Banco Bradesco S.A.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Greetings, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's Fourth Quarter 2020 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:]

Hi everyone, welcome to our conference call for the discussion of the fourth quarter results. We have today with us our CEO, Octavio de Lazari; our Executive Vice President and CFO, Andre Rodrigues Cano; Bradesco Seguros' Chief Executive Officer, Ivan Gontijo; and our Executive Director, Investor Relations Officer, Leandro Miranda. For starting the call, I turn the floor to Leandro.

[Leandro Miranda:]

Thank you, Firetti. Greetings, everyone. Welcome to our conference call. Needless describe 2020. It's widely known how challenging that year was and the impact the pandemic had on our lives, families, communities and the global economy as a whole. Bradesco's performance was naturally below what we expected a year ago by the time that we present our guidance during the fourth quarter 2019 earnings conference. But it certainly was, by far, much, much better than we imagined that it would be soon after the beginning of the pandemic. We are proud to deliver our best results ever. We'd like to thank all of Bradesco's team for its commitment, resilience and creativity, our Board and especially Mr. Trabuco for his wisdom, guidance and trust. 2020 was a year of much learning of breaking paradox and of lessons that have changed the way in which we do business. Home office has come to stay. The digitization of our operations has deepened. The habits of clients have changed it. And once again, we were able to adapt to the new scenario and thrive as we have always done. Unfortunately, the pandemic is not over. It still has a terrible cost in terms of lives and suffering. But we believe that over the coming months, with the development of vaccination and logistics, we will see a significant reduction in the number of case and victims. In relation to the economy, we can see during 2021 the consolidation of the economic conditions. The increase in the number of the COVID case has brought greater restrictions to the economic activity, but we expect minor impacts on the economy than we had at the beginning of the pandemic due to the learning curve experienced in the first wave. We believe that the next tax incentives will be smaller, preventing further deterioration of public expenditures and asset prices.

[Operator:]

Our first question is coming from Mario Pierry of Bank of America.

[Mario Pierry:]

Okay. Congratulations on the excellent results. I have two questions, and I wanted to focus, one, on your fee income guidance in light of 1% to 5%. It just seems too conservative to us considering that you have easy comps, right? In 2020, your fees were down like 3%. You're forecasting strong volume growth of more than 10% on average. You're introducing a bunch of new products, as you highlighted. So I wanted to get then a little bit more better understanding why is the growth so anemic and maybe if you can break down between the major lines. If you talk about cards, checking accounts, asset management and loans, that will be helpful. And then my second question is related to your branches, right? As you showed on Slide 15, you reduced almost 1,100 branches in the last 1 year. That's 25% of your branch network. So I wanted to understand what happened to your NPS score during this period. What do you think is the right size of your branch network? So how much more do you think you can reduce? And also related to the branches, right, if we do a simple math here, 1 year ago, about 50% of your distribution network was through branches. Today, it's about 40%. So I was trying to understand also, does this have an impact on your revenue generation? Does it impact your -- especially your insurance operations?

[Leandro Miranda:]

Leandro speaking. Well, basically, regarding to the guidance of fees from 1% to 5%, you are right. It's pretty much conservative, but we are living in a world with the second wave of COVID. We do not know how much the economy will suffer from that. We do expect to have a GDP growth of 3.5% and an increase in competition. So we believe that if you take a look at the mid of the guidance, 3% shall be something that is very doable. Regarding to branches, at least 300 branches, we shall close or transform this year, but we are still in advance of the studies to see how much we can go beyond that. Our clients have been using more and more digital channels, and we can see that the transformation at least of branches can be a very good way to reduce costs due to security reasons. We do not need 3 security guards there, and we not need to transport money from one site to the other. And those branch shall become more and more business offices than anything else. The digital channel, therefore, have been a very good replacement of the branches as a way to make business. The NPS continues to be growing, and we believe that our new initiative to have the customer in the center of our attention shall make this NPS to continue to grow more and more.

