Earnings Call Transcript - BBD Q3 2024

Marcelo Noronha, CEO

Good day, everyone. I am Marcelo Noronha, CEO of Bradesco. I am here to present the earnings for the third quarter of 2024. It's a pleasure to be with you again, and I appreciate your presence. I’ll discuss our balance sheet for the third quarter, and then I will join my colleagues to answer questions from our sales team. We recorded a recurring net income of 5.2 billion reais, which is an almost 11% increase compared to the second quarter of 2024. As a reminder, we achieved more than 12% growth quarter-on-quarter in the previous quarter, indicating that we are delivering on our commitments. We consistently focus on delivering results rather than making promises. Our profitability is growing steadily, with strong and secure growth. Our net interest income is increasing, driven by client income and a reduction in loan loss provisions. We are seeing productivity gains with rising revenues, controlled credit risk, balanced portfolio growth, and improving delinquency ratios. Operating expenses are progressing as anticipated, and our insurance group is achieving a relevant return on equity of nearly 24%, growing across nearly all lines. We will also discuss our increased stake in Cielo following a tender offer that closed in September. For our total revenue this quarter, we reported 30.6 billion reais. To break it down, total net interest income grew by 2.7% quarter-on-quarter, fee and commission income increased by 2.8%, and our insurance group saw an 8.7% growth. Overall, total revenue rose by 3.7% quarter-on-quarter. Our loan portfolio is nearly 944 billion reais, reflecting a 3.5% growth compared to the previous quarter. We are growing across all client segments, with total growth of 7.6%. Individuals are witnessing a 10% increase, while large corporates are experiencing a modest growth of 0.7%, and small and medium-sized enterprises are up nearly 17%. This indicates strong traction within our bank, with credit growth present across all segments including individuals, large corporates, and SMEs. In assessing the broader macro picture, we see individuals' loans growing by 3.9% quarter-on-quarter. The Brazilian Central Bank has communicated their statistics for September, allowing us to see that we grew slightly above the market, with a 0.25% advantage. Our payroll loans increased by 2%, compared to the market's 1.9%. Vehicles financed have grown by 4%, real estate financing has achieved a growth of 3.3%, and rural loans are up 16.5%. We're focused on growing loans to individuals with solid lines of credit supported by collateral. For credit cards, we experienced a quarter-on-quarter increase of 2.2%. However, growth amongst high net worth clients was 4.5%. It's important to note that while credit card income is losing share in our net interest income due to lower-income clients opting to pay in installments, our high-income clients are transactors that pay their balances in full, benefiting us through interchange fees. In consumer credit, we saw a quarter-on-quarter growth of 5.9%, particularly in personal loans with high margins, and half of these loans originated are backed by collateral and guarantees. Our focus is on maintaining high-quality assets while recognizing that a smaller portion goes to lower-income clients. It is important to highlight that overall, our approach does not alter our delinquency trends. In payroll deductible loans, we maintain a spread that is 30% lower than previous periods. Consequently, external channels face challenges initiating new operations, as we originate all our credits through our channels, leading to a safer portfolio requiring less provisioning and consistent net interest income growth due to improved quality. For corporate clients, we have grown by 3.2% quarter-on-quarter, with micro and SMEs seeing a substantial growth of 5%. The middle market, particularly for companies earning over 50 million reais annually, is where we see our most significant growth. Our real estate portfolio is up 5.5% with collateral guarantees, and we are witnessing good traction in foreign trade finance. We work extensively with government programs to ensure our portfolio remains robust and secure. Our decision-making frames our growth strategy through a risk-adjusted return approach. Various simulations have affirmed that even with higher rates, operating with specific programs yields an attractive return. We remain committed to maintaining a good balance in our loan vintages and continuously monitor our credit quality in personal and company loans. Overall, our results demonstrate that we are leading in granting these types of loans in Brazil. As we proceed, we anticipate stable loan portfolio creation and reduced delinquency levels. Our fee and commission income have normalized post-Cielo tender offer, achieving a year-on-year growth of 11% in asset management. Operating expenses grew by 0.6% this quarter, and 4.6% year-on-year, while maintaining control. Adjusting for Cielo, we achieved a quarter-on-quarter growth of 2%. Our insurance group has also shown significant gains, with premium revenue rising to 2.4 billion and an excellent return on equity of 23.7%. Our Tier 1 Basel ratio is stable at 12.7%, with solid capital ratios. We have seen normalization in our guidance related to loan portfolios, and we are delivering what we set out to achieve. We continue to focus on our net interest income and related provisions closely, with a strategic view benefiting our bottom line. In terms of the bank’s ongoing evolution, we are pleased to report an increase in team engagement, with significant new hires and investments aimed at expanding our offerings in key segments. Our focus remains on operational efficiency as well as transforming our client service capabilities, specifically through digitally enhancing branches for high net worth individuals. In summary, we have sustainably grown our profitability, while effectively managing risk-adjusted returns and solidifying our market positioning. Now, I would like to present a brief video related to the new segment before we move to the Q&A session.

