Earnings Call Transcript
BANK BRADESCO (BBD)
Earnings Call Transcript - BBD Q4 2023
Marcelo Noronha, CEO
Good morning, I am Marcelo Noronha, speaking live from Cidade de Deus at 10:32 AM to present the results for the full year of 2023 and Q4 2023. Following this, we will discuss our guidance for 2024. As you may have seen in our guidance document, 2023 was a challenging year for us, and the results did not meet our expectations. The guidance for 2024 is somewhat modest; however, we view 2024 as a year of transition and transformation at Bradesco. Finally, I will cover our strategic plan, providing an executive summary of the initiatives we've developed in the past 60 days, after which we can discuss these topics during the Q&A session. I am available for discussions with all investors later, with meetings already arranged for both buy-side and sell-side investors to delve deeper into our projections for the next five years, specifically from 2024 to 2028. Now, I face the task of presenting our Q4 '23 income statement while also discussing the full-year results, the guidance, and the strategic plan in a concise manner. Let's begin with our numbers. Our results show that we ended the quarter with KRW4.3 billion. We had some additional provisions for two cases in the wholesale bank, leading us to be more conservative with our ratings, which is why our recurring net income was KRW2.9 billion. We also faced two significant nonrecurring events, including provisions related to our restructuring and contingent liabilities. It's important to highlight some positive aspects of our income statement. The wholesale loan loss provisions were implemented in the cases I mentioned earlier, and we maintain a comfortable coverage level for our wholesale bank this year, despite reductions in loan loss provisions in our mass retail segment. Consequently, we are expecting a decrease in our delinquency ratios. Although we saw higher delinquency levels for SMEs and the mass retail segment, we are beginning to observe credit statistics accelerating, with improvements for individuals and SMEs. Our market net interest income (NII) is recovering, with a total NPL dropping by 50%. Another positive indicator is the growth in our insurance division, achieving an ROAE close to 25% in 2023. Our operating expenses stayed within guidance, and I will provide more detail on our financials. As we proceed, it's notable that we experienced a curve inflection for both individuals and SMEs, with vital growth reaching 1.3%, despite a more cautious approach to risk in 2022 and 2023. However, SMEs have shown a quarter-on-quarter growth of 1.5%. The write-off of a notable case at the end of 2022 has caught our attention, particularly in relation to our average daily production. In the latter half of the year, credit statistics increased due to changes in our credit models and policies, leading to a more restrictive approach for individuals, yet we achieved positive outcomes with new controlled vintages for SMEs. We have successfully tested and implemented new credit models. The delinquency ratio is trending downward, with NPLs decreasing significantly. Our coverage ratio has improved to 165%, with a decrease in NPL creation. Furthermore, we noted two cases in the wholesale bank, resulting in total provisions of BRL10.5 billion for Q4. Our net interest income has seen positive growth, reaching BRL0.7 billion in Q4, along with favorable expectations for our fees and commission income. Although the entire market, especially in card income, faces pressures, we managed to achieve a quarter-on-quarter growth of 3.4%. In terms of our operating expenses, I'd like to highlight three points. First, in 2022, we experienced a decrease in other operating expenses, resulting in a lower baseline for comparison in 2023, which has led to better valuation. Secondly, we've made efforts to balance our operating expenses in 2024 by returning to 2019 and 2020 levels. Lastly, personal exposure showed a 6.4% rise despite a 7% salary increase due to collective bargaining agreements. Now, let's discuss the growth in our insurance division, which has been a highlight for us. We achieved remarkable growth of about 21.1% in 2023 compared to 2022, with net income increasing significantly and an ROE approaching 25%. Our IUC was declared at 11.3, with our Tier 1 capital rising by 81 basis points compared to Q4 2022, reaching 13.2%. Transitioning to our strategic planning, we anticipate growth for our loan portfolio to be between 7% and 11%, averaging around 9%, slightly above market expectations that sit around 8%. It's important to note that NII may not directly align with the loan book growth due to the month-to-month average portfolio changes. Additionally, we expect fee income to grow between 2% and 6%, even amid pressure, and our operating expenses will also be closely monitored. We aim for a 5% to 9% growth target for operating efficiency. For our insurance group, we project a growth range of 4% to 8%. Addressing why only this range, we identified factors such as falling interest rates, expected to reach 9.5% by December 2024, and variations in the GPM indices. At this point, we have an expanded ALL projected at BRL35 million to BRL39 billion, but we are managing