Banco Bradesco S.A.
Q4 2021 Earnings Call Transcript

Published: 9 Feb 2022

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's Fourth Quarter 2021 Earnings Conference Call. This call is being broadcasted simultaneously through the Internet in the Investor Relations website bradescori.com.br/en. In that address you can also find the presentation available for download. Before proceeding let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect their future results of Banco Bradesco and could cause results to differ materially from those expressed such forward-looking statements. Now, I will turn the conference over to Mr. Carlos Firetti, Business Controller & Market Relations Director. Please proceed.

[Carlos Firetti:]

Hi everyone. Good afternoon. Welcome for our conference call for the discussions of our fourth quarter 2022 results as well our strategy. We have today with us Banco Bradesco's Chief Executive Officer, Octavio de Lazari Jr.; Andre Rodrigues Cano, Executive Vice President and CFO; Leandro Miranda, Executive Director and IRO; Oswaldo Fernandes Executive Director; Ivan Gontijo, Bradesco Seguros CEO; Renato Ejnisman, Bank Next CEO; and Curt Zimmermann, Bitz Chief Executive Officer. Before starting the presentation I turn the floor now to Leandro.

[Leandro Miranda:]

Thank you very much Firetti. Good afternoon everyone. I hope you are doing well. Thank you for joining our fourth quarter 2021 earnings conference call. 2021 was more complex than expected, but also a year of record profit in our history BRL26.2 billion. We went through two more waves of the pandemic which had a significant impact on the economy and our business, but the rapid rollout of vaccination at the mid of the year allowed business to resume activities. Unfortunately high inflation, a global phenomenon along with some local flavor led to a dramatic rise in interest rates. The tightening of monetary policy was a factor in 2021 and it will affect the recovery of the economy in 2022. For 2022 we anticipate a continued return to normalcy despite the current increase in COVID case as a result of the Omicron variants which we believe to be temporary. However, 2022 looks to be a year with modest growth due to the impacts of the monetary policy and fiscal uncertainties, which will certainly have an impact on our business. In this landscape, we see consistent credit growth over the year as the quality of origination remains quite good and there is demand from customers. We'll talk more specifically about guidance later on. Regarding our earnings we saw a solid performance in 2021. Net income came up to BRL26.2 billion the highest annual recurring net income in our history. We performed well in client NII which grew 6.5%; and fees which grew 4.1%, also an all-time record. The insurance segment was a slight contributor to the results even after absorbing around BRL5 billion in claims related to the pandemic. The loan portfolio grew by 18.3% and reached BRL812.7 billion. Credit origination through digital channels came up to BRL88 billion and now represents about 30% of the total. Cumulative ROE jumped to 18.1% on the way to recover to a higher recurring level and the efficiency ratio also improved coming down to 46%. Finally, we would like to point out the distribution of BRL9.2 billion in the form of interest on equity and dividends resulting in a payout higher than 44%. Turning now to slide four, we will address the issue of sustainability at Bradesco. Over the last few years we have seen growing concerns of climate change and its risks and opportunities for companies and economies. This is why this issue is one of the pillars of our sustainability strategy, ESG. In 2021, we were the first resident bank to sign on to Net Zero. It's a major commitment because it involves working even closer with our clients during the transition to a low-carbon economy, once again placing the client at the center of our strategies. As of now we are already carbon-neutral in terms of the emissions generated by our proprietary operations including indirectly Scope 3 emissions which for instance involves our employees commuting between their homes and workplace. We were the first Brazilian bank to join the PCAF, the Partnership for Carbon Accounting Financials in 2020 aimed at measuring and publishing our financial emissions. From this point on, our challenge will be even more significant, because it's no longer related to our operations, but about engaging and helping our customers during this transition, so they will be able to better manage their risks and take advantage of the opportunities that will come out of this new economy and becoming more resilient to climate change. Now we go to slide 5. We also announced in 2021 the goal of targeting BRL 250 billion by 2025 to sectors and assets with a positive social environment impact, as part of the commitments and strategies related to the transition to the new economy. We have already channeled BRL 83.6 billion, representing one-third of the targets, as a result of the growing demand for credit in these sectors and the greater momentum in the investment area. This solid performance may lead us to revise this goal. Further evidence of our commitment to financing sustainable business and serving as an agent of positive change in society was the issuance of our first bond linked to social environment criteria in international debt capital markets. It was announced in January, which amounted to $500 million. And as a result of our continuous development of the ESG aspects of our business, we have been recognized by major indexes and specialized agencies, and have received a rating above the market average. We would like to point out that the fourth year in a row