Andre Carvalho, Manager

Thank you, Marcelo. It’s a pleasure to be here with all of you. Good morning, everyone. I'd like to mention that Ivan Gontijo, CEO of our insurance group, is here with us online. You can ask your questions in either Portuguese or English; just send your queries to investidores@bradesco.com.br, or use this WhatsApp number (11) 9 7443 8238. Now, I will open the floor for questions.

Eduardo Rossman, Analyst

Hello, good morning, everyone. I have a question. I hope you can hear me well. My camera is not working, so I'm only audio today. My question is about the loan portfolio growth. You are reopening the bank doors for clients seeking loans after experiencing loss in market share and principality with these clients. When we analyze loan portfolios, profitability is dipping, not just in corporate but also with payroll-deducted loans. Noronha mentioned this in his presentation. I'd like to hear your perspective on growth and the outlook. What is your primary concern: inflation, employment, or perhaps pricing? I'm keen to understand the pace of recovery.

Marcelo Noronha, CEO

Thank you, Rossman, for the question. It raises key points. We conduct our strategy based on data to ensure the right mix and ratings. Consider an individual who faced financial stress over the past three years. Have they fully recovered? They may have employment now, and their real income grows over 6% a year. However, have they managed to settle their debts? Most banks would tell you many still struggle. We want a safe portfolio with the right risk-adjusted return since that affects our bottom line. We had expectations of higher NII previously and prepared a 60-day action plan considering risks. Our penetration across all client segments speaks volumes about our traction. With the establishment of our new business unit, we realized leveraging FGI and ProNEP would present a much better risk-adjusted return. Although NII can be lower, provisions needed are significantly less, hence, a more appealing business model. Ranking these different projects shows Bradesco's impressive traction with attractive RAR. We may not see rapid growth in NII now, but expect a robust increase in profit and net income. Our current provisions are lower than before.

Eduardo Rossman, Analyst

But why is that the case?

Marcelo Noronha, CEO

The quality of risk is better now, and the mix is more reassuring. When surveying the economic horizon, we feel assured about current strategies. I had a conversation with journalists about the economic landscape recently. When asked, I viewed deterioration as less likely than other scenarios. While we might experience currency shifts, I don't perceive inflation increasing excessively. New measures from the Finance Minister may guide expense control positively. What I deem the probable scenario is incrementing interest rates up to 13%, possibly closing the year at 11.75% while the unemployment rate sits at 6.7%. Regional variations exist, such as São Paulo. Others like Center-West show 5.2% unemployment. We anticipate growth at 3% this year with inflation around 4.5%. Projections predict GDP growth slowing slightly to 2% or 2.1% and a potentially stable unemployment rate around 8% next year. Real income could rise about 2% to 2.5%. This market environment appears appealing for individuals wherein we expect fruitful traction as high-quality borrower risk. Our commitment stays grounded in decisive actions to ensure profitable trajectories.

Renato Meloni, Analyst

Hi, good morning. Thank you for taking my questions. I wish to understand the dynamics about client NII and provisions. It’s clear there’s a struggle to rebound in mass retail, especially for SMEs and individuals. You justified this with costs of risk — are there other challenges in regaining principality with theseclients? How significant is the change in bank strategy concerning this acceleration? Will you revise next year’s plans?