this carefully to adapt to our increasing loan book demands. Now, moving to our strategic initiatives, our expectation is that 2024 will be a transformative year. Implementing a strategic plan typically requires about six months, but we aim to execute it within 60 days in collaboration with a reputable consulting firm, as informed by detailed market diagnostics. We have developed a plan, consisting of several initiatives that revalidate what we had already planned while identifying new opportunities to pursue as part of our strategic roadmap. During this execution phase, we will break down these initiatives into detailed actionable steps, defining economic intervals and investment requirements. In terms of market positioning, we are aiming for substantial growth. Bradesco operates in a resilient and profitable market space with significant revenue potential. We anticipate doubling our revenue share from SMEs over the next five years while maintaining our leadership position. Our focus will be on increasing our wallet share with existing clients and providing enhanced service through improvements in technology and credit structures. Our review of the organizational setup is crucial to enhancing efficiency; we've already begun streamlining our structure to improve decision-making and reduce unnecessary layers. Technology investments remain a priority as we continue our journey toward cloud transformation. To conclude, our strategic plan aims to increase profitability steadily over the next five years. We remain committed to executing this plan diligently while periodically updating all stakeholders on our progress. Thank you for your attention, and I look forward to our Q&A session with my colleagues present.
Andre Rodrigues Cano, IR Officer
Thank you. It would be a pleasure to work with you closer to Marcelo, Casino, and the whole management. So I'd like to thank you for the support during the transition period. It will be a pleasure to take on this new role.
Thiago Bovolenta Batista, Analyst
Good luck in your new roles. I have two questions. First in our strategic plan, you indicated 8 percentage points, that would be an ROA of about 400. This is only the ROE will not go to be the cost of capital. It will be close to the cost of capital. People use between 14 and 15. So you just want to go back to the cost of capital? Or could we expect an ROE above the cost of capital? That's number one. Second question regarding loan income segment. We in the Morgan have the perception that the segment is having negative returns. How are you addressing this point in your strategic plan?
Marcelo Noronha, CEO
Thank you for the question, Tiago. It's great to speak with you. Our goal is not merely to achieve the cost of capital, as we have numerous ambitious indicators to consider. While there are aspects we won't discuss publicly, our primary objectives are to enhance profitability and returns. We aim to progress steadily, quarter by quarter, with the aspiration to significantly elevate our position within five years. I prefer to deliver results rather than make promises, so I'd rather surprise you. We anticipate that by one quarter in 2026, we may exceed the cost of capital. We have high ambitions for operating efficiency, which we will achieve. We are also focusing on growth by reassessing our footprint. Operating efficiencies are key to our strategic plan and likely our greatest opportunity for improvement. In retail, we've gathered insights from a consulting firm and identified clusters where we are profitable and have a notable share of the market. The critical aspect here is the cost to serve, which is why we need to evaluate our footprint. While we aim to reduce it, it's not a straightforward decision, as we will transition to digital as well. Regarding Vitesco Espresso, we have a B2B2C department. We've introduced a new tablet system for our merchants, who engage with clients by providing credit, selling cards, and offering checking account services. This gives us a competitive edge that I don't see among others, although competitors have their own advantages. I have great respect for our competition in Brazil, including established banks and emerging companies. With over 38,000 service points, we have the largest corresponding banking system in Brazil and can effectively serve the low-income segment. Besides the cost to serve, we are closely monitoring credit risk with robust modeling to ensure profitability across most clusters, although there may be some we decide not to engage with. This is our rationale, and we are confident in our ability to compete, as shown by our internal assessments. It's crucial to mention this, and we will continue producing results over time. Thank you, Tiago.
Daniel Vaz, Analyst
Thank you, Firetti. As the new CEO of the bank coming in with the challenge of putting the strategic plan into place. Good luck, Firetti and Andre, I'd like to explore the culture and targets for the high levels, C-suite for the bank and others with this kind of control, more agile, more efficient, and we see experiences outside of Brazil or throughout Brazil that this target for C-level is essential. So if you can talk about the changes that you're working on or outlining for this. Thank you.