we are among the 10 top banks in the world in the Dow Jones Sustainability Index. We have also been part of the B3 ISE since its creation in 2005. And now we are part of the first IGPTW portfolio, which is the new index from the B3 ESG family in partnership with Great Place to Work. Turning now to slide 6. Respect and care for our people have always been an integral part of Bradesco culture. And when we speak about our people, we are referring not to only 90,000 employees, but to 90,000 families. We believe in the strength of diversity, reinforcing the company's culture with interaction between employees. We employ a diverse staff with solid attitudes and actions related to the inclusion and have focused on our efforts to continually evolve through training and development. We adopted measures during the pandemic to ensure that customer service continues all along with the safety of our employees through unconditional support, including a 24/7 team of health professionals. The return to on-site activities has taken place gradually in the administrative areas with a bit more caution in place this time. And we will implement a hybrid model in which we are going to combine the best of both worlds, thereby benefiting both productivity and the quality of life for our team's environmental matters. Turning now to slide 7. With technology advancing quickly, the client has increasingly become the main player of their own choices, which is at the center of our decisions. Clients are more digital and demanding each day. They are engaged and intensively applying for new technology to their daily routines. Our policy is one of the alignment with what drives the client. And we are continually devoted to the search for new solutions to make our clients' life more uncomplicated. Bradesco experience uses their intelligence to build customized solutions improving financial and non-financial products and services according to customer expectations. On slide 8, we outlined some of the innovations in client experience with the bank, which are quickly deployed in systems that run into the cloud. We have implemented a financial manager tool which facilitates management of Bradesco accounts; and soon those of other institutions; plus promoting personalized e-sites. Everything in a single place within our existing app. The Bradesco app offers access to exclusive cashbacks in addition to non-financial products, such as our partnership with Disney. Transferring money abroad just got easier with the me-to-me currency exchange from Bradesco to BAC Florida an instant transfer from one account to another account. And through Bradesco Invest US, our digital investment platform in Miami, clients now have a simplified and 100% digital journey to invest in international assets through portfolios managed by BlackRock and Bradesco. Therefore those portfolios are based on their investment profile and objectives. Turning now to slide 9. The digital experience within Bradesco is constantly evolving and it ensures that the client has autonomy in their financial management. Proof can be found in the total amount of transactions. 98% are carry out through our digital channels, 91% of which are concentrated in mobile and Internet. We posted a surge of 5.3 million digital account holders compared to 2019. And the number of accounts opened through the app grew by five times. We also saw a significant boost in the number of products both individuals and companies have applied for. Turning now to Slide 10. The volume of credit that we originated through our digital channels was BRL 88 billion in 2021, a 36% growth compared to 2020. This amount now represents 30% of all credit produced by Bradesco. It should be pointed out that this number is greater than the sum of the credit portfolios of all fintechs operating in Brazil. We even made the progress in digital renegotiation, which was 43% higher than in 2020. These results illustrate the quick progress of our cloud systems such as BRAIN and CRM in the evolution of our business platforms that are centered on the clients. Moving on to Slide 11. We present the growth in the numbers of four of our cards. We revised the product portfolio and introduced cards that complement our offer allowing clients to choose the card that best suits their usage profile. The sale of cards through digital channels grew 5.8 times this year and now represents 20% of total sales. Slide 12 outlines our performance in vehicle financing. We took the lead in origination with a production that was 25% higher than a year ago. This performance is due to our continued focus on the needs of customers and partner channels which has made the journey to contract our products a digital experience, where it's possible to finance along with the vehicle, accessories, IPVA and other expenses plus the ability to take out insurance coverage. Rounding out this block of solutions focused on client experience I turn to Slide 13 to address BIA. BIA which also runs in the cloud has allowed us to become the pioneer bank in artificial intelligence. It's a solution that has already totaled 1.2 billion client transactions. Moved platform, BIA is found in branches, Fone Fácil or WhatsApp, one of the primary communication channels in the market, responsible for over 60% of BIA's mobile interactions. And the most intriguing thing is that BIA is also a pioneer in linking artificial intelligence with voice commands. It not only listens to the customer but also performs requested actions such as sharing of PIX receipts. On Slide 14, we feature some of the progress we have made in our digital initiatives that also make a great use of the cloud

[Operator:]

Thank you. Our first question comes from Jorge Kuri, Morgan Stanley.

