Banco Bradesco S.A. (NYSE:BBD) Q4 2022 Earnings Call Transcript February 10, 2023
Operator: Good afternoon, ladies and gentlemen and thank you for waiting. We would like to welcome everyone to Bradesco’s Fourth Quarter 2022 Earnings Conference Call. This call is being broadcast simultaneously through the Internet in the Investor Relations website, bradescori.com.br/en. In that address, you can also find the presentation available for download. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco’s management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements.
Now I will turn the conference over to Mr. Eduardo Botero , IR Head. Please go ahead.
Unidentified Company Representative: Hello, everyone. Thanks for joining our call for the fourth quarter 2022. We have here in the room Octavio de Lazari Jr., our CEO; Cassiano Scarpelli, Executive Vice President and CFO; Moacir Nachbar Jr., Executive Vice President in charge of Risk; Oswaldo Fernandes, Executive Director; Carlos Firetti, IRO; and Ivan Contijo, Bradesco Insurance Group CEO. I move the floor now to Firetti.
Carlos Firetti: Thank you. Hello, good afternoon, everyone. Thank you for joining our conference call for the fourth quarter ’22 results. We posted a net profit of BRL20.7 billion in 2022. BRL23.7 billion excluding the impact of the full provisioning for a specific large client. These numbers are below the levels we want to deliver and below what we consider to be the recurring levels Bradesco is able to show. We are certainly not satisfied with them. Our investors can be sure that we are working to change it as soon as possible. We are confident that we can return to levels of performance we used to produce in the past. Our goal is to return to a sustainable ROE above 18%. The dip in profit and returns in 2022 can be explained mainly by 3 factors; the negative impact from the fast Selic-rate hikes on our asset liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies, and additionally, provisions amounting BRL4.9 billion in .
Operator: Ladies and gentlemen, please hold while we reconnect our speakers. Speakers, you may now proceed.
Carlos Firetti: Okay. Sorry, we were temporarily disconnected. So returning here, the dipping profits and returns in ’22 can be explained mainly by 3 factors. The negative impact from the facility rate hikes on our asset and liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies and Additionally, provisions amounting BRL4.9 billion in the fourth quarter related to 100% of our exposure to a specific wholesale clients. In our expected performance for 2023 reflected in our guidance. The main effect on our results still comes from the increase in loan losses provisions. In the Retail segment, credit provisions should be higher in the first half of the year and should decline in the second half, growing full year in line with the loan book.
Provisions in the wholesale segment will remain low but we are not going to have reversals as occurred in 2022. Part of the recovery in the bank’s return will occur naturally and gradually up to the end of 2023 with improvements in market NII and cost of risk. Asset liability management results is rebounding with the renewal of the fixed rate loan portfolio with new loans at rates adjusted to the current scenario, leading to improved results throughout the year. In terms of delinquency, we adopted the necessary measures to control the behavior of the individual and small companies’ portfolios revisiting models and our risk appetite. Consequentially, provision expenses shall reduce in the second half ’23. Looking back it seems clear that we should have tightened our credit policy and risk appetite earlier on the retail portfolios.
Elevated inflation since mid-’21 has led to much faster and stronger income loss for our clients over ’22 than we expected, mainly with the rising food and fuel prices. Bradesco has historically had an important exposure to low-income and small business segments as a result of our regional positioning and by serving all segments of individuals and companies. We believe that this market positioning is correct from a strategic point of view, even if at this point in this cycle, we are suffering more from nonperforming loans. We think that it will prove once again correct in the mid- to long term. Another part of the improvement in performance and returns will come from implementing measures focused on efficiency and expansion in areas that we consider strategic.