Marcelo Noronha, CEO
Thank you, Daniel. During the presentation, I said that we've been working on a new plan for human resources that will be discussed in February and delivered in March. That takes into account this new structure precisely. I talked to all of the bank's leadership team showing the new plan, those who work directly with us at every step of the way, had already seen it, that we are going to deliver a new performance assessment methodology, depending on the level, the weights are different, and we are going to recognize and compensate that that's in the run the bank and the team that's going to change the bank as well. We're taking excellent people to change the bank because that's crucial to us. We are going to deliver a new payment scheme for the executives of the bank. We have that already in many departments, and we're going to replicate it to the entire organization with a greater flexibility for some positions that somehow were kind of socialized when we were to hire or pay those variable income, and we're changing all of that. This is all well-based. We are going to make progress, and you will be able to see that over time. But our expectation is to approve this quarter so that we can implement it after that with our team.
Unidentified Analyst, Analyst
My first question is about the credit quality. NPL is dropping, but that's based a lot on write-offs. So starting 2024, how do you see the credit quality of the new vintages and how is that translating into originations, especially for no income? And second, it's more strategic. What are you thinking about in terms of the team you want to attract for this stage in this phase for the company? I know it's the perspective. What do you think will help you succeed?
Marcelo Noronha, CEO
First, we are monitoring very closely all of the new vintages. We're working with much better ratings for individual loans and for SMEs as well. So all of the VPs are involved. We didn't focus only on the credit people and the segment people, but everybody is involved, and we are monitoring this very closely. We're seeing good vintages. We still need to improve some lines to improve our mix and help us in this growth of NII, client NII, it's step by step, but it is going to happen. You can be certain in this last quarter, I saw the inflection point of this curve, both for individuals and micro, small and midsized companies. We are working on during the year. We'll maintain traction to grow during 2024 with controlled vintages. I think that here, we also have an important quick win in this new credit structure that we can capture value for other initiatives we're implementing as well. Now the team that we want to attract, and we have a headhunter doing the election for us in discussing debating. We had an assessment process in our team since starting in December. So we've been working, creating development plans for our leadership colleagues who will remain with us either unchanged or on run. So to attract people with different skills from what we already have people with flexibility, with an easy relationship, and who can deliver digital skills with our colleagues at Next, Bradesco and Dico as well, and who can also bring more knowledge. In human resources, we also want to change our paradigms to be more aligned with the market, having growing ambitions for our organizational development. I can tell you another concern that we had since you talked about the team, and I think it's very important. We are giving recognition without increasing operating cost. As I said, we're actually reducing this cost. This is also an example for the organization. We were only able to set aside the team for change and the team for run because we reduced the layers and changed the spending. Otherwise, how were we going to do that with departures and taking people or changing the bank? It was difficult to run this business with the directors leading. Of all supporters, five of them are owed to replace me to be in the succession plan as well as the Vice President, and those who have been recognized new executive officers will continue to run their departments while not being replaced. There are also five of them with the age and background to replace any of the vice presidents who are here as well as myself, taking on my seat in the dual time toward the association.
Bernardo Guttmann, Analyst
Marcelo, we show a lot of success in your new role. Building on the prior question on incentives, I'd like to ask a question, but in a broad way regarding the transformation process of tides you've been in this role for a little time noon. You've had different positions at the bank. In the presentation, it's clear that we have a wide diagnosis of the necessary changes to be made. I'd like to focus on one specifically. Bradesco has a very traditional culture that has been very well worked on over the years in terms of robustness and cost. But the new environment is quite competitive. The moment that the bank is dealing with brings about a different sense of urgency. You need to have different agility to react to change of housing. How has this initiative been received in the bank regarding the adjustments that need to be made? And what paradigm do you still have to break because that will give me an idea of the priorities of your agenda of transformation.
