Banco Bradesco S.A.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Good morning, ladies and gentlemen and thank you for waiting. We would like to welcome everyone to Bradesco's First Quarter 2021 Earnings Conference Call. This call is being broadcasted simultaneously through the Internet in the Investor Relations website at bradescori.com.br/en. In the address, you can also find the presentation available for download. We affirm that all participants will be able to listen to the conference call during the Company's presentation. After the presentation, there will be question-and-answer session where further instructions will be given .

[Carlos Firetti:]

Hello everybody, welcome to our conference call for the discussion of the first Q 2021 results. We have today with us our Chief Executive Officer, Octavio de Lazari; our Executive Vice President, Andre Rodrigues Cano; our Executive Director and Investor Relations Officer, Leandro Miranda; Oswaldo Tadeo Fernandez, our Executive Director and CFO and Bradesco Seguros, Chief Executive Officer, Ivan Gontijo. For starting the presentation, I turn the floor to Leandro.

[Leandro Miranda:]

Thank you very much. Good morning, everyone and welcome to our first Q 2021 earnings conference call. As we all know, the first quarter was marked by the worsening of the COVID-19 pandemic situation, with the second wave unfortunately leading to a new peak in case and victims, much as what we have witnessed in 2020. We believe that restricted measures adopted in March in both states, somewhat controlled the spread of the virus and thereby reduce it case and hospitalizations. Despite levels remaining high, we believe that we will see an improvement in this statistic over the course of May. The worst-case scenario we believe is going to be June, and even greater reduction in restrictions, especially as vaccination progress. We sympathize with all those impacted by the disease and take our employees for the full efforts during this difficult time. The impact on the economy in 2021 appears to be lower than it was in 2020, probably due to the fact that people in business are better prepared to conduct business in the midst of the restrictions. Our performance was solid in the first quarter. And the second wave of the pandemic had no significant vary on business dynamics with the exception of a natural deceleration in the origination of some credit lines. We now see signs that appear to indicate an improvement in the scenario of the pandemic. We believe that this improvement should continue throughout May, as some of the restrictions are already being relaxed in a number of states.

[Operator:]

We will now initiate the question-and-answer session. Our first question comes from Jorge Kuri of Morgan Stanley. Jorge, your line is open, you may proceed.

[Jorge Kuri:]

Hi, good afternoon everyone and congrats on the numbers. Sorry, I'm not sure you mentioned this at the -- talking about the guidance on that last slide maybe you did it, but it was a bit difficult to hear, but I wanted to ask you about the guidance range for expenses you're evidently in the area, of course, but you're at minus 5% minus 4.7% for the first quarter. If I look at your last 12 months performance, you're minus 6%. Do you think it's possible that you'll end up at the better part of your guidance for expenses which is minus 5%? And same question for provisions. You did BRL4 billion -- BRL3.9 billion, but I'm assuming that includes the BRL1 billion in original provision. So, is it possible that you end up excluding that BRL1 billion in provisions at the low end of the guidance of BRL14 billion? Thank you.

[Leandro Miranda:]

Hi Jorge. Thank you very much for your questions. I'm going to go straightforward here to the points. Operating expenses we expect them to go in the worst-case scenario in the mid of the guidance. So, we shall continue to perform very, very well in operating expenses. Of course we shall see some adjustments regarding to the compensation of the employees. But we shall never exceed the center of the guidance there. Regarding to expanded ALL, we shall see the provisions going to the mid of the guidance. It shall be in a range I would say between BRL15 billion or BRL16 billion. This is our base case. But if the economy really recovers as we believe, we shall even be lower than that.

[Jorge Kuri:]

All right. Thanks. All clear. Thank you very much.

[Leandro Miranda:]

Thank you.

[Operator:]

Our next question is coming from Mario Pierry of Bank of America. Mario, your line is open, you may proceed.

[Mario Pierry:]

Hi everybody, congratulations on your results. Let me ask you two questions. And also related to your guidance. When we talked about the outlook for NII client and how should the growth rate should accelerate second half of the year you've talked about better mix, economy is reopening. But can we talk about the impact of a higher rate environment in Brazil and how that could have a negative impact on your funding costs in the short-term? So, if you could give us a little bit more detail your expectations of rates and the impact that it could have on NII growth this year? And second question also related to fees, as you mentioned, why you're expecting that our volume is in expecting a better mix in the asset management to support your fee. So what concerns you on your fees is that when we look at your checking accounts either down 2% year-on-year, while your client base grew to 8%. So what significant pressure on current accounts, can you be a little bit more specific about your views on the outlook for current account fees?

