Banco Bradesco S.A. (NYSE:BBD) Q1 2023 Earnings Call Transcript May 6, 2023

Carlos Firetti: Good morning, everyone, and welcome to the Conference Call to discuss our First Quarter 2023 Results. Thank you for your interest and participation. Our CEO, Octavio, will present Bradesco’s results, and then we will have a Q&A session. [Operator Instructions] The presentation and other materials are available for download in our Investor Relations website. The presentation will be made in Portuguese with simultaneous interpretation to English. You can choose the audio of your choice on the platform. Now I turn the floor to Octavio who will begin the presentation of our earnings. We’ll meet again in the Q&A session. Thank you very much. See you soon.

Octavio de Lazari: Thank you, Firetti. Good morning, everyone. Thank you for joining our videoconference to discuss our earnings of the first quarter 2023. In the first slide, we present some highlights. We posted a net profit of BRL 4.3 billion, a 10.6% ROE in the first quarter, in line with the expectations we indicated in the last earnings release and reflected in the guidance. Credit provisions are still high, however, within our indications. We saw positive progress in important lines such as insurance operations and market NII. This first quarter was marked by volatility in the markets, including discussions on interest and tax issues. However, the quarter ended better with a positive expectation brought on by the new tax and fiscal framework.

As we mentioned previously, we see our second quarter performance still under pressure mainly due to credit provisions. We reinforce the message that we see our earnings evolving over 2023 with superior performance in the second half. We believe that our structural return has not changed significantly. Bradesco’s management is focused on delivering returns compatible with what we have previously provided. But we do acknowledge that this is a recovery that will be gradual. Before we talk about our numbers, let’s talk about strategy. There are a number of initiatives taking place simultaneously, such as in retail bank, high income, digital assets, IT and others. We’ve spoken at length about expanding our operations in high income; the purchase of Bradesco Bank, the Invest US, which is a partnership with BlackRock for the management of Investment funds abroad; the official opening of the new headquarters in Coral Gables that took place last week; the capital increase in Bradesco Bank now exceeding BRL 2 billion because we understand that this is fundamental, and we are allocating our efforts in this endeavor with a dedicated team.

And we also want to make clear that this does not mean at all that we are reducing our activities in retail because retail is the stronghold of the bank. It is embedded in our DNA. Obviously, at times like this, individuals and small and medium-sized enterprise suffer more. But this is part of the economic cycles. The opportunities and potential of the retail operation are huge, enormous. It is clearly imperative that we adjust our structure to a cost to serve that is more and more profitable. We will talk a bit about this a little later. Bradesco is broadly positioned in the Brazilian banking market with outstanding performance in all segments. In individuals, there are over 1.5 million high-income clients, 35 million retail clients and more than 50 million non-account holder clients who consume some type of product such as insurance, consortium, cards and others.

In companies, there are 15,500 corporate clients and 1.7 million small and medium-sized enterprises. With a presence in all regions, socioeconomic classes and generations, Bradesco is a solid reflection of what Brazil is. We’ve always been positioned to grow in tandem with the country and with the economic development of Brazilians. As I said, our positioning in the market is certainly a winner, and we are adjusting it to be more efficient and to invest in areas where we want to grow. In the high-income segment, we seek to increase our participation and the relationship with the 1.5 million clients we have. This year, we are growing our investment specialists team by 40%. That is more than 2,000 advisers, specialists spread all over Brazil.

And we are not going to stop there. This is a broad and continuous project that extends to our customers’ experience also in the United States. The focus of our teams on customer service has produced tangible results. The NPS of cards for this segment climbed 16 percentage points. And in investments, we rose 25 points. In private, we reached a local market share of 22% based on Anbima data, a bump of 4 percentage points. Our bank in the United States, Bradesco Bank, already permits Prime clients to open accounts in dollars. We integrated with our app in Brazil, and the transfer of funds is completely digital, done online in real time. Furthermore, we have also created an investment solution that makes BlackRock funds available on a very smooth journey.

