Q2 2022 Banco Bradesco SA Earnings Call - Afternoon Session

Good afternoon, ladies and gentlemen, and thank you for waiting I think would like to welcome everyone to the desk second quarter 2022 earnings Conference call.

This call is being broadcast simultaneously through the Internet in the Investor Relations website at <unk> Dot Com E R. As Lash E N.

That address you can also find the presentation are available for download.

We can affirm that all participants will only be able to listen to the conference call during the Companys presentation.

After the presentation, there will be a question and answer session. When further instructions will be given to.

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Before proceeding let me mention that forward looking statements are based on the beliefs and assumptions of Banco Bradesco <unk> 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'll turn the conference over to Mr. Carlos <unk>.

Business controller and market relations director.

Good afternoon everybody.

Welcome to our conference call for the discussion of our second quarter.

<unk>, we have today with us our Chief Executive Officer Bob.

The love that has joined.

Our executive Vice President and CFO and record.

Victor Director and IR Oleander Miranda.

It was volatile Fernandez executive director, <unk>, Bradesco, Seguros, CEO and not sustain this month.

Vocal next Chief Executive Officer.

Zimmerman.

The bid Chief Executive Officer, and cartilage Youre burning NAV is bulk of the issue.

Chief Executive Officer now for starting the presentation I turned to thoughtfully on Demeter. Thank you very much good action with external everyone.

Thank you for taking part in our second Q 'twenty two earnings call first call.

<unk> has remained quite complex this quarter with persistent high inflation and the need for monetary tightening and major global economies in.

Initial surge turns into risk of global recession at the end of the quarter.

In Brazil high inflation, the consequent impact on income were part of the dynamics that affect the economy during the periods.

<unk> generating new fiscal pressures.

Despite this outlook the Brazilian economy is a bit better, which led us to increase our GDP growth expectations to two 3% in 2020.

The cycle of rising interest rates in Brazil has already advanced to the rapidly.

This has led us to report a less optimistic view for 2023 with a zero grills protection for GDP.

We saw a solid result in second Q2 thousand 22 with a net income of seven point, all four 1 billion Reais and an increase of three 2% compared to the previous quarter, representing an ROE of 18, 1%.

The loan portfolio also posted evolution expanding by two 5% compared to the first Q 'twenty, two and 17, 7% compared to the second Q2 thousand will.

The more expressive annual advance will occur in the portfolio for individuals with a 22% rise over 12 months.

We did this portfolio credit cards expanded by 46% the growth at the end of the period is expected to be lower in line with the guidance, mainly due to the comparison basis.

We point out of the performance of client the NII that grew seven 1% in the quarter.

The market NII continues to be pressured by the impact of say leak increase will now our A&M position. This pressure is expected to continue throughout 2022, but in 2023, we expect market NII to resume growth.

The insurance business posted a $3 7 billion reais income in the quarter, an increase of 135% over 12 months.

Explained by the comparison basis with last year and 12, 8% in the quarter.

<unk> performed solidly with an increase of six 7% on an annual basis benefit primarily by the strong performance in line of credit cards, which favored by client based growth and by higher spending.

Despite the challenges brought by inflation total costs were well controlled total expenses grew four 9% year over year in line with our guidance.

We have been able to offset much of the inflationary pressure through our efficiency actions and this growth that we have had includes investments in our digital initiatives as well as additional reinforcements in the investment investment advisory Tech knowledge and data science teams.

We analyze our performance in relation to the guidance later, but we can report that we're able to maintain a performance that was consistent with what we have proposals.

Moving now to slide three.

We present the earnings evolution, considering the nominal variation of each line in the periods.

In both quarterly and annual comparisons we had expansion in client NII fees any shares this growth was more than enough to absorb the drop in the market NII, which is currently pressured by the Hiseq and higher credit provisions, which are a consequence of delinquents return.

To historical levels and growth in high yield credit lines.

We will now take a look at slide four.

The loan portfolio evolved with in line with our expectations origination for companies per business day was higher primarily due to the base of comparison, which was affected by the second wave of the pandemic last year and its main concentrated a little shorter lines.

In the video segment, there was lower demand for older lines, such as mortgage and natural caveats inkjet and credit scores session.

We have seen a significant annual whole notion in consumer financing lines.

These are lines with higher spreads and have favored the growth of client NII.

The most expressive movement occurred the credit card portfolio with a 7% hike in the quarter and 46% in 12 months.