Marcelo Noronha, CEO

Thanks for your question. Let me clarify — we're not decelerating mass market activities, neither in SMEs. There’s been significant growth in public rankings, which you can access. Look at the ProNEP ranking, showing which bank is leading in distribution to SMEs. We maintain principality and monitor all operations actively. With our recent changes, we are equipped for future growth. Change in banking strategy propels growth forward, offering substantial initiatives for our organization to remain competitive. Our new segment will forge ahead, driving significant expansion in credit lines. We've expanded the SME segment counting our branches now at 150; growth values and risk quality are paramount. Our credit business unit has enhanced models for better risk assessments. Approval timeframes for loans in the wholesale bank have improved by 40% for our clients. We're dedicated to providing high-quality credit while managing costs effectively.

Yuri Fernandes, Analyst

Good morning to all. I’d like an update regarding ROE converging with cost of capital — this has frequently surfaced in our conversations. Previously, you mentioned this would progress gradually and align with improving top line and NII. I want to focus on cost of capital as Brazil encounters elevated rates. In 2026, will we aim to achieve higher ROE or is that timeline extending due to ROE improvements not aligning with capital costs?

Marcelo Noronha, CEO

Thanks for that question, it remains our mission—the target is to deliver continuous improvement in returns irrespective of capital costs. We aim to enhance returns quarter after quarter with safety. Although we have fundamental tasks at hand, hiring within our credit and technology segments incurs higher operational costs. Our journey will entail crafting balance as we integrate these essential expansions. The aim is to ensure predictable outcomes for investors.

Cassiano Scarpelli, CFO

You’ve captured it all, and we aim to propel forward with various initiatives. We want to scale steadily, addressing internal considerations affecting our operations. Our dynamic balance sheet ensures continuity while we engage in significant strategic changes fostered by Marcelo. Our transformation process is grounded in solid structures ensuring profitable operations, thus enhancing client engagement and competitiveness across every segment.

Thiago Batista, Analyst

Hello, everyone. Good morning. My question pertains to technological investments; the bank appears to be investing more to bridge gaps against peers. With artificial intelligence, will this process simplify? Further, how does your current approach compare to before? Also, regarding the Selic rate at 13%, what would be the implications if confirmed at this level?

Marcelo Noronha, CEO

Thank you, Thiago, for beautifully articulating your queries. Regarding technology, we have identified opportunities to boost productivity. With more third parties than employees we need to enhance efficiency, investing in senior talent to amplify capabilities amidst technology advancements. For some time now, we have systematically utilized AI and machine learning for models via our business units across pricing efforts. We intend to roll out effective measures across the organization as we advance, all while ensuring client experiences are positively affected.

Cassiano Scarpelli, CFO

As for interest rates, the effects are neutral to us — reflecting on the present curve. Yet, with higher floating income anticipated, we also foresee potential reductions in marginal asset liability management. There is still uncertainty ahead, making it premature to speculate on concrete numbers regarding costs.

Daniel Vaz, Analyst

Thank you, Andre. Good morning, Noronha, Cassiano. Noronha, as I followed your presentation, it seems you’re highlighting risk-adjusted returns alongside your focus on collateralized credit lines. I’d like to understand the returns from tests previously conducted, especially where collaterals were introduced and any ventures into clean loans, which fintechs often offer. Can you explain your standing in this specific market?

Marcelo Noronha, CEO

Thanks for your inquiry, Daniel. We always prioritize risk-adjusted returns, applicable even in our wholesale bank. Our regional managers possess dynamic curves regarding each client within an omni-channel spectrum. We've implemented risk-adjusted return simulators, meaning returns hinge on risk standards. In small business lending to individuals or high-net-worth clients, our pricing structures noticeably reflect the importance of these risk concepts. While we do extend clean loans, they target selectively high-rated clients. However, our overall focus remains on maintaining a well-balanced portfolio.

Mario Piery, Analyst

Good morning, everyone; thank you for this opportunity. I want to focus on the insurance group's earnings as they account for 45%. We’re observing increased health insurance profits with a 66% year-on-year growth over nine months. Noronha, can you help me understand the drivers of this, and is this growth sustainable for the following year?

Marcelo Noronha, CEO

The PNC profit increased by 76% quarter-on-quarter, possibly influenced by events in Rio Grande do Sul. I’d like to invite our colleague, Ivan, to provide clarity on this PNC phenomenon.

