Banco Bradesco S.A. (NYSE:BBD) Q3 2020 Results Conference Call October 29, 2020 12:30 PM ET
Carlos Firetti – Director and Head of IR
Octavio de Lazari – Chief Executive Officer
André Cano – EVP and CFO
Vinicius Albernaz – Chief Executive Officer, Bradesco Seguros Group
Leandro Araujo – Executive Director and IRO
Conference Call Participants
Mario Pierry – Bank of America
Geoffrey Elliott – Autonomous
Mario Pierry – Bank of America
Ladies and gentlemen, thank you for waiting. We would like to welcome everyone to Bradesco’s Third Quarter 2020 Earnings Conference Call. [Operator Instructions] 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 the general economic conditions, industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause the results to differ materially from those expressed in such forward-looking statements.
Now I’ll turn the conference over to Mr. Carlos Firetti, Market Relations Director and Head of IR.
Hi, good afternoon, everybody. Welcome to our conference call. We have today with us our CEO, Octavio de Lazari; our Executive Vice President and CFO, Andre Cano; the CEO of Bradesco Seguros, Vinicius; and Leandro de Miranda Araujo, Executive Director and Investor Relations Officer.
For starting the presentation, I turn the floor to Leandro.
Greetings, everyone. We are pleased to welcome you to our third quarter earnings release conference call. Throughout the third quarter, we have seen evolution in the reopening of the economy as well as a somewhat restricted return of the various day-by-day activities in a number of regions in Brazil. At Bradesco, practically, all of us have remained working from home, with about 95% of our employees from departments and affiliates working remotely. And as we had stated in the previous quarter, our work has gone very well, and we have seen a high level of productivity.
We have prioritized the health of our personal clients as our top priority in all of our decisions. We have made great pride in the nearly six months since the onset of the pandemic. We have introduced new solutions at an unbelievable speed that made our digital services to clients even more complete. In addition, we have been focused on providing our clients with financial solutions in order to help them navigate their way through the crisis. The search for loan extension has almost vanished. In April, we extended BRL32 billion. In September, only BRL one billion.
We will bring more details ahead. We intensified the restructure of loans in order to provide our customers with loans suited to their payment capacity, and we are also offering a large volume of new credit lines related to emergency programs. We see a continued recovery in the Company for the remainder of third quarter with a pickup in former employment, which would indicate an acceleration in GDP.
We expect a 4.5% decline for 2020, but this is a far better situation than what we saw at the time of the first quarter disclosure. Spot anticipated reduction in the emergency aid, interest rates will remain low and loan will underpin the economy. Furthermore, we see exports and agriculture play the efficient role in the performance of the economy. We believe that the economy will fully reopen in 2021 and this will help in the recovery.
There was a significant amount of money put away into savings during the pandemic, which also helped our collection of deposits. We believe that this mitigates the risk of default and will partially offset at the end of the emergency aids. Emergency aid paid to families without income was essential. But we need to recognize that Brazil has spent more on this pandemic than any other emerging company — emerging country. As such, managing public accounts will be crucial to ensure that the recovery in 2021 is not disrupted.
On Page 3, we now turn to the results. The net income in the third quarter was BRL five billion, an increase of nearly 30% on the quarter in an annual comparison, but still 23% below the same period of 2019. ROE in the quarter was 15.2%, a positive trend compared to 11.9% in the second quarter, but still well below the prepandemic level. We believe that our ROE will continue to improve, assuming that we do not have any significant worsening the course of the pandemic and the economy continues on the path of new recovery. Our loan portfolio rose by 0.5% in the quarter with good performance by SMEs in individual borrowers and a reduction in large companies. Tier one capital showed a solid growth of 40 bps, reaching 12.9%, closely approaching the fourth quarter ’19 level.
Moving on to Page 4. We present the performance of some income and asset lines. I would like to highlight the evolution of the margin with a growth of 3.5% year-on-year, despite the reduction in interest rate on overdrafts. Compared with the previous quarter, we saw a reduction of 8.4% and as the net interest income in the second quarter was quite strong due to the margin with market, which was above average. It’s also worth noting that loan loss provision expenses decreased by BRL3.3 billion in the quarter. We’ll drill down on these lines in the upcoming slides.
