Earnings Call Transcript
BANK BRADESCO (BBD)
Earnings Call Transcript - BBD Q1 2025
Marcelo de Araujo Noronha, CEO
Good day, everyone. I am Marcelo Noronha and I am here at the headquarters of Banco Bradesco Cidade de Deus, on a Thursday, May 8, 2025. It is now precisely 10:31. It is a pleasure to be here with you to disclose Bradesco earnings in the first quarter of 2025. So thank you very much for all of you who are joining us. So I'll start speaking about our net income. You probably all had an opportunity to read the earnings release last night. Almost BRL5.9 billion recurring net income, growing more than 39% year-on-year and 8.6% quarter-on-quarter, with this level of ROAE of 14.4%. It is obvious that this result, the net income, is a vertical surplus. I will speak about the causes. The main driver being revenue in three different pillars, which I will comment on momentarily, and with a very safe portfolio, intensive use of technology helping to increase our productivity and, of course, with a strong result from the insurance group. So these are the pillars of revenue, which are also a consequence. In a moment, I will speak about what's driving each one of these pillars. But total revenue was BRL32 billion and growing 15% year-on-year. We have this absolute growth seen on the chart below. So total net interest increased by 13.7% year-on-year, and 1.4% increase quarter-on-quarter. Fee and commission income increasing 10.3%, and insurance growing 32.7% year-on-year. So we get to the first item or topic, which is driving our NII, net of provisions. So expanded loan portfolio totaled BRL1 billion, bureaus to grow 4.9% year-on-year and 2.4% quarter-on-quarter, excluding John Deere Bank. The growth would be still significant, 11%. And we can see in the charts the level of growth that we had in each one of these segments of the loan book. Individuals, 16.2% with a relative growth that is growing. And micro, small, and medium-sized enterprises almost growing to 30% year-on-year. Wholesale banker growing 1.2%. And if we didn't have the exchange depreciation, this number would be higher. But here in the wholesale bank, as I normally say, we got a lot of traction in each one of the segments of the wholesale bank. There are quarters with a BRL10 billion increase and another quarter, a decrease of BRL10 billion. For some reason, the capital markets here, DCM, is very active. A lot of companies getting loans. We are having issuances. We are participating in those. And we also have the secondary market with our origination book for distribution. If you look at the main publication, you will see a TVM reduction of the wholesale bank of BRL7 billion year-on-year. And I draw your attention to this. In order to get to that ROA of 14.4%, which, by the way, when we communicated our results on February 08, 2024, the cost of equity was below 14%. Today, we would be above the cost of capital, but we're not worried about that. We're looking forward because we have much greater ambitions, and gradually, we will achieve them. So looking at our loan book. We have traction in all of the business units and business segments, but our credit business unit has very important deliveries. We increased our headcount. We have intensive use of machine learning, better credit modeling, better credit policies. And in the last quarter of 2024, we mentioned that our risk appetite was more moderate for the year of 2025, and that continues to apply. And we adjust our models all the time. And we assess this relationship of the team led by Andre, the business unit, and each one of the segment heads, well, they have an excellent communication. We don't have a lot of discussions to step on the brakes when we need to hold back a little or the opposite so that we can have a risk-adjusted return, RAR. So we are working with the ratings. And we have a lot of growth in collateralized portfolios. So I'd like to draw your attention to that. Individuals grow 16.2%. Rural loans posted a significant growth for farmers, for cattle raisers. This portfolio is 100% collateralized. Real estate financing. You just have to look at our LTV of origination, about 61%. You can find this in the main publication. And in the portfolio close to 52%. We continue to grow payroll deductible loans. Here for payroll deductible loans, among the private banks, we have the highest share, 14.3%. Here, we see an avenue of opportunities. For personal loans, we have good ratings. We follow the vintages one by one, and we have been growing with a lot of quality. Part of this is FGTS guarantee. Credit cards are growing in high income segments. This is what we see here. In the open market, we have been a lot more conservative regarding loans for CDC. We also posted another important growth, another collateralized portfolio. I spoke about micro and SMEs, posting a 3.5% growth quarter-on-quarter and almost 30% year-on-year. What has driven this for the companies? Working capital. This is growth that is fully collateralized. We're speaking about receivables and speaking about FGO and FGI. We have a lot of traction, as I mentioned, in the past quarter. Same for rural loans, CDC, and foreign trade finance. We are very certain about what we are doing. We have consistent growth with an adequate RAR for our clients and for our business lines. And, of course, this drive, this distribution capability combined with good models, good policies, good processes, would not be effectively used if we didn't have a solid client base, a high penetration in all client segments, and commercial capability to make the business happen, not just with our army of managers in each one of the segments. They've been working really well with very high engagement, but also counting on our digital channels and better and better CRMs supporting all client segments. Based on that asset portfolio, our net interest income growing almost 14% year-on-year. With a positive combination of cost of risk, we can see here 3%. It is absolutely stable. And with this, we had an NII net of provisions of BRL9.6 billion growing 30% year-over-year. We also had a good performance in our market NII. The main driver here was ALM. I was telling some colleagues in our internal presentation last night. I told them our ALM continues to work and work really well. We had volatility in Brazil in the last six months. And this gives us an opportunity to make some moves working not just during the quarter, and they did that from January to March, but also looking forward and focusing on the first quarter of 2025. We had high activity with a lot of traction in the wholesale bank, which creates a lot of business for our client desk. Of course, there is a pass through via trading; the more activity or treasury activity we have with the wholesale bank, the more successful the trading is. There was a third line item which was smaller and that is developing with good origination is the energy trading desk. It's not as material as trading or ALM for us, but still, we have that energy desk. Client NIA, BRL16.8 billion and growing 15.5% year-on-year. NIA increasing to 8.6% from 8.4%. More than this important growth in my view is the consistent growth of our client NII quarter after quarter and with quality in our loan book. We are going to explain that more. Client NII, net of provisions, grew 36% year-on-year, 5% quarter-on-quarter. Again, we look at the bar chart, and we see consistent growth in terms of our client NII net of provisions because this has a bearing on our bottom line. The quality of our portfolio is not debatable. We have an over 90-day delinquency totally under control. The share of the loan portfolio by stages is already compliant with Resolution 4966. We have some additional regulatory topics imposed by the Brazilian Central Bank. But the way we see this, 92% of our portfolio is on stages one and two and with a higher proportion. In this stage of three portfolios, 35% are up to date. They are paying. In terms of collateralized portfolio, we have this 54% to 57% in percentage with guarantees. When we focus more on loan origination, this number is even more important for us. Another important element to highlight here in this quarter is exactly the restructured or renegotiated portfolio, whatever you prefer to call