Earnings Call Transcript
Banco Santander (Brasil) S.A. (BSBR)
Earnings Call Transcript - BSBR Q4 2023
Operator, Operator
Good morning, everyone, and thank you for joining us this morning to join us during the 2023 Closing Results Conference Call. This event is being broadcast live from our headquarters in São Paulo and, as always, will be divided into three parts. First, our CEO, Mario Leão, will talk about the main highlights of the period and the strategies by which we will continue to direct our growth in the coming quarters. Next, our CFO, Gustavo Alejo, will provide a detailed analysis of our performance. And finally, we will have our Q&A session, during which you will be able to interact directly with our leadership. Before we begin, I would like to give you some instructions. We have three audio options on the screen, all the content in Portuguese, all the content in English or the original audio. The first two options will have simultaneous translation. To choose your option, just click on the button at the bottom center of your screen. To ask questions during the Q&A session, simply click on the hand icon at the bottom of your screen. Questions will be answered in the language in which they are asked. Today's presentation is now available to download from our IR website. Now I hand over to Mario Leão, who will begin the presentation.
Mario Leão, CEO
Hello, good morning, everyone. We are here live with you. It's 10:03. It's a pleasure to be with you again, closing my second year in the leadership of Santander. As we started with this new format last quarter, I will try to present to you the first slides in a very direct and dynamic way. And then Gustavo will join me to talk about the numbers. We will try to conclude the presentation in about half an hour because we want to allow 45 to 50 minutes for Q&A, depending on your interest. So we are here to answer your questions promptly. And then our IR Department will certainly be available to answer further questions. Here on slide four, I would like to highlight a few key messages; revenue and our net income are also here. But we also want to focus on the consolidation of our messages for 2023 that just ended. Well, slide four carries some key messages. First of all, this has been another quarter of margin growth as a whole. We will show you a more impressive growth in market NII. We also have growth in the client NII, but client NII is the summation of margins on the liability and also asset side. I mean, liability margin has the challenge that we will try to make up with more volume. And on the asset side, we will try to show you several lines that are growing as well. The first takeaway message is that certainly we have a revenue recovery, apart from NII. And looking at the portfolio diversification, as I've been stressed constantly, this quarter has been stronger, but even with seasonality, the quarter has been very positive in terms of fees. I'll give you more details on how we go about that. Our balance sheet construction has been more solid. We already showed you some of our balance sheet lines, and now we will elaborate on that in the fourth quarter, which consolidates our strategy, both in terms of portfolio diversification. Portfolio diversification has to do with assets commissions and being less reliant on market credit. But it also has to do with diversification in the credit line, focusing on the customer base where we were growing less in the growth cycle, but we are growing more in products and client base. The quality of our portfolio makes us very optimistic and excited. We are talking about that turnaround in the curve, which happened in the first quarter of this year. In the fourth quarter, we are very comfortable with the evolution of our cost of credit. Cost of credit and the relevant indicators of cost of credit, especially in the retail business, are evolving as expected. We had some one-off cases and there was one-off case on the wholesale part. Gustavo is not going to give you lots of details on that, as we usually do. We did some special efforts, something that was one-off identified, and therefore the recurring cost of credit remains very sound with good prospects. In terms of priorities, as we've said before, we've been very consistent with our message. We will be constantly focused on customer-based monetization. We have a customer base of almost 65 million customers. We have to try to make them more loyal and focus on principality, which is our focus. Our strategy of being the principal bank of our clients is something that is here to stay, and it's very important for the bank. We will talk a lot about customer-based monetization. We will also talk about the consolidation of our strategic business, and I'll give you some figures about what we've been doing since the second half of 2022 and how things interact. In the next three slides, we chose three slides to talk about customer centrality. I mean, our strategic agenda, which has to do with our delivery quarter-on-quarter, is mostly focused on customer centralization. Here, we have a summary of some figures related to customer centrality. On the left-hand side of the slide, on the bottom part, we have a chart showing the evolution of our NPS. Back in 2017, almost seven years ago, Santander was one of the first large banks to talk about NPS. We released our measures and talked to the market about it. Certainly, other competitors talk about NPS because we're not the only ones, but we've been talking about it for at least seven years, and I would say that this past year, we made great progress. I mean, there was a good evolution on the individual side, and in terms of business accounts, this is our highest NPS in the company segment. And looking at every channel, we also evolved substantially. My message to the market is that we are valuing NPS as one of the major KPIs. NPS is not the only one, but we will continue to talk to our clients in an omni-channel approach, online and on the physical channel, and we certainly react based on their feedback. That's why we were able to evolve in our principality agenda. We are also improving our profitability for the new vintages. Clients from the new vintages