We continue with the process of optimizing our branch network and we will maintain our personnel and administrative expenses growth in line or even below inflation. The bank’s digital transformation continues in a fast pace. Bradesco is now above all, also a digital bank presenting growth in the number of transactions, credit origination and in all products and service we offer digitally. Due to the clear changes in the business environment, we are seeking efficiency in our digital initiatives, promoting higher integration with the bank looking for cost efficiency and potential consolidation of initiatives. Our focus is on client profitability. We are leaders in wholesale banking and are among the top investment banking market, a business with a high return on capital.
We will continue to develop, invest and grow in these areas. In hindsight, we also remain focused on the purpose of delivering the best experience to our clients with a complete portfolio of products and with a pleasant and simple journey. Our investments specialists are focused on advisory, understanding and respect in the moment of life and needs of our customers. Finally, we highlight our strong focus in all levels of our organization in placing customers at the center of all actions, a strategy that reinforces our purpose and create even stronger links with our clients. We will continue in this path. Moving to Slide 3, we present our key numbers. We reported net income of BRL20.7 billion in 2022, a decrease of 21.1% compared to the previous year.
The expanded portfolio grew 9.8% in the year. Tier 1 capital closed at 12.4%. I will go for more details in these lines ahead. Turning to Slide 4, we illustrate our main impact in the earnings performance in ’22. The main positive is in client NII, followed by insurance and fees. The negative impact comes from higher credit provisions, market NII and the provision for the large corporate clients. On Slide 5, the expanded loan portfolio grew 9.8% in the last 12 months, 1.5% in the quarter and companies growth was 7.9% year-on-year, with 9.7% in the corporate portfolio. For SMEs, loan growth reduced to 4.6%, mainly as a result of the slowdown in small companies due to lower risk appetite and focus on lower rate of operations. For cards, quarterly growth can be explained by seasonal effects in the period.
The annual growth of 20.5% is still strong but pointing to a slowdown. In credit originations, we can see an increase in corporates and a decrease in individuals and small companies as a result of tighter credit policies to control delinquency. Turning to Slide 6 now. Credit provisions expenses without the amount related to the client from the wholesale segment reached BRL10 billion in the fourth quarter, representing 4.5% of the portfolio in that quarter. Considering total provisions, it reached BRL14.9 billion in the fourth quarter or 6.7% of the total portfolio. We should remain with high cost of risk throughout the first half of ’23, with reductions expected for the second half ’23. Our night days NPL coverage ratio remains healthy at 204%.
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On Slide 7, you can see that our 90 days delinquency ratio showed an increase of 40 bps with 40 bps in individuals and 8 bps for SMEs. Large companies remain with a very low delinquency. 15 to 90 days delinquency ratios rose 50 bps with an impact mainly from small companies. NPL creation in the quarter reached BRL8.1 billion. We continue to provisioning well above the NPL creation. We are now showing delinquency information considering the index without the effect of portfolio sales. As shown in the chart, over 90 days would be higher but the trend is similar to the one without sales. In fourth quarter, we sold portfolios totaling BRL2.8 billion. The rationale for selling portfolios is purely economic. We are able to sell at values above our recovery estimate and free up time of our staff to work more on portfolios with higher probability of recovery.
Turning to Slide 8. We made material revisions in our risk appetite, making changes in the credit policy throughout 2022 which reduced our approval rates. Comparing to the new loan approval rates, we had a reduction throughout the year of about 33% between December ’21 and December ’22. As a result, 30 days delinquent for cohorts 4 months on the book have already reduced in the last data available by 38% compared to cohorts of December 31. We see similar trends in most of individuals’ credit lines. In our internal estimates, we still expect NPLs under pressure in the first half ’23. Now we turn to Slide 9 on which we present a breakdown of provisions expenses between retail and wholesale. Total provisions reached BRL32.3 billion in 2022, including BRL4.9 billion related to the provision for the wholesale clients.