Cost to serve. Currently, we have three strategic fronts that we consider of great importance for our future: the review of the cost to serve in its broadest sense; technology and digital transformation; and customer centricity, where we will highlight the themes of NPS and principality. We will go over the details on the upcoming slides. Optimization in cost of serve. We continue to make adjustments, fully mindful that the need for a physical branch structure was greater in the past since there’s just been a migration of transactions to self-service channels. Just to give you an idea of the change in people’s performance, before the pandemic, we had almost 1 million teller transactions per day, every day. And today, this number has reduced to less than 10% of that volume.

So because of this change in behavior, our focus is on reducing the cost to serve while promoting enhanced customer experience with a much more advisory approach. In other words, with less paperwork, we have more time for the commercial team. And thus, we achieved an increase of 11 percentage points in the share of business teams in the service network. We are transforming our branches and not simply closing them down. Obviously, when there are blatant overlaps, we need to adjust. But the truth is that we’re expanding the number of business units, a format that makes more sense in a number of situations. Business units, just like branches, they’re points of sale but with much lower fixed costs and no tellers. And therefore, they’re focused on providing advice to clients and doing business.

Moreover, we are also expanding our network of banking correspondents called Bradesco Expresso, which will reach 46,000 locations and points of service by the end of the year. This is an important channel of originating — for originating business and services in various regions because this network is totally based on variable costs, allowing us to serve clients at an adequate cost. Talking about digital transformation. Our teams are working in a structured way. This is a process that began long ago and makes positive evolution year-after-year with the technological transformations that take place, the changing behavior of our clients, regulatory changes and the natural evolution of our business. As a result, 80% of the developments we make today adhere to the agile methodology with a 40% reduction in the delivery time of solutions.

Currently, 35% of business transactions already run in the cloud, and our goal is to reach 75% by 2025. This year, we are going to invest BRL 6 billion in technology and innovation, modernizing the bank with a continuous focus on customer centricity. In our digital-native solutions, it is worth noting the simplification we made this quarter. We integrated next into Banco Bradesco, now as a new segment, in an effort to make its cost structure much lighter. Digio absorbed Bitz clients and will continue as a separate structure from Bradesco. It is a digital bank in essence with a sound credit card business. It was chosen as a strategic partner by Uber in Brazil, and it has seen positive results, an interesting opportunity, which is worth deepening.

On Slide 9, talking about NPS. All these initiatives listed so far have a firm purpose. We’ve been talking for a while about our performance focused on customer centricity. For some time, we’ve talked about this. And today, we are going to show you some numbers that illustrate the relevance of this theme. We saw a boost in NPS in all segments, 20 points in retail individuals, 12 points in retail companies, 18 points in Prime and 28 points in cards. Clearly, the improvement of NPS is not only important for the number itself but also for the reflection it brings to the business as our promoter clients have significantly better numbers. You can see here 72% more profitability, 17% more funding invested and 57% less friction or inactivation of accounts.

And this is one of the main goals of our teams, which are reflected in their Goals Program, and that has led to a significant improvement in the quality of our services. Now talking about operational performance. Let’s take a look at the figures for the first quarter. This graph depicts the development. Excluding the wholesale client event in Q4, recurring net income is in line with the previous quarter. Market NII variation contributed positively. Client NII and insurance was — in the case of insurance, the effect is absolutely seasonal. And we have to bear in mind that in the quarterly variation, we also saw a negative impact from the lower number of calendar days and the higher number of working days. Loan portfolio. The loan portfolio posted an annual growth of 5.4%, down 1.4% in the quarter.

Contraction in corporate segment origination in Q1 was the main pressure and is due in part to the high interest rates that reduced the appetite, the demand by medium and large companies for new operations in addition, of course, to prudence in credit policies in the portfolios of small and micro companies and individuals. For individuals, we saw an evolution of 1.2% in the quarter and 10.2% in 12 months. High-income cards and real estate financing stand out. As for our guidance, we remain below the floor. Throughout the year, though, we believe that we can return to the indicated range of our guidance. I’d like to speak a little about credit policies. In credit policies, as we talked about in the previous slide, we have reassessed our risk appetite, making material changes throughout 2022 and therefore slowing the approval rate.