have had a good profitability performance, and here we are showing that in the year 2023 alone, we evolved. I mean, of course, newer vintages evolve much better when compared to older vintages, but we've been very fortunate because we are able to choose the clients with whom we want to work. The way we work with these customers allows us to improve profitability. We are also improving and making progress in terms of loyalty. We make important progress, and we will look for more in 2024. But this is just to show you that we are on the right track. We are evolving, and we are also focused on being the principal bank of our clients. That's why we're focusing on principality. Some of the main leverages are payroll. We've been talking about we are a major bank focusing on payroll, and we want to enhance that even more, our relationship with companies and large corporate, and also the high-income segment. I will elaborate on that further on. And investments, I will give you more details about our diving to that important strategy and also expansion in revenues. Also, talking about Select, I've been talking to analysts, and everybody asks, what are you doing that is so different? Everybody is talking about how income, everybody has their own responses, and our brand is Select. But we do believe that we are doing something very special and very particular. Maybe I can give you some more details later on during the Q&A, and our IR team is also ready to give you more information. In 2022, we decided to have a special position with the Select or high-income segment. We are working very closely to our customer base. Our loan portfolio, I mean, 27% of the individual's retail portfolio is already represented in Select. We are growing 27%. Our customer base is growing more than 50% year-on-year. I mean, we had our public mission, which is to reach 1 million Select customers by the end of 2023, and we surpassed that figure. Now we reach 1.2 million Select clients, and now the new target is 2 million. So this is what we will work towards. We want to do this in a profitable way. I mean, our loyal Select customers are more loyal than the average. That's why our revenue has been increasing throughout the years. Another additional figure that has to do with Select at first is that we are launching a new initiative. It's still running as a pilot, but I believe that this will be an important step towards our goal for 2024. We are expanding the concept of AAA. AAA is our investment advisory service. It's evolving quite well. It's already bothering other competitors. So now we are launching the concept of AAA patrimonial. This is the version for insurance and consortium of our AAA. So AAA patrimonial is something that we will grow this year and we now have a large number of advisors. First of all, they are linked to the Select store, selling it in a very personalized way, selling insurance and consortium to our high-income clients. The movement we did last year was very exciting, and we believe that we will have an important agenda going forward. Now, moving to Retail, but now going to the other extreme because we were talking about high income. We are making some important advances in what we call Mass Retail. So Mass Retail, which is the large base, not only of Santander, but all of the other incumbent banks, our agenda is being quite diversified. We're looking for more loyalty, greater principality. We're evolving with NPS, so we are doing that quite well. But doing more of the same or more of what we've been doing with just marginal evolutions, it's not going to work. In our last call, I told you that this is a segment that is generating negative results for Santander. This is not something exclusively of Santander. Other banks are also facing challenges, but certainly we want to be profitable in every segment. We do not want to have a bank where one segment funds the other. We do have opportunities to really focus on mass retail, and we are working diligently so that in the next few months we can also show some good evolutions in our offerings. This will be a more remote and digital agenda. The mass retail segment will also combine digital experience and a greater capacity to relate with human beings through our remote channel. Well, over the phone, but a phone call that evolves to chat and generative AI. So this will be a year of evolution in the way we deal with Mass Retail. This simplification agenda is very robust. We have had a reduction so far of 31% of the products in the portfolio, and in cards alone, that number surpasses 50%. What are we doing in practical terms? We are cleaning up our offering, making it simpler, making it more user-friendly, and with that, we will be able to increase engagement with clients, especially in terms of Mass Retail. Clients do not need much. They need a good card, a good account, and good credit offerings. Therefore, we are looking at an agenda that is based on the essentials. It has to be simple and easy to understand. Now moving on to the investment agendas, which is one of the strategic building blocks. We made important advances, and I will show you the numbers of how we grow in terms of volume and results. Retail is a driving force behind our growth. Of course, we want a lot more. We want to extract a lot more, especially in terms of companies, but also SMEs. We have a funding record, which is 1.5 times more than what we did in 2022. Sometimes in previous years, that number was even negative. So in terms of investments, it was something that was not part of our strategic agenda, but now it is. Certainly, we are ready to look for better multiples like we did in 2023. This shows that we are on the right track. One of the important segments is our AAA. It's like an office that focuses on advice, investment advisory. The NPS is 85, which is the highest NPS in the industry. NPS here is measured by third parties in the market. Our net inflow per advisor was 2.5 million. This is a very competitive number compared with other offices or other peers. We show that here, AAA is a major driver. Toro, our digital brokerage firm, I mean, last year I showed you that we grew and posted great results. Toro has a very relevant