[Jorge Kuri:]

Hi, everyone. Good morning. Thanks for the presentation. I wanted to ask two questions if I may. The first one is on your credit card book which grew 30% year-on-year, which is evidently very impressive. I wanted to understand what's driving this. Is -- what percentage is new clients? Where are those clients coming from? What type of segments you're winning market share on? Is it higher credit limits to your existing clients? And what do you think that looks like over the next 12 months in terms of growth rate for that portfolio? And then the second question is on asset quality. Evidently, I'm guessing you've seen your stock down. It's down now 9% today. My guess is that it's on delinquency risks. I think the market was unhappy to see NPLs go up. And so what do you think the market is missing? You seem to be very comfortable, if not even optimistic on delinquency. What do you think we're not seeing that you are? Can you maybe help us understand delinquency by product? What's your delinquency on your credit card book for example? What's your delinquency on your SME book? I think as you talk about mix shift driving this increase in NPLs and provisions, I think it will be very useful to provide the evidence of that. And my guess is that NPLs by product will be quite useful. Thank you.

[Leandro Miranda:]

Jorge, this is Leandro speaking. Thank you so much for your question. Well, basically credit card book has been increasing by 30% year-on-year. And the reason for that is the reopening of the economy primarily. Besides that, we are also improving and increasing our base of clients. Bradesco itself has reached the number of 31.4 million clients with checking accounts with us. Those clients also benefit from credit cards. Also, when you consider Next, you see this benefit. And as the pandemic resumes, we believe that the retail shall also increase the issuance of credit cards. Besides that we also have Bradesco Expresso that's our network that expands our fiscal presence even more on an asset-light basis. Regard to quality of the NPL, it's important to point out that it has been still lower our historical levels. And therefore, we feel very comfortable with the level of delinquency that we have seen. Pretty much we have increased NPL by 20 bps. So we do not see clients requesting any sort of additional renegotiations that significantly impact our books. So we guess the quality is very good. We have made all the provisions that we needed in 2021 especially. And therefore, from now on it's much more like the growth of the portfolio itself than any sort of the rate you'll see of the quality of the portfolio.

[Carlos Firetti:]

Hi, Jorge. Let me complement Leandro in these two questions. Regarding credit card I think, we had a pretty meaningful improvement in some of our platforms in credit card. We have increased a lot our digital origination of credit cards with new products. And also we benefit from a big improvement in the last – a big improvement in the last few years in our process of credit analysis analytics usage of data that allowed us to have even better underwriting. We have been working a lot in the activation of cards in our base of clients trying to deepening the penetration of cards in our base of own checking account holders. And also, we have an operation of – with retailers that was pretty much affected by the pandemic. And the reopening of the economy has also benefited this operation. Regarding credit quality, we are very comfortable with the evolution of our credit quality. NPL is doing very well sustained by a very good underwriting by all the changes in the profile of loans with strong growth in collateralized loans during the last two years, payroll loans mortgage. And this is behind, this very good performance. In terms of cost of risk, we think, we have a pretty realistic assumption and guidance for cost of risk. Now remember, last year, when we provided our guidance I think the market also thought it was kind of optimistic. And actually, we overperformed – we overdelivered on that. We think we are ready to go through the same path this time. Regarding NPLs by product. As you know, we don't provide and no one in the market among the peers provide. So we will at this time keep it that way.

[Jorge Kuri:]

Thanks, Firetti and Leandro. Much appreciate it.

[Leandro Miranda:]

Thank you, Jorge.

[Operator:]

Our next question comes from Jason Mollin, Scotiabank. Please proceed.

[Jason Mollin:]

Hello, everyone. Thanks for the opportunity to ask questions. My first question is on the outlook for Next and perhaps some additional operating metrics. You showed us some 10 – over 10 million clients now. I'm not sure, if you're able to share some more details on acquisition cost per clients or revenue per client. And if you have a view on, whether it makes sense – you've talked about potentially doing this in the past or made some comments that you'll see about listing potentially listing Next in the public market. And my second question is on the nature of the non-recurring items that you reported in the quarter, specifically on the reclassification of the securities from available for sale to trading. What were the implications? What was the decision-making process there? Were there tax implications? And now are you planning to sell those, or now you have the ability I guess to sell them. And also, on the non-recurring, if you can give us an update on potential future impairments. We saw some impairment charges and goodwill write-offs et cetera. If you can give us an update on what you think we could see going forward there? Thank you very much.