On Page 5, we address a little bit more on funding loans. We show that our funding continued to strongly progress. We had a 3.6% growth in total funds raised by some clients in the quarter, and a 35% growth over the last 12 months. Our loan portfolio new accounts now accounts for 81% of total funding, a very comfortable position. This positive performance in firming can be explained by the flight to quality of clients to Bradesco deposits at the beginning of the pandemic and also the integration of investments in DI funds to deposits.
We now move on to Page 6. The loan portfolio grew 0.5% in the quarter and 11.7% over the last 12 months. When we look at the composition of growth, we see a strong performance of the SME line, driven by the lines of emergency aid and a solid growth in individuals as well, where we grew in practically all lines except personal loans as we adjusted our credit models and risk to be taken. The rotating lines, personal check, and credit cards have also been used less and less. The large company’s portfolio narrowed significantly this quarter, with clients paying part of the excess working capital they took at the start of the pandemic.
On Page 7, we point out that Bradesco has disbursed BRL19.3 billion in line of emergency programs granted by the government, BNDES and the Central Bank of Brazil. The lines that concentrate the most volumes are the FGI, the investment in guarantee funds and the lines that use from saving accounts at sending.
Moving on to Page 8. Regarding the provision for credit risk, we have continued to bolster our provisioning lower level this quarter, is still naturally making provisions well above what they were prepandemic, but reducing them to the lowest level of the year. The calculation for our provisioning requirements is based on our modeling of expected loss. Our expense with expanded loan loss provision reached BRL5.6 billion in the quarter or 3.4% of the loan portfolio.
Over the nine months of 2020, we totaled BRL21.2 billion of provision expenses compared to BRL14.4 billion in 2019. The total provisions on our balance sheet reached BRL44.9 billion or 9.2% of the loan portfolio, a clear sign of the strength and sufficient even considering adverse scenarios. It is true that we maintain a conservative approach, but it’s fair to say that the current trends are maintained. We may show a further reduction in provision expense in the fourth quarter, and we hope to have no additional provisions in 2021 as we did in 2019.
We now move to Page 9. We continue to show improvements in the 90-day delinquency indicator as well as stability in the short-term delinquencies. We are seeing most of our own portfolio performing well in terms of quality. We acknowledge that NPL indicators are affected by lower renegotiations. We now believe at the peak of defaults in the current crisis will occur in the second or third quarter 2021. Our expectations as to loan quality have improved greatly, which is why we believe that the peak may be lower than the one seen in the 2015 and 2016 crisis. This depends, of course, on current expectations coming through and that no further economic slowdowns occur.
On Page 10, we show the NPL creation. We have a low NPL formation, impacted also by loan extensions and renegotiations, but with good news as we are going to present ahead.
Page 11 illustrates the coverage duration. With further declined, the NPL ratio and growth in the stator provisions, the 90-day NPL coverage ratio continued to grow. Considering the breakdown by segment, we saw an expansion of coverage in all of them with the exception of the portfolio of large companies. Coverage remains virtually stable in an expanded coverage concept, where we include a portfolio renegotiated a 90-day NPL.
Now on Page 12 regarded to the extend portfolio. We’d like to emphasize transparency, so we present some very important information for you, which shows a really good view of the extremely positive performance of extended loans, way better than what we could anticipate in the beginning of the pandemic. The total extension in the second quarter came to BRL61 billion. Of that amount, €39 billion was back to normal on scheduled payments after the grace period ended. BRL21 billion was still within the group spirits, and those in areas amounted to only BRL one billion.
At the end of September, out of the BRL72.7 billion of extended loans, BRL53.3 billion has already returned to normal scheduled payments. BRL18.3 billion was still in grace period and BRL1.1 billion in areas equivalent to 1.63%. We’ll have another BRL9.2 billion coming out of the grace period in October, BRL6.7 billion in November and only €2.4 billion December onwards. With information we have available today, we are confident that the loan quality of the clients who are still coming out of their grace periods will also be good. We expect the portfolio that is in gray spirits also to have the same behavior of the portfolio that is starting to be repaid. And we are very comfortable with that on the current basis.
