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

Good morning, ladies and gentlemen. Welcome to Banrisul's video conference to discuss the results of the fourth quarter of 2023. This video conference is being recorded and the replay can be accessed in our IR website right after this event ends. So today's event will be divided into 2 parts. So in the first session, we'll have the presentation of our results, number financial performance by our CEO and President, Mr. Fernando Lemos. And after that, we have a Q&A session during which analysts and investors will be able to interact with the executives. [Operator Instructions]. This presentation will make today is available for download in the chat. And it's also available for downloading our IR website. Now I'll give the floor to our President, Mr. Fernando Lemos, who will begin the presentation of our results. Please, Fernando, you may proceed.

Good afternoon, everyone. It's a pleasure to welcome you all here. I'd just like to mention before we start diving into the numbers that we have here all of those who are in charge of the financial area of the bank, the main executives. Just to let you know, I have -- I was the President of the bank from 2003 to 2010 when we had a major transformation of the institution, along with the -- the publicly traded bank that bank that Banrisul was turned into at the time. So this is why I'm here to discuss the results for 2023 with you. From the middle -- from half of the year, we started being the CEO of this bank. And then we started performing the job for the two final quarter of 2023. And so let me dive into the numbers. So the total earnings, the total profit was BRL -- sorry, the net income was BRL 871.1 million with an increase in the year of 11.5%, which fit our expectation, especially considering the performance in -- of the fourth quarter of 2023. In that period, we had BRL 304 million as the net income, which configurated the ROAE of our bank, as expected. Our net interest income helped impact the results of the bank with an expressive growth over 15% in the year and 7.8% in the final quarter, reaching BRL 1,476.6 million. In terms of the administrative expenses, there was no surprises. And fees and services revenues were within our expectations with the growth in the past year of 9.7%. And in the past quarter, the growth was very expressive of 5.1%. And this is our highlights, and we all know our company. The Vero has a very important impact on the earnings of the institution. Our loan portfolio also had increased to BRL 53.7 billion, 9.3% in the year and 2.3% in the quarter. And the rural funding, the rural credit has had a highlight in the bank. So loans to individuals also had an impact. We need to be careful regarding default, so we can adequate the portfolios as we wish. So they are under control. The total funding had a growth. It's a major strength of the bank. It reached BRL 79.2 billion with an expressive growth of -- in the last quarter that was very expressive, reaching 6.0%. Next, please. As you know, since we started being in the CEO department of the bank, we directed the bank services to the client. Our focus is the client. So we have a digital attitude coupled with operating efficiency, innovation and sustainability. Our goals have been directed to reach these goals. And then we have been working more in finding and reaching these results not only in expanding our portfolios, but increasing and adding quality to the existing portfolios. On top of that, we are working with clients to have an excellent service, maintain our participation in share in the market. This is our main numbers. Profitability was 11.5%, considering the previous year. ROAE 9.1% -- in 2023, 9.1%. And in the final quarter, there was a growth of 12.3%. Change in net income was highlight also including the net margin reaching the goal of [ BRL 823 million ]. This is our net interest income, as I showed to you, 15.3% was the growth, which was very expressive and very good for us. Our change in net interest income was very important. This is one of the reasons why we've had such good results. We expanded our credit and our loans, which allowed us to reach the numbers we are presenting right now. In terms of our loan portfolio, this is in, you can see this, the portfolio balance grew 9.3%, considering that our individuals portfolio 77% of it is collateralized individuals portfolio. Having this collateral portfolio. And you know that the bank is very strong in payroll loans, although we haven't grown in this previous months, due to the change in the state government, which will later allows us to have a better impact on this portfolios. Real estate loans had a growth of 16%. And we are going to work on improving the working capital in small and medium-sized companies in the state. In rural loans. The bank is very strong in that. We reached 11.5 -- sorry, BRL 11,359 million to December '23, 44.2% and I forgot to mention that the real estate loans depend a lot on funding, but we plan to keep on working on that, 16% in growth. The asset quality is under control. Our default ratio was 2.6%. This is below the market. This is safe for us. Provision expenses and costs of risk also decreased us a little, which helps us in the coverage ratio is the same. This is very good, very safe for us. In terms of expenses and banking fees 6.0%. And we all know about the values in this. It's always impacted or there is always an impact coming or resulting from wage agreements. In terms of funding, we have a very strong funding, very diversified funding. We will keep on doing that, and we expect the future to keep the same levels or similar levels. Our basal ratio is pretty comfortable, which allows the bank to keep on growing, as projected with no surprises. And no hurdles in terms of capital. This is our guidance for 2024. The total loan portfolio, we expect to have a growth of 2% to 7%, cost of risk from 2.5% to 3.5%, administrative expenses 6% to 10%, depending on the results and our financial margins, NII, we expect to reach 25% to 30%. And now where I give the floor back to Nathan. Thank you very much for your attention.

