Earnings Call Transcript
BANK BRADESCO (BBD)
Earnings Call Transcript - BBD Q2 2024
Marcelo Noronha, CEO
Good morning, ladies and gentlemen. I am Marcelo Noronha. I am here speaking from Cidade de Deus, the headquarter of Bradesco Bank, for the presentation of the results on the second quarter of 2024. Now, the time is 10:31 a.m. And it's a pleasure for me to be with you again this morning, this beautiful sunny morning in the town of Osasco in Sao Paulo. And we are here to talk about our results for the second quarter, which hit BRL4.7 billion of net income, growing 12% quarter-on-quarter, meaning that the second vis-a-vis the first quarter of the year, with this ROI that you see here in the screen. And here we have six topics that summarize our net income or summarize what happened in the second quarter of 2024. It could also be the summary and the conclusions that will lead us straight into our Q&A. First of all, we had solid and safe profitability growth. And here I'm referring to our loan portfolio and the mix that I am about to show you in a moment. We also posted an evolution of net NII driven by client NII quarter-on-quarter and also the reduction in control of loan loss provision expenses. We increased the expanded portfolio in all segments, including in the wholesale bank with emphasis on SME and MSME and individuals. But please note that we are not growing above market rates. We are growing in line with the market. We had improvement in NPL in all segments, and also we posted growth in the coverage ratio. Operating expenses are growing in line with our expectations, and naturally with a lot of discipline, we were able to accelerate our footprint, as we've been saying to you before. And finally, we were able to maintain the solid performance in the insurance segment. And further on, I will give you more details about every one of these topics. Our loan portfolio went beyond BRL912 billion with a quarter-on-quarter growth. But I would like to draw your attention to an increase of about 5% of the wholesale bank and moreover, MSMEs with a growth of 10.12% and individuals also growing 5.7%. In the case of the MSME, I would like to remind you that here we have middle market segments and also SME market. And moving on, look at the loan portfolio and the mix with similar growth in individuals, 2.5% and 2.5% in companies. I'm speaking about quarter-on-quarter, but this snapshot gives you an idea of our mix first. The first conclusion is that we grew in all lines. Secondly, we grew with a very balanced mix with insurers, good NPL levels through time, constant speed but not spikes with client NII because here we have payroll deductible loans, real estate loans. These are all very important portfolios for us and rural loans on the individual side which allows us to have a good balance of our mix with low credit risk. Now, maybe the card segment that didn't grow as much is something that I will talk about later on. In terms of companies, look at SMEs or MSMEs with growing 7.2% quarter-on-quarter. And again, here we had good growth in foreign trade, in real estate, and working capital. But there was also a very satisfactory growth in the company segment. I'm talking about SMEs and large corporate, with a very good level of guarantees which is higher than what we experienced in previous quarters. This also ensures good balance for us in the next coming quarters. And this also demonstrates, and if you allow me to give a step back, this demonstrates our capacity for attraction or commercial attraction. Every day we deploy new models. We are improving our portfolio management with all of that business unit segment that we put together for the loan portfolio. I mean, traction is also important. I could have all the limits available, but look at the penetration level that we have in all segments. And soon I will talk about fee income recurring revenue. Here I have two charts that we also presented last quarter and here I'm talking about vintages, over 30, but I'm referring to vintages that presented the best correlation of losses in every vintage, four months after credit was granted, what is overdue, you know, more than 90 days. This dotted line, which is the 100 base, is the average of approvals of 2019. That means prior to the pandemic. And here is the line that we use as our own reference. So in the mass individuals, we have control vintages between 60% and 65% of everything that we approved back in 2019. But we've been gaining traction. Look at the first quarter and then second quarter in the grey bar, how much we evolved, even with that same level of vintages over 30 days, 4 months, and the idea here is that this could be slightly higher, so that we will strike the optimum return level in terms of loans. I can take a little bit more risk here and then this will give me a very good return in terms of NII and delinquency is well behaved going forward. And then I can give you more information about our origination. We are growing in line with the market. We are growing with a good level of solidity and security. Accounts opening, the reference is again back in 2019. In terms of growth in the first quarter, SME, and I'm talking about mass companies, it was more traction in this quarter, but the level is between 60% and 65% of what we used to present in the vintages of 2019. This inflection of the curve is the baseline because it was very low here. It means that the approval rate was very low. We were capturing lower vintages with lower origination, but here we are at the same level of individuals with a drop in delinquency in the next chart as you can see. Now, moving on, here I bring this slide to show you probably three things. First of all, how come we were able to deliver a total of released loans in the second quarter of 2024 of BRL84 billion, BRL34 billion being through digital channels. And why is it that we believe that we will continue to perform as such in the third and fourth quarters as well? With all of these new modeling systems and the intensive use of machine learning, increase in personnel, process improvement and everything else we did, even considering credit card management, not only in terms of middle marketing but also SMEs of BRL3 million to BRL50 million, I think. There was a change in pre-approval compared to the second quarter of 2023, starting with a base of 100, that was an increase of 20%. But if we look at the volume, there was a growth of 27% in this sense. What does that mean? It means that with the commercial traction that we have in every segment, including in digital channels, naturally we are delivering a client NII that is growing, stable based on that mix that I showed before. But not only based on credit because that's the main leverage, but also based on liabilities because in 2024, we noticed growth of our receivables from clients, but the cost was slightly lower when compared to the same period of 2023. But the third piece of information I have here for you is the evolution of the approval rate. This reinstates what I said before. Be careful with credit risk. Mix