semester? And if the case which would be the main drivers to improve ROAE for the second semester, if that's the case, I mean?

Well, regarding your first question regarding payroll loans, well, the system as a whole hasn't grown as expected or considering the previous periods. [indiscernible] Considering INSS, I would say it did, yes. We still need to accommodate the levels -- the price levels to work with, especially for you to -- the figure of the correspondent. And with the drop in interest rate in the future curve, this will lead to an encouragement of this space. And regarding individual guidance is more to reflect what happened in the first semester. In the second semester, with a lower Selic rate, we'll be back maybe not to the previous 2-digit levels of growth, but it will grow. Regarding other agreements, there is an also effect regarding higher Selic and more commitment of the income. And with the drop in interest rates, it will help markets to stabilize in somewhat lower levels. We would -- we have been working with 2 -- with a level that is much lower now. It's important to talk about this business aspect. The business has had a strategic decision to strengthen our participation in Agro business. So we changed our focus to this area, to the Agro business. We create a share in now. We are in a very proper level and we will be able to refocus on payroll loans. This is being reflected in our goals and metrics. I'm certainly -- I'm certain this will make a change in the growth and quality of our products. Well, regarding the second part of your question in ROAE guidance, we adjusted from 9% to 13%. I believe we can still aim around the middle event, the center event and the dynamic of margin growth will be the driver that will lead or make the bank achieve this guidance that was disclosed. Another important thing is that administrative expenses, when we consider them year-on-year, you have to consider a low inflation rate and the -- and also consider decreased expenses when collaborators and employees will leave.

Yes. Yes, it's 9% to 13%. I was mistaken. I'm sorry. Well, thank you very much for your answer.

Another question. It comes from Pedro Leduc from Itaú BBA.

Now talking about rural, the rural sector, the main highlights for this past quarter Banrisul and we consider the crop plan for 2023 and 2024 with almost 60% additional resources made available for this new cycle. And when we are to model NII and voluntary resignation program, we must consider that the Agro sector has -- will continue growing in the portfolio. I would like to confirm this with you. Is it right? Will the Agro business grow even more in your portfolio? And how can you -- how can we understand this, especially -- and also regarding the loan loss provision?

Well, this is a strategy that we created for the Agro business. We have a compatible funding, which is pretty relevant with a very interesting price, allowing us to naturally grow in this portfolio. This offer is compatible with the lines that we have available. And this will lead to natural growth, and we can have -- or can make less effort to do that, to achieve that. And then we can focus on other lines such as payroll loans. And we will continue like cruise speed with the Agro business. I believe the bank has had a successful strategy to put together a portfolio of credit strategic activities, and Agro business is one of them. In the market, we have 16% our market share today, and we can achieve 20% of a share which is a share that Banrisul achieves in many of its activities but always relying on structured and quality growth. President Coutinho, would you like to talk more about the Agro rationale?

Yes. As mentioned by Irany and by Osvaldo, I believe Agro was a successful strategy that we have implemented. Since the previous management, as I mentioned, I believe that considering the domestic growth of the state in Rio Grande do Sul, it will always be important, compounding and making part of our market share and corresponding to a vegetative growth of this portfolio. But we will work to get to 20% of market share, which would be a proper level, I believe. Four years ago, our market share was below 10%, just to remind you that. And you have to consider that this market has grown from the absolute standpoint. So the growth in our portfolio was not due to the growth in share only but the size of this share as a whole has also increased.

Another question, I would like to open to Flavio Yoshida from Bank of America.

I have 2 questions. The first is related to the previous question made by Pedro on the rural sector. I'd like to understand how you can see this competitive scenario, considering Cuban traditional banks, which has been pretty vocal regarding the growth of Agro. And also regarding the cooperative programs and cooperative groups you work so much with. And I would like to know about the appetite for growth of this portfolio more aggressively in terms of higher needs. You said that there was a default rate that is controlled but has increased. The cost of risk guidance is not showing that this will decrease substantially. So I would like to understand whether you want or have the appetite to change the portfolio mix a little bit to support an improvement of NIM and consequently, ROAE.

Now considering the Agro strategy, at first, I believe that the bank strategy to have specialized offices and departments in a very intense incentive to prepare our teams and our networks in order to map. And we know that we have 350 branches with Agro profile, and we will keep on training these branches to focus on improved wholesale service. This will make a difference regarding this successful strategy in our growing the Agro business. And if you put this effort together with the proper funding structure and when a sales channel and modern systems that we do have, I believe you will make this growth possible. This growth that this bank has achieved with quality and even considering adverse scenario. Every year, we evaluate parameters, risk and strategies. And again, in our portfolio, if you have a space, a strategic space for Agro, this is super good, super nice. We talked about 20%. And now regarding other portfolios, then my colleagues will discuss that.