This significantly decreased production in the higher-risk portfolios, and this was a necessary measure. But we continue to experience expansion in lower risk lines. With this effect, it is natural that credit will grow less, but the moment is for caution. We believe that we are on the right track because 95% of loans initiated over the last 12 months are in the better rating ranges. And we already see improvements in newer vintages NPLs. Excesses with expanded ALL. We had indicated that credit provisions would remain high in this first as well as in the second quarter due to the effect of the change in the ratings of stressed credits. However, the cost of credit was 4.3%, with credit provision expenses of BRL 9.5 billion, in line with guidance in annualized terms.

The credit provision balance reached BRL 60 billion, representing 9.3% of the loan portfolio. Note that our provisions in BR GAAP have historically remained in line with the expected loss under IFRS 9, which is the metric adopted by the bank regardless of whether it is mandatory only in January 2025. Over the quarter, we have seen a lower level of credit provision expenses for IFRS as a result of new loans with a better risk profile and an improved risk landscape. In coverage, here in this graph, we show the consistency of our provisioning, which maintains the strong and suitable level of provisioning for riskier credits in ratings D through H. And therefore, I point out that the reduction in credit provisions occur in lower risk credits, which are performing well.

Additionally, with the changes we have made to credit policies, we are bringing clients with a better risk profile into the portfolio, which naturally allows us to have a lower level of provisioning. The NPL creation increased in the quarter, still driven by the default of older vintages and, as explained, by deteriorating ratings. And also part of the growth in the quarter can be attributed to the non-realization of sales of active loan portfolios. Adjusting for this factor, the new NPL still grows but to a lesser extent. For 90-day NPL coverage, we consider its reduction to be natural given the delinquency cycle. We are approaching the peak when the provisions predicted by the expected loss model are being consumed. On Slide 17, looking at the NPL graphs.

The NPL over 90 days rose in the quarter mainly in the mass market, both for individuals and small and medium-sized companies and also due to a denominator effect due to lower credit growth, as I said. If we considered a constant base of credit growth, this percentage would be 0.5 percentage points lower. Delinquency should still grow in the next quarter, but we believe that we are approaching the end of the cycle. We did not have relevant sales of active credit portfolios over the quarter, as we said. And the indicator from 15 to 90 days had a 50 bps increase prompted by the seasonality at the start of the year and by fully provisioned cases of corporate clients. And the renegotiated portfolio reached BRL 36 billion. However, 55% of the renegotiations are less than 90 days past due, which are operations with a higher probability of recovery because they are newer delays.

Even so, our provisions for these credits represent 63% of the total volume while the delinquency of this portfolio is 23%, meaning 1/3 of the total provisions. Now on net interest income. As I said, it’s good news. As we said last quarter, market NII continued trending towards a recovery despite the still negative result at the beginning of this year. This line will continue to gradually improve over the upcoming quarters through the repricing of our ALM positions and may become positive in the second half of 2023. Client NII fell 2.9% in the quarter affected by seasonal effects, but year-on-year, it increased 7.3%. Total net interest income compared on an annual basis fell by 2.4%. Despite being off guidance, this has been anticipated due to the market NII comparison with a much stronger number at the beginning of last year.

Over the coming quarters, we will see a recovery with better market NII in the second half of 2023. Total NIM posted quarterly growth of 20 bps. And lastly, we’re going to move on to the interest rate sensitivity. For a 100 bps reduction in the yield curve, we expect a positive impact of BRL 1.4 billion on the total NII over 12 months. In fees and commissions income, some challenges for this year, as stated in the guidance. We closed the quarter with an annual growth of 1.6%, just below the floor of the guidance, but we expect to move into the range along the year. Card income remains the main positive driver due to a healthy growth on high income. Checking account line is affected by structural issues and regulatory issues that have impacted the entire market as well as us.