adequate pricing, models that are much more adequate using transactional data, use of machine learning, better ratings, particularly in the individual segment. When we talked about the 2019 vintages ratings ranging between AA and B, we were bringing 61% of approvals, but today the same vintages are bringing between 74% and 75% of approval rates with ratings between AA and B. But note that if you look back to June 2023 where you see this red curve, it was in the low range of our approvals. Our approvals increased on average in June of this year when compared to June of last year. They grew 25.7%, meaning that was 16% lower than all of the approvals back in 2019, even with that traction and the growth that I showed you before. But also notice that in order to achieve 25.7% in individuals, we grew almost 27%. And small companies, the approval level is lower and is more conservative. And we are very much with our foot on the ground, therefore we are very comfortable and very reassured in terms of what we've been doing with our credit selection and our growth, growing step by step, but moving forward in terms of our credit risk. And so naturally, we go to our NII, which grew 2.8% quarter-on-quarter, reaching BRL15.6 billion. Natural market NII, given the volatility, notice in the past periods was slightly lower, but we believe that it will grow. But now, client NII stood at BRL15.3 billion, growing 5% quarter-on-quarter. And the net interest income in the first quarter of 2024 went to BRL15.3 billion in the second quarter. But notice that in the meantime, if you look at our net NII, we grew substantially, and this growth mainly came from our loan growth, but everything was balanced, less margin, payroll loans, and there were other lines that also helped to make up that mix and also in the corporate segment with that net spread. But look at the NII growth. Quarter-on-quarter we grew 18.7%. And this is what moves the needle in our bottom line. And this is what we have in terms of client NII. Our delinquency curve is coming down. NPL creation well under control in line with the previous quarter, very close to 100%, but the coverage ratio over 90 days reached 170%. Now, moving on, in terms of our expenses with loan loss provision, we reached BRL7.3 billion, mainly attributed to these two reasons. We had improvements in the vintage's quality and higher efficiency in terms of collection and credit recovery. And this explains and justifies our loan loss provisions. And then we come to another area and this has to do with having the business areas well traction. And I'm referring to fee and commissions revenue that helps our top line. And if you look at it, they grow almost in all the lines with highlights to credit operations, 3.5% quarter-on-quarter. And again, this is due to our commercial traction, to the level of relationship that we have with our client base at different levels. So we also grow in current accounts, you know, 3.1%, and I draw your attention to asset management. We grew, you know, quarter-on-quarter, 6.4%, and AUM grew to BRL33 billion when you compare the second quarter of 2024 versus the first quarter of 2024. And then I draw your attention again to the card income. You know, you saw that our loan portfolio was not growing that much but we are more conservative in terms of the low-income client and obviously with those that are non-account holder in terms of the capital market, we grew 12% almost year-on-year. So with our pricing, risk is lower and capital markets also grew substantially. It's not absolutely regular, but the growth was quite high. Talking about operating expenses, I'd like to draw your attention to our revisiting of the footprint. We've been doing this very carefully with very discipline and you can see a client base again has commercial traction, drawing 1.8 million clients, most of them coming from payroll loans, INSS, public payroll loans, private payroll loans. And a part of this comes from checking account holders. That also grew in the last quarter. And we point to our indicator in the guidance. First half 2024 compared to first half 2023, up 7.6%. And here, bring you a reconciliation to some points. Personnel and administrative expenses growing 4.3%, or 4.5%, first half 2024 over first half 2023. And this was because of the care and discipline that we've been having in terms of growing our personnel and administrative expenses. But if we look at the complete income statement, you will see other expenses that do have an impact on this indicator. This is 4.5% in representing 7.6%, but I bring you an interesting reconciliation just for your assessment. We are shareholders of all of the companies under EloPar, Livelo, Alelo, Veloe and Cielo. And what we have seen in these companies, for example, Cielo has been doing a lot of transformational work, but they are also investing to grow, to develop their business. And the same goes for Alelo, Veloe, and in these three cases, when we consolidate, we see a two-digit growth in operating expenses. If we were to normalize this level of growth, because it will normalize eventually, our indicator would not be 7.6% but rather 6.2%. As a result of this consolidation, which is positive for the growth of these companies. So this is just a reconciliation to show that our expenses are well under control in the quarter. And then we move to the insurance group, another very strong quarter. Net income of BRL2.2 billion, 12.7% growth quarter-on-quarter, 22% ROE, and this level of revenue from premiums, contribution, savings, bonds, with this level of growth. And why is this happening? Why is this growth happening? Because of commercial traction, competitive products and services, both in the bank and in the insurance group. This is what explains this growth. There is a phenomenon we'll see in relation to the guidance is that in the second quarter of 2023, the result of the insurance operations, net income in our guidance was BRL4.8 billion, in this quarter, BRL4.6 billion. But we are taking strides towards Q3 and Q4 to be well within the guidance regarding the results and operations of the insurance group. This is our expectation, as well as the expectations of the insurance group. Technical provisions, BRL382 billion, growing 2.6% quarter-on-quarter. Our capital will remain practically stable, 10 bps. If we didn't have mark-to-market, given the volatility we've seen in recent quarters, we would have 0.24% up. Capital would have grown even with we growing our loan book. And I'll end the figures part with the guidance. So I'll look at the implicit net income that we decided to deliver, which is a combination of all of these lines. And if you do the math, our colleagues in the sell side, you will see that we are delivering an implicit potential net income which is superior to the middle of the guidance. So we have here some supplementary information which is net interest income minus expanded loan loss provision that will give us an implicit in annual indicator with that band, with that range to facilitate your evaluation. In other words, we