Without this amount, it would be BRL27.4 billion at the top of our guidance. We had BRL33.2 billion in provisions for retail, while in the wholesale, we had reversals of BRL5.7 billion. In the last years, the Corporate segment has presented a very good performance in terms of credit quality which allowed the release of part of the excess provisions in the segment. In 2023, we expect a growth of provisions in retail in line with the portfolio growth higher in the first half than in the second half, as we said and partial normalization in wholesale provisions. We expect cost of risk in ’23 to reach 4%, considering the guidance compared to 3.2% in ’22 without the provision for the specific clients. We turn now to Slide 10. The renegotiated portfolio represented 5.2% of the loan book growing 10 bps in the quarter.
Provisions for this portfolio represented 63% of total renegotiated loans. On Slide 9, we show that total NII grew 3.8% year-on-year in 2022 with a strong growth in client NII of 22%. On the other hand, market NII was negative in the year. As we can see in the chart, our total NII has inversed tied to the movement of interest rates, it’s liability sensitive. The current sensitivity points to an increase of BRL1.58 billion total NII for reductions of 100 bps in interest rates and a similar reduction in NII for rate increase. The sensitivity refers to the NII variation in 12 months after a parallel shock interest rates and are based on our Pillar 3 report. Turning to Slide 12. Our market NII has a history of positive results as you can see in the chart on the bottom left, no net less in ’22, it posted a negative result of BRL1.4 billion due to the effects of rising Selic on our asset liability management positions.
Our portfolio has an average maturate of 1.5 years and reprices itself in that period. what contributes for the improvement of this line in ’23, especially in the second half of ’22. On Slide 13, a we discussed our fees and commission income. It grew 4.7% in the annual comparison, primarily driven by cards, mostly it change. The other lines remain under pressure. We have important initiatives in molding these lines and hope to revert the trends so. Card transactions continued to grow, reflecting the increased penetration of cards in the high-income segments and inflation in client spending. We reached 77.1 million cards, a growth of 3 million cars in the year. We believe that our ongoing strategy of strengthening the high income segment will produce growth in fee lines as one of the key benefits despite other important initiatives.
Turning to Slide 14. Total costs grew 4.7%, well below inflation. The other net operating expenses line contributed to a reduction due to less provisions and some reversals. Our costs have demonstrated growth well below inflation since 2020, as you can see in the chart in the bottom left. In ’23, other net operating expenses will negatively impact total expenses, mostly due to the low base of comparison we had in 2022. On the other hand, personnel and administrative expenses should continue to run in line or below inflation as we will continue looking for gains in efficiency. On Slide 15, we present data from our insurance group. Premiums grew 16.7% year-on-year with the improved operational performance, income from insurance operations expanded 28.9% and net income grew 27.2% year-on-year despite the claims ratio challenges and service costs.
We highlight the performance in administrative efficiency ratio and the financial results. The insurance group continues to grow and improve its operational performance with keeping its disciplined in terms of underwriting. Now we turn to Slide 16. We bring the discussion on capital. Tier 1 capital remains at 12.4%, a very comfortable level. The reduction this quarter was primarily driven by the normalization of the treatment of trucks credits arising from our hedge of assets abroad, greater prudential measures the payment of interest on capital that amounted BRL10.2 billion. Additionally, the provision for the specific clients reduced earnings and therefore, impacted capital by almost 30 bps. We see capital ratios spending throughout 2023.
On Slide 17, we present figures on our footprint. The growth in digital channels and client service platform helped us to continue our optimization efforts. We have reduced our footprint by 1,400 points of presence since 2018. In 2023, we plan to reduce between 200 and 250 service points. Today, 70% of our clients are predominantly making transactions digitally. We also — we are also focused on optimizing our digital initiatives, making them more connected to ensure that the experience continues evolving. We turn now to Slide 18. We have created a new structure for the high income segment in Bradesco, what we call which we call Bradesco Global Wealth Management, led by with extensive experience in this segment. We combine our local and U.S. investment platforms, investment distribution and our banks in U.S. and Europe, aiming to deliver a complete investment and banking experience for our clients.