[Leandro Miranda:]

Jason, Leandro speaking. Thank you so much for your questions. I'm going to answer your second one, and then I'll pass the word to Renato Ejnisman that is Next CEO that is also with us on the line, okay? Well basically, we perceive some strong movements in interest rates. We realized that there would be an opportunity for handling a larger portfolio with current rates. And we sold the portion with lower interest rates and we acquired the portion with the long ones. It will bring benefit to '22 and also the coming years. And it will be neutral regarding to tax implications on this matter. Renato, please go ahead.

[Renato Ejnisman:]

Thank you, Leandro and thank you Jason for the question. I mean with regards to Next I mean it's true. I mean we don't yet divulge a lot of the figures which is .

[Leandro Miranda:]

Renato, are you there? Renato. Jason, are you there?

[Operator:]

We have lost the connection. Please hold.

[Jason Mollin:]

I'm here.

[Leandro Miranda:]

Okay. Unfortunately we missed Renato. He shall be back shortly with us. So, we're going to move to the next question and then we get back to yours, okay?

[Jason Mollin:]

Sounds good. Thank you, very much.

[Leandro Miranda:]

Thank you.

[Operator:]

Our next question comes from Tito Labarta, Goldman Sachs.

[Tito Labarta:]

Hi. Good morning. Good afternoon. Thank you for my call -- taking my question. A couple of questions also. I guess a follow-up on your loan growth guidance right 10% to 14%. I mean the system today is going around 15%, but you have -- the economy is decelerating. GDP growth could be 0% to 1%. How realistic or how comfortable do you feel on being able to achieve that growth? What kind of growth would you expect for the system? In other words, do you expect that you'll be able to gain some market share? It looks like you gained a little bit of market share on the overall loan portfolio in 2021. Do you expect that trend to continue? And then second question in terms of NII growing a bit below that loan portfolio. Could you is that because of just that your liabilities kind of repricing from the higher interest rate how long would it take to reprice your loan portfolio? And if you can give when do you think you could maybe see some margin expansion from the higher rate if you can? Thank you.

[Leandro Miranda:]

Thank you, Tito. I'm going to start here and then Firetti will come up with a complement, okay? Basically economies in Brazil, they see the credit portfolio growing by 7.5% this year. So it's way high from the GDP because there is a huge room for needs. And therefore, it won't be possible to grow by 18% as we did last year. But when you see the range that we are indicating we are pretty much comfortable with that. We have always been growing ahead of the market and we feel very confident that we shall be in the middle or even the upper part of our guidance. Regard to NII basically we are changing here in terms of market for higher coupons. So we believe there is very good gains ahead of us. It should be neutral by the end of this operation. And regarding to clients we have seen that clients are keeping up the spreads. We have been able to grow our margin. By year-end it was around 12% when you compare year-on-year. And besides that you have to conceive that we have a bank book. So basically the margin with clients is going to grow on a step-by-step basis why we just see the outstanding balance of our portfolio. That's the reason why you see some sort of encompass between the lines.

[Tito Labarta:]

All right. Thanks for that Leandro. And maybe one follow-up on the loan growth again. I mean you mentioned more in terms of the asset quality that you don't that you feel pretty comfortable with current levels. But I mean there was some deterioration. How much -- do you expect the asset quality to deteriorate a lot NPLs to get back to pre-COVID levels? Do you think you can kind of stay below that? I mean just with that type of growth in this economy you don't worry that there could be further deterioration in asset quality? Just trying to think how much can NPLs increase from here and does that impact your loan growth at all?

[Leandro Miranda:]

Tito, that's a very good question. We ourselves believe that we should be getting back to 2019 pre-pandemic levels. But the quality of the harvests have been so good so far that we have been driven to believe that we shall be even below our historical levels. So, we see a normal deterioration, but we shall believe that all the provisions that we have made heavily in 2020 and 2021 shall be more than enough to keep us on a very comfort level. Besides that even if the whole renegotiated portfolio went into delinquent we would still have 111%. The whole market would be below 100%. So, 202% in the weightings today and the worst, worst case scenario, in a chaos scenario, we would have 111%. So, we feel very comfortable with the level of protection that we have today.

[Tito Labarta:]

Great. Thanks for that. And then one final follow-up on that. That would imply that you do expect to use some of that excess coverage -- so the coverage ratio could maybe fall a bit this year. What's the normalized level? I know you don't always look at it this way but just to kind of how you think how that should evolve?