it. This is a legal obligation by Resolution 4966, restructured portfolio, problematic assets, secured operations. Regarding Resolution 4966, it's important to tell our investors by side and sell side that the Resolution has its own characteristics, forcing market players to treat certain elements in a certain way. This is in the complete publication in our explanatory notes, explaining each one of these concepts, and our team is available to you to discuss these items whenever you feel like it. I would like to stress that in 2024, we had a total portfolio of BRL39 billion. We reduced it by BRL4.5 billion, arriving at this total in December. In Q1 2025, we reduced it by about BRL3 billion, two-thirds of what we reduced throughout 2024. We are trending towards an even smaller portfolio considering these criteria. Another growth driver of our result is the set of fee and commission income. As you can see, I'm not going to address each one of the topics, but we grew practically in all items. We have high activity even in card income that is growing here in the best portfolios of middle-income, high-income. Two topics that I would like to underscore are the consistent growth of our consortium business and also asset management and capital markets. Our investment banking grew year-over-year by 76%, and we continue to have a robust pipeline. We are continuing to give this business more traction to do business in our wholesale bank, combining all wholesale segments with our investment banking, both in terms of fixed income and M&A and repo operations. This is another driver of revenue that brings us results, and it is boosted by our commercial activity and our relationship with our clients. Operating expenses, as you saw, have a 12% growth year-over-year, a reduction of 8.6% quarter-on-quarter, and I'll speak about this. We have been reviewing our footprint with a lot of discipline and organization, achieving numbers that are higher than what we had planned. We closed close to 1400 branches. So I have been mentioning this to you quarter-on-quarter. We have to include Cielo and Elopar. Part of Cielo is in Elopar. I'm talking about Elopar, Cielo, Elo, Alelo, and Cielo itself. The growth of our revenue is 8.8%, but we interpret everything in our balance sheet. When we look at personnel and administrative expenses, we'll look at the growth year-on-year. It's lower than inflation. I have a lot of control here, but it is also important to highlight that this is not bad; it's good. We have a transformation process underway at Cielo. We have been investing in Livelo and the other companies as well. They've been bringing revenues and results to us. It's accelerated. Distribution is good. Our insurance group continues to bring results. We have a smaller set of employees with the insurance group. Some more because they're also investing in growth just as our related companies here. We also grew in technology, in our credit business unit, in our CRM, in our data analytics department, in the enterprise segment, in the principal segment, in our corporate segment, which is our middle market. We continue to invest, but expenses are under control. The insurance group, we also see a lot of traction. I'd like to highlight two drivers. The ROAE is very high, 22.4% in this growth. Year-over-year, 25.3%, reaching BRL30 billion revenue from insurance premium, pension contributions, and capitalization bonds. Our technical provisions are now BRL414 billion growing a bit more than 11% year-over-year. Two main drivers here are good management in each one of the pillars, a very good combined ratio in each business line, and commercial capability using external and internal channels, increasing our penetration in the customer base and bringing revenue growth from the insurance group. Now talking about capital ratios, the Basel ratio has grown to 13%, and we see the JCP limit will be distributed throughout the year. Our guidance for 2025, as we look at this guidance, we mean we have an annual guidance, that's for the whole year of 2025. However, we are trending towards delivering this guidance. At the end of this presentation, I'll make a few comments about this again. Now let me move on to our final slides talking about our strategy. First, Bradesco Principle. We launched this initiative in October with three offices. We wanted to reach 50,000 customers, and we have done so. We now have approximately 50,000 clients. We will now open 45 new offices this year, expanding services and the manage model for the middle market and corporations with more than 10 different platforms for the middle market. That has helped us grow our assets and relations with small and medium-sized enterprises. We are leaders in this segment, and we continue to grow with secure loans with a very safe loan portfolio. We continue in our cultural evolution with Bradesco. More than 1,400 people have been hired in tech, and there are two more elements I'd like to speak about. Productivity in tech, we've been able to reduce the delivery lead time by 32%. In terms of applications, we've grown more than 53% in business development hours, not only because we have a greater team, but also because we've improved productivity. Now everyone is making intensive use of GenAI, including Copilot, very much connected to our tech modernization initiative. We have enterprise agility with our tech squads throughout all levels of the organization, and our developers are using GenAI we call BIA Tech. One thing is BIA GenAI that is already serving 768,000 customers. Very soon, all our customers will be able to use our new BIA. But we have our corporate BIA for employees, which reads and rates our stories, and that has improved our productivity significantly. We've had a 46% efficiency gain in our developments. We are using GenAI intensely to build our path towards using multi agents. We set up a squad with eight or ten employees, a developer, someone from product, and you will have one specific GenAI for each pillar. All the squads will be using GenAI to improve our productivity significantly. We can certainly provide more color on this if you have any questions. I'd like to speak about all of these deliveries. Yesterday, we disclosed two very important points. First, we've promoted two of our colleagues to directors in our legal department. Araujo, who's been with us for a long time, is a very promising young attorney who will now take on all litigation activities in our legal department. The other new director is a colleague with a strong relationship with our customers in wealth banking, and he is Marcio Renato, who'll be our new legal director, also supporting global brand and all other business lines. For example, the investment bank needs a lot of support in writing contracts. We have another executive director who will join us to be part of the legal team, bringing his vast 35-year experience in one of the best law firms in Brazil, Pinheiro Neto. His name is Júlio Bueno. He will join the bank and start working with us in July. We feel proud of this new team leading our legal department, with all other colleagues in our legal team at Bradesco. Now let me move on to my conclusions. Our net income growth is based on revenue, and that will continue. Revenue from different business lines and controlled expenses. Our loan book is under control. Our view based on RAR, looking at every vintage. We continue to work very closely on our loan book because the quality of our assets is not negotiable. I always tell our team that the quality of our assets is something we cannot negotiate. That is why we have continued this path step by step in a good track. Our transformation plan is now being executed in an accelerated and well-done manner. Thank you for being with us. Let me now invite Cassiano Ricardo Scarpelli and Andre Carvalho to answer your questions. However, I still have a few brief comments before I give you the floor, if I may. I mentioned our guidance. What happens with our annual guidance? You've seen our expanded loan book. We have delivered above the guidance. The NII net of provisions also has a great number, so you can project our trajectory in the next quarters. We deliver above the guidance. These numbers will trend towards the guidance, but one thing