Thank you for the presentation, President and now, let's start our Q&A section.

And we all already have some analysts here with questions. I'd like to start with Mr. Flavio Yoshida from Bank of America. Flavio, can you hear us well?

Hello. Thank you for this opportunity. I would like to understand, when you look at the guidance for portfolio growth, which are the lines? I mean, especially in individual segments, we should hope for some growth. We have a controlled default and the coverage is high. So let me understand if you're going to change the mix moving towards lines with higher profitability or if you plan to be or keep on being more conservative, working on the conservative side? What about the competition for this year? Because last year, we know that there was a year of adjustments in the portfolio for most banks. In their speech, for the most part, was about more competition going for market share. So how are you getting ready to grow with profitability considering this scenario?

Well, this is Gonzaga speaking here regarding portfolio growth. For example, rural portfolio, In 2023, the bank had 44% of the growth in this segment. This is a very diversified portfolio with a medium and small producer ticket. Most of our clients are these and in the cooperative segment that gives this credit more for small producers. And real estate portfolio also grew. The rural portfolio is becoming more and more competitive, and our market share is very expressive in Rio Grande do Sul. We do not operate in with rural portfolio -- rural loans outside Rio Grande do Sul. We have just very small number of clients in Parana and other states, but mostly in Rio Grande do Sul. So if you grow too much in the market, we will hold down your growth for 2024. So I need to be careful about that. The real estate credit -- real estate loans grew 16%. So we do not expect for it to grow so much there's not so much income to grow anymore for this year. So there will be a balance. So our focus will be to grow in terms of small and medium-sized enterprises. We are designing credit lines. They are more adequate for the segment of the market. We are trying to understand the behavior of this small and medium-sized clients, along with Vero and the payroll loans portfolio, we want to grow in INSS segment and the municipality portfolio has some space to grow. But the government side, the government portfolio, there's not a lot of room for growth for this payroll loan in the government side because it has already grown so much. So basically, we're talking about the state and the legislative assembly and public ministry and justice court. This portfolio, they have already achieved a proper level. Not to create, not to generate debts with the public servants. So there is not so much room to grow in these portfolios. And then this is why I told you that we are expecting to grow in medium -- small- and medium-sized enterprises in this state Rio Grande do Sul, where we will focus on this growth for small and medium-sized clients.

Just a follow-up question. At the end of the day, when you look at the guidance, it implies in growth of margin above the portfolio. There are some other effects such as the Selic reduction that helps somewhat. But considering this effect, how do you see the margin growth of the product per se? And while we talked about growth in the INSS segment, how are you seeing in facing the profitability of this product taking into account that we have seen a reduction in the interest rate cap? So how are you managing to compensate for it? Or if the product profitability has become smaller?

Well, as you said, we have a speciation of 2 points Selic. Our portfolios have a longer period in the assets. So we have a better margin, I believe. We are also exploring our treasury and going into the interbanking market with GLF well-calibrated one along with the banks optimizing more and more the revenues for the treasury in the interbanking market. So there will be a select rate reduction and the treasury which can help us explore this interbank market. Small and medium-sized companies give us a reasonable margin. And the INSS payroll loan is a heavy credit. It's a heavy loan for the government. The rate has reached the ceiling cap -- interest cap, but you perform operation using our network. And the clients and the market, they have -- the way they work, they give a good margin, I would say. And what's more in terms of INSS segment, they have a very well stabilized default rate. So it's very proper. And this margin, I believe we can obtain this.

Just to complement -- just to add something here. The stabilization of payroll loans generates more margin. So we have an origination cost that is high. And after it stabilizes, the result is more significant.

Now our second question, let's open the floor to Ricardo Buchpiguel from BTG. Ricardo, can you hear us?

Hello Nathan. Hello, everyone. Thank you for this opportunity to participate in the Q&A session. First of all, let me ask about quality. We have seen negotiated portfolio growth, and we have seen a change in the methodology to plan for the rural portfolio. So it's not so clear for us regarding the asset quality. In the past quarter. So in terms of asset quality, what changed from the third quarter of 2023 to now, what can we expect moving forward? Regarding the cost of risk of 2% or 2.5% in this guidance. But if we consider the change of mix results, what can we expect for 2024? Considering deterioration potential and the mix changes or changes in your product mix?