Marcelo Noronha, CEO
Thank you for the question. This is a big question. What I can tell you is, number one, I think that we have to learn from the past. We did have some conviction. When we sit and we deeply debate each topic, it's almost like you opened up your kimono and you see what you need to do. So without beating around the bush, I'll go to the answer. The Board of Directors gave me autonomy and has been supporting me in 100% of the changes. We also wouldn't have changed the structure. I wouldn't be telling you that I'm in the process of hiring a C-level for HR and a C-level of food digital. Other levels of the org structure we are in the process of hiring a lot of people. The support of the Board of Directors is 100%. This has been really nice, the kind of debate we are having. The Board of Directors is aware and we put everything on the table. We were very pragmatic. It's no use of the laser. There's a sense of urgency. We have to change. We have to do it, and that's kind of my style on this file up some colleagues here of the executive management. We go straight to the point.
Mario Pierry, Analyst
I have a question about cost and efficiency. You talked about improving the efficiency ratio, but when I look here, your provision is BRL570 million this quarter to restructure branches. So I'd like to understand what that means in the short term. What are you thinking to get to this efficiency ratio target? How do you think about your headcount number of branches? When we look at the bank today, the bank has about 86,000 employees with about 2,700 branches, 32 employees per branch, it seems to be a very high number. How are you thinking about this metric?
Marcelo Noronha, CEO
Thank you for the question. Let me address it. I encourage you to recalculate the metrics because while there are 2,700 branches, we actually have sales over 7,000 weeks. Despite having 7,000 branches, we also have additional locations and various types of service points. We have branches with different characteristics. To analyze, you would need to divide the employee count by 7,000 and up by 20. We are currently reviewing our approach and will provide some basis for our expectations. We originally had a different outlook, but we have since become more ambitious and stringent. There are two key points to note. First, the goal is not to reduce the sales force, but to improve efficiency. Second, we plan to hire between 3,000 and 4,000 people in technology, which means while personnel costs will increase, we will lower operating expenses with new hires. This is the main aspect of enhancing efficiency. This is not an initiative aimed at cutting costs. We are considering several areas, including the presence of points of sale and how we can automate processes to execute them more quickly. Our operating efficiency project consists of multiple initiatives, with this being the largest. We will keep you updated on our progress and performance regularly. By the end of this year or the start of next, we expect to see significant changes in our organization. Alongside the sales considerations, we are not going to neglect the restructuring of our affluent segment, where a portion of the sales force will be dedicated to optimizing our account management for important clients. In terms of branch efficiency, this is closely linked to the operational synergies between the different departments involved. Within this larger framework, there will be a reallocation of personnel, which is crucial for driving initiatives forward. I’d like to add to what Cassiano mentioned. It doesn’t make sense to have one branch manager looking after mass retail when they could be managing SMEs. We are refining our plan for reallocating the sales force to ensure effective execution.
Tito Labarta, Analyst
A couple of questions on the strategic plan from just looking at Slide 13, some of the comments you made, right, that the market represented $1.3 trillion in post-risk revenues, 30% to 40% in retail respectively, and the biggest challenge is the cost to serve. You mentioned that for the entire market. I mean, just I could argue that, that's really the biggest challenge for the incumbent banks, right. For the fintechs have a much lower cost to serve, right don't have the brand to network, to have the employee base that you have. Excuse me, the employee base that you have. So what can you do to get your cost to serve down? Does it mean that you will need to invest quite a bit in the business first? We look at your expense guidance above inflation. I mean, do you think that continues for some time before you are able to bring down the cost to serve? And then somewhat related to that same slide, a couple of bullet points later. You mentioned that credit is the primary anchor and challenge for fintechs, which represent less than 3% of the market. You could argue that they are also gaining share at least one or two are gaining share very rapidly. So just to understand your ambition to get to that 15% to 19%, given that you could argue that the market has gotten more competitive in the last few years, what can you do to really capture that market share, given that other competitors are also growing very fast.