is for us to be at the top of the guidance. The other thing is for us to be above the guidance. If you look at these three lines, we are above the guidance. Why don't you review the guidance? Well, because we are still within the ranges disclosed in the guidance. However, if it's necessary, we will be willing to review the guidance in the second half of the year. I had a conversation with journalists, and I got an interesting question from a journalist. If we believe we will have growth of 8% or 10% quarter-on-quarter, I answered no. We continue to bet on slow, consistent growth step by step. We have not changed our speech. We have a plan. We have not interrupted our investments. We continue to follow our plan with a lot of discipline. My view is that right now, we are at the top of the basic interest rate, the selling rate. The margins, the NIIs are under stress when you are at the top of the guidance. We expect challenges in terms of NII, but my view for this year is much more favorable if you want to look at the midpoint of the guidance. We are trending towards the top of the guidance, from the mid to the top of the guidance. I believe we will deliver a result above this guidance. So I do feel optimistic about our performance. Although we see slower growth in the second half of the year, our economists have told us this, but we still feel optimistic about growth because we see lots of opportunities in individual loans, payroll deductible loans. Regarding company customers, we can continue to grow loans with collateral such as receivables, CGI, CTO. This will help us grow our NII. As we look at service and commission income, what are the offenders and what is driving the growth? By June, we may see a charge for instant transfers or BI acts. But we feel we are in a very comfortable position. We will also be launching a new cash model. When I look at the bright side growth, I can see payments growing healthily as the main driver in revenue from service and a few related companies, such as the consortium, but also payments will bring us more commercial traction and revenue. The third point I'd like to mention is the investment bank. I said we have a robust pipeline, and I believe we will also deliver a good performance this year. The insurance group, I've already mentioned. What drives our optimism is the low-end book, a very secure low-end book, good credit lines, higher intermediation margins, and more revenue from the insurance group. This is going to help us close a good year in 2025. Thank you, Marcelo. Thank you, Cassiano. Good morning, everyone. The CEO of our insurance group is also with us. He is online. You can ask your questions in Portuguese or English. You can send us your questions in writing using the WhatsApp number on screen now, or you can send us your question using this email address.
Operator, Operator
Thank you. First question from Thiago Batista with UBS. Thiago?
Thiago Batista, Analyst
Hi. How are you doing? Good morning. Congratulations on the results. I think it was very strong across the board. My question is about the ROI of the bank. Not only did you mention an ROAE of 14.4%, and you said that you naturally aim for a much more robust return for the bank. At the beginning, two or three years ago, you had said that the initial metric was to achieve the cost of capital. But now you said you want to fly even higher. So my question is, when we look at it by segments, we see the insurance group and ROAE of 20%, which means that the banking operation has returned close to 10% or slightly under 10%. What do you still have to normalize? What are the main segments? Is it retail, wholesale, SMEs? I mean, what are the big buckets that you have where you still see some room to bring the ROAE to a higher level?
Marcelo de Araujo Noronha, CEO
I'll ask Cassiano to answer, but I'll start. Thiago, thank you for the question. It's a pleasure to have you on board. It's basically mass retail. This cost to serve is something we've been correcting. Over time, this will bring us a different level of return. For example, the wholesale bank. The level of RER is high in all client segments that we have. I'm not talking about IB or global markets because that requires much loss capital. Global private is high 30s to 40s. High-income segment, the same. The principal clients are impressive in terms of the level of return we have. That applies to prime as well. With SMEs, we reversed the trend, and it's increasing. That's what we are working on. Of course, we're investing to gain productivity. As I mentioned, Cassiano, you can complement.
Cassiano Ricardo Scarpelli, CFO
No. That's exactly it. These are the levers. Productivity is one of them. Of course, the effect of our cost to serve in our mass retail. This is what's going to give us the final leap to improve our ROE.
Operator, Operator
Next question from Daniel Vaz with Safra. Daniel?
Daniel Vaz, Analyst
Good morning, Andre, Noronha, Cassiano. Congratulations on the excellent result. It's clear that the bank has traction with good indicators. I'd like to take this moment with you to hear a bit about what we didn't read in the release, which is the part on private payroll-deductible loan. A lot of people are discussing products. I'd like to get your take on this because you have a big market share, about 15% in the traditional payroll deductible loan. So what will be the position of the bank? Would you have portability of everything? Or how are you planning to operate in this segment?
Marcelo de Araujo Noronha, CEO
Thank you for the question. I'll give you some of my own perspectives. Sorry, Daniel. I called you Thiago again. Sorry, Daniel. It's a pleasure to have you. Here are some points in our review regarding that. Number one, we believe that there is a great opportunity for Bradesco. We have 14.3% market share of payroll deductible loans in the public setting at different levels of government, INSS, and private. With private deductible loans, our share is lower. Our share is much lower there, and private payroll deductible loans take up small space, just about 6% of the whole 14.3%. Among the private payroll deductible loans, we are the biggest in terms of share. We understand that here, there's a lot of growth coming from this. Perhaps the question should be, why is it that private banks or perhaps the mainstream banks, incumbents have not yet presented a great origination here? There are some important variables here. We believe that here lies a great opportunity for Bradesco. The client base that already had a payroll-deductible loan increased between April 16 and April 21. Until then, there was an origination of BRL8 billion. What we did was we had an initially defensive strategy. Other more active organizations might have operated with their agreements in force but using a new channel. Others did not see these clients or did not look at these clients that already had a payroll-deductible loan. Let's suppose you had an agreement with Bradesco, and then you applied for a loan and another organization offered this loan to you. When that base increases, there is no more margin. This is credit with a clean risk. That's why some organizations, even smaller organizations, which are more focused, have offered a slightly higher price with smaller tickets. A working group with FEBRABAN regarding portability of these loans. An organization is closing. We'll now move to a more aggressive, active strategy rather than a defensive strategy regarding our client base and the market. We see good growth expectation perhaps starting in June or July when everything is very well oiled. I would like to remind you, we continue to have room to grow in public payroll deductible loans, INSS deductible loans. The level of delinquency of these two items is much lower. In the case of private payroll deductible loans that we currently have, our delinquency is more than double that. Approval is not just of the individual. We consider not only the individual but the company that pays the salary of this individual. The existing private deductible loans have a delinquency rate that is higher, close to 9%. We have to work with good models looking at the individual and the company they work for. We will be fighting for our market share. Thank you very much.