[Leandro Miranda:]

Indeed it shall even increase. So we do not see a deterioration of our coverage ratio.

[Tito Labarta:]

Okay. Perfect. Thank you.

[Leandro Miranda:]

Jason I guess Renato is back with us. So, I'm going to kind of ask him to keep on answering your point. Renato can you hear us?

[Renato Ejnisman:]

Thank you, Jason. Yes. Yes. I hope you can hear me. I apologize. I don't know what happened and I kept talking so I don't know exactly where I got interrupted. So, what I'll do is I'll just kind of start again, but I'll start a bit quick and summarize my answer. But essentially what I was saying was reached the 10 million market level which was market show that we are able to grow at a fast rate and have continued to do that. We did that while increasing unit metrics in a way that we are very comfortable with in terms of increasing revenues. And the revenue line that is most important for our business model is credit and we managed to do that increasing credit and we have improved tremendously our credit policies. We have done -- we're in the fourth review of our credit policy using a lot of analytics. We have hundreds of variables that we take into account in our credit models much in line with what other digital initiatives like ourselves have been doing. And as a result we managed to increase. When you look at on a year-over-year basis, we increased 84% our credit portfolio, but this mostly happened in the course of the second semester of last year when we started kind of around July kicking in the new credit policies the new credit models that have been improving over the last few months. And we believe that this will continue to accelerate and improve our revenue line. So, with regards to the customer acquisition cost that you also asked Jason again I mean we don't talk about ARPU or CAC most like most of our competitors. But what I can tell you is that we managed to increase the number of clients and accelerate the customer acquisition rate but actually reducing customer acquisition costs. Obviously, there is some seasonality within that. So, towards the end of the year, it costs more because there are more people fighting for air time in the different medias especially because of Black Friday and Christmas. But kind of if we take that out of this effect because we have changed our marketing strategy because we have -- like we have more awareness we have adopted some marketing campaigns, we have also introduced new models of acquisition like the Member Get Member program. And I think essentially our awareness has increased so we didn't have to push much in the end of the funnel at the performance and we managed to reduce the customer acquisition cost. So, again, when we look at the business model, I think things fall into place and we are happy with the way we are growing our business and also with the way the markets are. Thank you for the question Tito.

[Tito Labarta:]

Thank you.

[Operator:]

Our next question comes from Thiago Batista, UBS.

[Thiago Batista:]

Hi guys. Thanks for the opportunity. I have basically two questions and both of them on the guidance. The first one your guidance clearly is very complete but there is two main lines that are missing the market NII and the taxes. Can you comment what are the main trends that we are seeing for market NII and tax rate? The second question is still on the guidance is about the NPL ratio that you guys are considering when you look for the midpoint of the guidance -- of the guidance provision sorry.

[Leandro Miranda:]

Thiago regarding your -- the first part of your question in terms of market NII you can consider that we're going to have a reduction in 2022 compared to 2021. Tax rate, you can use a range between 32%, 34%. Regarding the NPL considered in our guidance, we consider that NPL will -- the total NPL will rise a little more in 2022 getting probably closer to pre-pandemic levels but probably still a little below it but already close.

[Thiago Batista:]

Very clear. Got you. Thanks.

[Operator:]

Our next question comes from Mario Pierry, Bank of America.

[Mario Pierry:]

Hi, guys. Good afternoon. Thanks for taking my question. Let me ask you two questions as well. The first one is on your client NII outlook. I was wondering how conservative are you being here? Because, when I look at your client NII in the fourth quarter and I annualize it, I already get 7% growth in 2022 while your guidance is only 8% to 12% growth. So, either you're having problems like repricing your loan books maybe you can discuss that. Are you seeing a more competitive environment, or are you concerned about raising spreads, because the consumer is not in good shape in Brazil given the high inflation weak economy. So that's the first question. It just seems too conservative to grow NII on the 8% to 12%, especially when you were expecting loan growth at 10% to 14% and maybe it has to do with the mix of your loan book. So can you also discuss on your loan book forecast, what are you expecting for SMEs, consumers and large corporates? That's the first question. The second question is related to your guidance for provisions. At the high end of your guidance, you're expecting growth of almost 30% in provisions. So I was wondering what could happen for you to reach the high end of your guidance and why you think that -- why you provide a guidance where provisions are rising 30%? Thank you.