Marcelo Noronha, CEO
What we have here to compete in this market, as you asked. The revenue I mentioned, you mentioned it again. And then you said about their retail... 40% of total revenue, how can we compete with the cost of fintechs? It's a fact that our main challenge is the cost to serve, of course, right credit model for that, but cost to serve is key. As I said, we assessed or evaluated clusters, and we found out that in some clusters, we are able to compete, and we have a significant share of wallet, but we are going to have to reduce the cost to serve. We identified exactly where we have to get to, and now we're detailing this. But let me tell you other things that are worth mentioning. First, Bradesco has high penetration in this segment. Not all incumbents have that. But this principality, as I said, is around 60%. Not all incumbents have that. Bradesco has, in its DNA, the relationship with this type of customer. We need to change the cost to serve. We have Bradesco Espresso as a very important competitive lever, not only as a channel, but I also told you we can serve those customers with variable costs instead of having fixed costs and some points of sale throughout Brazil. We have different competitive levers that can allow us to compete in this market. But look, Tito, know that we have a market of 30% to 40% of the total revenue of the banking business in Brazil, and it can be divided with three or four banks or fintechs; everybody can hold 20% of share and be big. That's another important thing here to have scale. We have the scale to serve this market and to be able to compete in this market. That's how I see it. There is room for those who will serve in a certain way, and there is days for those who will serve in a more connected way. That's what I think for Bradesco over time, and we're going to show you that. I think you asked about the side how we're going to grow. Yes. We are going to grow effectively with good models. We have the capacity to do that with good credit models, a good follow-up portfolio management, and we are going to have portfolio management looking at the entire expanded portfolio from the retail bank to a wholesale sale bank, how we're going to operate capital allocation. That's obvious. But we have distribution capacity. So I believe that today, competition is a lot more among the incumbent banks rather than fintechs. They still have a small share. There are opportunities, and they will grow a little bit more, but we have the levers, and we have the capacity to distribute in growth, depending on our models. That's what I showed in the last quarter, we had that inflection point for the curve, both for individuals and SMEs.
Jorge Kuri, Analyst
Yes. Good morning, everyone. Thanks for taking the time to do this and progress Marcelo on the new goal and best of luck. I wanted to ask about the return on equity that's embedded in your plan and your ambition. Your return on equity, based on the 2024 guidance, it's going to end up roughly at 10% to 11%. That's half of what the guidance for Itau, which is your biggest peer is. I wonder how long do you think it's going to take you to close the gap vis-a-vis your best-in-class peers, five years out. If you execute your transformation program, where should the ROE be? That's my first question. And first I'll ask my second one later.
Marcelo Noronha, CEO
Thank you for your question. As I mentioned, our ambition, our main target is to grow our profitability over the next five years quarter by quarter. We have an opportunity to show better ROE maybe at some quarter during 2026. As I mentioned, I believe in the first question that was asked. That's when we probably will be able to exceed that cost of capital. The idea is for us to grow during these five years, delivering comparable returns with our shareholders' expectations and compatible with our expectations. That's our ambition. There's no date and time. There's no deadline for this delivery. Thank you, Jorge, for your question.
Jorge Kuri, Analyst
Thank you, Marcelo. And my second question is about the C-level compensation package and particularly your compensation package, what type of targets is it linked to? Is it return on equity? Is it market share? Is it stock price? Can you walk us through how the success of the bank and your success are tied together?
Marcelo Noronha, CEO
Okay. So look, we are reviewing this plan. We're preparing, as I said, a new human resources plan to be implemented by the end of this quarter. We'll discuss it during the month of February. The idea is to approve it in March in order to implement it. The C-level will be connected to this total compensation that we're going to determine. Of course, we already have references and benchmarks in the bank. We are still working with the previous policy, but I believe that we are competitive enough to bring C-level individuals to our organization with competitive compensations. We are going to compensate both people who are on the rate bank and those on change the bank, recognizing their respective roles here. The indicators will depend on each of the departments, right? Where they are. We have indicators related to the plan, and we're going to have indicators department by department for digital, of course, physical to effectively implement this new human resources plan. Of course, the higher the level of the executive, the more linked to the whole they are; the higher the hierarchical relationship it has with what they deliver.
Eduardo Nishio, Analyst
I wish you a lot of success in the new strategic plan. My question is more related to the cycle and how this should change with the new strategic plan. In this past cycle, in my own assessment, you had three big challenges if we can call them that. Treasury, market NII, there was way below the peers, ALL, particularly in the low-income segment, which negatively impacted the results of the bank. Your digital strategy, which was then restructured and now is under the bank. So if you could speak about these three points, what will they be like with a new strategy? I know you have very few days, just 60 days since you took over. But do you see any structural change in these three pillars?