Operator, Operator
The next question comes from Mario Pierry from BofA Securities. Mario?
Mario Pierry, Analyst
Good morning. Congratulations on the earnings. Now I'd like to hear a bit more from you about the insurance group. I believe the market does not yet appreciate the value of the insurance company, growing 25% year-on-year and accounting for almost 40% of the net income. We've seen lots of improvements. The level of claims has fallen. The claim ratio has fallen. So I'd like to hear from you, whether you believe you can keep the same level of growth and the same level of claim rate. To what extent are these results sustainable?
Andre Carvalho, CEO of Insurance Group
Yes. Ivan is also here. But when we look at the insurance earnings, two-thirds came from production and one-third came from the financial portion. Production had a bigger weight, and that's what provides us more confidence that this is sustainable. You spoke about the improvement in the claim rate. Of course, you have some seasonal effects and a bit of volatility, but it's trending down because of investments we've been making for a number of years to improve the claim rate. We are now harvesting the benefits of this initiative, especially in health insurance. We trend toward a lower claim rate. The first quarter was not even so favorable. We do have noise along the path. But there is a very good trend down the claim rate. Traction in sales is good for the insurance group, driving sales, driving the premium, and bringing the claim rate down. Improvement in production, financial portion, with a higher basic interest rate. We believe performance will remain consistent. We could see the ROAE 2.6% above the first quarter last year. After many years of improvement, we continue to improve. Insurance is one of the lines that Marcelo highlighted. We want to be closer to the top of the guidance, at least above the midpoint.
Marcelo de Araujo Noronha, CEO
Mario, let me add. Ivan is here, and he can also add if he wants. We see our strategy, the associations we now have with hospitals to improve the efficiency of our health insurance. We're growing our network of health care providers, and that also helps us control the claim rate and the cost. The combination of these figures gives us excellent earnings. Our concern in each one of the verticals is to always work to improve our operation and a very strong distribution. If you look at the future, we see room for more improvement. Look at the penetration of insurance in the Brazilian GDP. We have a lot of room for growth, and I do believe we can have a higher penetration of insurance products. We will continue to work hard to improve this rate of insurance over the GDP. Our colleagues are working towards the same goal. Now, Ivan, do you want to add to this answer?
Ivan Lima de Queiroz, Insurance Executive
Thank you, Marcelo. I believe Andre provided a very thorough answer to Mario. If Mario has any further questions, I shall be available to help.
Operator, Operator
The next question comes from Gustavo Schroden from Citigroup.
Gustavo Schroden, Analyst
Hello. Good morning. Congratulations on the earnings. It's very good to see this traction that the bank currently has. Now, Marcelo, what is the level of comfort that you feel in terms of more growth in your loan portfolio? We can see the bank clearly has capacity to manage risk. You mentioned delinquency is lower. The quality of the loans is a mantra for you as you as you said. I'm also looking at the country's economy: inflation up, a high interest rate. What do you expect in the next 12 months looking outside the bank's borders? Because that may lead to slower growth in the bank. How do you view these aspects so that we can also feel confident that the macroeconomic factors will not go against your very well-done work?
Marcelo de Araujo Noronha, CEO
Thank you, Gustavo, for your question. I'll be very candid. Loan portfolio growth, as I said, our risk appetite remains moderate. Since the last quarter of last year, we mentioned that. One thing is risk appetite. The other thing is model adjustment, credit policy adjustment. So if you look at the concentration of loans, it is down. In the largest customers, the concentration has fallen. Although we have a moderate risk appetite, we see great opportunities because we have a large customer base, due to our penetration capacity, we want to grow in secured loans. In payroll deductible loans, we have 14% market share, so we have an opportunity to continue to grow regardless of macroeconomic factors. Private payroll deductible loans are also an opportunity. However, we still have lots of opportunities to grow in public payroll deductible loans. Our book is now about BRL100 billion in payroll deductible loans. The second front would be working with agribusiness, always customers with good credit ratings. In this segment of the economy, either cattle breeding or agriculture, when you look at the different segments, corn prices, for example, went up. They are now down closer to 50, but farmers are well compensated. We don't see any problems in terms of these prices now. This market can bring us a lot of opportunity to grow. Even the Zhuang Diaz Bank, we are now, the two teams are now working together. We are reviewing the guidance for this year. In terms of small companies, I showed you a ranking while this information is open to the public. Looking at FGO and Pronamp, check the ranking of financial institutions. You will see Bradesco currently has a lot of traction. We keep a close eye on this market, working with receivables, FGO, FGI, in terms of collaterals. We want to grow agricultural loans but always with collaterals. I see a great potential ahead of us. Obviously, when the economy grows slower, that may happen in the second half of the year; a few demands will be lower. But in these specific lines that I've mentioned, I have great confidence that this is the right track for us to deliver good margins and good net income even in the second half of the year without interruptions. That's why I say the drivers are these three main lines. Always secured loans, loans with the right collaterals, and all activities that will be related to that. NPS, for example, these are the fees generated by our robust pipeline, which we have even in the first quarter. I feel very confident. Look at the FGO ranking. Last year, FGO plus FGI, these two collateral lines, these two guaranteed lines, had an origination of BRL89 billion. Those are numbers that you should watch and monitor, and then you will understand what I say and possibly feel the same level of comfort as I feel looking at the quality of our loan book, which again is not negotiable for us. Thank you, Gustavo, for the question. It's good to see you.
Operator, Operator
Next question from Pedro Leduc with Itau.
Pedro Leduc, Analyst
Thank you. Good morning. Congrats on the results. My question is about LLP. LLP in the quarter increased at the same level of the quarter about 2% quarter-on-quarter with a very stable cost of credit. The question is that the pace of LPs, compared to NPL formation was much smaller, but it's not easy to get this conclusion. I'd like your help on this because some things changed, and the NPL formation is not in the release, 15 to 90 NPL is no longer in the release. I'd like you to elaborate and help us consolidate this because these slight changes or perhaps doesn't make any sense to look at NPL formation the way we used to because 15 to 90 day change, then perhaps that's why you're not communicating this. But I just want to understand the pace of loan loss provision versus NPL formation Stage 3, what is more relevant, what should we be looking at looking forward?