agenda. More and more there will be an integration between Toro and our Santander stores. We have independent brands, distinct brands in our private, as I mentioned before. We posted record numbers in terms of funding and results, but we still have more room to grow. We want to double our private segment in the coming years, and we are ready to do that. Now moving quickly to our strategic agenda. We've been accountable to the market. In the third quarter of 2022, I decided to tell the market something about our strategic agenda. We were still in the first year of our legacy portfolio of older vintages. On one hand, some of the portfolios needed to be managed. On the other hand, we chose some other businesses in the third quarter of 2022 to focus on growing those businesses. This is just a quick accountability of these businesses. I'll start with payroll deductible loan. On the left-hand side of the slide, we see that we are growing again this quarter across all payroll deductible loan lines. We are growing on the private side, which is an asset percent in there. We are doing that with a very strict control of cost of credit. We are putting focus on payroll deductible loans. I’m very pleased to see that we've been consistently delivering good results. Agribusiness, we made important deliveries. We wanted to reach 50 billion of our portfolio of agribusiness products. We are talking about Ag products. Not only did we arrive at 50 billion, but almost 54 billion, meaning that we were able to grow 42%, if you look at December '22 vis-à-vis December '23. When compared with December 2023, we reached almost 100% growth. This shows that we put a lot of relevance in this business. Our consumer finance is the largest consumer finance company in the country. At the end of the year, we had 21% of quota. We want to grow that. The ambition is to reach 25, and I hope we will reach that number this year. But we finalized that with a loan origination record, and this is a historical volume. This is a very strong sign that appears in our results. But this just shows that we are really thinking big in terms of our consumer finance operation. About cards, I already mentioned our evolution in cards. We already posted great evolution in cards this quarter. If you look at billings, I mean, billings in the quarter year-on-year, in the fourth quarter of 2022 that was down compared to the previous year. In the third quarter of 2023, it was growing 7%. In the fourth quarter of 2023, it is growing 11%. So we are growing in double digits in terms of billing, giving that the average spending increase in our customer base. Also, there is the fact that we are selling more cards now than when compared to the first quarter of the year. What we saw in the fourth quarter of 2021, which is our record sales of cards, now we are resuming to a level that is almost two-thirds of that level. This is a very adequate level for us. Again, we are not trying to have a sprint in terms of card sales like we did in 2021 because this is not how we wanted to end 2023 and move into 2024. But we are happy with the sales of cards, considering our customer base, and the results will appear. Also, principality with Esfera. We will talk more about Esfera, but Esfera is progressing very well. In terms of companies, the agenda is quite positive. You will see the volumes further on. But talking about strategies for large corporate and SMEs, there was a very good portfolio expansion. We grew double digits year-on-year. And so we want to continue posting a strong performance year-on-year, but the focus will always be on profitability. We could grow much faster on the large corporate side. With principality being the focus now, we will certainly compete with the capital markets. We have to be more selective in terms of what we want to include in our balance sheet. We have a very good performance in several rankings, number one in consumer finance, foreign exchange, etc. The agenda remains very clear. We grew more than 100% quarter-on-quarter after growing more than three times last quarter. That stable agenda of the portfolio, where we were still looking for the right moment to accelerate, we were growing stronger after the second half of the year. The numbers are here to prove that. We are already giving clear steps in that direction. To conclude my part, I will talk about technology and innovation. This is connected to everything I said before. We don't have technology on one hand and business on the other hand. Everything is business, and technology is a major business center. The operation areas are large business centers. We have lots of figures in the slide I will just mention some. 95% of our operation already runs in the cloud. We are converging to 100%. Very soon, 100% of our operation will run in the cloud. This is a very good figure because it generates efficiency and cost reduction. Therefore, we are very pleased to have such a strong cloud agenda. We are constantly investing like the rest of the market. We are investing in Generative AI. Generative AI can be a major response to chat and the remote channel. It can also give us a good response for coding, development, and generating new businesses. Therefore, we are moving quite fast in this agenda. We are also focusing on innovation. Our first innovation with DREX was very successful. We are making good progress with the Central Bank of Brazil. We are also focusing on banking as a service. We want Santander to be more present with our customers. We want to be a part of our customer experience on a day-to-day basis. We are also maturing our agenda of business domains. We have 27 business domains that we introduced from 2022 to 2023. Now, from 2023 to 2024, we are launching that more intensively with our product agenda. So, business domains, those large communities that operate end-to-end in our businesses, are quite consolidated in all of the remuneration, and all the incentives are aligned. We continue pursuing our efficiency agenda. We are doubling the number of transactions while at the same time, we reduced by almost half the unit cost. With that, I will turn the floor over to Gustavo, and I'll come back during our Q&A. Thank you.