Marcelo Noronha, CEO
Thank you, Nishio for the question. I will divide the answer with my colleagues. So I won't be the only one speaking here. I'll ask my colleagues to begin, and I will add to their themes. Firetti, feel free to contribute.
Cassiano Scarpelli, CFO
Thank you. The market NII, as you said, suffered in 2022, '23. 2023 recovered almost €1.7 billion compared to 2022, and it became positive. In 2024 in our guidance, it's basically the natural levels that we had in prior years. So that's a phase that is behind us. The whole loan book originated in the prefixed area and did well in our trading desk and client desks working strongly. We believe that we now are handing the baton from the difficult period to a more normalized period of 2024 onwards. That's for ALL. Marcelo mentioned we had the ability to pay, particularly low-income cards, and as Michel mentioned, in our numbers, we see the important means that all delinquency curves are reducing which is very good. All our testing in the new cohort puts us in a very good position regarding additional ALL allowance for low lawsuits. This still poses a reduction in mass retail. This has been happening and given the growth of the loan book, the nature of the loan portfolio with different types of clients. With more risky clients, we need more provisioning. So this year, that's when we will be paying the bill this past bill and studying in 2025, we will have a more natural cycle in terms of loan losses. As for the ALL as Marcelo showed, we recognize that we have adjustments to make not only in ALL but the whole credit cycle, which is reflected in our credit business unit; they will look at credit in an integrated way. The loan book, quality of credit approval. We will also be making adjustments in terms of credit modeling. Modeling has always been a strength in this bank. But there's always room to evolve and cost improvement. We do acknowledge the need for adjustments in this part of the strategic plan.
Marcelo Noronha, CEO
Let me add that digital. Strategic paths are not limited to one. You can choose different paths through different organizations who can achieve common goals with both initiatives being successful. We decided in the past to better Next DG. Then we saw that the values, the prices of the business changed in the market with decent growth. We brought this close to Bradesco because it's a core business for us. A lot of lessons learned in value are embedded in Devon NEXT. Our client base continues to grow. We continue to do things differently. Next, DG is an important laboratory for us also in our strategy for Bradesco digital. Everything is closer to us, whether we're going to integrate next, keep the brand. We have beyond bank. Our marketplace. We brought it from NEXT. We just delivered it for friends and families here at Bradesco. We are testing this introduction with Bradesco-based but also connected to NEXT. We have another part of Beonbank, which is agribusiness, another marketplace. This theme of beyond bank is quite often. We do some business for us to move around. We see the importance of creating value.
Rafael Frade, Analyst
I wish you all great success in your new roles. I wanted to address the discussions in the market regarding the low profitability of Patisaran and how it may be linked to structural issues or contextual factors. Additionally, there are market elements to consider, but you also mentioned having many opportunities to enhance your operations. We often discuss lower-income segments, but I would like to learn more about SMEs. Marcelo, you mentioned that Bradesco is a leader in the SME segment, which is a crucial aspect of your profitability and has contributed significantly to NPL formation in 2023. What issues have you identified in your analysis that could be swiftly addressed? Perhaps you could provide more details on the diagnosis for this SME segment.