Marcelo de Araujo Noronha, CEO
Pedro, thank you for the question and I'll ask my colleagues to answer that. I'd like to stress one thing that you mentioned which is important. Indeed, we were not going to mention NPL creation in the 15-to-90-day NPL, but we did include it in the presentation. NPL formation or NPL creation went from 109 to 98. Our 15 to 90 day in bill, which was 3.4% last quarter, continued flat at 3.4%. A year ago, it was a little over 4%, down to 3.4%. This doesn't make a lot of sense. I'll let Cassiano and Andre complement the answer.
Cassiano Ricardo Scarpelli, CFO
It is exactly what you said, Marcelo. With Resolution 4966, we have to adapt and look at this new concept. Stage 3 is super important. Andreas' explanation of Stage 3 mentioned this. However, Stage 3 is our main topic to pay attention to. There's not much comparability with 109 against 98 in the last quarter. That shows the robustness of our loan book. The Legacy WO Model can no longer be done. So this leads to a new way of looking at our loan book. We have to look at Stage 3 quality. Our LLP compared to the portfolio has remained stable around 3%. This attests to our ability to grant loans. Andre will comment on this. I just want to add something. See, Pedro, there is a table where they reconcile what was Stages 1, 2, 3, what was included, what was excluded. This reconciliation is crucial, and you should monitor that from now on. What was done with 4966 regarding write offs? Because we can have a more lengthened term. We can change over 90. We don't lose portfolio because we are no longer writing it off, which did not happen to us, by the way. We kept exactly the same concept we had with 2682, same write off period. You can compare apples to apples. Andre?
Andre Carvalho, CFO
Okay. So what changed in the accounting regime in terms of quality of assets is that until Q4, we looked at the operations in areas more than 90 days, over 90-day NPL. That's what we announced. 98% coverage in Q4 provisions compared to the over 90 provisions. Before 4966, we changed this to Stage 3. Stage 3 is broader and has almost double the value of operations classified as more problematic. We have over 90 and the problematic ones; over 90 increases. In Q1, problematic ones dropped. In the economic financial analysis report, page 18, we have a table of Stage 3 moves, and we see what was included from Stages 1, 2, 3, the cured operations, and what was originated. Because the total put the provision in the numerator, we get to a 109% coverage. We expect LLP BRL8 billion, give or take, we'll get to this a 109% coverage, and that's how we have to look at this. It's good to read explanatory notes because since last year, we made these movements very clear. So it's expected loss divided by Stage 3. That's what we should look at. In the presentation, in the explanatory notes, we have all the criteria used with Resolution 4966 in detail. Thank you for the question, Pedro.
Operator, Operator
The next question comes from Jorge Kuri from Morgan Stanley. Jorge, the floor is yours.
Jorge Kuri, Analyst
Thank you. Good morning, everyone. Thanks for the presentation. Congrats on the number. Can you hear me?
Marcelo de Araujo Noronha, CEO
Yes.
Jorge Kuri, Analyst
I wanted to explore part of the answer that Noronha gave at the beginning of the presentation. Why do you think you can get closer to the top end of the guidance? You said that with rates now peaking, you think that the next few quarters are going to be more challenging. Could you please elaborate on what that means exactly in terms of numbers? You're expecting a negative result of market NII for the next couple of quarters because if it's just a bit smaller than the first quarter, which was BRL462 million, it's hard to see how your net income is not going to continue to grow from the first quarter number because of operating leverage, it said that much better seasonality as we move forward. That gets you to BRL24 billion, BRL25 billion in net income, which is not far from that BRL26 billion which is the upper part of the guidance. Could you drill down a little bit on that?
Cassiano Ricardo Scarpelli, CFO
Okay. Let's speak about market NII, which is super important. Marcelo mentioned this on the work that we do with our treasury. It is very focused, strong work. Seeking the best opportunities, it was no different in this Q1. It was very important to consolidate our ALM, a market that was volatile in the last six months, but we could work strongly on the concept of protecting our ALM or prefix portfolio. Q2 is tighter. We talk about market NII between BRL0 and BRL1 billion. We confirm this, and it will lead to a certain robustness in managing the ALM. Treasury, as Marcelo mentioned, trading, there are a number of opportunities. We understand that the soft guidance is valid, it is well protected by the protection work we did to create value in our prefixed portfolios. This has worked on by our treasury. This regard, we are doing well. Looking at our guidance, we are normally in the middle of the guidance. That's how you evaluate us. Marcelo is talking about the upper range. When we look at both ends of the guidance, it includes the potential of looking above the middle of the guidance. This is fundamental to keep us attractive. We consider this a positive trend for the next nine months. If there is a need for adjustments, we will communicate that.
Andre Carvalho, CFO
The income tax rate impacts the implicit calculation in our guidance. We were discussing a rate between 19% and 23% for this year. In March, the National Monetary Council increased TJLP, potentializing the payment of interest on capital. For our stakeholders, we have to enjoy this benefit to the most. Increasing the benefit, we reduce the rate. The most probable range would be between 18-21%. The mid-portion would fall from 21% to 19.5%. With that, we adjust the implicit income in the guidance that you can calculate. I would like to stress what Cassiano said. Jorge, we are more optimistic. Looking at client NII, the expectation was to grow 14% over the full year.
Operator, Operator
The next question comes from Rosman.
Rosman, Analyst
Hello, good morning, everyone. Congratulations on the earnings. My question is about profitability or the income growth. You said the recovery will happen, but it's gradual. Sometimes when you look at just one quarter, it's difficult to have a general view because maybe in this quarter, you are building the foundation. On the following quarter, you may have a higher net income. But we saw a leap between Q4 2024 and Q1 2025. Today, I feel you are more optimistic. Was there any surprise internally? Did you have a better reaction to change? Did the loan book grow more profitable? Were you talking about lower income customers that are more active, or was it funding? Can you help us understand this leap between Q4 and Q1?