Well, considering rural loan, the concept has to do with the working capital, the credit to fund. The activity of planting in the cost of this operation. We are talking about very well selected clients, traditional clients, that have operated and have worked with the bank for a year. So we are focusing now on the segments to reattract these clients, and these clients acquire rural loans with us. So they have a major equity. This is a really, really low risk operation. So we didn't want to hurt this operation by working with such a high level. So this is why, because they are very well selected clients. So on the other hand, I would say that I'm pretty conservative in terms of provision. But for this portfolio, we had to forge related about the provision because these clients were out of the -- were outside of this curve. This risk curve. Regarding the future, all banks have had -- have been hurting in terms of their portfolio. But in terms of retail and other high liquidity activities, working with Vero, we can increase our services in terms of credit. And we need to work a lot on the collection. We made a lot of effort putting together managers and employees to keep this default ratio low by working on collection procedures and also the -- and it also has an impact on the employee profit sharing by the end of the year. So this is why we made this effort to keep the default ratio as low as possible. So working really hard on this. Administrating this portfolio very well. Then I believe we can maintain the space very well.

Great. We have seen the guidance showing some lines, some figures. I would like to understand a little bit more what about the expectation regarding services and operating expenses? How do you see the perspective in the growth of these lines for this year? And if the vehicle payment arrangement, what do you expect for this? Positive impact? Negative impact for this year?

Well, first of all, in our service revenues, we are working very hard to work and work more on the -- in the currency, services. The spread is low. It's very good. We have working with limiting factors, to giving waivers to some clients. In our financial system, we can gain a lot with limits. So we are exploring the services, the exchange service. And fees will increase as we work every year. Year-by-year, we have worked with price levels, and we have like a vegetative growth space. And we have worked on the portfolios of the companies, of the branches, INSS customers, we have a very good service on this. We have a system that will add values to credit, to overdraft services as well. So this is the expectation we have regarding the growth of service fees. And also, we plan to add [indiscernible] to Vero portfolio and also working with the interoperability of Banricompras. Let me tell you that there must be some effect. On the other hand, there will be like a pool in Rio Grande do Sul, because we have over 100,000 companies that work with -- we can work with this Vero and PCR. We are going to pay to provide services. So the competition in other players. So we have a pool of over 100,000 companies, small companies. So they can take their services to other competitor for acquiring services, but we will get there to try to work. So they can start working not only with Banrisul, but also with Vero. There is a small threat. We may lose 5,000 to 10,000 clients who only have Banricompras, then they choose to go to another bank. This is part of the game. But the opportunities are much bigger. And if you work well, we can make a lot of money, more money. The state of Rio Grande do Sul added electronic invoice in the POS. It was a threat, but now, we have all of our customers with NFC and fiscal invoice, digital fiscal invoice in which added -- which made the services much quicker. There was a technology, a state-of-the-art technology on the equipment and the clients do not lose any time working with this digital invoices. So we helped us secure more clients. We have some assets and some liabilities working in these customers. You have always have to look for that.

Just a final question. Regarding service revenue, it has space for expansion right regarding margin growth expectation and margin growth adjusted to risk. So we reached 13% adjusted with the ROAE. Does this makes sense regarding profitability as a whole?

I do not know about this number, this figure yet. But yes, you need to consider the margin, we haven't said that before, but we have credit recovery curve regarding problematic credits below the market. And we also have some room for improvement in this area. So we will devote efforts to update modeling in digital channels, massify the services and probably we'll have some good opportunities in this area as well. Yes, this asset will be recovered. A good part of this, this pool will be recovered

Now moving on here, we have Yuri Fernandes from JP Morgan.

Congratulations on your results, the guidance imply very good growth in terms of net income growth. You are very well positioned for this margin tension. Regarding this agreement with the state for the payroll, we still have 2 years to go. I think the agreement goes to 2026, right? But we have a new administration in the bank. So how are you dealing with this agreement? The agreement with the state government? Can you talk about that?

Well, we have a very good relationship with the state government. We haven't discussed the agreement because we still have 2 years to go. But there's no problems regarding that. If you won't need to renegotiate in the future, there will be no problem. I don't believe there are any setbacks, any problems very good relationship with the treasury. And there was a new rule passed recently that is very positive for us to prevent the super debt of public institutions and the government set very good deadlines and fees. And one of the things we saw in the market, one of the mistakes of the payroll loans is leveraging that is too high. Ideally, it's 60 months, 60, 70 months to avoid the high debt and have some. Have some good results. So taking all of this into consideration, I would say our relationship is very positive with the state government and maybe, but we think about -- well, we have to review this situation 2 years from now because everything may change. Who would say that picks would become such a huge form of payment 2 years ago. So we have to consider the situation 2 years from now.