[Leandro Miranda:]

Thank you, Mario. Basically in the very beginning of the year, when we released this guidance, we were very conservative and we are keeping in this sense. The client portion shall go to the center of the guidance naturally, pretty much because as we are reopening the economy, you shall have more transactions, and you shall be able to change the mix of products, as well as the mix of clients into a more – into a riskier standards. Just to give you a flavor, when you have the retail closed, you are not able to work so much in SMEs. And the individuals portion as we were conservative, we decreased the amount of credit cards, personal loans, and we increased the focus on mortgage financing and compulsory loans, which are less risky lines of products. Besides that, it's important to mention that, when you compare to the first quarter of 2020 during two months pretty much, you have the large companies raising a lot of liquidity here, and they have lower margins than SMEs and individuals. Therefore, from now on, we do not expect to have such a base of comparison. There's a 31 . And so we shall see an increase in this client portion. So better mix, and better of products clients shall be the answer together with the reopening of the economy. And of course, as Octavio has pointed out earlier, it pretty much depends on the vaccination process. So we are confident that by May or June, we shall see this improvement in the economy. Regarding to fees and commission into searches, well, we have here again a very conservative guidance from 1% to 5%. We believe that, we shall go to the lower portion of the guidance to the center. So we shall be in the first half here of our guidance. And we can give some overviews regarding to our lines. And of course, my colleagues here will be more than happy to help me out to complement anything. First of all, credit cards, with the reopening of the economy suspension of the restrictions, due to the lockdown, you shall see the retail. And of course, our base of private labels and light branded credit cards shall have a much better performance than the previous year. Retail through Bradesco Expresso also is important for our tariffs. Regarding to asset management, we made significant adjustments in management fees. And now, we see a growth of migration to better paid management fees and performance fees into our funds. Besides of that, there was a lot of withdraw from fixed income funds buy CDs from the banks, and we benefit from that in our liquidity. Capital markets investable banking has performed extremely well. We are positive for the year. But it pretty much depends on the opportunities, the windows that we see and the macro has a significant impact on that. And on insurance, we – the premiums were very good and we intend to keep on doing that. If my colleagues, want to complement anything more than happy to.

[Octavio de Lazari:]

Yeah. Just one point on the funding side US, the higher rates actually have a positive impact in the funding results that go in the client market. So, this should be positive. When you look to the client NII, we have there apart from these funding results mostly spreads. So basically the increase in rates don't impact that, any rate variation actually is managed by our treasury and this is in the market NII.

[Mario Pierry:]

Thank you.

[Octavio de Lazari:]

Thank you Mario.

[Operator:]

Our next question is coming from Jason Mollin from Scotia Bank. Jason your line is open, you may proceed.

[Jason Mollin:]

Thank you very much. My first question is a follow-up on the sensitivity of the client portion and the treasury portion to rates. Maybe if you could just give us an idea all else equal, and obviously, that's not the way you manage the balance sheet. But if all else equal at the end of the first quarter let's say 100 basis point increase in the SELIC, what does that do for your client portion and your treasury portion? I just want to try and clarify that. And then secondly, on the fees line, it sounds like apart from what you said about adjusting management fees and asset management that it was the reduction in the fees from cards and current accounts was related to activity. But can you give us some sense of what's going on, on the pricing there? Competition? You've seen a free checking account? You got -- everyone has their version of a free checking and other fees. What's going on with the pricing side not just the activity? Thanks.

[Leandro Miranda:]

Okay Jason. Let's start from the beginning here. You're pretty much asking for sensitivity in 1% SELIC rate, right? We believe that there is no negative impact on the client’s portion. It's pretty much dependable on economic conditions and competition. So we do not believe it shall create us any problem. We have a benefit in our deposits, since because of the floating we can invest more. So it's 1% of our deposits. And besides that assuming that we wouldn't hedge -- we wouldn't come along with any market strategy. What is totally unusual with the bank, if we are just stopping and we fire everyone there in the treasury department for a 1% SELIC change, we shall have a BRL900 million impact.

[Octavio de Lazari:]

Yeah. Just complementing that this exercise is based on 2020 figures and also things keep changing as Len said.

[Leandro Miranda:]

Yeah. But we are active. We are dynamic and so it should never happen. It's just a theoretical to stress your model.

[Octavio de Lazari:]

On fees?

[Leandro Miranda:]

Yeah. On fees, basically, as I have just answered Mario, it pretty much depends on scale and the recovery of the economy, because basically we see competition there. But credit cards you have seasonality in the first quarter and you have the retail pretty much shutdown. So as the economy reopens, the barriers and for lockdowns we shall see it coming strong especially because we have a significant part in white label and private label launch.