Marcelo de Araujo Noronha, CEO
Thank you for the question, Rosman. No, these are not customers who have become more active. This reflects our penetration within the customer base. Without that, we wouldn't have achieved such traction. Even with new investment groups and processes, if we lack the right level of origination and good penetration in the customer base, selling becomes more challenging. We are seeing sales growth, and our plan focuses on quality—quality in credit lines, credit models, and credit policies, including both automated loan approvals and other methods. When we prepared our budget for 2025, back in October or November 2024, we considered the market volatility in Brazil and changes in the U.S. market, including higher interest rates. The market NII could have been somewhat lower. At that time, we decided to continue our transformation initiative, believing in both short-term and long-term benefits. We experienced some positive surprises, particularly a significant productivity gain from our technology teams, which exceeded our expectations. These improvements are noteworthy as they are not just a new application but part of ongoing development within the company. We are closely reviewing our KPIs for each business and improving our legacy systems to enhance customer experiences, which previously fell short. As we modernize these systems, we anticipate future benefits. We have strong traction with high penetration across different customer segments and see potential for growth in secured loans, which are fully collateralized. I have mentioned this before and will reiterate: please examine the collaterals provided by FGI and FGO, as this public information highlights that we ranked second last year with an approximate share of 18% to 18.4% of a total origination of BRL89 billion. In summary, our loan book continues to show significant traction. We have adopted a more cautious growth approach, but we do have substantial growth potential, which we will pursue with appropriate ratings and collateral for both individual customers and small businesses, representing a strong line of business. This is not incidental; it's the result of our strategic investments in the loan book and commercial initiatives. We've also expanded our investment banking team, which has led to pipeline and fee income growth exceeding 70% year-over-year in the first quarter. We've seen pleasant surprises due to our diligent efforts. Right, Andre, Cassiano? I'm not sure if you'd like to add to that. Yes, I agree, but it's fundamentally about people and our team. The level of engagement is crucial. Our cultural model fosters leadership and associate engagement, alongside the determination of our salesforce driving this transformation. We've achieved four solid balance sheets and must continue along this trajectory because we believe in the value of our franchise and brand, which is essential. I concur with what Cassiano expressed regarding engagement levels; our transformation initiative in the BAC connects to our private banking and high-net-worth segments, which form part of our value proposition for affluent individuals offshore. We now have 150 associates in the U.S., and during a recent town hall, there was a noticeable high level of engagement among everyone involved in the transformation initiative. I also visited Fortaleza, spoke to customers there, went to Belem, and attended the Hebron Agricultural Trade Show where I observed strong engagement. I want to extend my gratitude as I see our leaders and teams across Brazil are highly engaged, which is why we are achieving these results. This is an exciting time for the organization. Everyone understands their role and direction, and there is a strong belief and engagement throughout, which drives our increased earnings. Thank you for your question, Rosman.
Operator, Operator
The next question comes from Enrique Navarro from Santander. Enrique?
Enrique Navarro, Analyst
Hello. Good morning, everyone. Noronha, congratulations on the earnings. My question is about capital. In the last few months, we've received a number of questions about Bradesco Capital. I'm sure you've also received questions about this. I'd like to hear a bit more about the quality of common equity and the other question from investors, if perhaps in a new moment of growth, Bradesco will be more fragile in terms of capital compared to other competitors. From everything we heard, we could see that in the first quarter, Bradesco is at a higher level of income with quality and that should continue in the second and third quarters. Maybe not with an expansion but with stability. In the second half of the year, we may have tailwinds. So maybe Bradesco will have another leap in terms of quality and income. But do you have the right capital structure to face a growing demand that may happen in 2026 in Brazil? I'd like to hear from you because this has been a frequent question from investors. This concern is not so present now, but I would like to hear a bit more from you. Thank you.
Marcelo de Araujo Noronha, CEO
Thank you for the question. I think Cassiano can answer your question. I would love to have a problem of having to face such relevant growth because we feel very comfortable looking at the plans we have. In terms of capital structure, we're growing our revenue so quickly that we have questions about the capital structure, which we don't, really.
Cassiano Ricardo Scarpelli, CFO
Well, we started a project last year with a firm belief, and we cannot forget that. The project, you know, when we were in 2024 and looking at 2025, we would have a better cost of capital. This is very relevant, and it makes us feel optimistic to continue following our plan step by step. The plan has four years, four important years. The level of capital is at the level we planned, and that's important. If you look at the level of Bradesco Capital historically, this is the level, you know, working with the dividends, paying out the dividends to our investors as we've historically done. So there's no deviation from our plan. In 2025 and '26, Navarro, we want to continue to be very close to this new market and be even stronger and attractive for customers. Our customers have not left us. We continue to work with the bankers' share. We feel very comfortable when we think about 2026. We hope you're right. Brazil will truly grow macroeconomically in 2026. We feel we have a comfortable level of capital. As Marcelo said, this could be a good problem.
Marcelo de Araujo Noronha, CEO
Let me add. We are talking about growing capital in the first quarter when many questioned whether we could do that. The main source of this growth was net income. In 2026, we may have a higher number, but also in 2025, continuing to follow our plan step by step and generating more net income. This will help us. We will continue to pay out our dividends, and the level of capital shall remain stable until year's end. We are not really concerned about that. Thank you, Navarro.
Operator, Operator
Next question from Eduardo Nishio with Genial.
Eduardo Nishio, Analyst
Good morning, everyone. Congratulations on the results. My question is more linked to retail. According to you, this is still the detractor of profitability. How are you executing the strategy, unifying the brands, systems, the timing for launch? I have basically four verticals to work with, Classic, Next, DigiU, and Bits. Could you talk about your expectations regarding profitability, growth, and the focus on digital transformation in mass retail? If you can comment on the size of your network. At the beginning of the year, you said that you intended to reduce points of service by 1,000. You did 222 in Q1 alone, so perhaps you could speak a little about that linked to costs and the size of your workforce. The headcount has not changed a lot.
Marcelo de Araujo Noronha, CEO
I'll ask Cassiano to start answering. But I want to thank you for joining us in this call. You spoke about different brands, and you're talking about Next and DigiU. Bits is something that was absorbed. It no longer exists as a business unit. It was absorbed. DigiU is a separate unit. It continues to operate. We will communicate this value proposition to the market, and we'll be speaking to you about this. This is an interesting one. Adjusting the footprint is linked to serving the mass retail tale in a more digital way, user-friendly way, in almost a tailor-made way. We have a reduction of the footprint, but this must be done carefully and cautiously, testing possible attrition because we spread all over this continental country that Brazil is. We cannot lose our presence there. We grow clients even closing 1,400 branches because we have Bradesco, Expresso that is strong in the front line, 30,000 offices of Bradesco Express, almost 39,000 banking correspondents. We must make connections. Bradesco Expresso, reduction of the footprint, bringing clients to a new value proposition in digital retail. With this, we will rebuild our profitability because this is the detractor segment in the sector of our ROAE. This is important to move in that direction.