The growth of the renegotiated portfolio is a reflection of the advance in the credit portfolio and also of the origination mix with a higher share of more profitable lines.

Turning now to slide five.

The cost of risk increased slightly this quarter and represented two 5% of the portfolio reflected the origination mix plus the higher than English in retail both in individuals and small companies.

The early delinquency, we made at the same level as the previous quarter and the over 90 day delinquency rate grew by 30 by 30 bps, reflecting this increase in retail delinquency. The large company segment continues at historical lows.

In line with the projections, we mentioned during the first quarters earnings call. The coverage ratio showed a reduction given that we had anticipated provisions in 2020, which are now being consume it with the effective over years of several of these credits.

Our projections is still point to default growing in the second half of the year.

Adding on employment and income conditions, we expect the coverage ratio to remain consistent at around 200% by year end.

Turning now to slide six.

These slides include some charts that are relevant to current dynamics overall, the employment levels continue to show good growth and the unemployment rate has been GP and has reached the levels. We saw in 2015.

Real wage match have improvements, which also reflects an increase in employment and the transfer of inflation to wages due to the collective agreements. It is important to highlight this prepare their information illustrating our clients' income commitment to Craig servicing closely during both transactions.

<unk> and also with other institutions, we see a relatively small increase in income commitment with bread servicing.

Now we go to slide seven.

The client NII continues to both a good expansion both in the for Italy, and the annual comparison, reflecting the rise in the mall portfolio by the higher yield lines plus the growth in revenue from funding.

The market NII as we point out in the previous quarter continues to be pressured by the higher <unk>, partially offset by the higher results.

Our own working capital.

A significant factor to mention is the NIM increase both gross and net of credit provisions.

We will now take a look at slide H eight in which represents the insurance group's numbers netting.

Net income improved by 49% in the first half of the year, reflecting on our ROE.

Of 19, 7%.

We emphasize the growth in revenues, which was above 16% over six months.

This rise is due to the increase in the number of lives covered by health as well as in the number of patient plans and life insurance plans and price adjustments in auto.

Concerning the income from <unk>, we saw better performance, mainly related to the improvement of the loss ratio from reduce it effects from the pandemic as well as a better financial result for the periods in our projections up to the end of the year. These lines shall reach our highest growth expectations at least.

<unk>.

We continue to see a drop in Covid related claims in the second Q 'twenty to these events represented only 348 million the lowest volume since the beginning of the pandemic.

We now turn to slide nine.

Fees jump at six 7% year over year, reflecting the addition of $4 three medium clients in the last 12 months totaling $75 5 million clients. The credit card line Spike at 32% in one year, reflecting a higher transaction volume in cards, which stop it.

$73 6 billion Reais this quarter.

This growth in volume is a consequence of larger client space.

General and monetization of the economy and also the effect of inflation on our client spending.

Let's now go to like them.

<unk> expenses increased by four 7% in the accumulated six months.

Much lower than the inflation of $10, 7% as we saw in a GPM and 11, 9% in a PCA in the periods.

Personal expenses have risen to the collective bargaining agreements, 11% last year and also investments in our investment advisory Tech knowledge analytics and data science teams as a result of our efficient campaigns administrative expense as opposed to the homepage grow other.

Expenses deeper due to the large volume of provisions that occurred last year and should not be repeated this year.

The efficiency ratio was 42, 4% one of the best in our history.

One thing to highlight is the optimization and promoted in our physical presence we have some swarmed our branches.

Great into our more advisory and less transactional model as such since 2018, we have opened at 976 business units.

<unk> 1691 branches.

As part of this transformation, we train our managers with tools that facilitate remote or face to face service. According to the wishes of our clients to date, we have nearly 25000 relationship managers and more than 1000 investment specialists, who promote low investment and ensure.

<unk> consulting to our clients.

We will be adding 700 investment, especially as to this theme.

Still this year.

We also need to point out our unique competitive advantages in our strategy that is but at this space.

Where we complement our physical presence with a significant capillarity and convenience to customers through more than 40000 baked correspondence you saw our asset light strategy in our branch network.

Now we take a look at slide 11.

Our capital ratio remained at fairly comfortable levels.

Rusty generation has allowed us to maintain.

Solid distributions to shareholders in the form of interest on shareholders' equity, we experienced an expected reduction of 40 bps and the tier one capital index over the quarter due to the regulation of techs have great treatment or originated from the hedge of investments abroad with an impact of 50% in June .

Train two and the remaining 50% in December 'twenty two.