Marcelo Noronha, CEO
Thank you, Frade. Good to see you again. Alright. SMEs. As I mentioned, we are leaders in the SME segment. We have a significant share, but, Frade, we have to admit. I think we had a credit policy, which was perhaps a little more open, maybe we stopped granting credits a little later than we should have, so we have to admit these things. But Bradesco despite the Brazilian social pyramid in lower income and SMEs, we're very present in these segments. So when there's a delinquency issue, we tend to suffer more proportionally or in absolute trends than peers regardless of higher leverage as we should have stopped before. That's a given. This bill is being paid. When I look at the segment, it has the right size; it is profitable. Most clients and SMEs are paying their loans. They are not delinquent. Most of them are okay. They have been paying off their loans, and they are making business with us. We have new credit moves. We have new credit policies; these credit policies are slightly more restrictive than in the past. Yes. We are a little more conservative than we got less conservative in the transformation of the bank, but more conservative in managing credit risks based on the new modeling. We have a new opportunity to quickly reverse this because NPLs dropped, delinquency is dropping; that's under control. We went back to growing. Like I said, we had an inflection point in Q4. The number is under control. Yes. What are we doing in this segment? We are creating 122 platforms, as I mentioned in a presentation. We have delivered some by the end of the year. We'll deliver 122 platforms in 2024 as quickly as possible with the team fully dedicated to this target of clients, Tier 1 between 3 and 5 million in the main cities. We started working with some radius, but we are increasing this segmentation as to putting this client base when we have a complete network of platforms. For the target from 0 to BRL3 million, we improved the whole work on remote service. We increased the first sales or sales forces in the segment of SMEs because we see this opportunity. Besides in order to get more traction and more safety, we brought in some credit analysts to work closely with these platforms. We have been doing some good testing which ensures to us most of this credit rent is judgmental. We have a different management model different than what we had implemented in our client management or we started with that segment of 50 million with a different way of managing the performance; now we are trying to educate and train managers. We will have to be monitoring this in a central line fashion so that we can manage risk assessment. The contracts? How do I monitor? Because if you get their first enjoy benefits. We have models and indicators to manage this, just like we do in other segments. We are improving this management model so we can be much more competitive here in terms of delivering good customer service and experience managing our credit risk.
Arnon Shirazi, Analyst
Welcome to this position. My question is more related to 2024 - to talk about your guidance. You gave an expectation of the increase in the loan portfolio, but I'd like to understand where this growth is coming from. If it's more individuals or more companies, and also about the rate for '24, I think it changes the perspective that the analysts have for the year.
Marcelo Noronha, CEO
I can answer in terms of growth. I believe I can say that we're going to be growing in our main lines very closely. As we've been saying, we're accelerating credit origination in retail. This origination has been significantly growing. It's still not overflowing to lead to portfolio growth as the portfolio hasn't responded yet. But the main driver for growth includes personal lines, wholesale, retail, and small and mid-sized companies where we're also accelerating. This growth will accelerate during the year as the guidance includes 7% to 11%. We have significant growth in line or above the market, of course, the average portfolio grows less, and that's what translates into the margin guidance that's slightly lower. In terms of the rates, you can consider between 16 and 18 as a reference, the tax rate. Yes, the idea is to grow the entire portfolio with the expanded portfolio as Firetti mentioned.
Yuri Fernandes, Analyst
Good morning, and I wish the management team well with the company and its plans. My first question concerns the bank's capital generation. I believe Bradesco has a strong capital position; it's not an issue of funding. However, when we discuss return on equity, it seems that by 2026 it might surpass the cost of capital. Looking ahead to the 2024 guidance, it should be in the range of 10% to 11%, possibly a bit higher given the portfolio acceleration highlighted by Firetti. In recent years, we’ve seen you optimize the advantages of IOC. The bank has been distributing relatively good dividends, but this suggests limited capital growth. My concern is understanding the decision-making process between growth and capital, along with funding growth, particularly since profitability improvements may not be significant until 2026. The cost of capital could be extensive as you aim for that 15% to 19% market share. If you could elaborate on this, particularly regarding the payout and the balance between investment growth and capital, that would be helpful. On a separate note, Norona, could you provide us with more insight into the strategy concerning Cielo? Are there any ongoing discussions about this public acquisition, particularly regarding the select rate related to the software pricing? The dividends have been communicated clearly, demonstrating a strong focus on Cielo, but it remains uncertain whether there’s an adjustment for the Selic rate.
Cassiano Scarpelli, CFO
Thank you, Yuri. It's a pleasure to see you here again. On the capital side, we understand here that our projections are all considering sufficient capital to maintain the credit growth. Of course, in our strategic plan and even for the new approach for the Central Bank's operating risk that we've been discussing in some of the brands, and we can talk about it in person. To grow, and it also makes capital more robust. So the strategy, as Marcelo said, our transformation pattern is to seek growth in our profitability growth in our net income that is also a significant part of our capital composition. We see it as natural to continue working the basic leverage of IOC as long as it exists. This year is no different. At least over the next few years, we will be comfortable in terms of capital to support the transformation process and the bank's growth.