Cassiano Ricardo Scarpelli, CFO
Thank you, Nishio. Good to see you here. An important part throughout the year, we'll be bringing a new value proposition for mass retail. This will touch these three brands that you mentioned. This will be important in the future. The cost to serve these 30 million clients are very good clients, but we must adapt them to the best cost to serve. This will entail some adjustments. On the other hand, the footprint adjustment is linked to how we will serve the mass retail in a more digital way. We are growing clients even by closing 1,400 branches because we have good distribution. We cannot lose our presence there.
Operator, Operator
Next question from Yuri Fernandes from JPMorgan.
Yuri Fernandes, Analyst
Thank you, Andre. Congratulations to all of you. Noronha, Ivan, Casiano, congratulations on the earnings because they were really strong. I would like to explore a point that you touched on, Noronha. I'm talking about NIM and Joe's spread that increased by 20 bps, and that was a very good result. The message is that it should continue to expand. I'd like to understand the order of magnitude that you're seeing because in this quarter, you had help from funding. It helps, but I don't know whether this should be helping in the coming quarters. My question is about the mix. Noronha, you said it over and over that the bank is growing, that there is risk appetite, but following safer lines FGO, FGI, Pronamp. Should this margin remain at the same level we saw in this quarter? Will it expand a little less or perhaps a little more? I just want to think about the spread, NII NIM?
Andre Carvalho, CFO
You can start, Andre. I think two points to highlight here. First, the funding NII. Positive contribution from funding NII in Q1 will increase over time along 2025. This is a cumulative process of efficiency gains in managing clients' resources. This should contribute even more in the coming quarters. The benefit is not done. There will be additional benefits to be captured. This will happen in Q2. The expectation is that it will continue throughout the year. Second point, focusing on the macro economy. When we have a monetary tightening, typically spreads increase. It's not that banks aim to increase the spreads, but we look at the RAR of operations. The bank wants to have NIA and other provisions. The spreads tend to widen during monetary tightening; this is happening in the Brazilian economy. This will be another driver that will help us increase BRL8.6 billion towards the end of the year. I don't want to give you a specific target, but there is an upward trend.
Marcelo de Araujo Noronha, CEO
Andre, let me add to what you said. Thank you for the question, Yuri. We had a cost of funding that was the lowest we saw in recent years, and this is a fact. The biggest dry ever came from the growth of assets. Growth of our relationship with micro, small, medium-sized enterprises because here we have better margins, a better NII. We reduced the loan book of the wholesale bank. If you look at the complete publication, there is the TVM line item. Year-over-year, first quarter 2025 over first quarter 2024, there was BRL7 billion drop in TVM, in securities. I'm convinced of what we are doing with individuals and micro and SMEs. That's where the biggest opportunities lie. One of the colleagues asked about growth and drivers. I see that will continue to grow, mainly our NII. The NII is growing steadily. Look at the bar chart that I showed. It is piling up. We are offering loans with guarantees, collateralized, longer maturities with a very high RAR and very low losses. We see NII growing, and NII net of provisions also growing. This explains this growth, not just of NIM, I stress NII.
Operator, Operator
The next question comes from Carlos Gomez-Lopez from HSBC. Carlos, the floor is yours.
Carlos Gomez-Lopez, Analyst
Thank you, Andre. And congratulations to all for the results and for the market reaction. Two specific questions. One is long term in terms of credit cost in the corporate sector. Record low cost of credit, I would say, since COVID. It has never quite increased. At some point, the bank was guiding for higher provisions from that, but they have never quite materialized. Do you think that even with these higher interest rates, we should continue to have this benign scenario of credit cost again in the corporate segment in the coming years? My second question refers to insurance again, following up on Mario's question. Health insurance has given you BRL900 million this quarter, almost three times as much as it has typically given you. What has changed there, and how sustainable is that for the coming quarters and years?
Andre Carvalho, CFO
Would you like to start? Carlos, I will begin to answer your second question about health care insurance. What we've noted, as Marcelo mentioned, is a lower claim rate. That lower claim rate is the consequence of many years of investment plans. After the COVID pandemic, we see a more normal curve in terms of the claim rate. These two factors are helping us push down the claim rate in the health insurance product, and we expect that to continue. That's very relevant. Also, as Marcelo mentioned, in health care, we have our strategy in terms of Atlantica d'Or, and that will bring benefits in the midterm or in the long term. New hospitals produce incredible benefits, a high level of occupation, and they already bring benefits to our earnings. This is a promising investment.
Marcelo de Araujo Noronha, CEO
Carlos, look, regarding the cost of risk, your rate, the margins are tight. We kept funds stepping out from variable income and multi-market. They are moving to fixed income securities. Regardless of the corporate ratings, especially companies with a higher credit rating, they are able to obtain funding at a much lower cost. This is a very favorable moment. That's why I spoke about our origination strategy. I am looking at low cap with a small share, but there is a big demand. While we have high interest rates, a weaker capital market with more volatility and without new money coming into Brazilian funds, that is funds in BRL, towards variable income securities, we will continue to see the same circumstances. Maybe further on, closer to year-end 2025, when the Monetary Committee begins to plan for 2027, the interest rates would be around 15%, where is the center of the inflation? What is the inflation target? We may see our inflation very close to the inflation target. As you see interest rates coming down, you see more expectations in the variable income market, in the equity market. This would be later on in 2026 or the beginning of 2027. That's when we expect to see a change. You might like to add?
Cassiano Ricardo Scarpelli, CFO
Yes, I'd like to add two comments. Bank credit for large corporations and capital market funding for these big companies. The margins are lower; there is a higher demand for loans by large corporations. This helps improve the quality of our loans. Large corporations have different funding sources. We see a high level of liquidity for large corporations. This helps us keep delinquency down. As the economy grows slower, that will be a risk to monitor closely. The quicker the interest rate begins to fall, the better will be the outlook. It's also important to remember that Brazil has more than 400 companies listed on the stock exchange in the open market. Most have the right level of leverage, and with a high cost of funding, there is pressure for the EBITDA margin to pay for debt management. Looking at most of the large Brazilian corporations, I expect we will not have any surprises in terms of delinquency because that's more concentrated in the middle market and specific industries, not really in large corporations.