continue to pursue each one of the indicators. That's our objective. It's not a gift that we wrap in January 1st and open the gift in December 31. No. We continue to pursue these indicators. We believe that they will grow in the NII. You could see that we are growing client NII quarter-after-quarter, and I draw your attention to the month of June when we grew a little more than the market, but in line with the market. And you could see the trial balance sheets disclosed by the central bank, you did your evaluations, then we have July. So it's easier for you to see and to realize that this level of growth and everything we've done in May and June will have benefits in the third quarter, which is where we're living now. You don't capture all the value in Q2. And the growth that we show in Q3 will be actually seen in Q4. And speaking about our transformation project, we have been working with a lot of discipline. Cassiano is a CDO and he has the transformation office. They have been working and he has been controlling the team positively, checking the timeline and the deliveries, and we detailed all of the execution here and everything is underway. The people have been working strongly and reviewing a lot of things, but we delivered a variable compensation plan for the second half of, which is more meritocratic. And it fits the expectations of our shareholders. And we had accelerated progress in the credit business unit, as I mentioned, with the right pricing, better processes, better collection performance, better portfolio management with this portfolio management BU, bringing people from the market and implementation of models with a much more intense use of machine learning, transactional data. And all of that leads, as I mentioned before, to better ratings in our loans for individuals and for companies and for SMEs. Our expectation for the second half is that we will start our new affluent segment, continued expansion of SMEs, and in the case of Bradesco Expresso, I'd like to stress what I already mentioned in the prior call. We have two important platforms in Bradesco Expresso. One to which we relate with our banking correspondents at the checkout. And they offer a much better experience when we started that delivery in December and January and we started rolling it out to the whole base. This rollout will be completed now in October. And it is very, very important for our strategy in the mass market clients. On the other side, we have the other platform to capture transactions. That is done by a network. We are concluding the rollout. There were four capturing networks, and when this is completely done, what we'll have is, number one, a reduction of operating costs of Bradesco Expresso for their transactions, and that's the first consequence. The second consequence is we'll be in a position to have new investments for the capturing network, as well as for this new platform that relates with the checkout of the banking correspondence. All of this will be done much more easily in a much more friendly environment for those frontline people. I went out in the field. I did visit some small merchants in the countryside of Sao Paulo to see their experience and had excellent feedback from the correspondence, from some correspondence that have been now correspondence since 2005. And the third gain, third consequence is the experience of the commercial banking correspondent and of the individual clients who are served through that channel. And also for SMEs. The SMEs platform also is part of this and it involves CLO. And I move to my final slide with the conclusions and the summary of everything I've said so far. Number one, step-by-step, solid and safe profitability growth. I spoke about the mix, I spoke about pricing, and about the model. We have revenues growing with a positive inflection of the client NII, as well as fee and commission income, the insurance group, everything influencing positively our result. Focus on net NII with a focus on risk-adjusted return. I showed a slide with the levers that prove everything we delivered in loan, BRL84 billion approved, and the increase in the NII, client NII, as a result of everything we are doing. And we expect to have better deliveries in Q3 and Q4. Firm plan execution at an accelerated pace of our transformation. And lastly, enhance the client's interest within your way to serve new product formats that will fit different client segments, different than what we did in the past, with other structures, other configurations, and we'll deliver a new app to our clients with a new experience for them as well. We also deliver much greater use of GenAI to help our team to interact not only with our employees in the several segments but also with our clients. So I spoke about the insurance group as well. With a great combined ratio below 90, when we had achieved 90 in recent periods, which is an excellent indicator for the sector. And lastly, I'd like to bring you one more piece of information, some news, which is the hiring of a new officer for our organization, somebody who will be working with our technology team. This man has vast experience abroad and experience in transformation projects. His experience will be added to our team with Edilson, Cinti, and our other colleagues who make up the technology department, but linking more and more technology to the business, to the products department, to clients. He will be joining us most likely by the end of August. That's the expectation. Everything is arranged. And this officer will be bringing great experience in other transformation projects to add to our efforts. So I'll end my presentation here. I'd like to thank you for your attention. And I have my colleague Andre Carvalho, our IRO, and Cassiano Scarpelli, who heads the financial department. He's our CFO and he's also our CTO. And we are available to answer your questions. Thank you very much. Andre, over to you.
Andre Carvalho, IRO
Thank you, Cassiano. Thank you, Marcelo. It's a pleasure to be here with you. The CEO of our insurance group is participating remotely and let us begin the Q&A session. Your questions can be sent in Portuguese or English using three channels. Either email to investors@bradesco.com.br using the WhatsApp number 11-974438238 or if you want to point your mobile phone to the QR code, you can send your questions. First question from Renato Meloni with Autonomous. Renato?
Renato Meloni, Analyst
Good morning, everyone. So it's good to see you. Thank you for taking my questions. My question is about the guidance. In this quarter, you added additional information to the guidance with a much lower expectation of market NII. But the guidance was reinforced. So I understand that the client NII will be lower, and provisions will probably be lower. So I'd like to understand. Perhaps you can explain whether this comes from a greater growth of client NII or lower provisions, and I'd like to understand actually what changed compared to the beginning of the year when you prepared the guidance, when you had a higher market NII expectation.