[Octavio de Lazari:]

Let me just complement some points. You asked about the growth in volumes. This is something that not necessarily has -- in low volumes, not necessarily has a direct, strong correlation with fees. I remind you that the fees for credit operations is part of the credit operation line. That is one of the -- one of our fees, certainly doesn't represent the bulk of the fees. We think credit cards will do very well. We should have a positive performance in checking account fees. But certainly, it's not a very strong growth in this line, mostly driven by the increasing number of accounts we had over the last few years the -- and probably we will continue to have. In the asset management, basically, we are doing a very good job in terms of changing the mix. We thank it to you that the fact we're up here soon. But especially in the first half of next year, we still have on a comparable basis -- on a comparison basis the effect on the fixed income funds that actually had a reduction in a management fees and resources in the first half '21. In terms of branches, basically, we can say that most of what is going to happen in 2021 are going to be transformation of branches in business units. We can say some 300 branches in 2021. We don't know the timing for that, but up to 100 branches could be definitely. Yeah. And 100 branches could be closed.

[Mario Pierry:]

Okay. Just then to expand a little bit on the fees. Like when I mentioned, you're talking about loan growth of 10%, it means that you expect activity to go back up in Brazil. When we look at your GDP forecast, about 3.5 and then we're talking about inflation, may be another 3.5%, 4%, we're talking about nominal growth of 7 million. And then when we look at your fees, it's growing half of nominal GDP. So that's why it was a bit surprising to me. It just seems too conservative. I think what you mentioned here, credit card should do well, checking account okay. But maybe the pressure is more on the asset management line. Is that right?

[Leandro Miranda:]

Mario, we hope you are right. We hope you are right that it's too conservative. We never know. We shall expect competition, and that's the number that we feel comfortable to indicate to the rest of the industry with a lot of responsibility.

[Octavio de Lazari:]

Yes. And if you remind, it's pretty much in line with our speech since the third quarter when we gave that guidance.

[Mario Pierry:]

Right. And my final follow-up question is on the importance of your branch network for the sale of insurance. Is that -- is there -- should there be a big correlation between the number of branches and insurance revenues?

[Leandro Miranda:]

Well, as you may be aware, we have been expanding our channels in order to distribute insurance. Next, for instance, is a very good example, next has no branch and is more and more distributing insurance plans. So as we transform those branches into rep offices, such as Octavio has mentioned previously, we shall expect the number of insurance policies to grow. So we are centering our efforts on the clients. And we wanted our managers, regardless of where they are, to be focused more and more on clients' needs. And we do believe that insurance is something extremely important to our client base as a whole and shall be back even stronger in 2021. So we do not see the situation being jeopardized by the closure of branches. But on the other hand, we see it increasing as we transform it into rep offices. There will be more focus.

[Operator:]

Our next question is coming from Morgan from Jorge Kuri from Morgan Stanley.

[Jorge Kuri:]

Congrats on the numbers. Two questions, if I may. The first one on your operating expense guidance, minus 5 to minus 1, evidently, of all of these guidance items, that's where you have most control of. And the range seems quite high, minus 1 to minus 5. What are the assumptions for you on both sides of that guidance? So how do you get to minus 5? What are the things that you don't know for sure today that could potentially happen to get to minus 5 and the other way around or the minus 1? So as the year goes by, we're able to understand whether you're getting closer to 1 or the other end of the guidance. The second question is on the loan book. In 2020, you grew 10%. And I guess this is similar to the previous question. Loan book, you grew 10% in 2020. And your guidance for this year is not that different, 9% to 13%, so the midpoint is around that. Considering that the economy, hopefully, will be in a completely different dynamic this year, growing 4%, 5% maybe versus shrinking 4%, 5% last year, what's holding that expansion of credit this year? Why would it be the same as last year? Why would you have this like significantly easier comps to grow the credit book this year more?

[Leandro Miranda:]