Operator, Operator
Our next question comes from Bernardo Guttmann - XP Investimentos. Bernardo?
Bernardo Guttmann, Analyst
Hello. Good afternoon. Noronha, Andre, Cassiano, thank you for taking my questions. Congratulations on your deliveries. Now looking at the NII improvement that comes from a higher efficiency in the bank's funding strategy. I'd like to hear more about your funding strategy in retail. Do you expect to continue to improve? What about the marginal cost of funding considering the current level of the interest rate and the concern about liabilities? We see a few neo banks that are more aggressive and active. We'd like to hear more from you about that, please.
Cassiano Ricardo Scarpelli, CFO
Thank you, Bernardo. What I usually say is that we are always looking at liquidity management, trying to reach the best level of cash. We have a 136%. This has helped us reduce our cost of funding. Here, two levers are important. Our customers are closer to us. We have more principality in the relationship, not only in low income but also in mid-income and high-income customers. This helps us keep the cost of funding down. The second lever is that we have improved the way we compensate these customers when they bring deposits to us. We have improved our compensation strategy, and that has been helpful. When we look at the whole year, this is something we are doing in our cash management in the middle market that made us gain in terms of principal. We no longer need higher cost funding. When I have a plan and I can execute the plan engaging results and keeping a balance in terms of lower funding costs from small companies and lower income individuals, that helps us reach the optimum cost of funding. Will this last forever? I don't believe anything will last forever. We still have our plan, which we are executing step by step. The more principality we have in our customer base, then the easier it will be to keep this balance. This year, I believe we will be able to maintain this optimum level of cash and funding. We increased our origination at BRAM in asset management. Our BRAM has grown healthily just last year, you know, in our BRAMB, the asset management. That is because of our strategy. We trend towards the optimum level of cash, and the liability level is the lowest in the last few years because of this strategy. We are harvesting benefits from a few investments. We see a demand in the market. We have maybe our lowest historical cost. Thank you, Bernardo.
Operator, Operator
Next question from Renato Meloni with Autonomous.
Renato Meloni, Analyst
Hello, good afternoon. Congratulations on the results and thank you for taking my questions. I would like to focus on client NII and focus on this message of being conservative. At the same time, you're growing more than the industry and with a reasonably high yield. I know we spoke a lot about loans with guarantees, the payroll deductible loan, but that's a segment that is the most competitive. Your CTC is also growing. I'd like to understand if perhaps you found a niche which is being underserved by the other banks and that's where you're growing? In the beginning, you said that these are not new clients. You are just using your network. Looking forward, can you continue to grow with the current mix or would you need to get into more risk lines to continue to expand your NIM?
Marcelo de Araujo Noronha, CEO
Thank you very much. I can answer that quite objectively. In personal loans, we had some interesting movements. With higher net worth clients. They normally get personal loans but with lower rates. If I offer conventional rates, I will do an adverse selection. Higher-income clients who have the payroll with us and ask for a loan have good credit ratings. That's number one. Regarding payroll deductible loans, part of that personal loan line item is guaranteed by FTTS. If I included that, in payroll deductible loan instead of seeing a BRL5 billion increase year-over-year, we would see an increase of BRL10 billion to BRL11 billion considering FTTS and the other payroll deductible loans. That means we are well positioned in the INSS deductible loan. We have a big penetration as payers of INSS. We have high capability of distribution. The bulk of our distribution is done through our own channels, digital channels, ATMs, and also service units. I don't see the bank entering into riskier lines because we have great opportunities. Micro and small and midsize enterprises, look at this. Last year, the origination of alliance FGO and FGI was about BRL89 billion. We have penetration here, and you must have a client base and ability to deliver; we do. That is what we're showing. I don't see riskier lines on the horizon. I might offer more personal loans in the prime segment. Yes, it's possible if pricing is adequate, and we have the right risk-adjusted return. I stress what I've said before. This is an important focus for us. It is the quality of our assets, and we don't give that up. We prefer to advance more slowly than too quickly and make mistakes.
Operator, Operator
Comes from Tito Labarta from Goldman Sachs. Tito? We cannot hear you. It's on mute.
Tito Labarta, Analyst
Yes, sorry about that. Thank you. Thanks, Andre. Hi, Marcelo, Cassiano, thank you for the call and taking my question. Congratulations on the strong results and the stock reaction. Just one final question on my end. I saw John Deere contributed BRL17 billion to your loan book. Did that contribute at all to the earnings, particularly, I guess, on the client NII? Did you see any benefit from that? Looking forward, do you see any contribution from John Deere in terms of the business and potential improvements in profitability? Just quantify if that had any impact in the quarter and expectations for the year.
Marcelo de Araujo Noronha, CEO
John Deere was much more important strategically with a stronger share in agribusiness. The BRL17.3 billion added to our portfolio at the very end of Q1 is broken down to individuals, legal entities. Without that, our portfolio would have grown 11% in Q1 2025 year-on-year. But the contribution to the net income is very close to zero; it's actually immaterial, and that's why we didn't highlight that. If you consider we have a cash outlay with the cash not being remunerated, that contribution becomes even less important to our net income. We shouldn't be thinking so much about John Deere. The strategy is much more important right now than any contribution to the net income or customer NII or any other line item.
Andre Carvalho, CFO
Thank you. We are now closing our Q&A session. I want to thank you all for contributing with your questions. The questions that we did not have time to answer will be answered by our IR team, and the press release is available on our website.
Marcelo de Araujo Noronha, CEO
Thank you, Andre. Thank you, Cassiano. I want to thank all of you who've joined us this morning for this earnings call, the earnings of the first quarter of 2025. I am certain we will continue to work hard to deliver more and better during the year. Thank you all for your time. Have a great day.
Operator, Operator
Thank you, Andre. Thank you, Cassiano. I want to thank all of you who've joined us this morning for this earnings call regarding the first quarter of 2025. I am certain we will continue to work hard to deliver more and better during the year. Thank you all for your time. Have a great day.