We also saw the impact from Mark to market of the securities portfolio.

The additional capital increased by 20 bps with a review of that that would mature progressively from 'twenty to 'twenty five they can advantage of favorable market conditions at the moment.

Let's go to.

To take a look at slide 12.

Our digital experience is continuously evolving represent enhance it autonomy a better experience for our clients and much more business, 70% of the account to account holders already digital.

Our total transactions, 98% are carried out via digital channels and the financial transactions via mobile and Internet grew 57%. This autonomy also drives the accounts opening and <unk>.

This half of the year alone we have nearly stopped the total accounts opened at food yet in those 2021.

There are 82% more accounts totaling close to $1 5 million openings from January to June this year.

The opening of individual micro enter premier's accounts, followed this growth with an increase of 79% within the same periods.

And that's for experience glides has increasingly sought ease and customization to improve their experience, we give voice for our clients, we listen to what they have.

I would say and develop products and services consistent with their desires needs and moments in their lives. These allow us to enhance their experiences as we did with revitalization of the big section within our App.

In addition to positive feedback disclosing this lower clients generates a lot more business opportunities for each of vigils digital origination red represents 74% of the volume of transactions. The same effects can be seen investments we'd jump at.

12% and an insurance, which grew 132%. There were also positive results seen companies, where the amount of press release spike it by 139% and investments by 111% Consortia also grew by 70%.

Turning now to page 13.

In sustainability, one of our major pillars of corporate strategy, we weren't the first Brazilian banks, who joined peak F partnership for carbon accounting finance financials on international benchmark for calculating the portfolio of carbon emissions in 2000 2021 the car.

<unk> emissions from our company's portfolio were 13% lower than the emissions in 2020, and just to give you an idea to 80% of this portfolio comes from customers, who have already made some voluntary commitment to decarbonization.

Our strategy was recognized by defense.

Linus that brings together financial institutions around the world with net zero commitments. We had two case highlight as I referenced in the financial sector. This recognition we force our purpose and performance in favor of sustainable developments in this sustainable business agenda, we remain committed to the growth of general.

<unk> business with a positive impact and by June we have already reached 52% of the objective.

Our strategy and leading role are recognized at the evaluation of the main sustainability index and the ratings all over the world, where we perform above the industry average.

We are happy with this recognition and invite you to learn more about our sustainability strategy in our integrated report.

Now we go to the next slide we're going to discuss guidance.

In the expanded loan portfolio, we expect to close the year with a movement compatible with the range from 10% to 14% closer to the Sanford considering a stronger comparative base in the second half of 2022 and adjustments we continue to make in our origination. According to this scenario of service.

The performance in clients and client NII continues along at a good pace benefiting from the increased spreads portfolio repricing shifting the mix and the impact of the higher selic rate on our deposit margins.

We see growth at the top of the range of 18% to 22%.

Fee and commission income is expected to continue to be favored by the growth in card income and loan operations. Our expectation is the convergence forwards with center of the 4% to 8% guidance.

Regarding operating expenses, we continued with our efficient cyclical control actions that allowed us for our guidance with a range well below inflation, even with investments in our digital initiatives and in the technology technological evolution of our business.

We should finish out the year between the center and the top of our operating expenses guidance.

Expectations are positive for our insurance business with our with our growth trends at the top of the guidance of 18% to 23%. The result may be driven by operational by operational improvements with evolution premiums as well as in the financial improvements.

Finally in credit provisions, we are looking at movement over to the upper part of the guidance, which is 17% to 21 billion reais due to the intensification of growth and a higher yield portfolios and the expectation of delinquency levels is likely higher than the current to us that's where the market NII, although we do.

Do not have a guidance, we remain with announced looked at proceeds other pressure that we're gonna committed as we have already commented before.

Thank you for your time and now we're going to proceed to the Q&A section.

Thank you.

We will now begin the question and answer session.

Like to ask a question. Please press star one if at any point. Your question has been answered you may remove yourself from the question in queue by pressing star two.

Hold while we gather all require requests.

Okay.

The first question comes from Charles <unk> with UBS.

Hi, guys. Thanks for the opportunity I have two questions. The first one about the capital position of the data.

The bank ended the Q2 to one ratio of 13, three months wrong more or less in the meat of the bank's indication between 13, 2%.

When you look ahead.

Do you see any chance to reduce this.

<unk> targeted antibody that's go ahead.

13% to 14%.

And just a quick question my follow up for the Portuguese call, but can gain from what it was call it not to mention that NPL ratio would not.