Marcelo Noronha, CEO
Thank you for the question, Renato. I'll begin, and my colleagues can provide additional insights. In response, we have enhanced our outlook expectations, reflecting our earlier guidance preparations. We're now positioned to deliver more. If you look at the implicit net interest income in the guidance, you'll notice an increase. The market net interest income is projected to improve in Q2, and we expect continued quarter-on-quarter growth in client net interest income. However, it's important to recognize that we cannot isolate provisions from the growth of net interest income; they are interconnected. With better mix, appropriate pricing, and effective modeling, we are achieving growing results with safety. This forms my perspective and expectations. Andre and Cassiano, feel free to add anything.
Andre Rodrigues Cano, CFO
Well, good morning, Renato. I just would like to add to what Marcelo said. I'd like to remind you that in the guidance, as Marcelo mentioned during the presentation, we have the implicit net income. That's our reference. And we started adding something more to show how we are looking at our NIM. There's a specific guidance, how we set out the ranges which we believe are fundamental to get to this implicit profit. And the traditional guidance, by the way, is annual. So the lines will fluctuate. But it is just a north for us, an incentive for us. We want everyone to focus on the initial guidance because it is tangible. It is strong. So our people can work with a lot of dedication. And more than that, we cannot forget that the lines have values that will complement the market NII. It can come from the client NII, can come from very controlled expenses or in fee and commission income. So we’re confident in the implicit profit. It's a base and we'll try to deliver more. And just to add, this time we added a slide to the presentation which is the slide of the levers. In other words, we present to you measures that have been adopted to accelerate our revenues. Our revenues don't grow in a linear fashion. They will expand more in the second half compared to the first half. And Marcelo spoke about number of clients who are pre-approved, offering of loans to these clients, increased approval ratio, better management of the client funds. In other words, a number of measures that should help us accelerate revenues and margins in the second half. It's a game we're playing. It is a challenging one for sure, but we continue to pursue the goal. That's my point.
Andre Carvalho, IRO
Moving on to the next question from Eduardo Rosman from BTG.
Eduardo Rosman, Analyst
Good morning. Congratulations on the results. I have two questions. The first is about your risk appetite. I think the financial conditions of the country and even abroad got worse. I just want to understand how this could eventually change the bank's risk appetite for the next quarters. And my second question is about the recently announced change in variable remuneration. Does that contemplate anything like short-term or mid-term? I know that you are in the midst of an important transition. I just want to understand whether you're contemplating anything for next year.
Marcelo Noronha, CEO
Thank you for your questions. I would say that our risk appetite is moderate because we are grounded in reality. Our approval rate today is 16% lower compared to what we typically approved in the past. In terms of small and medium-sized enterprises (SMEs), the approval rate is still lower, at 17% compared to 27%. We have models that consider mix and pricing. This affects our risk appetite, leading to more stringent portfolio management focused on SMEs, which makes us more comfortable with our current strategies. While we remain in line with market conditions and are not pushing for excessive growth, our appetite for risk in SMEs is lower. We monitor this closely every day, and changes in the macroeconomic environment may lead us to adjust our risk appetite. We are committed to growing with quality and maintaining a strong level of security. Regarding the new variable remuneration, while I can't summarize it in just two minutes, I’ll provide an overview. In the wholesale bank, managers are evaluated based on what they generate in their portfolios using certain indicators. However, the leadership team's evaluation was less tied to their specific units and more aligned with the overall performance of the bank. Meeting shareholders' expectations is crucial, but it’s also essential to consider the leadership group where remuneration might be higher due to their responsibilities. This is tied to operational efficiency and transformation areas. We aim to ensure that compensation is merit-based; for example, if one person delivers superior results, their compensation will reflect that compared to a colleague with a good track record but lesser performance. We do take into account the individual performance and the responsibilities each individual has, and the new variable compensation is already being implemented in the second half of the year.
Andre Carvalho, IRO
Now the next question comes from Thiago Batista from UBS. Thiago, welcome.
Thiago Batista, Analyst
Congratulations on your results. I have two questions. The first, Noronha, when he presented the strategic plan a few quarters ago, he said that the bank expected to have returns very close to the cost of capital at some point in 2025. When we look at Bradesco's results this quarter, is it possible to say that the rebound of the bank is occurring faster than you anticipated or maybe not, or maybe ROE is in line with the capital or the estimate for 2025. And the second question is about the insurance company. What was the impact of the events in Rio Grande do Sul? How does that affect the bank's results? Or there is still something to be recognized going forward?
Marcelo Noronha, CEO
Well, Thiago, sorry, I said Rosman. Rosman was the previous question. Thiago, This ROE close to capital in 2025, as you mentioned, I think the dates may change. I mean, we are not promising to deliver ROE close to capital with a very specific view. But I think we are talking about 2026. But now what I can tell you goes in line with what you said. Well, we are moving faster. Yes, we are faster than what we previously anticipated. That's why when I talk about the guidance and the net income, we were above the guidance. So I think that we can deliver something in addition to what was implicit in our net income in the combination of all KPIs. But in terms of your second question, all of the potential impacts for the insurance business that is much more related to the Auto segment has been already absorbed in this half year. And in terms of the solidarity with our clients and people in Rio Grande do Sul, not only at the bank. We made – there were several actions, but the insurance company paid for all the claims and everything has already been contemplated in the results of the bank, which was good. So we don't anticipate any impacts going forward. The impact was fully provisioned in our results line. Thank you for your questions. Any more comments? Ivan is here. Ivan, do you have any additional comment, please?