Ivan Gontijo, CEO of Insurance Group

Thank you, Marcelo. I appreciate Mario's inquiry. The growth stems from all revenue lines in comprehensive product offerings and improving claims ratios. This operational performance reflects our underlying initiatives. With regards to health business, we’ve implemented practices yielding results towards the latter half of the year, including adjusting health plans and substantiating our fraud monitoring, thereby improving claims ratios since the year's onset. As for the sustainability of this growth, we are comfortable continuing this effective trajectory.

Marcelo Noronha, CEO

Thank you for the question, Ivan. To conclude, our traction spans all client segments alongside a robust distribution network for the insurance sector.

Andre Carvalho, Manager

Thank you, Mario and Ivan. We’ll turn to Pedro Leduc from Itaú Unibanco for the next inquiry.

Pedro Leduc, Analyst

Good morning. I appreciate your attention. I'd like to talk about the unfolding ROE recovery, which began with loan loss provisions, followed by portfolio growth and subsequently NII, which is currently rising. I want to know if this sequence is still valid, especially since new vintages, pricing, and funding could elevate gross NII in the next twelve months.

Marcelo Noronha, CEO

Thank you for your interest. I believe we can adhere to the sequence you described. Carrying an NII depends on the scenario shared; however, to be clear: I prefer to deliver than to promise. Should we manage to stabilize NII around 8-9%, the focus is on adequate provisions. NII largely reflects the mix since where mortgage loans become dominant through high-quality channels, specifically through collateral-backed loans, NII becomes steady. Growth expectations hinge on the positive performance of our robust and secure portfolio.

Cassiano Scarpelli, CFO

We must not forget that both NII and the dynamics in controlling our liabilities will play a role in SME performance as well. It’s all about managing our interests and gaining principality in high net worth segments, which is essential as it encompasses the essence of our transformation. No further major adjustments have been made to our hedging, but keep in mind that while our current holdings focus on neutrality, rapid market shifts may present new risks.

Eduardo Nishio, Analyst

Hello. Thanks for the opportunity. I'd like to return to the transformation plan. You've conducted several changes. What’s the current progress on the new compensation plans for executives and branch levels? Regarding your branch restructuring, I believe you had 5,300 branches in 2016, now down to 2,300 — will this trend continue? Lastly, any updates on digital banking rollout plans?

Marcelo Noronha, CEO

Regarding loan loss provisions, as I previously stated, we are attracting better ratings which positively impact delinquency rates while keeping our portfolio health in check. We are confident in our control measures unless we see unexpected shifts from large corporations, which is unlikely. I believe the delinquency rates will revert to their previous levels. About compensation, we're in the first six months of a new plan focused on individual evaluations — this covers various levels appropriately, fostering intra-team engagement. I now hand it over to Andre and Cassiano for their auditory on our footprint. About digital banking, I’ll follow up to give you more details as we welcome Tulio, a recent recruit responsible for our product interfacing.

Cassiano Scarpelli, CFO

We now operate at 5,000 points of sale. We witnessed cost-to-serve evolution. While 1,041 point alterations mark notable progress, our focus also scrutinizes client behaviors across branches, ensuring operational efficiencies through valuable insights gathered.

Andre Carvalho, Manager

As for credit loss provisions, we maintain calculated adjustments based on credit assessments, entering a period where the credit risk is expected to stay around 3%, symmetrically resonating our portfolio growth. We anticipate stable performance amidst substantial quality fixes for renewal.

Tito Labarta, Analyst

Thank you for your insights. I have two queries. Initially, your demand deposits surged recently, but we note savings and time deposits slipping. I’m curious about growth stagnation. Is competition a contributing factor, and what drives this subdued rise? For my second question, fee income has shown solid progress—asset management grew by 11%. Can you clarify the underlying growth drivers, especially in loan fees?

Marcelo Noronha, CEO

For demand deposits, there’s substantive growth, albeit multifaceted since we even incentivize some clients to maintain those deposits, so they are indeed climbing. We can provide detailed insights following this call. Savings accounts reflect a natural challenge in the current real estate climate. We’re confident amidst the competitive landscape; otherwise, we wouldn’t experience growth across these metrics. Therefore, we're set to continue delivering optimal customer experiences across diverse channels. I’ll let Cassiano provide additional detail.

Cassiano Scarpelli, CFO

Indeed, within the realm of competition for savings accounts and demand depots, rivalry against investments, including CDBs, is apparent. Nevertheless, our positioning within our demand deposits remains commendable, reflecting our footprint strategy. The segment’s expansion has led to our recent success along with new FGC transactions. AUM surged for Bram to a considerable $55 billion, which significantly influences our positive trajectory.