Gustavo Alejo, CFO
Thank you, Mario. Good morning, everyone. Let's start the results section with the NII. We posted NII growth of almost 5% year-on-year. With good progress in client and market NII, we recorded good performance in terms of volume, as well as funding, both of which benefited the client NII in 2023. In Q4, we saw the continuation of some positive trends seen in Q3, which led to growth of 4.8% in NII quarter-on-quarter. One of these is the gradual growth in retail credit, which will be detailed in greater depth in a minute. The other trend is the reduction in the Selic interest rate, which benefits our funding costs, as Mario mentioned. Market NII shows a progressive evolution, which I have been commenting on over the last few presentations, and which is in line with our expectations. The performance of spreads in the full year reflects a strategy of greater selectivity, which began in 2022 and is in keeping with the risk profile of new loan originations. Lastly, regarding NII, I would like to highlight the positive year-on-year evolution of the net interest income. In the fourth quarter, as you can see, we posted growth of 12.3%. Now I am going to comment on some data on the evolution of our loan book. We increased our expanded portfolio, growing 9% over the year, as mentioned. We grew in all lines of business, with significant expansion in retail for individuals, vehicles, and SMEs. During Q4, we achieved a strong performance in cards for individuals. This result was sustained by seasonality and the gradual resumption of card sales. The resumption and improvement have proved to be more assertive and with satisfactory quality levels in loan origination. This performance was accompanied by continued, consistent results in payroll, deductible loans, mortgages, and farm loans. Actually, Mario has commented, and I'll stress that we should also highlight the strong growth in every business, up 10% in Q4, and up 42% in the full year. In auto loans, we posted growth of 5.5% quarter-on-quarter, marking the best performance of the year. This improvement more than offset the impact of the sale of the PSA portfolio in the previous quarter, and it reflects the strength of our strategic partnerships and the positive momentum of the market. In SMEs, we continue to boost the growth of our portfolio after a relatively stable first half year, which is totally aligned with our stated strategy of increasing the share of this business in the total portfolio. The 5.2% increase in the portfolio in Q4 is something to be highlighted here. On the next slide, I share details on our funding. As we have highlighted throughout the year, we have achieved solid performance in funding, which shows our commitment to the expansion strategy and the search for a more balanced mix between wholesale and retail. Our funding, as mentioned, grew by 15% in the full year and 2.6% in the quarter, with a highlight going to time deposits and exempt securities. Our loans to deposits ratio stands at 92%, the best level in our history. Here, we present the performance of our fees, which each quarter reflects the evolution of our business in a very clear and consistent way, with positive performance in practically all business lines. In Q4, we recorded growth of 7% on the back of a 6.5% growth in the previous quarter. Even with the positive seasonal effects that happen in cards and insurance, business in general showed very positive dynamics, which reinforces our strategy in fees, aiming for greater transactionality or more transactions with our clients. We now move to talk about the quality of our assets. This quarter, we have the effect of increasing provisions for a specific case and reinforcement of provisions for wholesale cases. If we disregard these effects and the lower volume of recoveries, after two quarters of record performance, we have a stable growth ALL in relation to the previous quarter, with no signs of deterioration. We maintain the downward trend in the cost of credit, which closed the year at 4%. We continue to see a downward trend in the renegotiated portfolio in relation to the total portfolio, reaching 6.3%, as you can see here. This 120 basis points reduction over the year reflects the better quality of recent vintages, especially in retail. On the other hand, NPL formation posted a slight increase due to higher delinquency in the renegotiated loan portfolio. But this is something that was expected as we move forward in the process of purging this portfolio. On the next slide, we present the evolution of our general expenses, which rose 9% in the quarter and 8% in the full year. Personal expenses were affected by the collective bargaining agreement, which had an impact on the fourth quarter as a whole. In addition, in the full year, we also had the 8% carryover related to the 2020 labor agreement. Administrative expenses increased in the quarter, largely driven by seasonality. The main factors behind this growth were strategic investments in marketing campaigns to take advantage of the end-of-year period and data processing due to the increase in volume in more business. The seasonal effect also affected our efficiency ratio, resulting in a deterioration of 80 basis points. To continue with the new breakdown implemented last quarter, we present the performance of our expenses, segregating product expenses and business expansion expenses from recurring expenses. We can see here that our annual growth was mainly concentrated on expenses focused on business growth, which we consider fundamental to supporting our strategy of delivering the best experience to our clients. And to conclude the results section, we present our income statement. As a result of the dynamics discussed throughout this presentation, we recorded net income of R$2.2 billion. Compared to Q4 2022, total revenues grew by 11% and net income grew by 30%. Managerial profitability, excluding the specific case, reached 12.3%. Our core capital reached 11.5%, a level that we consider adequate to continue with our long-term growth strategy. We ended 2023 with a more positive trend, despite fluctuations in specific provisions and seasonal expenses typical of any given last quarter. Credit performance was favorable and was accompanied by an increase in revenue generation. We expect this trend to intensify along 2024. With that, I'll end my part and I'll give the floor to Mario for his final thoughts.