Just wanted to say something about Agro, the very design of our growth shows that we have qualified ourselves to enter, to join this market very strongly. We have been looked after for business in 2019. We took part in a very important fair. And there were not too many people in our stand. But now we had this strategy, which is a strategy. The previous fair, the previous show we attended, we were visited by the main players. So this strategy paid off. Our main challenge now is to transform this relationship into something broader and deeper and place other products, increase profitability in this sector. So I believe the bank strategy is consolidated in this sense. And regarding other products, I would say yes, it makes sense that the bank goes back after a somewhat low appetite due to risk and the pandemics. It was good because our default ratio was low. And little by little, we were working with our traditional markets, small companies. But now we have expertise and support and relationships and space to grow but always being careful working with quality and being safe and working with common sense. Now talking about products and margins, the -- I mean, payroll loans themselves, they are -- they have a somewhat lower margin if you compare it to the -- to our history. Our portfolio has a rate of [ 1.50 ] stocks, but this is a growing rate. With Selic and costs growing -- going down, throughout the first quarter, in the second quarter of next year, it may reach 2-digits, which is the pattern of payroll loans. This will give a drive to our services. It's important to highlight that we can increase our profitability and margin with the current portfolio that we have. So in that word, about future results, and we'll act very carefully regarding the opportunities that may show up. Thank you very much.

Now another question. Now Yuri Fernandes from JPMorgan.

I have a question about equatorial service and which are the dynamics? What could we expect? And interest curve and which are the drivers for us to consider this impact in your equity?

Yuri, the adjust of this liability, it's made every year by the end of the year. It follows an index NTN-Bs of medium- and long-term. And this liability was evaluated with a lower rate. So the impact will come mostly from this interest rate closure. I believe -- I don't believe there will be a big movement. What did happen was a stronger movement when we compare NTN-B above 6%, considering those levels of 5% or 5.3% that we have currently.

I have -- Now considering loan loss provision, I would like to understand more your results on this quarter. Coutinho said that NPL was related to companies which already provisioned for. But your loan loss provision has gone up. And we can see that we have more growth in NF because if those companies were already provided for, maybe it was related to other portfolio. And 70% of your portfolio is rural real estate, very defensive, let's say. So we would have 2% of cost of risk. But you had 3 -- 3.1% of cost of risk. So what led to this increase in loan loss provision in this quarter?

Well, Yuri, I don't know if I understood your question properly. Well, if you consider individuals and corporate, considering the percentage, what I see in the individuals in this quarter, we have similar levels. Now regarding corporate clients, there was a change in -- due to credits that were once active that became or entered in default, but they had almost 100% of provision levels. Besides what -- we have an impact on loan loss provision that we must consider in your analysis is the starting loan loss provision. If you make your portfolio grow, even if it's go, you have to create a new provision for it. I don't know if I was able to answer your question.

Yes, there was a credit recovery. When you recover credit, you surpass that level a little bit. Maybe a part comes from this?

Yes, precisely. There was this movement. If you compare this to the previous quarter, there was an improvement of BRL 80 million in recovered credits quarter-to-quarter. This will increase not only or surpass the level and the margin, which will come back as financial margin.

I have a question that we have that was sent to us through our chat window. Let me read it. It comes from Osmar Santiago. Despite the functional restructuring plan, with the decrease in the company's number of employees, the results of the second quarter show an increase in personnel expenses. What can explain this such a disparity? Why do we still not see decrease in expenses for such category? Coutinho, would you like to talk about personnel expenses? And later, our colleagues will discuss that.

Thank you, Nathan. Well Osmar, during my presentation, I mentioned that you have, well, people joining -- new employees joining the company while other employees will leave the company based on the voluntary resignation program. So for a period, this transition period, there will be overlaying staff. So once this transition ends, these expenses and these numbers, figures will be clearer. So the total administrative expenses was even below the percentage of 8%, which was a previous wage -- collective wage agreement. So in fact, we grew 11.6% in staff, and we expect this number will decrease as time goes by. So if my colleagues would like to comment on that?