[Octavio de Lazari:]

Yeah. I think it's important to emphasize the base of comparison effect. We are comparing a very almost normal quarter last year with a quarter that actually is impacted by the pandemic, its impact in the credit cards. There was also in the beginning of last year a very important change in terms of volumes of fixed income mutual funds that went to deposits also a revision of management fees in asset management. And we believe as we go through the year as Leandro said, we go to a different base of comparisons and our performance and fees will naturally improve.

[Leandro Miranda:]

But we are confident that we shall reach the center of the guidance. We shall have two years…

[Jason Mollin:]

Great. Thank you very much.

[Leandro Miranda:]

…the first half and the second half. Two different years.

[Jason Mollin:]

Thank you, and congrats on the strong first quarter.

[Leandro Miranda:]

Yes.

[Operator:]

Our next question is coming from Tito Labarta of Goldman Sachs. Your line is open. You may proceed.

[Tito Labarta:]

Hi good afternoon. And thanks for the call and taking the question also. My question is looking at the ,

[Octavio de Lazari:]

Sorry we can't hear you. I can't hear you. It's -- we can. Can you maybe pick up the phone or talk slower?

[Tito Labarta:]

Yes. I'm taking on the phone. I'll try to speak louder. I don't know if that help, can you hear there? Hello.

[Octavio de Lazari:]

Not really. Try to speak slowly.

[Tito Labarta:]

I try to speak little louder. Is that better?

[Octavio de Lazari:]

Yes. No it's better. Okay.

[Tito Labarta:]

Did you hear me there?

[Octavio de Lazari:]

Yes.

[Tito Labarta:]

Okay. My question is just on the digital initiatives. You did some good data there. How do we think about the impact on this? I mean if you look at some of the impact the gaming clients that don't necessarily have revenues at your level. And given some of the revenue pressures that we're seeing, I understand that should improve as the economy recovers. But as it become more and more digital, do you think that should not necessarily boost your revenues and you continue to see pressure there, the game client conversely perhaps offset by continued cost control. Just to kind of think about how that competitive environment and digital initiatives should impact the revenue growth and expense growth and where you see the benefit from that? Thank you.

[Leandro Miranda:]

No, I got it to. Tito, thanks. Let me start from the end this time, regarding to costs. You are totally right. As the clients get into more and more in digital channels, we are able as Otávio has emphasized earlier, we are able to either close or transform our branches into point of services increasing the level of business. We can also reduce the space in the branch and give it back to the lessors. So therefore there is a significant reduction in costs for us as the clients got more digital as we have seen in 2020. So it's pretty much -- shall see the continuation of this trend. Regarding to pressures on fees, we have to take a look into scale and we have to consider the costs associated with that. But as the economy grows, you have all kind of clients. And they also need important products such as credit and they also need to have the whole combo of banking services and products. Therefore we believe we have an agenda there and we have a very strength that shall be seized. Of course the open banking, it reduce our market share initially. If you just consider that we are stopped, but we are not. We are active. We are being proactively discussing and analyzing a lot of opportunities of growth with this enhanced competition as you can get market share from the other banks. So if the newcomers shall get market share from incumbents, we are in a position, as we are the most advanced digital bank in Brazil to get market share from the other competitors as well.

[A –Unidentified Company Representative:]

If I can add, this is Renato Ejnisman from Next. On the big data and analytics front. I mean I can tell you a little bit about our experience in Next and the same I know is happening at other areas including Bradesco itself, but the use of big data I mean it helps on the two fronts that you mentioned. On the expense front, we have models to calculate and try to quantify the propensity to churn. We also have malls to calculate the propensity to default. Obviously, these are algorithms that we are developing and hopefully soon introducing machine learning aspect so that it improves over time by itself without further manual or further human input. So that something that significantly reduces expenses. And on the revenue side, we also have models to see what is the propensity to consume some products and the same rate that I mentioned. I mean the next step will be to introduce machine learning aspect so that over time you don't have to have any human input and they just get more and more efficient over time.

[Tito Labarta:]

Okay. Thank you.

[Operator:]

Our next question is coming from Thiago Batista of UBS. Thiago, your line is open. You may proceed.

[Thiago Batista:]

Hi, guys. Thanks for the call. I have one question about the insurance business. We saw this quarter a good improvement in the profitability of the insurance business. It achieved about 20% this year versus mid-teens in the previous quarters. This level of profitability or results of insurance business, I mean that this is recurring, we can see derive or even some additional improvement going forward. So how do you guys are seeing the result of insurance business?