Mario Leão, CEO
Thank you, Gustavo. I'll take just one more minute of your time to close, and we'll have the Q&A. The big message here in this conclusion page, page 22, contains four main messages. Revenues are expanding, and we have a very positive expectation for 2024, both in terms of clients and markets. We are optimistic and excited about the revenue line. The business portfolio continues to be diversified. That's the second big message. We'll continue to be very focused on liabilities and on expanding the fees business, which has always been very positive for Santander. We want to grow it even more. Diversification is also related to credit, which is the third point. We'll continue to pursue portfolio growth to gain market quotas in several products and segments and do it smartly so that we can grow the portfolio with profitability. The fourth contextual message is our obsessive quest for client principality. This is the strategy of Santander for 2024. In the coming years, everything we do will have to be linked to the client's agenda, and we'll strengthen this even more. The drivers for this, I mentioned already, but I want to stress that we are repositioning ourselves in retail, both in mass retail that we'll talk more about during the year. We have a lot of deliveries for Q1 and mainly Q2 2024. We'll end the year in a totally different position compared to where we started. We are very excited about that. In Select, high-income, company segment, now the mid-income segment, and some SMEs: these are segments that we're specializing in even more. We are making our service to these segments even more regionalized, more tailored. In cards, we're taking another important stride forward with an obvious focus on principality and the ability to serve clients. We're very excited about this resumption in cards. We're doing this in a smart, precise, and technical way with an in-depth personalization, understanding each client in each cluster. We have a consumer finance segment growing again in Q4. It was already showing some strength. We sold PSA, yes, but Q3 was good, and Q4 was strong. We are very excited about what consumer finance will bring us in 2024 and beyond. We also have consumer finance that is not related to vehicles. The companies segment is growing again in retail since the middle of last year. We're doing this in a calculated and balanced way. We're excited about that. In terms of corporates, it's about profitability and discipline, but we have an important franchise that was established decades ago. So, in a nutshell, as we officially close 2023, we start 2024 with great excitement about the business dynamic. There are some points that Gustavo mentioned in terms of ALL and wholesale, no concerns with retail, which is very important. For the last two years, we worked to have comfort, and I'm sharing with you that we are very excited about the portfolio and the new vintages. In terms of expenses, we have one-off situations, but the franchise makes us very excited to start 2024 with full steam and with the top line growth that we have been showing in a consolidated way. With that, I will stop and let's start the Q&A. Thank you very much.
Operator, Operator
Thank you, Mario and Gustavo. We will now begin the question-and-answer session. Our first question comes from Thiago Batista with UBS. Good morning, Thiago.
Thiago Batista, Analyst
Good morning, Camila. Good morning, Mario. Good morning, Gustavo. Good morning, everyone. My question refers to loan origination. In the fourth quarter, we saw that the bank had a strong origination in the auto segment. I think it was the best quarter ever in terms of vehicle origination. We also said that the bank is already issuing cards with a good evolution in the portfolio. So, this return to origination, is it something that the bank feels comfortable to go back to several segments or do you still see a concentration in high income alone or income to mid-income? How do you see origination in the Santander portfolio?
Mario Leão, CEO
Thank you, Tiago. It's a pleasure to talk to you. We'll start, and then Gustavo will just add. We've been talking to you in a very linear and consistent way, meaning that throughout the years, we've been very selective in terms of the portfolios that we would accept to keep them flat and CP and pure CP were in that category. The cleanest and more direct loan, especially if you look at average to low income, we knew that for two years these portfolios would be flat or maybe down. This would be compensated by other businesses. Some of these portfolios, I mean, we are investing in CP FGTS and personal loans and cards. We are focusing on all income brackets. Of course, we are looking at high income, considering the bulk of Select. But in the payroll area, that's a very good leverage to get to know clients better. We are not doing payroll just now. We have been doing it for the past few years. In this past year, we saw a clear evolution in terms of our capacity to understand it better and to make that a more loyal client. With that, we could sell cleaner products for low and mid-income. Payroll is a very good example that justifies that. Other products we have been growing starting in 2023 and more aggressively in 2023, 2022 and 2023. But today, I mean, we still have that. We are still in that comfort zone that we had before in the same portfolios that we are growing in 2022 and 2023, like payroll, agribusiness, and large corporate. We never stopped growing. It was just a matter of profitability. But since that second half of the year, we also started growing in other portfolios like consumer finance, small and mid-sized companies, which were two portfolios that we decided to step in the break. We could have been more aggressive, but we chose to take care of the portfolio we had, take care of all of the origination assumptions so that starting June and August, we would put more emphasis on that. We start 2024 with the idea of maintaining what was growing and consolidating things that were started growing in the second half of 2023 in the customer base that we are operating, but we are careful enough to do that with the right clients, not seeking the growth we had in 2021, but we want to grow in these lines as well. So come 2024, we will have greater diversification with different products, etc. I hope I answered your question. Yes, thank you.
Operator, Operator
We now have a second question from Gustavo Binsfeld from Goldman Sachs.
Unidentified Analyst, Analyst
Hi, Tiago. Hi, Camila. Can you hear me? My question relates to provisions. During your presentation, you said you did not see any deterioration throughout the quarter, but when we look in the long run, you have been posting two years of high provisions. What is your view towards 2024? Do you believe that is a year of transition for the cost of credit, or do you see a trend towards normalization? Also, if you could comment on the corporate segment, there was a very specific case in that past quarter or whether you see any other specific one-off case in 2024.