Marcelo Noronha, CEO
Yes, Judy, that's what Casciano said. We ran all projections with the expected growth levels, and we have sufficient capital to do it, and we're comfortable with that. In terms of Cielo, you asked two questions. So first, whether there's going to be a correction. That's not the information we have. That's not where we have in mind for the time being. We don't have that perspective in this direction, and the second is about Cateno, there is no discussion about separation from Cateno at this time. We are offering these stocks to the markets, the public acquisition offering because there are some important strategic points that I mentioned in our plan. On Banco do Brasil's size, they also have good penetration on legal entities. For both, the strategic aspect is essential because then that gives us greater strategic freedom to review our value proposition for SMEs and even for larger companies since Cielo can also penetrate larger companies in their acquiring business. We won't get into their strategic decisions, and they don't get into ours, but we'll have the liberty to do that. There are already separate commercial teams in the company, but it's a closed capital company that allows us to move faster and make faster decisions because we need to do that now.
Pedro Leduc, Analyst
Thank you, Firetti. Welcome, I wish you a long success in this new chapter of your lines. That's a quick question. Just to clarify regarding the outlook for efficiency. We see the EMA and OpEx of this year running above inflation. Well, this is a period of investments and other costs that come with transformation. I guess we could imagine as G&A growing then inflation in 2025, 2026? Or should we think that the efficiency ratio would improve because of revenues, while investments are kind of multiannual in a sense?
Marcelo Noronha, CEO
Obviously, we want to grow revenues a lot, but the adjustments we will be making in terms of reducing the cost to serve in our structure will be implemented partly along 2024 and should start giving us higher effects in 2025 in terms of reaping the benefits, improving the efficiency, and evolving those line items. Now, when we look at our expenses for 2024, administrative and personnel expenses will grow basically in line with inflation in our projections. There's slightly more pressure on the line item others because of provisions for civil claims and other provisions that are part of that line item. But in administrative and personnel line items, we already have a good level of control for 2025; we'll start capturing benefits. So, this is summarized. Revenues are important. But, of course, the biggest capture will come from reduced expenses.
Pedro Leduc, Analyst
If I may ask a question about SMEs. We're discussing its strategy to assume growth in retail. I know that SMEs are a relevant segment for Bradesco. It's a profitable portfolio. What is the turnaround strategy integrated with the recent announcement of Cielo if you could elaborate for SMEs?
Marcelo Noronha, CEO
As I mentioned, Pedro, I've been dividing SMEs into three segments: Tier 1; €550 million. We're having new platforms that are being opened in the main cities of Brazil, we'll expand the radius of those eventually. We are locating the sales force with more prepared people. We are training people. We started opening these platforms at the end of last year, and we'll continue these openings in 2024. We expect to deliver 122 new platforms with a much more focused and established management. As I said, with a new management model, including portfolio management, not just in a centralized way, but also decentralized and a better customer experience for our clients. We're also changing the value proposition and increasing the sales force in SMEs 0 to 3 million because these are more decentralized in the branches in Brazil and also for micro-entrepreneurs with remote service and digital services. Naturally, we expect to improve the value proposition linked to this OPA, the Cielo OPA or OPA is the public acquisition offering and other strategies going to the market. If I may add, also to the use of transactional information. That's the best use we can put our CRM for. We have been working a lot on this. The best way is to look beyond banking and integrate different platforms. Thank you very much for your questions. Now I would like to thank everyone. We are going to close this video conference call. I remind you that all of the questions that were not answered during the meeting will be answered by our Investor Relations department. May I just make a final comment here? This is my first conference with all of you, and I would like to say that I thank you all for your attention here today. We already have, as I said in the beginning, some meetings scheduled with international buy-side meetings to investors tomorrow, local buy-side colleagues, sell-side colleagues, and we are open to talk to explain with more details all of these plans for the future, not only myself, but my colleagues here as well from the Investor Relations department to give you more detail, not only this week but even later. I am open to welcome you here. It will always be my pleasure to talk to all of you. Thank you.
Casciano, CFO
Thank you.