Cheap or not to be above the 4% ish food.

I want to confirm if this is the banks because they.

They end up the year or if this is more of a kind of a peak that we can we believe we will see.

So wanted to trying to do to have a little bit of more color of this 4%.

The power ratio bucket or.

NPL ratio at the bank.

Okay.

Thiago.

In terms.

Terms of.

Capital I think we.

Have been operating at a level, we think it's very comfortable I think we have.

A.

Level.

<unk> that is.

<unk> been slightly above what we.

We see.

The internal targets for the time being.

It should continue.

<unk>.

With some.

Crawford ROE levels of capital, we should keep our dividend policy in.

In line with.

What we have been doing in the last few years, probably paying interest on capital that will naturally take hour.

Payout something around.

40% for the.

The time being we foresee as will remain.

S.

Our policy in terms of Npls.

<unk>.

Our private referred as a partner as a reference basically with that we don't believe it's going to be above this level by the end of the year plus more like a reference yes, just to get your sense here Tiago.

Although we expect some small deterioration towards the end of the year as inflation.

Gets cold thrilled and interest rates started to decline.

We shall also benefits as far as Npls concerns.

Okay very good.

Amanda.

Yes.

Just to complement on capital.

This quarter given the adjustments related to the end of the central bake a waiver on the <unk> tax credit.

We had this reduction in capital that also was caused by.

The market markets, we have seen given the.

Interest rate movements, we believe that with defense.

Monetary policy probably.

They are ready.

<unk>.

With interest rates, reaching the peak, we foresee last market to market. So even though there is another round.

Of.

Adjustments related to the end of this waiver we don't foresee.

Further reductions in capital probably earnings retention will allow us to more than compensate this event until the end of the year. According to <unk>.

And it's important to highlight that we shall just have.

Next revamped in December and from that point on we are just going to see the capital increasing by accumulated profits. So we believe that we are on a very comfortable position as far as <unk>.

Okay. Thanks.

The next question comes from Keith <unk> with Goldman Sachs.

Hi, good afternoon, and thank you for the call and taking my question a couple of questions also first.

I guess following up a little bit on the credit quality.

NPL ratio went up 30 bps, you sold about $2 billion.

Probably would have been up another 30 bps. So you would you would have been around three eight.

So youre already above kind of the pre COVID-19 levels.

Just to understand what gives you comfort that it won't go above that 4% level.

Just given some of the deterioration that we've seen in the last two quarters.

Also combined with that.

The loan growth I know, you mentioned that you're going to kind of slow down a bit.

Pretty quickly in unsecured credit.

Credit cards up 46% personal loans up 20.

How much one is is the growth in those segments impacting that MPR ratio like how much of it is just mix.

And what gives you comfort also to grow in those segments.

With the sort of deteriorating.

Credit quality.

Just to get a sense of how you see that going forward. Thank you.

Thank you very much for your question.

Well first of all the deterioration that we see.

Credit cards as well as in personal loans.

They are pretty much natural and expected.

Therefore.

What is really important for us to see the net spreads and the net spread is not only possible but is growing. Therefore this is something that still makes sense for us of course, if we do not see a GDP growth. If you do not see the unemployment rates decline as well as a massive salaries are growing.

This line shall we start to get to <unk> and if we if it for any reason <unk> advises the expectations. We have we are going to reduce the growth. We do not have a magic number regarding to how much it might increase until year end, but we do not expect to be drawn.

<unk> hi.

And in terms of the 29.

They do have point out considerably.

An occasional sale of the portfolio and the way. We did this is something that we do every quarter and.

You shall have this effect by the end of the day and we do that because basically we believe that either we are selling the portfolio at a much higher price than what we have in our books or because we are going to expand much much more in terms of cost and time attention from.

Our team in terms of origination so we just make that whenever it makes sense most of it.

We are talking about.

Individuals' portfolio. So we are not.

We are not in a position that is not controlled or different from what we have done the last quarters and as our CEO has pointed out we do expect to keeping with this practice because by the end of the day <unk>.

Maximize return.

And we have a much better use of our time.

In our in our teams yes.

Yes, just complement with.

<unk>.

A few points in terms of the growth we have seen npls.

We believe it's related to the normalization of credit conditions, we have seen.

In the beginning of the pandemic, where we had more renegotiations, we had low expansions and also families.

Accumulate.

Savings I think the normalization of this conditions answers for part of the increase on top of that we have kind of a mix effect we were growing.