Mario Leão, CEO
Okay, I will start, and then I will give the floor to Gustavo. Your question has two parts. One is the cost of credit, and the other is the absolute value of provisions. During the presentation, I would reinforce again that we have been posting improvements in the cost of credit, I mean, in that percentage. We have been posting an improvement in that line. We still hope that this figure continues to improve going forward. The cost of credit has been improving, especially in this last quarter, once you remove that very one-off event, and Gustavo can comment on that. So we expect further improvements. I mean, we are not going to give you any guidance. Allowance for loan losses, of course, has the effect of the cost of credit per se. When we accelerate the portfolio as we have been doing, starting in the second and the third and fourth quarters, and we hope to do the same towards 2024, I mean, with a better portfolio, our ALL just moves along in parallel. We hope that the cost is lower compared to the average, but we continue to pursue a lower cost of credit. The same token applies to ALL. Therefore, we still expect a downward trend in provisions as we move forward. You asked about that one-off case in the corporate world. We understand that there wouldn't be any other relevant cases. We look at every case individually and make the necessary position adjustments. Looking forward to 2024, we don't see any relevant event in the corporate world in our portfolio.
Unidentified Analyst, Analyst
Now, Brian Flores with Citibank. Thank you for the opportunity to ask questions. One about efficiency. How should we think about the income ratio? Close to 23? Close to 22? And in your view, what line should contribute more to attaining your goals?
Mario Leão, CEO
I'll start, and then I'll turn the floor to Gustavo. Brian, thank you for the question and for the opportunity to speak about income and expenses. There are two drivers here. Undoubtedly, we want to expand. I started my conclusions talking about revenues. We are super focused on expanding, but expanding the revenues line item in the right way. We want to grow our revenue, which is the strength of our franchise, measured in the top line. We want to grow our revenues consistently. It will never be linear. The world is not linear. But we want to grow the top revenue line. I want this to be sustainable. I don't want to have hiccups in revenue; I don't want to have regrets. Of course, we can make mistakes, but we are careful to grow in the right way in each one of the segments, in each one of the product portfolios. So, part of the answer is yes, we want to expand revenues. In terms of revenue, of course, there'll be some increase in expenses, but it is only natural because the business will require more volume, more expansion. We are hiring people as we speak in some of the sub-segments that we are specializing in. I mentioned mid-income and small companies, small enterprises. We are specializing even more, and that requires more people. These are individuals or companies that need to be covered. We want to be truly multi-channel and omni-channel. So, in some lines of expenses, those will grow. The question is how will we fund those? In the last quarter, we had to have a turnaround in mass retail. We had to reduce our base of expenses materially between 30% and 50%. That will give me the funding to invest where I need to invest. I'll have a potential increase in expenses, but it must be a lot smaller than the increase in revenues so that we'll have the crocodile mouth. Gustavo, if you want to add?
Gustavo Alejo, CFO
That's exactly it. In 2024, we are seeing a deflation process. This will benefit us. We'll have a more efficient use of the expenses that we have, spending benefited by inflation, which is different than in the previous quarters. A gradual and solid increase in revenues. We see a positive evolution in terms of the level of efficiency, but it's basically what Mario said. It is very important to increase our top line to gain speed and traction in resuming efficiency.
Mateus Raffaelli, Analyst
Next question from Mateus Raffaelli, Itaú BBA. Good morning. Thank you for the opportunity to ask a question. I'd like to explore the expectations for client NII. I know that the funding spread pulls this down, but we see Santander with more appetite for clean lines, vehicles. We expect growth, renegotiated portfolio as well. So, perhaps you could elaborate on what you're expecting for client NII for 2024. Do you expect a flat NII or dropping or expansion, given the factors that I mentioned before? Thank you very much.
Mario Leão, CEO
Thank you, Mateus. I'll start. Directionally, like I said, nothing is linear. You should not expect anything linear from us or anybody else. But we want to grow the revenue I spoke about this in the previous question. Of course, the revenue has some sub-blocks, but NII is a fundamental block. It measures the strength of the franchise together with fees. In client NII, it's even more precise. It measures the strength of the franchise. We are very focused on that line and in the sub-lines that comprise client NII. You mentioned that in Q3 compared to Q4, we have a challenge because the Selic interest rate is dropping. As much as we increase the volume and spread as a percentage of CDI, if the Selic rate falls, it's a detractor. It's positive for the economy, but for the liabilities line item, it will be a challenge. It will be a challenge this year. You can do the math you want, but around 20% give or take a lower Selic rate in 2024 compared to 2023 is a challenge that we will have and the whole industry will have in terms of liabilities. What we can do is to expand even more our investments and liabilities agenda. I have spoken about how this is strategic for Santander. We'll offset that with volume. I have some hedge in volume. We'll try to be pricing efficient as we try to be efficient in everything and offset that with credit NII because you mentioned we are more constructive in several line items. I mentioned we want to have growth. It will not be equal in all portfolios, but I would like to have all portfolios growing over 2024 so that we wouldn't have any portfolio dropping or flat. If we take care of spread on the asset side and grow volume, sometimes we'll look for two-digit growth, sometimes we'll grow just like the industry, but we'll pursue relevant growth in all credit portfolios. If we take care of the spread, we'll have a compound effect, and we'll have a good evolution in the client NII, credit NII that I think will be more than enough to offset the challenges we will have given the Selic interest rate, not because of the strategy, on the contrary, because of the interest rate.