[Octavio de Lazari:]

Thiago. Basically we performed this quarter a little bit above our guidance. Our guidance has a growth, considers a growth of 4% for the insurance line. I think the – there was some good news this quarter related to premiums. I think we perform better. I think it's a good sign and it's the base for actually keeping constant and the evolution of these results. We should see going forward a continued pressure in some claims due to COVID on life insurance, health insurance. But as you guys know, we have constituted provisions. I think we are well prepared to face this environmental higher – higher claims. On the financial results an environment of higher interest rates, actually somehow helped. So I would say, I think we are very comfortable with our guidance of 4% growth for the line maybe we could do better. That, I think, at this point, is the best I can tell.

[Thiago Batista:]

Thanks, Octavio. Just to confirm one point. There is no reversion of the provision that the banks have insurance booked in the previous quarter. So there is no reversion, correct?

[Octavio de Lazari:]

No, we didn't revert anything this quarter.

[Thiago Batista:]

Appreciate it. Thanks so much.

[Operator:]

Our next question is coming from Carlos Gomez of HSBC. Carlos, your line is open. You may proceed.

[Carlos Gomez:]

Hello. Good morning. Congratulations on the results. Given that there -- first, could you comment on BAC, the bank in Florida in 2017 you acquired. What are your plans there? Is this the first step? Do you want to go to join Florida in the expansion offer? Second, the Central Bank has just currently published report regarding the increments of the positive credit go and explaining how it reduces the cost of credit for a lot of times. So is this starting to make a dent on the margins of the products that you offer? And how do you expect to counter margin issues? Thank you.

[Leandro Miranda:]

Carlos, we had some difficulties to understand you, especially on the second question. We understood that the first one is about BAC Florida, but if you could repeat maybe the second question at least.

[Carlos Gomez:]

Yes. My apologies. The second question is about the influence of the positive credit growth in Brazil, in terms of pricing the products. Is that making the market more competitive for you, it means that reducing the margin that you can charge on consumer credit. Thank you.

[Leandro Miranda:]

Carlos, Leandro speaking. I'm going to address BAC and then your -- Octavio, actually will address the second one regarding the Credit Bureau, okay? Pretty much at BAC we have a wealth management strategy. It's key for our clients to have the ability to have a checking account, credit cards, mortgage financing at a bank, US. It has been a long-term demand from them. And the appetite and the wellness of clients to participate has been outstanding. Besides of that, BAC also have a brokerage house in which we can help clients to invest their money throughout investment funds and secure share in debt our equity there. So the point is, we shall be able from now on to provide a full array of alternatives regarding to banking and investment products there in Florida. Regarding to expansion, we want to feel the American market. We want to feel how clients feel this experience. But initially, our focus is to stay in Florida. We do not want to expand throughout other states. It's important to mention that BAC has e-bank. There is an app in which BAC is pretty much able to raise funding in almost all over U.S. states. They have local licenses in almost of all US states. And therefore, BACs ability to raise funding on a very cost-effective way is outstanding. In BAC, of course, we will keep on its regional strategy of financing banks throughout Latin America and Brazil and support any Brazilian company that is a multinational. And it serves there.

[Octavio de Lazari:]

Carlos, regarding the Credit Bureau, I think this is a very important development for Brazil or the Brazilian market as a whole. In our case, as you know we have a lot of information and we have experience. We have been investing a lot and especially over the last few years in credit models in data. So we believe, our models and the information we have, it has allowed us to originate more-and-more loans and very good credit quality. The Credit Bureau in our case, allow us to bring new information that potentially complement the data we have. And allow us to actually, eventually approve loans for clients that we now with our own models eventually, we wouldn't concentrate it given this complement of information. As you know, we are shareholders of Credit Bureau on which, we have as partners the other bank. It's another Credit Bureau that provides also the information and for which we consume data. I think for the market as a whole, it really helps other players that don't have as much information as us to have access to client information. But we believe that, considering our experience, our models and all everything we have invested in these models, we continue with an advantage. And we also have a very good access for originating loans. That also is something very important in this process.

[Carlos Gomez:]

Thank you very much, for your answer.

[Operator:]

Excuse me. Ladies and gentlemen, since there are no further questions, I would like to invite the speakers for the closing remarks.

[Leandro Miranda:]

Well, first of all, once more thank you very much for making the time to be with us. We are very proud of the results we are presenting. And we are even more confident in our performance from now on, as we see advancements in logistics of the health situation. And we are confident on the recovery of the economy. Thank you once more. Have a great day.

[Operator:]

That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a good day.