[Leandro Miranda:]

Mario, let me start. Regarding the NII for clients' outlook, I think -- thank you for the question. I think we have been getting a lot of inquiries on that. The fact that the -- in our guidance, the NII from clients doesn't grow in line or faster than the loan growth, relates to the fact that despite the spreads in the new loans originated being higher than what we have seen for instance in the first half of 2021 when probably we had a bottom in spreads. It takes time to have the full repricing of the loan book. Basically this discrepance between the fact that in your view you see in the rates, rates are up and the fact that our NII from client doesn't reflect that totally is related to the pace of repricing. Our loan book has a duration of 1.5 years two years. So it takes time. Also despite the fact that spreads are higher than the bottom, they are still lower than what they were in the beginning of 2020. And you have operations maturing and getting out of our loan book. So that's the effect that is behind this kind of lag in the evolution of the clients NII. I remind you we had an 18% growth in the loan book in 2021 and our NII from clients grew 6.5%. Now we have -- we are pointing to 12% and NII from clients grow 10%. So this repricing and this benefit, it's coming. But the full benefit of higher spreads, higher interest rates on the funding side, takes a while to happen. So that's the key message there. In terms of client -- in terms of mix, we're going to have lower growth in large companies and kind of a similar growth in individuals and SMEs leading. So, individuals and SME is growing higher than the 12%. Sorry, can you remind me the question on provisions?

[Mario Pierry:]

Yes. Just before we get to the question on provisions then so when you talk about loan growth being driven by individuals and SMEs, right? This is a better loan mix that we're talking about in 2022 than 2021. So you should have some benefit on your margins from that. And if you can discuss like you said right the spread is already higher than in the first half of 2021. Do you see room for you to continue to increase spreads? Do you think that the consumers and corporates in Brazil would be able to absorb the higher spreads?

[Leandro Miranda:]

I think basically spreads were actually in a very low level in the first half of 2021. I think we are going through some recomposition of spreads in this environment of higher interest rates. I think the impact of higher spreads in the origination leads to this lower loan growth. We are pointing in 2022 comparing to 2021.

[Mario Pierry:]

Okay. And then the question on provisions was when I look at your guidance range of BRL 15 billion to BRL 19 billion the BRL 19 billion implies growth of almost 30% in provisions relative to 2021. So I was wondering under what kind of scenario you think you would be close to this high end of your guidance?

[Carlos Firetti:]

Yes. Our guidance as it always happens, we focus on the middle of the range. That is what connects with our budget our estimates. So the range contemplates unforeseen scenarios where actually things go worse than our expectations. Basically, that's what is contemplated in the range. But as you know the base case is BRL 17 billion.

[Mario Pierry:]

Okay. But that's what I was trying to get to then the 19 billion right, if things don't go as expected what are we talking about here? Is the economy contracting 1%, 2%? What are the macro assumptions behind that?

[Carlos Firetti:]

That may be related to growth higher than expected economy lower than expected. So again the range contemplates the -- some sort of standard deviation on the base case scenario not necessarily relates to a well-defined scenario.

[Mario Pierry:]

Okay. That's helpful. Just final one then. What is your base case scenario for interest rates, inflation and GDP growth?

[Carlos Firetti:]

Our scenario for GDP growth is 0.5%. Growth for inflation is 5.4% and we have SELIC at the end of '22 at 11.75%.

[Mario Pierry:]

Okay. Very helpful. Thank you very much.

[Operator:]

Our next question comes from Geoffrey Elliott, Autonomous.

[Geoffrey Elliott:]

Hello, everyone. Thanks for taking the question. The expense outlook clearly you're pointing to something that embeds some efficiency improvements. But can you talk about your expectations on the personnel cost side? You have the 11% agreement with the unions last year. Inflation is high, I'm sure not going to bond one chunky increases again. What sort of expectations are you embedding? Is it 11% again? Is it something a bit lower than that this time? And what are you seeing in the labor market in Brazil when you're out trying to hire people?

[Carlos Firetti:]

Thank you, Geoff. Basically our cost growth guidance considers all the impacts of this environment of higher inflation the fact that we are actually investing in our operation in technology, we are investing in people. At the same time, we are running a process in which we improve our efficiency which should incorporate or convert about 500 branches in 2022 in a smaller format. So we continue the process of improving efficiency. We have been converting most of our operations for instance the formalization of sale of products the signature of contracts in digital process on some sort of omnichannel approach where the client may be talking to a branch manager, but the confirmation of the contract the signature actually happens online. And all this process has been helping us to reduce costs. So this 5% considers all the pressures we have coming from the increasing salaries we had last year of about 11%, considers the fact that probably we're going to have inflation plus something or at least inflation again in September that is pretty much given by the jurisprudence in terms of labor agreements we have in Brazil. So probably it will happen something kind of in the same trend this year. And with that we -- with all these cost-cutting initiatives we think we may have the ability of keeping costs running only close to the inflation increase.