Interest.

Until 2000 early 2021 in lower risk credit lines with mortgage leading the growth.

And then we start to see growth in consumer finance lines.

Comparing for instance, the mix of loans, we have today with the mix we had in 2019 basically this change of mix.

Answers for something around 40 bps in terms of increasing the 90 days NPL, it's only by the.

A change in mix in the <unk>.

The last.

12 months, where we had strong growth in consumer finance lines in terms of loan growth itself.

We have this deceleration throughout the year part of it is because we had a big growth in the second half last year and this base of comparison will naturally leads to a deceleration that's why our guidance goes from 10% to 12% we were already expecting disguise.

<unk>.

Of growth, we have already done some adjustments in our in our right its origination in our models.

Especially on the consumer finance lines, but anyway, we are.

Yes.

Leandro pointed out we still see opportunities as you can see in our net interest margin after provisions as they understand we are still growing.

Margins after provisions then.

That said it makes sense to continue originating good quality.

Our credits.

That are profitable, yes, and just opposite to that.

Our NII grew by 130 bps.

So by the end of the date was accretive to.

The lower results.

Great. Thanks, Brett Thanks, Andrew that's helpful and just to clarify you said the mix impact was 40 bps over the last 12 months.

Yeah, no quite a bps comparing year end 2019 portfolio through now.

2019.

Yeah year end 2019 to the current portfolio, yes, basically we are just making reference to the changing mix because at that time with lower interest rates will have a longer term financing such as mortgage more corporate loans and less short term financing to individuals and smbs. So just just trying to show you that.

The increase in the NPL was much much lower than that.

The net NII that we got.

Yeah, Okay. No that's helpful and one other follow up if I may just.

Have you tightened your credit standards at all.

I understand you see opportunities in credit spreads are there.

Are you tightening a little bit on how much you land at all or are you still kind of comfortable that changed at all.

Yes, sorry.

Well basically our model is pretty much automatic.

<unk>, how much you have an inflation how much receipt, we have in interest rates in unemployment rates how much is the salaries.

Earnings of our clients and it adjusts so as of course as long as inflation goes all in interest rates remains high.

There is less appetite normally.

From our organization to provide loans to risk in riskier securities too.

Riskier individuals.

Small companies. So this is something that we keep an eye on a ongoing basis.

For us it's important to see a growing and positive NII net NII.

Okay, great. Thank you very much.

Okay.

The next question comes from Carlos Gomez with HSBC.

Yes, hi, good morning.

Two questions are you interested in the sale of Aneel.

And then second on the waiver for capital.

Is there any other additional waiver that we should know about for the future.

Okay.

Alright.

Carlos regarding the first question, we are not looking at.

We now have introduced the second question can you repeat it.

Sorry, we lost it.

Yes.

For the background noise.

You had this waiver for the capital that has resulted in a total cost of 80 basis points.

We didn't know about it is there anything any other waiver that we should be aware of what do you think you're back with I think your capital positively or negatively.

No there isn't anything else I think this is something that was related to the big volatility we've had in the beginning of the Pandemics.

And we don't have any other.

Extraordinary events like that to improve.

Thank you so much just to make two sands here after FID Ed.

If for any reason EMEA was willing to discuss business with those who are more than happy.

To listen to each we are wide open to business opportunities all the time.

Thank you, ladies and gentlemen, I would like to remind you that to ask a question you just have to dial star one and to remove yourself from the question in queue start to please hold while we collect new questions.

Okay.

Okay.

The next question comes from Thiago Batista with UBS.

Hi, guys, just a small follow up above.

So the 2 billion do you have the profile of these loans is more retail any type of retail loans, let's say consumer lending credit cards student.

Any color that you can share with us.

Okay.

Yes, most of it was with deal.

Consumer and credit cards.

And also loans in this category that were renegotiated previously renegotiate that sometimes echo renegotiation.

Okay.

Okay.

Excuse me, ladies and gentlemen, since there are no further questions I would like to invite the speakers for the closing remarks.

Well. Thank you. Thank you all for making the time to be with us.

We're going to be more than happy to address any questions. You may have from now on our Investor Relations team.

He is ready to answer you by email or phone calls or whatever.

Easier for you.

And with that I would like to wish you a very nice weekend goodbye.

That does conclude <unk> conference call for today. Thank you very much for your participation have a good day.

Yeah.

[music].

Yeah.

Okay.

Okay.

Yes.

Thanks.

Yes.

Yes.

Yes.

[music].