Andre Carvalho, Manager

Within asset management, we noted an increase by $33 billion in AUM. This progression has been achieved through performance fees, given the excellent performance of our funds, thus consolidating the growing trend we foresee moving forward.

Carlos Gomez-Lopez, Analyst

Hello everyone. Thank you for the opportunity. I have two questions on different segments. Firstly, regarding investment in credit cards, including ELO, considering how debit cards may face replacement by PICS, does it still make sense to persist with debit cards? How do you envision the market progressing here? Secondly, regarding the new Principal segment, how does it relate to Prime?

Marcelo Noronha, CEO

Thank you for the queries. Cassiano will delve into debit card strategies while exploring the integration within PICS. The market is trending digital, serving our goal to push less plastic while maintaining operational success. The initiatives mentioned focus on mutual sustenance in client relationships. The Principal segment supersedes Prime within our offerings specifically qualifying clients within the higher tier ranging from R$300,000 to R$10 million — it's aimed for sophistication and a seamless experience.

Cassiano Scarpelli, CFO

To recapitulate, we are strategically adapting to the debit card dynamics relative to PICS, ensuring we leverage the strengths of both avenues with less plastic and higher efficiency in client communications.

Marcelo Noronha, CEO

The cannibalization by PICS is quite natural for us driven by high volume captured through debit channels. This business model remains fundamentally sound whilst we maintain a user-focused, economic lens as we look to address client needs effectively.

Bernardo Guttmann, Analyst

Good morning, everyone. Thank you for the opportunity. I am particularly interested in the agribusiness portfolio. Recent reports indicate strong growth in rural loans for individuals at 16% against a backdrop of reduced loans for companies. How does Bradesco strategize in this context, especially considering delinquency concerns?

Marcelo Noronha, CEO

Thank you, Bernardo. Currently, the company portfolio shows a minor drop owing to settlements and market access by larger companies who choose to pursue capital market options with favorable costs. We are maintaining a robust footprint within agribusiness, fortified by our distribution across key Brazilian belts; our able team comprises agronomists equipped to tackle ongoing demands efficiently. There's ongoing collaboration with John Deere. Our rural portfolios maintain quality metrics as we navigate impacts collectively ensuring safety in lending.

Andre Carvalho, Manager

Our delinquency rates within the agribusiness segment remain stable.

Henrique Navarro, Analyst

Thank you, Marcelo and team, for this opportunity. I'd like to revisit the NII conversation regarding provisions — emphasizing viewing NII net of provisions is essential. With numbers hovering below 27%, we’re keen to understand growth trajectory into 2025 while weighing portfolio recovery against market competitiveness.

Marcelo Noronha, CEO

I feel assured, Navarro. We’re consistently expanding our client base across all sectors, including mass individuals and high-net-worth segments within our ecosystem. We’re harnessing opportunities as they come, leveraging insights into value-driven services to optimize wealth management. The traction we experience is a strong representation of our responsible expansion as we counter further market pressures; we emphasize prudent growth whilst ensuring risk levels are appropriately managed. Overall, we expect favorable momentum leading to 2025.

Andre Carvalho, Manager

To clarify for our stakeholders, our NII primarily compounds from portfolio growth alongside cost-driven opportunities which enhance overall profitability through effective spread management.

Brian Flores, Analyst

Hello, thank you for taking my questions. I have a brief inquiry about interest rate impacts. With current NII in 2024 approximating $2 billion, considering higher tracks, might we anticipate maintaining similar NII levels in 2025?

Cassiano Scarpelli, CFO

While it's premature to speculate on 2025 positioning accurately, we hold a neutral outlook approaching the evolving rates. Our strategy remains consistent amid fluctuating dynamics, maintaining flexibility in our assessments.

Andre Carvalho, Manager

We will close the Q&A session now. Any questions we have not covered will be addressed by our investor relations team. Marcelo will provide his closing remarks, and I remind everyone we have a collection of full results shared on our website.

Marcelo Noronha, CEO

Thank you, Andre, and Cassiano. I appreciate everyone's participation today. Our team is always here to assist; myself and Cassiano are available for further communication. We look forward to our next earnings conference. Thank you for your attendance today.