Gustavo Alejo, CFO
You mentioned well, Mario, there are different speeds of growth for the portfolios. We have payroll deductible loans, SMEs, mortgages, auto loans, etc. The speed of growth among the portfolios will dictate the NII. Of course, we have to be very disciplined about pricing and volume, and the trend is that we will be able to effectively balance the NII with the challenges here. Of course, we will have a positive evolution in market NII, which is the implicit question here. We continue to expect a growth in market NII, which will happen, it is a given. We also expect client NII to evolve with a net effect because we will have an anchor in funding given Selic, and we will deal with the net positive in client NII on the side of assets. I hope I have answered.
Daniel Vaz, Analyst
Hello, Daniel. Hi, Camila, Mario. Good morning. Thank you for taking my question. I would like to hear your view about something that has been very recurrent, which is payroll loans. There is pressure on rates and also an additional potential from a major digital player that wants to add share in 2024. First question, how do you advocate in favor of the product? Are you increasing origination? And second question is, how do you see a potential increase in portability? If the bank is expecting that, how do you intend to defend yourself while maintaining cost of client, etc.?
Mario Leão, CEO
Thank you, Daniel. That's a recurring question about payroll deductible loans. This is a very relevant question because this is part of the industry's portfolio. For us, this is quite relevant. If you look at our expanded loan portfolio, our payroll portfolio is about 10% of our expanded loan portfolio. That means this is a very relevant portfolio and we are happy with it. How do we see the pricing and the competitive dynamics playing out? First of all, you mentioned the price ceiling pressure. It's very specific. It's not lower, but it's very specific related to INSS. As Santander, and I can certainly also speak on behalf of the entire industry, we don't think that this is a pro-consumer agenda. The decisions made in this past year in terms of limiting that rate lead to origination volumes. The origination volume is coming down by a few million every month, maybe two billion, even more per month. If you multiply that by 12 months, that's R$25 million to R$30 billion. The INSS loan, which is the cheapest loan available in the market, competes with mortgage loans. It is certainly the cheapest kind of loan given to retirees, and many of the potential borrowers have to resort to more expensive loans. This is an agenda that does not favor consumers, and we are trying to tell the authorities about that. We hope this year our advocacy is more successful. We look at this and are very sad because we know consumers are being hurt. Having said that, we are trying to rebalance our pricing equation because we do not want to let go of INSS. As I said, we grew a lot in this past year and a half. We gained momentum and grew the most with INSS. I can assure you that this was very profitable. We are trying to rebalance the equation of fees. Like the rest of the industry, there is a great relevance coming from the external channel, the banking correspondence. We continue to have them, but we reduced the relevance of the external channel vis-à-vis the internal channel. So in practical terms, we are investing more to use INSS in our special stores. We are making advances in terms of our reading of INSS audiences. We are turning some of our major stores into stores that focus on INSS loans. I mean, the whole agenda is not very favorable, and this affects the entire industry. If you look at the historical format, we are trying to do more things internally and we want to keep our relationship with customers at different levels of profitability. In terms of competition from other digital banks, this is something that we are looking at very carefully. We respect them and think that their move is legitimate, but we will try to monitor that attentively. Our agenda must be focused on payroll and non-payroll clients. We want them to look at Santander as their main bank. We want to provide a whole basket of things. I can have everything in one single bank. We want to be a simpler and more effective bank.
Gustavo Alejo, CFO
Daniel, it is precisely that. We are making progress. The relative share of other banks is being reduced year-on-year. There is an agenda of reduction. We are leveraging our digital footprint with a very strong agenda. We are also using our proprietary channel. Therefore, this is a move that we are already engaged in, in general for the payroll portfolio. We will also be more aggressive in other portfolios where there was a higher dependency relying on third parties. We are moving at the right speed, but certainly, there are some market challenges, like you said yourself. But we are ready to defend our portfolio with these movements of lower Selic rates. We have INSS, payroll, private loans, and payroll deductible loans coming from the public sector. Pricing dynamics and competition are different, but we're very pleased to say that we're evolving in all of them. We do not want to rely on a single one, even though INSS is quite relevant. We do not want to rely on the government alone. Our agenda is very dynamic, and we are pleased with the way things are evolving. That's why we focus on these lines going forward. Thank you.