Clients will be covered by relationship managers and financial advisers. Today, we have close to 2,000 financial advisers and both of them will work together, the relationship managers and financial advisers. We have also advanced in the unification of the content available to our customers with investment recommendations aiming to align risk profile and financial goals. We turn now to Slide 19. In 2022, we performed within the reviewed guidance range, except for insurance on which we were above. In credit provision expenses, excluding the specific clients, we were at the top of the range. For ’23, we have the following expectations. We expect loan growth between 6% and 9.5%. For NII, we now provide guidance for total NII. We expect growth for the line between 7% and 11%.
In fees, we expect a growth between 2% and 6%. Operating expenses should grow between 9% and 13%. But in personnel and administrative expenses, we expect to grow only around inflation or less. The line order should bring the negative impact in total expenses for 2023. The line of insurance operations will grow between 10% and Finally, for credit provision expenses, we expect to be between BRL36.5 million and BRL39.5 billion. We believe this guidance still implies a return that is below our potential. As we stated before, our strategic objectives to once again reach a level of return on pace with our track record or at least 18%. We understand the bank’s ability to generate recurring returns remain intact. So we believe we can go back to those levels we reached before.
As we pointed, part of the recovery in the bank results will come from the normalization some lines. Other parts will come as a consequence of the execution in topics we highlighted such as the expansion in high-income segment, efficiency and innovation initiatives. Finally, we highlight our focus in all levels of the organization in placing customers at the center of all actions, a strategy that reinforces our purpose and create even stronger links with our clients. We will continue in this path. Placing customers at the center is a key topic in our strategy focused in the long-term sustainability of the organization. With that, I conclude my presentation. Thank you for your attention and we will now move to the Q&A session. Thank you.
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Q&A Session
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Operator: Our first question comes from Tito Labarta with Goldman Sachs.
Tito Labarta: A couple of questions actually. I guess, first, just help us understand what’s — what do you need to see or what needs to happen to get back to that 18% ROE and time frame that it would take to get there? I mean, do you need interest rates to come down? Obviously, some normalization in terms of asset quality, do you need NPLs to come down? Even expenses and I know it’s part of it, the other expenses given the expense guidance above inflation but just to help us think about the path to returning back to those normalized ROEs? What it would take to get there? And then the second question, just to understand a little bit on the provision guidance. You said cost of risk to grow kind of — or provisions grow in line with the retail portfolio growth and I know corporate provisions are kind of normalizing.
But does that — do you expect the deterioration that we’ve seen in the retail portfolio to continue at the same pace that we’ve seen sort of the last 2 quarters? I know part of it is your exposure to lower income segments. But when does that — I know you said it will peak in 2Q but when do you think that starts to sort of deteriorate at a slower pace? Just to help us think about the evolution of that.
Carlos Firetti: Okay. Tito, thank you very much for the question. I think the path for the recovery in ROE is the one I mentioned in the presentation. We believe that part of the reduction is related to things that will improve with time for sure, considering the actions we have taken, I mean, the asset liability management results that are included in the NII. This will improve throughout the year with the repricing or renewal of our loan book, especially the fixed rate loan book and it is already happening. The internal rate of our books is improving. And as the time goes by, it will take this rate closer and closer to Selic and this will drive the market NII upwards. It’s — today, the results and the asset liability management are still on the negative and we see them going to close to 0 at some point in the second half.
The other part is the normalization in NPLs. We are at a moment in the cycle where NPLs are already higher than we believe is the more normalized level they should be through the cycles. And the cost of risk is already high. So this is something that will take our ROEs closer to 18%. I’m not — we are not even at this discussion counting on actually going back to material gains in the asset billet management. But also, we think in parallel, we will be running and we are running some initiatives in terms of efficiency. We have been moving many initiatives in business areas like, as I mentioned, the investment initiatives in the high income segment. So I think altogether is behind these views, I would say, a meaningful part are related to the first 2 items I mentioned.