On Page 13, in accordance with our strategy of supporting clients during the challenging time, our renegotiated loan portfolio grew by BRL four billion in the quarter, mainly due to customers that prefer to renegotiate our loans with longer tenure instead of extending the due dates. The renegotiated portfolio has a high level of provisions, with provision accounting for 6.7% of the loan portfolio.
On Page 14, the total net interest income showed an 8.4% drop in the quarter. This was due primarily to the results in the market portion, which had been well above the average of the second quarter and also the reduction in the decline portion due to the similar use of rotating lines, companies as well as individuals and the growth lines from emergence programs. On an annual comparison, NII grew by 3.5% and with a 2.3% increase in the client portion, despite the cap in the overdraft that began in January 2020. We see the market portion remaining a good performance over the next few quarters. The current portion is expected to react to volume growth with a more favorable mix.
We now move on to Page 15. Fees rebounded in the quarter due to the improvement in the economy compared to second quarter. We still see a negative quarterly performance in the line of loan operations, impacted by the reduction in low originations in portfolios with contracting fees. In the annual comparison, we positively highlighted the investment bank and brokerage activities.
Despite the recovery in the quarter, significant lines such as credit cards and asset management, are still decreasing. In credit cards, the reduction occurs due to the drop in the volume of transactions in asset management due to the reduction of the management fee of fixed income funds as well as the migration of resources from these funds to deposits. This effect obscured the solid improvement we have seen the mix with the growth in equity funds, multi-market funds, funds and mirror funds by independent managers.
Now we move to Page 16, where we were going to discuss operating expenses. We continue to deliver an outstanding cost performance, and we do expect that it continues this wave on a monthly basis. In the annual comparison, we can see the size of the cost adjustments. We saw a 7.9% drop in administrative expenses for the quarter alone and 3.3% over nine months.
Personnel expenses declined by 2% in the quarter and 7.6% over nine months. Accounting for total expenses, including others, we reported a 5.7% decrease in the quarter comparison and a 3.9% decrease over nine months. We are in the process of making major cost adjustments within the bank right now, which should allow for a reduction in costs in nominal terms for 2020 and also 2021. In order to address the expected cost of implementing these adjustments, we carried out a restructuring on recurring provisions of BRL879 million in the quarter to help us to change our cost structure.
On Page 17, you may see information on the optimization of the physical presence. Basically, we have a number of adjustments in our branch network. We are already performing an essential adjustment since the beginning of the year, but this adjustment was intensified by the acceleration of client digitalization trends and the reduction in the use of branch tellers. We will be reducing our total number of branches by 1,100 in 2020, 700 of which will be converted to satellite or business units and 400 will be definitely closed. We estimate that we can attain cost reductions of around 30% to 40% of the conversions into downsized formats. So far, we have reduced 683 branches, 163 were closed and 520 were converted.
Now moving to Page 18. We show a series of business at Bradesco that I believe reserves to be highlighted due to their strategic importance. Next, our native digital bank. We reached the mark of 3.2 million customers. Agora continued to expand its base, reaching 409,000 customers. This year, we have already added 150,000 clients to the base. Launching this quarter bits, our digital portfolio complements our project service offering and has just acquired Dentin. In addition, we highlight a series of business and specialist banks such as Losango, Bradesco Financiamentos and.
To complete in the next few days, we will complete the acquisition of BAC and BFI, for which we have already obtained all regulatory approvals. Finally, and also recently announced an agreement with JPMorgan to transfer its private banking activities in Brazil to Bradesco. And with that, we bring an excellent team of bankers as well as BRL21 billion in assets under management.
Page ’19, we present our performance insurance, which continues to be adversely impacted by the financial results, which is still constrained by the environment of low interest rates, low IPCA, an elevated general market price index, and that affects our ALM heavily. On the other hand, we saw a reduction in the quarter in the operating income of insurance due to increased claims, its natural due to the recovery of the economy.