[Geoffrey Elliott:]

Got it. And if I could squeeze one more in on this credit topic, are there any pockets at all where you've seen credit metrics worse than you would have expected maybe six months ago given the slowdown in macro the other pressures on consumers and businesses? Is there anything that you're seeing that is worse than you would have expected if only because the macro and GDP growth is going to be a bit lower?

[Carlos Firetti:]

Look, I think during the pandemic there were some different and new trends. There was first the trend of actually clients and people the population accumulating cash actually saving. So getting financially in a better position that is certainly, have improved the credit worthiness of potential credit card clients as a whole. Even if the economy hasn't been doing as good as we expected we have seen actually formal employment in Brazil improving job creation so far improving. And that's kind of good for us kind of as part of the normalization of the economy in the post pandemic. On top of that there were all the improvements we had in terms of credit modeling usage of data access to different kinds of information knowing structural information about clients that somehow we could incorporate in our credit modeling process. So -- and we originated a lot of credit with collaterals mortgage payroll loans. So I think that's -- with that we believe, as I said that credit call it should normalize with NPLs increasing, but we think it will keep relatively under control.

[Geoffrey Elliott:]

That's great. Thank you.

[Operator:]

Our next question comes from Carlos Gomez, HSBC.

[Carlos Gomez:]

Hi. Good morning. I'm going to go back to the extraordinary charges in the quarter. The first one referred to your restructuring of about BRL440 million. Now, you do that every year. So one wonders to what extent that is extraordinary, or you could contribute part of normal expenses. What is your logic to say that it is extraordinary? And should we expect more such charges in the coming years? Is this a recurring event? The second one refers to the BRL1.9 billion diversification of securities. Again I think we struggle to understand what the logic is to be able to bring that loss forward and to consider it extraordinary now because had it been in the books you would have had it as an ordinary loss or lower income for the next two or three years. So why is it extraordinary now but it would be ordinary so this remains here? Thank you.

[Leandro Miranda:]

Hi Carlos, Leandro is speaking. Well basically regarding to your first question on the restructuring provision that we have made is pretty much to seize branches and to transform branches into business units. Just to give you a flavor, we plan to seize around 700 branches and to transform I would say by 650 branches. So if you put their rental, labor, and furniture cost is pretty much you shall have this amount. In order to say we're going to be able to keep on doing that in the coming years, it should pretty much depend on, how much our clients are going to be -- continue to increase the use of digital channels and the business units. So, as long as it makes sense, we will not do it. But it's very hard to say that, it's going to be every year. And therefore that's the reason why we put an extraordinary provision for that. And related to the market NII, what happened is that we realize that the volatility in interest rates and the fast growth of the base rate allows us an opportunity to sell the existing portfolio that there was a lower coupon and to increase with another portfolio of higher coupon and a duration that our treasury guys thought that there would be a gain for us. So by the end of the day as you count on the years ahead, it shall be neutral or with a slightly gain for us but we are just discussing the year. So you're going to be able to see that would be good for us. And there was no tax advantage. It's pretty much neutral.

[Carlos Gomez:]

Sorry if I can insist. You -- so this really is a treasury operation. You are exchanging some bonds for others who are material -- you are realizing a capital loss. I mean, why is that not trading loss part of your market income?

[Leandro Miranda:]

Basically because it was a management decision. We think it is extraordinary in that sense. The realization of profits this year comes from a decision of doing this movement.

[Carlos Gomez:]

Thank you so much.

[Operator:]

Our next question comes from James Saul , Lazard Asset Management.

[Unidentified Analyst:]

Yes. Could you guys hear me? So I have two questions, one on NII. Just let me ask it in a slightly different way. So no I think second -- the Q4 was the second quarter in a row where we see positive NII contributions from both spreads and mix if I look at the Q-on-Q the quarter-over-quarter movement. So my question is the following. Is there any reason why we should think that this trend positive contribution from mix as well as spreads won't continue in 2022, or if I put it differently, any reason why we should believe that spreads will be worse in Q4 2022 versus Q4 2021 or product mix will be worse in Q4 2022 than Q4 2021? I have another question as well.