I would like to mention something else, Mr. Coutinho. That is we adjusted our guidance, reducing 1% for each of the ends, for each of the extremes, and that is a smaller effect of inflation projection. When you consider the year as a whole and this effect of new people versus people leaving the company, this will be minimized. And you check, you'll see that the expenses will behave properly.

Now another question that we got through the chat, Ricardo Luca. Would it be possible for you to talk a little bit more about information update projects and the use of data analysis to focus on product offerings, please.

Yes, we would like to keep on using data to base our decisions on. We have the corporate teams. They have been doing an assessment of the bank as a whole regarding maturity and data analysis. We have opportunities we need to grow more in this aspect. We have models developed by [indiscernible] and the Federal University of Rio Grande do Sul regarding consumption propensity, clients that may generate more value, more revenue. We are making an effort to connect this to the metrics and direct this to our product offerings. We have a lot to improve and to grow. We have available models, as I said. And now it is up to us to start using them to develop more accuracy, and so we can turn these into results.

Thank you very much. Mr. Irany. We have another question coming from Carlos Gomez from HSBC, which is what capital ratio objective would you like to have in the medium-term? What level of dividend is reasonable for this?

We have a policy, capital policy and -- which is connected to the minimum total capital base level, 400 basis points so that the banks start sharing. This level is 14% to us now. This year and the previous year, there was a distribution of 50%, slightly above the standard that has been followed by Banrisul since 2017, which was 40%. So there is some space for us for the current level of 16.1%. Traditionally, Banrisul follows a conservative policy. And in the medium term, I would say that this current interval from 14.5% to 16.1% is a good reference when you consider longer periods.

Thank you very much, Marcus. Let's now move to our final question coming from [ Cassio Guerra ]. He says, the question is about default. And he says, I would like to know about your view on the deterioration of default in the market as a whole, whether you see this as a one-off or a recurring event, given that the guidance has been revised downwards. And because of this, will there be a need for market capitalization or review of the dividend policy or frequency of payments, which today is quarterly frequency?

Well, Osvaldo, could you talk a little bit more about default in the market?

Well, this uncertainty that prompts us to reevaluate and generate this guidance revision, by looking to the performance of the bank portfolio, we can say that the bank keeps on maintaining a diversified portfolio, understanding and evaluating risk. We have real estate with a very good structure of guarantee as well in other actions like payroll loans and operations regarding small- and medium-sized companies. We need to keep on understanding the risk. This is our mantra. This will keep on being our slogan, this adjust was made also considering market uncertainties and what the industry and what the sector has been used. But I would like to state once again that this is a level that is a controlled one, and we will be reevaluating everything, every point that is deemed necessary. The most -- the level of highest pressure is gone. The interest rate has gone down. It's been reduced. So we believe that the scenario must improve and not deteriorate. Just considering a part of your -- the last part of your question, we don't see the need to change anything either in the dividend policy or the total volume or the frequency of dividend policy payments. Now regarding default, this is a historically low level, a low rate, considering the bank history, and it's below the retail rates as well.

There was a follow-up by Carlos Gomez from HBSC (sic) [ HSBC ] regarding the impact of the 229 Resolution of the Central Bank on actives assessed due to risk, and we're also considering the Basel ratio. Would you like to talk about that?

Well, there must be an advantage regarding these new metrics. The bank has -- is about to get some space in terms of capital. We are optimistic regarding what is in for the bank.

Thank you very much. I believe we'll end our Q&A session. In case we haven't answered your question, our RI team will get your questions to our shareholders and our team. I would like to pass the floor to Mr. Coutinho for his final remarks. Please, Mr. Coutinho.

Thank you, Nathan. Well, I would like to thank everyone who has attended this video conference to talk about the market. I would like to thank our employees, our top management and our investors. I'd like to mention that this may be the last results presentation under my management. Soon, Fernando Lemos will become the CEO, the President of Banrisul, and I would like to wish him all the luck. Banrisul is prepared for a new cycle of growth, and I am sure that Mr. Fernando Lemos will be able to continue making the bank grow and improving the role Banrisul plays for the state of Rio Grande do Sul. I would like to thank Mr. Irany. Together, we have faced this past 4 years, particularly the pandemics. They were really, really hard, and we managed to overcome these challenges very successfully. So I'd like to thank Irany and the top management, the Board as a whole. And I wish Fernando all the best. Thank you very much for your participation.

Thank you, Mr. President. And Banrisul's video conference has now ended. We appreciate everyone's participation, and wish you have a good day. Thank you.