Despite this, we saw a 3.8% growth over last year. The ratio of claims grew primarily because of life insurance, in which we decided to honor the coverage of case related pandemics for humanitarian reasons even though the policies do not provide coverage for this. There was an increase in claims for health insurance, but it remained at levels below those in the same period of 2019, 84.6% in the third quarter 2020 versus 87.9% in the third quarter 2019. In this quarter, we made BRL151 million in provisions for the adverse scenario, amounting to BRL1.259 billion in the first nine months of 2020. And despite of the current scenario, we have been able to keep the revenues at the same level of 2019.
Now we turn to page ’20. The bank’s capital ratio continued to increase. We saw an increase of 30 bps in the common equity and four bps in Q1 over the quarter. The main source of capital generation was the retained income in the quarter.
We now move to our last slide on Page ’21. We prefer not to return an official guidance for 2020 but as we did in the previous quarter, we bring some guidance on how the rest of the year should behave. We believe that our credit portfolio will grow a little more than the system in 2020. NII, which we previously believed would grow in line with the portfolio should actually grow a little less, but it should be noted that the credit portfolio will grow more than expected. The scale shall be the answer here.
Fees will continue to be pressured by the economic scenario but should show seasonal growth in fourth quarter. The assurance in results will continue to be pressured by the lower financial results as a result of low interest rates and the behavior of inflation rates. As we have shown, we are making an important structural cost adjustment in the bank. As we said in the last quarter, we expected nominal cost drop to drop in 2020 and 2021. In addition, we’ll continue to look for opportunities for the future. Regarding to loan loss provision expenses, we expect an additional reduction in fourth quarter and also lower numbers in 2021 compared to 2020.
For 2021, we are still in the process of completing our budget. But considering that you do not have a significant worsening of the dynamic, we now have a much more constructive deal. GDP is expected to grow by 3.5% in 2021. And we are confident that we can reach results such as the ones of 2019 with better margins with clients, better fees, results and — continue our results and expenses on a nominal basis. And then before concluding, I would like to invite you to Bradesco Day, which will take place on a virtual basis this year on November 10. You can find the details on the IR website. Thank you very much for your attention.
And now we move on to the question-and-answer session.
[Operator Instructions]. Our first question comes from Mr. Mario Pierry of Bank of America.
Congratulations on your results. Let me ask you two questions. The first one is with regards to net interest margin outlook. As you mentioned, that you expect NII to grow less than your loan book next year. But I was wondering, what is the impact of a steep yield curve in Brazil, right? It seems like the yield curve has been steepening. What would happen to your margins if we see a further steepening of the curve? Also, my understanding is that your loan mix should improving going forward, so I’m a bit surprised that you’re basically guiding for net interest margin pressure. So I wondering have — yes. Yes, go ahead.
This is Andre speaking. Thank you very much for your question. You’re pretty much right. I mean, I was — I was making reference to the fourth quarter in 2021 due to increasing interest rates, recover of the economy. We do expect better margin, as I have just pointed out. So those are very important items in our NII, and we share your vision. That’s how we see it as well. I was just making a reference to the last quarter.
Okay. Perfect. That’s clear. So let me ask you the second question then. When you mentioned — I think you mentioned that you expect provision charges to fall to the levels seen in 2019. Are you talking in nominal terms or as a percentage of the loan book? Because your loan book is probably — is about 10% higher right now than it was in 2019. So if you could clarify that.
Yes. Basically, we were making reference to the additional provisions. So we do not intend to make additional provisions in 2021 as we did mark in 2019. But of course, you are right, as the portfolio grows, we shall have a pausing provisions for that.
Okay. And so a follow-up to my asset quality question. When you mentioned here on your slides, right, that the performance of the extended portfolio has been better than you expected, what do you think explains that? Clearly, as you mentioned, right, the economy is doing better than everyone expected at the beginning of the year. But part of that is probably related to all of the government support that has been provided. Do you think there’s something more structural going on also that this portfolio is performing better than you anticipated?
Well, basically, you have pointed out two of the three main reasons. Definitely, we were much more concerned in the beginning of the second quarter, as our CEO has pointed out earlier in the morning. At that time, we had nearly 0 visibility of what could happen this year. And we are, by nature, very conservative. Therefore, the economy recovered much, much better and faster than we expected.