Well, I have another question regarding your payroll loans portfolio. Well, we have some growth in the rural and -- but considering this spread compression, what about the origination? I would like to know your ideas about these caps. These caps have pressured the payroll loans results. The bank had some space to perform repacification. But how do you see the payroll loan portfolio in the future?

Well, we have some -- a very good space to prospect credit. 95% of this portfolio, the payroll loan portfolio is in the INSS segment. We had some problems with the profitability in -- with the portfolio in the 2022 which also had some reflections in the beginning of 2023. So the perspective of this portfolio for 2024 is very positive, I would say. We've been working in payroll loans. We need to understand payroll loans and how to operate them, and how to attack this segment. I mean, how to deal with the segment. We have a very good strategy. We are not going to grow the volume. We are refinancing the portfolio and finding new loans in the INSS cap. So volume will be similar, but profitability is expected to be very good.

Have you seen any pressure from digital competitors such as Nubank? Nubank is going into INSS. Do you feel any threat? Or...

I don't know about the Nubank size in this operation, but Well, in this market, you have a certain loyalty, customer loyalty. It's around 700 -- 600,000 clients, captive clients, let's say. And so the consumer, they tend not to change banks. So they have their partner, the corresponding partner. And then there is this relation that tends to be stable. Well, the operations are open sea kind of operations, but Anyway, I don't see a big threat by Nubank in terms of competition. Well, this will be another player in the market. I don't know if they keep on with that fee, with that rate, I don't know if they can maintain that in the market. So I would say it's just another player, another competitor in the market.

In terms of interest and payout for 2024, So we do not have an approved payout to inform the bank in 2020 to 2023 bank worked with 50% of distribution, and this is sent to the assembly that takes place by the end of April, but that is a trend for us to have a payout adjustment, maybe go back to 40%, the historical 40% of the bank. I don't know if you have anything else to add.

While in due time, we will talk about this issue this year in 2023, there will be some dividends we will pay because we haven't paid interest on capital for the last quarter of the previous year. So there will be some dividends to be paid. That is due to the market, to the investors. And then we will study this matter to consider how we're going to distribute interest on capital for 2024. In due time, we will devote these results.

That's great. Another question we have here is regarding the agribusiness portfolio growth. We have talked about that in the previous answers. But there is a specific point here. He says that as most of the growth came from the agribusiness, how do you see the evolution of default due to a possible problems crop -- with the crops in here. Rio Grande do Sul the situation is a little different here.

Yes, Nathan, let me tell you that in spite maybe in the center and west region of Brazil, there will be some losses in the soy crop. But here, in Rio Grande do Sul, we had some terrible droughts in the past years. But this year, if everything is as well as it has been until now, the crops will not be affected. So we will not have problems regarding the rural or the Agro portfolio. I believe this portfolio will remain stable or even grow a little.

Thank you, President for the compliment. We have 2 other questions here, and I believe then we're going to final remarks. The first of them regardless expanding, is Banrisul considering expanding its areas of activity to other states in the southern region at some point?

Well, our bank is focused on the state of Rio Grande do Sul. However, with the new technologies in apps and so on, we can explore other. And go into other states, but our main focus will remain in the state of Rio Grande do Sul.

Well, moving on to our final question. I would like to ask you, is there any plans to implement Private Bank segment to work with the loyalty, client loyalty in the high-income segment, especially?

Well we have an important portfolio of the bank, which is -- we have Icatu and Santander. Icatu with personality and Santander with their own for high-income clients. We also have one for this -- one segment for this high income clients. And this high-income clients, they have a customized service provided to them especially in big cities and also in small cities with managers and leaders of the bank branches. Both for funding as in any other banks, we work hard to retain this client -- this high income clients because this is a very good type of clients, especially in the individual segment. So yes, we will have a special treatment for these clients and keep on having that.

Thank you very much. So I would like to thank everybody for being here. It's Friday, pre-Carnival Friday in the afternoon, and I will give you -- give the floor back to Fernando for his final remarks.

Thank you, Nathan. I would like to thank everyone for being here, the investors and press that covers the market. It was a satisfaction to present the results to you this afternoon. And our goals are focused to achieve better and better results for this bank. We hope to have better -- even better results this year. Thank you very much. I wish you have a wonderful Carnival. Well, yes, we had to make this meeting in this pre-Carnival Friday, but thank you very much for your participation and take care. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]