And we will recover this in the medium term. Hence, the need for scale gains, improvements in NPS and client perception. In asset management, the signs of improvement are clear with the adjustments we’ve made in our structure. So our funds are already showing significant improvement in returns, appearing in the best quartiles of profitability. We reinforce the focus on high-income segment growth, both onshore and offshore. Now on operating expenses. In costs, we’ve seen a solid performance despite the collective agreement that occurred in September 2022 and the adjustment of various contacts — contracts due to accumulated inflation. Overall, growth is 9.3%, at the bottom of our guidance. Personnel expenses for the quarter grew 9.6% over 12 months and 6.6% for administrative expenses.

As we had outlined when the 2023 guidance was released, the most significant pressure on expenses come from the other expenses and revenues line, which posted a lower basis of comparison in 2022. As we said in previous slides, we’re making further adjustments in our cost to serve and service structures without reducing our ability to provide services to clients. And we expect to deliver better results than the guidance. Moreover, through the strategic review of digital initiatives, we’ll adjust even further the cost of serving in 2023. Now on our insurance company, the annual growth in net income was 10.6%. Income from operations expanded 11.7% compared to the same period in 2022, a growth that’s above guidance despite, of course, the high increase in care costs especially in health insurance.

The quarter posted a good growth in premiums of around 13%, reaching BRL 25 billion. Financial income also had a good evolution in the annual comparison, resulting in an ROE of 18.2%. Basel and IoC, there was an increase of 20 bps in Tier 1 capital even with the full IoC provisioning. We remain in a very comfortable liquidity position with the LCR reaching 166% despite the seasonal effects of the first quarter. Now talking about our people, 86,000 employees. So far, we’ve talked about our numbers. But now it’s time to talk about our people who are always encouraged to seek development and training. Our purpose is that inclusion is genuine and permanent. It’s rewarding to work with such a diverse staff. To believe and invest in diversity and inclusion, in addition to being an ethical imperative, is also a business strategy that produces values and results.

The outcome of our practices can be seen in our significant acknowledgments and employee satisfaction. When we talk of sustainability, for the fifth consecutive year, we’ve been recognized in the S&P yearbook among the top 5% evaluated in the group containing the most sustainable companies in the global banking sector. In the sustainable business agenda, we remain committed to generating operations with a positive socio-environmental impact. We have allocated 100% of the funds from our first Sustainable Bond earlier than expected. And we should also point out the financing for the purchase of solar panels, which has now topped BRL 1.2 billion, an initiative with huge social and environmental benefits. As for the climate agenda, we announced earlier this year intermediate sectoral targets in line with the Net-Zero compromise.

In financial citizenship, we remain at the forefront of these actions and are pioneers in taking the commitment to health and financial inclusion of the principles for responsible banking. Finally, before we move on to the questions-and-answers session, we are going to highlight some acknowledgments on this slide that we received over the period. Two of these acknowledgments stand out. Our private segment was honored by the international magazine, Global Finance, reflecting the advancements we’ve made in this area. In addition, we were also recognized by our employees through the Great Place to Work 2022. I’m going to wrap up this first part of the meeting, and I’ll join Firetti now at the other studio to proceed to the questions-and-answers session.

See you in a bit.

Carlos Firetti: We are back now with our CEO, Octavio. We also have the CEO of our Insurance Group, Ivan Gontijo. So we’ll start now the Q&A session for analysts. Shall we begin, Octavio?

A – Octavio de Lazari: Yes. Let’s put the show on the road.

Carlos Firetti: Very well then, thank you very much to all. We are now closing the Q&A session. Questions that were not answered during this call will be answered by our Investor Relations team. I’d like to remind you that the release is available in our Investor Relations website. Octavio, your final remarks.

Octavio de Lazari: I’d just like to thank all of you for being here with us participating in this earnings conference or videoconference call. It’s always a pleasure to be able to talk more and in more detail about the bank to you. Certainly, now the IR area will start to schedule meetings that we’re going to have closer to you. We remain available. But in any case, our Investor Relations department is available to all of you to take any doubts, to provide additional information. I wish you all a great day, a great weekend. And thank you very much for your attention.