So economy recovery was definitely the main reason. The government support as well as ours, we landed with much more resources than was released from our composers. And the way the bank adjusted itself to support clients as a whole was basic to have such a recovery in the portfolio. And the third reason for that is that we put a lot of capital to work aligned with the other banks. So the society as a whole benefit from liquidity on an organized fashion, and we have seen also that the big companies were very cautious. They raised a lot of money with the banks in the beginning of the second quarter, and it also helped to have a healthy chain of suppliers and clients benefiting from that.
And Mario, just add one more. As you know, we had a big crisis in ’15, ’16, then all the volatility in the election ’18. So basically, if you look to our loan growth before this crisis, we are not coming from a period of a boom in credit. Actually, the year where we really accelerate, that was at the end, that second half ’19, we were accelerating a little bit more in the first quarter ’20. But the clients we have there are very good. Basically, the loan-to-value in the operations is relatively low, basically less than 50% in mortgage, in car loans is less than 50%.
So basically, even in the SME space, we were not booming in credit before this thing happened. So really have very good clients there. So I think that also, in addition to what Leandro said, helps this good performance. And the relief will finish. But as our requirements point, there was a big accumulation of savings in Brazil, probably not necessarily the people that will stop receiving the benefits are going to be the same the safe, but actually, macroeconomically this is also a caution that probably will help the — to keep the economy going for a little bit more and also help on the credit quality side.
[Operator Instructions] Our next question is coming from Mr. Geoffrey Elliott.
It’s Geoff Elliott from Autonomous. Two kind 0f — two questions, if I could. The first one is, can you tell us when you expect overdraft balances to reach that trough? Is that the end of the year when corona voucher payments expire? And then secondly, can you help quantify the savings that you’re typically realizing either by closing a branch or by converting a branch to one of these lighter units that doesn’t have the full branch infrastructure?
Geoff, Leandro speaking. Right, basically, we do expect to reach a peak in our delinquency in the second or third quarter of 2021. But it do…
Sorry, maybe I wasn’t clear on the question. The question was when are the overdraft balances going to reach a trough? It wasn’t about delinquencies. It was about the balances because, obviously, that’s one of the factors that has fed into the pressure on net interest income.
Probably we are only 2 right now. And as — and the economy is returning to kind of a normal pace, we believe that maybe already in the first quarter next year, we could start to see some improvement.
Okay. Let’s move to your second question regarding to how much savings we shall have when we close the branch. Well, it varies from 30% to 40%. Pretty much, we have around 30% relief when we transform the branch into a business unit because you have no security costs there. So your calculation should consider from 30% to 40%.
Yes. In terms of the impact in costs, again, we are not releasing a formal guidance on the full amount of the savings, but as we said, this is the basis for allowing us to have a nominal reduction in costs again next year on top of the very strong reduction we already had this year.
Okay. But can you give us any sense of how many million reals per year when you close down a branch?
Yes. At this moment, we prefer not. But it’s a sizable reduction that, as I said, will allow us to reduce cost nominally after a big reduction this year.
Our next question is coming from Mr. Mario Pierry from Bank of America.
Okay. Since there were no other questions, let me ask a couple of other questions that I had. First one is related also to these charges that you talk of about BRL800 million for the — to adjust your cost base. Is this primarily severance charges? Or does it relate to costs of like transforming these banks into smaller branches? And I was wondering because you have had already a sizable reduction on your branch base so far. So I was wondering if there were any extra charges related to this closing that you had already. Do you have any of those expenses embedded in your 9-month figure? And then the second question was related to fee income generation. And if you can just give us what is your — what do you think is the impact of open banking, the impact of pits on your ability to grow fees in the coming years?
Okay, Mario. Well, regarding to the extraordinary provisions that we are making of BRL800 million to the cost restructuring, pretty much it’s all there regarding to all the expenses related to make them close or transform into a business unit. And it just applies from October on, so we expect to use it in the fourth quarter. And regarding to fee income generation, it pretty much depends on the interest rates and how it’s going to be the dynamics of the market next year.