Ivan Gontijo, CFO
Hi, Marcelo, and thank you, Andre. It's just important to give a little bit more visibility to Thiago that the amount was BRL165 million gross, BRL100 million net. That was the impact to the insurance business. And we do not believe that this will be carried over in the next quarter. So there will be no further effect in our P&L. And also, you talked about the insurance assistance when we aided our insurance holders and those that were not insurance holders. So the impacts have been already contemplated in the P&L of the second half and now we just have to look at the second half in a more objective and clear way with all our objectives in line.
Marcelo Noronha, CEO
Thank you, Ivan, very much. Thiago, thank you.
Andre Carvalho, IRO
Thank you, Ivan. Thank you, Thiago. Next question from Bernardo Guttmann with XP.
Bernardo Guttmann, Analyst
Good morning. Thank you for taking my questions and congratulations on the performance this quarter. After the important de-risking work and work to improve the quality of credit, and a resuming origination of individuals' loans, and I imagine that this growth should be a combination of different segments in addition to the most market. The bank historically also had this DNA, a strong exposure to low income. It would be interesting if you could elaborate on how you're advancing to the top of the pyramid. The market seems a lot more competitive with some well-established players. Perhaps you could speak about the different digital platforms and the other initiatives in financial advisory, which you are pursuing to improve your mix and positioning in the individuals segment.
Marcelo Noronha, CEO
Thank you, Bernardo. Thank you for the question. You actually mentioned some important conclusions. It is true what you said. You will remember an indicator I showed of credit cards. We are not growing that portfolio a lot. There's a variation in terms of service provision there and fee and commission income. It's low, but we grew a lot more in the high-income portfolio. We grew 12% year-on-year. So what you said is true. We have substantial growth in mid-income, in high-income, as well as in lower-risk products, which are also originated by Digio and by Bradesco Expresso, such as payroll loans. I spoke about the four lines. INSS, public, private, payroll loans, and FGTS payroll loans. So we are growing in all of these audiences, and with a lot more care when it comes to low-income and non-checking account holders, when we used to have every current credit card growth. So we are growing quite well in high income and we are growing now with the adequate lower risk segments. And thank you for the question.
Andre Carvalho, IRO
Thank you. Next question from Brian Flores with Citibank. Brian, thank you for the opportunity.
Brian Flores, Analyst
Noronha, Andre and Cassiano. Noronha, you mentioned something interesting. We are kind of doing the math here. Sometimes we tend to focus a lot on assets, but in liabilities, we can see that the cost of deposits is improving as a percentage of CDI. So my question is, what are the measures you're taking there? Could you perhaps give us more color on the competitive landscape in this segment and what should be the trend looking forward? Thank you.
Marcelo Noronha, CEO
Thank you, Brian. Cassiano?
Cassiano Scarpelli, CFO
It's a pleasure to see you. What we have adopted some measures focused mainly on our commercial action. We have been doing important work in the part of middle market with our cash and the commercial evolution. And that's an important piece of data. And also our CRM and all of the work that we are doing in terms of working with the database. Our data scientists have helped us a lot in terms of low and mid-income clients, deposits, savings that grew again this quarter together with the time deposits where we have a CDB in our CDB that remunerates the balance of our general clients. So these three components, better optimization of costs and long-term funding costs for companies that gave us a much better balance in terms of cash and liquidity and that brought very interesting gains in our cost of funding. So this principality, this commercial action that Marcelo so well spoke about in the presentation to be focused on the client, close to the clients. It's not just the physical contact face-to-face, it's also the app contact. As Marcelo mentioned, we now have a new app, a new functionality, a new concept. So this concept of presenting proposals, presenting opportunities, this has brought us great results. And in terms of investments, the specialists that Marcelo spoke about, it's not just cash. It's also the assets part that is evolving a lot this quarter. So these are the components. We are focused on the assets line item, yes, but the liabilities line item is also important for our comeback story in profitability.
Marcelo Noronha, CEO
Brian, let me just add to this. We're talking about growing NII, client NII, and NIM. We're talking about growth and fee and commission income growing and also controlling liabilities. That's the result of commercial activity, mobilization, capacity and penetration that we have in our client base of different segments. We're talking about high income, retail, bank, wholesale bank, mass market, SMEs and so on and so forth. So thank you for the question.
Andre Carvalho, IRO
Thank you. Next question from Daniel Weiss from Safra Bank.
Unidentified Analyst, Analyst
Good morning, Andre, Marcelo and Cassiano. Congratulations on the results. I would like to refer to Change the Bank. I mean, I know you accelerated the footprint, 411 movements this quarter, and even then we see the client line growing and the individuals' segment is growing. So, can you tell me about this migration of clients, pains and learnings? What is your actual pace? Would you like to accelerate the pace or maybe step on the brake a little? Just let me know a little bit about the way you were serving clients today.