[Leandro Miranda:]

Thanks for the question James. I guess, we are pretty much confident that this trend shall go on. So we shall be able to increase spreads with individuals and SMEs. And as our CEO pointed out earlier, we shall see a reduction in large corporate names because they are pretty much able to access the capital markets and they do not need capital. They are very well liquid. So we believe that we shall go on.

[Unidentified Analyst:]

But that doesn't tally to your guidance.

[Leandro Miranda:]

Yeah.

[Unidentified Analyst:]

Right. Okay, fair enough. And second question insurance. So in your 18% to 23% insurance income growth guidance, what's the implied claims ratio you're assuming versus 2019?

[Carlos Firetti:]

In terms of -- look the guidance implies both an improvement in the financial income in 2022 and a continuation of the improvements in the operation of insurance operation trends. I don't have at this moment specifically the implied loss ratio…

[Unidentified Analyst:]

It's fine. It's just that…

[Carlos Firetti:]

…to you. But it's a continuation of the growth.

[Unidentified Analyst:]

If you can just give me -- so will 2023 claims ratio be better than 2022 in your assumption of course?

[Carlos Firetti:]

Yeah.

[Unidentified Analyst:]

Okay.

[Carlos Firetti:]

Just by the continuation of the improvements related to COVID normalization. There's a lot of improvements we can still capture especially health insurance, but also the claims in car insurance, the insurance remains high. So there's a lot of improvements.

[Leandro Miranda:]

This is Leandro speaking just to give you a flavor, we pretty much understand that in terms of life and health, as well as elementary branches, we shall see some reduction in delinquents. Nevertheless in terms of vehicles, we shall see higher delinquents because pretty much the life will be turning back to the old times and we shall see more vehicles in the street, more traffic and all, the delinquencies, all the claims related to that.

[Q – Unidentified Analyst:]

Okay. Thank you very much. That’s really helpful. Thank you

[Octavio de Lazari Jr.:]

No problem. Take care.

[Operator:]

Our next question comes from Yuri Fernandes JPMorgan.

[Yuri Fernandes:]

Hello, everybody. Thank you for the opportunity of asking question. I have the first one regarding the dividend payout given, I guess you may continue delivering those 18% to 19% ROE this year and you expect it to grow from 10 to 14. What is the level of payout you are expecting on this equation right for kind of KPR no major increase on leverage and nothing like that. So I guess your bylaws is around 30% minimum payout. But historically you have been paying 40 to 50. So if you can comment a little bit on what should we expect for dividends for this year? That would be great. And I have a follow-up regarding market income. I guess it's clear I guess the message from Firetti that market economy decreased. But if you can quantify a little bit like what should we expect? And again I know you don't have a guidance. I know this is very volatile but I do see two potential tailwinds for you here. Like the first one is, potential major gains from your shareholders ex remunerated. I know it's not fully floating but higher rates should help a little bit on your working capital. And the second one is, the reclassification right of the securities book so if you can provide some color -- kind of color should we expect another decrease similar to the 2021 that is something closer to 2020. If something is smaller than that. And just an order of magnitude would be great for us here. Thank you

[Leandro Miranda:]

Thank you, Yuri. This is Leandro speaking. Let me start with your IOC right? So basically the idea here is to -- of course it will pretty much depend on the year we have had the economic conditions, the opportunities, how we use our capital but history to continue to pay around 40% as we have done throughout the years. We believe that 35% of that will come from IOC, that's pretty much the maximum we can pay. It's the most efficient for our shareholders. And the difference will be through dividends. That's your first question. Regarding to the second one, there is market NII, which we shifted the position to longer portfolio of higher coupon secured and we shall benefit from that in the three to four years ahead.

[Yuri Fernandes:]

Perfect, Leandro. Thank you very much.

[Leandro Miranda:]

Thank you

[Operator:]

Thank you. Due to the duration of the call, we now finish the question-and-answer session. I would like to invite the speakers for their closing remarks.

[Leandro Miranda:]

Well first of all I would like to thank you very much for making the time to be with us, not only through our presentation, but questions and answer. Of course, the market is changing very quickly. We are analyzing the opportunities. And should you have additional questions or clarifications, our IR team is going to be more than happy to address any of those. Wish you a very healthy and a great day. Take care. Bye-bye.

[Operator:]

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