We expect, as the inflation is returning to higher levels and the economy is expected to increase speeds, that we shall have higher interest rates as the future fixed rating markets are showing and pointing out. Therefore, we shall benefit from this, and this could impact the asset management market as well and the underwriting market. Regard to overdraft, I guess it’s pretty much done. We do not expect any reduction on that, so we shall have some recovery. And of course, with the end of pandemic and recovery of the economy, we shall get to normal related to our past history on the products that clients use to ask us. So 2019 shall be a good proxy.
Okay. Just going back then, when I look here over the last 12 months, right, you have closed about 800 branches and your employee base is down to about 4,000. Did you incur any extra challenges in the last 12 months related to this closing and declining the employee base?
We made some provisions also to that throughout the year, and now we are going to expand it. So the idea is to spend the money on a cash basis to — on the following month, but most of it will be expanded now in the fourth quarter. The reason for that is that you remember that Octavio, our CEO, in the end of the first quarter, announced that we would reduce 400 branches. And now we are increasing this number. So we have to have additional provisions toward to that. That’s the reason why we decided to make this additional BRL800 million.
Our next question coming from Mr. Marco Turna of [indiscernible] Capital.
Just can you — apologies, I know you’ve probably gone over this earlier — in earlier periods, but just clarify the difference between the extended and renegotiated portfolio. The extended portfolio is — just got an inter payment holiday and you tacked on those months at the end, whereas the restructured portfolio had something more fundamental. Can you just clarify the difference between the 2?
Okay. Basically, the renegotiated portfolio is something we have always done that is basically when a client has a problem, you reach a deal with the client, sometimes expanding the mature, giving more time, making the loan longer. Sometimes, changing the terms and even renegotiating sometimes interest rate. In the case — or if it is a loan that is either written off, sometimes actually bringing the loan back to the balance sheet, this is what goes in the renegotiated portfolio. This is business as usual, what all banks do with clients that have problems at some point.
The expanded portfolio is something unique. It’s based on a regulation issued by the Central Bank in the beginning of the crisis in March. And basically, we can do it only for clients that were not late before beginning of March. And in this case, it involves only grace periods. We did mostly for 60 days. If the client requested, we did it for another 60 days. We try to make it shorter to have kind of a reference if the clients paying or not. So that’s the difference. And basically, we cannot do expansions for more than six months. We are doing much shorter than that. And that kind of — that thing will finish by the end of this year, even though the flow of new expansions kind of reduced a lot. Now it’s almost 0.
And what is the — and what percent of the — and this is business available for all borrowers, correct? It’s not held for retail SMEs that include corporates?
It doesn’t include corporates, it includes up to midsized companies. Companies from up to BRL500 million per year. That’s kind of up to — we go up to this kind of client. Most of it is individuals, is small companies, but we have some in the mid-sized company. We disclosed this number, for instance, I don’t have for the third quarter right now. But for the first — second quarter, we had BRL61 billion in extended loans, midsized companies made for something like BRL15 billion. So corporate, we don’t extend.
And I’m sorry, one final thing on this. And just the size of that loan book for the midsize, if you take the total size of the midsize reals plus the individuals who, for this, didn’t happen, what’s the size of that loan growth coming for clients?
The size of this expanded book?
No. No, the total size. So we’ve got $73.5 billion, which has some kind of grace period, $60.4 million have returned to normal. That $73.5 million is on a base of what, like there’s $150 billion? I mean, how many billions of your loan book took advantage of this at one point? That was —
No, the €74 billion is actually — when — we have in the presentation a slide in on Page 12. Basically, as of October 23, we had BRL73 billion extending. This is the total that was extended at some point, BRL73 billion. That probably makes something like 14% of the loan book, give or take. But…
14% of the loan book that could take advantage of it or 14% of total loans?
No, 14% of the total took advantage. But right now, out of the 73, 60.4 has already returned to payment. Regular payments are not in default. They have already made the initial staff payments after the grace period. What we have without still in the grace periods and that should finish mostly by November is BRL11.7 billion that makes for only 3.7% of the loan book.
Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for the closing remarks.
Well, I would like to once more thank you all for making the time to be with us. And now we finish the conference call. Have a great day. Bye.
That does conclude Bradesco’s conference call for today. Thank you very much for your participation. Have a good day.