Marcelo Noronha, CEO
Thank you for your question. The primary concern of the bank is our client base. We are carefully transitioning compensations and comparing them with previous transformations while ensuring we maintain discipline. We've exceeded our expectations for this period, and as we progress, we will keep advancing at this pace. We will increasingly utilize intelligence, dedicated teams, and thorough studies to minimize any impact on our clients. That's why I highlighted the growth numbers, which include a rise in current accounts. Our focus is on growing while maintaining quality and improving our operating efficiency, which also involves Bradesco Expresso, as I mentioned earlier. I’m not sure if Andre or Cassiano want to add anything, but I believe I covered all the key points. The experience we've gained from our initiatives has been invaluable. Our ambition to become a lateral bank has manifested in positive developments for our clients, and client satisfaction remains central to our strategy. All our actions have been executed thoughtfully, ensuring we maintain that focus. We've been increasing credit availability, with 66% of our account holders utilizing digital channels, and the feedback on our app experience has been very positive. A significant lesson learned is that our leadership recognizes our ability and necessity to do more, which is crucial for our commercial efforts. In summary, we are currently experiencing robust growth and can maintain this momentum in the upcoming half-year and beyond. Moreover, our service points will evolve from the traditional format. We are reallocating staff from traditional branches to focus on companies with earnings up to BRL50 million, allowing for a more agile operating system where credit specialists assist companies in making more informed decisions. We've transformed our service points to be more efficient and productive. Thank you, Daniel.
Andre Carvalho, IRO
Next question from Yuri Fernandes from JP Morgan. Yuri?
Yuri Fernandes, Analyst
Hi, Andre. Thank you, Noronha and Cassiano. Congrats on your results. My question is related to margins, the spread itself. Client NII, there was an inflection, about 10 bps, I think everybody was expecting that. My question relates to the speed of it. You talked about SMEs, but my question is whether this SME mix is the mix from very small SMEs. I mean, there were rural working capital was weak. So my question about spread, do you think that you would go back to that 9.7% or 10% that you had in the past, but at what speed your margin will be resumed and whether the mix of that SME improvement will be good enough to help you accelerate your return. And the second question is about the more structural cost of risk when compared to your historical numbers. You said that everything is improving, the vintages are improving, but the cost of credit is still much higher. I mean, there were some things in terms of impairment, reversal, when you look at the overall picture. But my question is, when you look back, do you think that Bradesco could resume the cost of risk that you had in the past or not, or maybe things are different? I mean, you will focus more on high income. Looking ahead the next two years or three years, what do you see in terms of cost of credit? And again, congratulations on the results.
Marcelo Noronha, CEO
Thank you, Yuri. I would like to begin by expressing my condolences to the family and everyone at JP Morgan following the recent loss of their head. Regarding the cost of credit, this is our expectation based on previous timelines. Clearly, we need to consider the mix, and this aligns with what we have observed in the past. As for spreads and the growth curve, these will depend on our risk appetite and the mix we can capture. If we increase our capture of payroll loans, which I refer to as four lines, we may see a return to higher spreads. However, we also want to maintain a mix that offers better remuneration. This aligns with your observations, though we don't have very specific guidance on how to achieve it. Ultimately, we aim to deliver improved results through the combination of the various lines we have. This is what we expect to witness.
Cassiano Scarpelli, CFO
And now, you know, my colleagues can add to what I said if they want. Yuri, I just have an additional comment. Our cost of credit in the second half was 3.2%, which is very close to what it was in the past, meaning that the main ROE driver this year comes from this reduction in the cost of credit, but going forward maybe the main ROE driver will be more towards revenues.
Andre Carvalho, IRO
Next question from Tito Labarta. Tito, the floor is yours.
Tito Labarta, Analyst
Hi. Good morning, everyone. Thank you for the call and taking my questions. Two questions also. Can, first on fees in the quarter, fees were, you know, fairly healthy this quarter, particularly loan fees and asset management fees, but also capital market fees jumped quite a bit. Just how do you think about the sustainability of this and the ability to really feed them, particularly, I guess, to highlight that may have been extraordinary or difficult to sustain for the rest of the year. And then second question on expenses, you know, operating, I guess, personnel and admin, you know, holding up, you know, pretty much roughly in line with inflation, but a big jump in the other particularly within the other long. If you could just give some more color on that and what drove the increase there on those other expenses. Thank you.
Andre Carvalho, IRO
Thank you, Tito. The fees that you mentioned, Tito, had a good performance, like I said during the presentation. We have been delivering this result sustainably. It's recurring. I actually used this word in terms of fees and commissions income. The one that grew the least was credit cards, payments. Of course, capital markets, for example, and you know how the equity market is behaving. It's kind of slow, and this is an important item for the capital markets. And of course, there is an oscillation, a fluctuation, greater fluctuation coming from IB, Global market that make up the capital, the market capital-line depends a lot on the number of transactions and capital inflows and outflows. So there was a more significant variation. But regarding the other revenues, we are growing quite well and in a recurring fashion. This is our expectation to continue to grow fee and commissions income better than in prior periods. Regarding personnel expenses, I'll ask our CFO, Cassiano to answer.
Cassiano Scarpelli, CFO
Good morning, Tito and thank you for the question. As regards personnel and administrative expenses, as Marcelo mentioned, we have strong control, about 4.5% increase, and it's a totally different period because that takes into account the collective bargaining agreement of 2023 now and 2024. So we are very much focused on controlling expenses. The main difference comes from the other operating revenues and expenses. We had a baseline deviation last year. We had some reversals, gains of some specific claims that caused a reversal in the past. So the baseline this year, it's kind of a difficult comparison for this indicator. And Marcelo mentioned something important that I would like to stress here. When we look at the 7.3 indicator consolidated for Bradesco and when we exclude the companies of EloPar and Cielo, we get to 6.2% within our guidance. We continue to be very focused on that, considering the whole transformation that is happening. And also in terms of personnel, we're still hiring people, we're hiring people for the technology department, we're hiring for credit, for investments, for loan products, and we're hiring a lot of data scientists. Still, we were able to balance the result with the adjustment of our footprint. So I think that expenses are under control, and they should bring us a positive bottom-line for us. Thank you, Tito.