Operator, Operator
Our next question comes from Bank of America, and the question is from Flavio Yoshida. Good morning, Flavio, and welcome.
Flavio Yoshida, Analyst
Good morning. Thank you for taking my question. My question is about competition in your credit business or loan business. I think in the past few years, we saw not only you but other banks making adjustments to their portfolios. Now, the risk appetite seems to be increasing. Therefore, I would just like to understand how you're getting prepared to face this more competitive environment. We see companies focusing on cards, AG, and SME loans. How is your feeling about demand for credit on the part of your clients?
Mario Leão, CEO
Thank you, Flavio. It's a pleasure to talk to you again. We are closely monitoring the competition dynamic. I would say that the speed and timing of this stepping on the brake have been different, depending on the bank in 2022 and 2023. We were one of the first, if not the first bank to say, okay, from 2021 to 2022, performance is not good. We would have to step on the brake and spend the next two years managing that. The fact that we were the first allowed us to manage that portfolio for a longer period of time. In the midst of 2023, we said, we can grow in other lines in addition to all the businesses that we were managing that were part of that case, like AG, etc. Our capacity has increased substantially compared to what we had in 2021, also because technology evolved and systems evolved as well. Therefore, in 2024, we are eager to grow our portfolio, more than in 2022 and 2023. Certainly, the market as a whole is looking at the same lines, and each one will pursue answers at their own pace. But how are we going to deal with that? We have an advantage because we started sooner, and we will try to get better experiences vis-à-vis the competition. Again, we are focusing on principality, which is a buzzword for us. We certainly want to be the main bank to our clients but our agenda prioritizes customer centricity. We will have an agenda that prioritizes the demands from our clients. This will involve having a very good and profitable agenda for the bank while maintaining a balance with a competitive dynamic. This does not only pertain to banks or incumbent banks, but it is a competition agenda that involves the capital markets. We never had difficulty growing on the wholesale side. We could have grown more than what we grew. There was just a drop of 0.1 percentage points. We will also discuss the expanded loan portfolio in 2024, as it will be easier to talk to you about that. We expect a better evolution on the wholesale side. But we are well prepared to face that.
Operator, Operator
Let's move to our last question with Guilherme Grespan of JPMorgan. Good morning, Guilherme, go ahead.
Guilherme Grespan, Analyst
Good morning. Thank you for your time and for taking my question. One around would like to tap into a different type of product. We spoke a lot about payroll deductible loans, and we also talk about installment payment picks. We've seen some entrants being successful with a relevant contribution to their top line, particularly in the card business. If I'm not mistaken, you were one of the first, if not among the first, to launch the product in Brazil. We haven't heard so much about this product in the last two years. I'd like you to share with us the challenges of the product, what was right, what was wrong about it, and if this remains a relevant product for you. Thank you.
Mario Leão, CEO
Right, soon after the government launched PIX, it was a very successful agenda. In 2022, we created Divide o Pix. We wanted to connect a wire transfer with consumer loan, so we created DVD PIX. We have been growing this agenda, the CP agenda, also related to PIX and CP meaning consumer credit. We did this, calibrating with the risk appetite that was being adjusted for the new reality, given the macro evolution we had, particularly in 2021. We didn't want to grow it for the sake of growing because it was a new product. But it is a product that has been on our shelf for two years. We had no deployment or implementation challenges. The big challenge is how fast we wanted to grow in pure personal credit because we reduced the client base that we wanted to operate with. We started operating with clients in the scale from one to ten. We continued to operate with clients scored nine and ten in our rating scheme. Each bank has a different one, but just to give a dimension of how sensitive we are. Even in this more sensitive range, we were able to grow in personal credit, including Divide o Pix and in the card basis we reported here. We believe this line item will evolve looking forward. It's not specifically very relevant, although it started some time ago. With time, as PIX evolves, we want to be hand in hand with the evolutions of the Brazilian Central Bank so that we engage clients more with us, with installment PIX or other products. This is not so relevant yet, but we expect it to grow together with the personal credit or CP agenda. To speak less about the product and more about the client, we want clients to be served by Santander in all different ways. If they want to do it via FGTS, the worker severance fund, that would be good. I prefer clients to finance a product that is better for them than a product that has a higher spread. I want to have that operation and not lose the principality of the client. So, we want to understand what is best for the client. In personal credit, we'll speak less about products and more about clients. The installment PIX is a reality, and it will be more and more relevant for us and for the industry.
Operator, Operator
With this, I would like to thank you all for joining us this morning. Immediately after this video conference, myself and the entire Santander Brazil investor relations team will be available to answer any remaining questions you might have. Thank you very much. Have a great day and see you next time. Again, thank you very much, and I hope to see you in the next call.