Leandro speaking. Well, basically, regarding to our expenses as a whole, we continue to reduce them. We are confident that this is not something that you make on a one shot. It's a process. It's a cultural matter. This is our first priority. So we're going to keep on reducing them as much as we can, as much as technology allow us to do so. The transformation of the habits of our clients into getting more and more digital has helped us to close and as well as transform the physical branches into rep offices or to business units, and therefore, it allows us to reduce costs. Octavio was previously mentioning that 1/3 of our physical branch costs is regarding -- is related to security. So by the time that you transform them into units, you do not need this extra cost anymore. And we are going to keep on doing that even further. We are still getting to more detail on a new plan to transform more branches. We also shall benefit from the reduction of branches and personnel that we have done last year. So basically, as we had provisions for that, they shall be reflected on our monthly expenses. So we believe that we have room to do that. We do not believe that minus 1% to minus 5% or 1% to 5% reduction is challenging. It's according to our pace when we look at our current figures. And the loan book going from 9% to 13%, that is pretty much 11% in the middle of the guidance, although it is slightly above the expanded loan portfolio that we have in 2020 and although we have an economy shot that shall grow by 3.5%, well, basically, it's still an economy in recovery. There's still a second wave there. There is still a lot of stale coming from the portfolio for next year. So we believe it's a decent guidance. And again, we hope you are right and the portfolio shall grow even more. The point here is that we should be able to grow the portfolio even bigger if we were taking additional risk. But we want to be keep -- we want to keep the conservativeness that we have so far. So we want to reduce costs, have a very healthy portfolio so we shall have less costs and less provisions. That's our focus by now. So we do not want to accelerate the growth that much, and we prefer to have an excellent mix in terms of NIM.

[Jorge Kuri:]

All right. So just to make sure I understood the question about expenses. So ultimately, it's really about the velocity at which you close/transform branches. If we see that in the first half of the year, you've already gone to those 300 branches, then the likelihood that you'll get to the minus 5 increases. Is that right? Is that the environment?

[Leandro Miranda:]

That's correct. A significant part of this come from the branch transformation, but not only this. We are always renegotiating the contracts with our suppliers. We are adjusting travels. It's a cultural matter. We are reducing rentals because of the IGPM that came very high last year and still not in a very good level for us. So we are always revising this matter, and we see that there is plenty of room to do it. But it takes time. You cannot -- you are not able to renegotiate and to make all the transformations, all the closures that you wish at once. So it takes time.

[Octavio de Lazari:]

Jorge, only a complement on this OpEx question. Remind you something that Leandro said, we reduced 7% of the staff in the fourth quarter. So basically, the 7% reduction on something that is roughly half of the costs will already lead us to a very good reduction in expenses in 2021. We also closed/transformed something like 900 branches in the second half 2020 with some concentration in the fourth quarter. This also adds a few percentage points in this reduction in expenses. As we mentioned, we expect to transform 300 branches. We have a benefit of roughly 1/3 of the cost of our regional branch when we downsize it to a point of service or a business unit. We should close 100. So this is something that will happen. The transformation probably in the first half, the closures more throughout the year. The -- on the negative side, there is the salary adjustment for the staff that should happen only September, where inflation probably will be a little bit -- will be higher than the one we had last year, maybe around 3.5 or so. I think that these are the drivers. I think that's how we get this minus 1 to minus 5. And we think the middle of this range that is our budget is pretty much achievable.

[Operator:]

Our next question is coming from Geoffrey Elliott, Autonomous.

[Geoffrey Elliott:]

There's been a lot of capital coming into the digital banks over the last few months. New bank, obviously completed the Series G really recently, but also bank go into C6 and a number of others are raising equity. What do you think that does for the competitive environment? How is the behavior of the digital bank shift doing? And how are you going to respond to that?

[Leandro Miranda:]

Well, basically -- well, first of all, thank you very much for your question, Geoffrey. Leandro speaking. I mean we have been transforming ourselves deeply into a digital bank. We have 3 pillars to transform the incumbent bank to have -- to explore more and more our native digital bank and the open bank in itself. So we do not see fintechs as major competitors. We see them as someone that is accelerating the environment in which we are. It's just accelerating a trend of investment in digitalization. And we see them as very often as partners. We have seen that we have been able to grow our base of clients in next and especially in Bradesco. And we do not expect to see new bank, as you have pointed out, as someone that is going to be just driving out of here. You have to consider that most of those clients, they have accounts in multiple banks. And what is important to us is to be their principal -- their main bank. So principality is something extremely important in this business. And being a full bank with all the services, knowing our clients very well, using AI, using all the information we have to provide them with the best products that they have, especially in their financing needs, is a unique competitive advantage that we have. And that has been reflected in our financial statements, in our results. They have been there for couple of years, and therefore, we have been able to thrive throughout this process.

[Geoffrey Elliott:]

Thank you very much.

[Leandro Miranda:]

Thank you. Have a nice day. Well, gentlemen, I would like to thank you all for your time and wish you a healthy and great week. Take care.

[Operator:]

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