Andre Carvalho, IRO
Next question from Mario Pierry with Bank of America.
Mario Pierry, Analyst
Good morning. Congratulations on the results. A number of positive trends this quarter. I would like to focus more in the long term. When I look at your efficiency ratio that is improving, it's still very high, close to 52%. So, Noronha, when you mentioned your strategic plan for the next five years, you never mentioned numbers. So, I'd like you to focus on this. How do you see the evolution of the efficiency ratio and where do you want to be in five years regarding this ratio? My second question is a brief one. I'd like to understand the impact of the BRL depreciation in the growth of credit this quarter.
Marcelo Noronha, CEO
Thank you for both questions, Mario. I previously mentioned the expected numbers for the upcoming periods until 2028, and Cassiano addressed the expenses. Now, I'll ask Cassiano to provide a more direct answer to your question.
Cassiano Scarpelli, CFO
Hello, Mario. Thank you for the question. Our operating efficiency ratio is exactly where we want it to be. It has an initial increase, which is natural given the investments and the transformation expenses, although we are controlling the personal line. So it has a higher curve. And as Marcelo mentioned, at the end of the project, we wanted to be close to 40%. That's our target, more towards the end of 2027, 2028. We understand that in the second half of 2025 and in the year of 2026, we'll be able to improve the efficiency ratio, bringing it down. The most important thing is that we are in this ascending curve, which was defined, designed, studied and ratified. And then it will start descending in 2025 or 2026, so we'll land at around 40% by 2028. So we are very pleased because we are following the plan that we have in the transformation project.
Marcelo Noronha, CEO
Thank you, Cassiano. But you see, Mario, when he says he's pleased, he's momentarily pleased. Whenever pleased with a 52% operating ratio. I want to stress that we will pursue this indicator, which is again not now, it will not be at the end, it will be in the process. And as regards the foreign exchange variation, well, it basically hits the wholesale portfolio. We didn't have anything relevant in the micro, small and mid-sized enterprises and the individuals portfolio. But to remind you that we produced a lot in trade finance during this period. So the variation is not just based on what we are carrying, but based on what we originated. And setting aside the wholesale portfolio, looking at SMEs and micro-companies and individuals, I think we're doing quite well. So I just wanted to point that out. Thank you, Mario.
Andre Carvalho, IRO
Next question from Pedro Leduc from Itaú BBA. Can you hear us?
Pedro Leduc, Analyst
Yes, yes, I can. Thank you, Andrea, Noronha, and Cristiano. Congratulations on the results. I just have a quick follow-up in terms of client NII. There was a very nice growth in the quarter. But you talked a lot about the mix. We see also a lot of spread. And looking at the rates at the end, it's hard to identify that spreads were going up, which led us to understand that there was a component of funding mix that was quite relevant. Can you please help us understand what led you to that 246 basis points of spread increase so that will allow us to see where the adjustment is so we can make calibrations for the second quarter. My second question is about health insurance. We see increase in technical provisions and whether that could be like a pent-up profit for the second half because I know that you are becoming more strict with the providers.
Marcelo Noronha, CEO
Pedro, thank you for your questions. It's a pleasure to see you again, you and your colleagues. So let's start with the second question. I would also like to ask Ivan to join us. Ivan, would you like to comment on the second question?
Ivan Gontijo, CFO
Hi, Marcelo. Yes. Growth reflects, Pedro, the growth of our portfolio. Efficiency and the financial discipline of our healthcare companies, they reflect the good moment that we are experiencing in the post-pandemic period. So that the increase in number of clients and a perspective view in terms of giving a higher degree of comfort to our clients is what allowed us to... I think the connection is poor and the image was frozen.
Marcelo Noronha, CEO
So Ivan will come back soon to finish answering the question, but Andre maybe you can answer the first question.
Andre Carvalho, IRO
Client NII is a great point you've brought up. It consists of three primary drivers. First, portfolio growth contributes significantly to increased client NII. Second, there has been a slight increase in the client NII spread, which is still modest but signifies the start of a more substantial improvement ahead. Lastly, as Marcelo and Cassiano explained, our efficiency in liability management and client funding has been enhanced. We are achieving better results and optimizing our funding mix, which lowers our costs. These three factors enable us to see recovery in client NII. As Marcelo mentioned, we've laid the groundwork for better performance in the third quarter compared to the second quarter. While the rise in client NII won't be drastic, we expect steady growth and improved results in the third quarter. It seems Ivan has rejoined us.
Ivan Gontijo, CFO
Hi, Marcelo. Thank you. I would just like to say that we had an operating increased performance of Bradesco Seguros, in that healthcare segment and this obviously puts us in a comfortable position in terms of the investment we've made in the value chain of the healthcare segment. We do believe in this market and we are very comfortable and we have a very positive perspective view. And I think I – I hope I answered your question and I'm available further on if you need any further clarification. Thank you. Thank you, Pedro, for the question.
Andre Carvalho, IRO
And then the next question from Eduardo Nishio from Genial.
Eduardo Nishio, Analyst
Good morning, Andre, Cassiano. Good morning, Noronha. Congratulations on the results. I have two questions. The first is about your new client platform that you were launching. Could you give me more details about the platform? How do you intend to reduce the cost to serve? I don't know whether that will be only through the reduction in the footprint of the branches or you're contemplating other initiatives that will lower the cost to serve. The second question is simpler. You talked about implicit profit. I think analysts have their own calculation on the side. But if you could share with us the members that you have in mind, the numbers you use. I think through my calculations is $18 billion. I just want to make sure whether that number is correct.
Marcelo Noronha, CEO
Thank you, Nishio. In terms of our client platform, we have plans that converge here. One is the positioning of Bradesco Expresso, because this leads us to a reduction in the cost of serve of Espresso. But this is combined with that strategy to be present in the physical world with a variable cost. This is our expectation. But we have other initiatives, not only the reduction of the footprint, because we want that unit cost of serve reaches a different level with time. But we are still working with Tulio's team and other teams from the different areas of the bank to take that to market when the right time comes. So thank you for that first part. And now I'll turn the floor over to Cassiano to answer your second question.
Cassiano Scarpelli, CFO
Hi, Nishio, and thank you again for your question. Well, we usually don't give guidance in this regard, but it seems that the market consensus is quite adequate, BRL17.5 billion or BRL18.5 billion, so that range seems to be quite adequate. Okay. I mean, that's very close to your number. Your number was, you know, right on the spot. Thank you, Nishio.
Andre Carvalho, IRO
Next question from Carlos Gomez-Lopez with HSBC.
Carlos Gomez-Lopez, Analyst
Thank you for taking my time. Two questions. One, client NII. I wanted to go back to market NII. In the past, the Bank has taken positions for long, short-term and short-term interest rates. How would you say the balance sheet is positioned today and what would be beneficial for the short term? And in the second question, the one that Andre likes, we see that the Bradesco is gaining momentum at an inflection point, as you mentioned. And what about Brazil? Do you see that demand is getting stronger, weaker? What is your assessment of the current investment? We have a lot of negativity in the market. You are also cautious. Thank you.
Marcelo Noronha, CEO
Okay. Carlos, thank you for the questions. I'll ask Cassiano to start asking about Market NII.
Cassiano Scarpelli, CFO
Hi, Carlos. Thank you for the question. Good to see you. Well, in this quarter, we had a reduction in market NII, and this had basically an effect on the trading. The ALM is very balanced. Our prefixed future portfolio is in good order together with our liabilities that are increasing. That is a natural hedging cycle. There's no other type of specific movement. So it's very well balanced. Obviously, we don't expect any strong and fast interest rate increases. It happened in the recent past. We're working with market expectations. If everything is okay, we'll have a healthy ALM in the second half of 2024 and most likely in the start of 2025. Nothing to really add, but Carlos, our expectation is what Cassiano mentioned. We expect to have two quarters better than the one we've just seen. That's our expectation in terms of market NII.
Andre Rodrigues Cano, CFO
Okay, so what we have seen so far is the strong increase in the macro uncertainties, the macro risk, and this is affecting a lot of financial assets but not so much the real activity. Our economist had a slight revision in terms of GDP growth expectation. It was around 2.3% with a possibility of being something better than that. So 2024 is a year that has been very little affected in terms of economic activity, not very much impacted by the macro risks that are impacting the assets. If that uncertainty continues, well, the interest rate will remain stagnant for longer. Our economist team expects the interest rate to be at 10.5% at least until the end of 2025 and of course that removes vigor from the economy. But basically in 2025 if the economy is not vigorous that's not good for the banks, it's not good for those that rely on domestic activity. But we have to deal with this, just like all companies, and we'll take our internal measures to increase efficiency, trying to offset this effect which is not under our control.
Marcelo Noronha, CEO
Well, I second everything that Andrea mentioned, Carlos. In terms of the outlook, we had an initial outlook of the GDP growing 2.5%. It was reviewed to 2.3%. It is good growth, in our opinion, for 2024. We have a very low unemployment level. And I know that this has a consequence in the monetary policy, we are following up closely the exchange rate because that can have an impact on inflation, which is not good. It's bad for us if we have a potential increase in the interest rates. But with this potential reduction of the interest rates in the US Market, it's possible we'll see a reversion of that. We'll have to monitor. We'll have to follow that. But as Andre mentioned, for next year, the growth expectation changes. If we maintain the interest rates, that's okay. And then we'll have a lower potential activity in 2025. In terms of risk appetite, we are always with our eyes open when monitoring them step by step. And if it's necessary to change the appetite of the bank, we'll do it.
Andre Carvalho, IRO
Thank you, Carlos. Okay, we are now closing the Q&A session. Those questions we were not able to answer here will be answered by our investor relations team. Before I turn the floor to Marcelo to his final statements, I'd like to remind you that in our investor relations website, you can find the presentation that was presented here and a lot of support materials. Marcelo, go ahead. Thank you, Andrea. Thank you, Cassiano. Thank you to all of you who joined us. I'd like to thank the sell-side team that asked questions. Thank you very much for your interest in our bank. Thank you for your questions. Thank you to the investors that follow us, to our clients. I'd like to stress we're always here available to have meetings with investors, with the sell-side team, to explain any line of the balance sheet you're interested in. But I share with you a positive outlook. Thank you very much and have a great and blessed week. Thank you.