Banco do Brasil S.A.
Q4 2020 Earnings Call Transcript

Published: 15 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Banco do Brasil Fourth Quarter 2020 Earnings Conference Call. This event is being conducted in Portuguese with simultaneous translation into English and is also being recorded and broadcast live via webcast through Banco do Brasil's website, www.bb.com.br/ir, where the presentation is also available. With us today are Mr. Andre Brandao, CEO; Mr. Carlos Andre, Financial VP and IRO; and Mr. A - Daniel Maria, Head of Investor Relations for Banco do Brasil.

[Andre Brandao:]

Good morning, everyone. Thank you very much for joining us today with -- during our conference call for the results of 2020. As always, I will start with a brief introduction, and I'll give the floor to Carlos Andre to elaborate on the details. I would like to start by talking about the year of 2020. As I said in our previous meeting, it has been a very unusual year and as we said during the presentation, was a challenging year for several reasons, personal and professional reasons. And also, it was a very transformational year because it led the financial industry and Banco do Brasil as well to rethink about ways of operating in this new momentum and in terms of what we saw in the competition group, digital banks, fintechs, regulatory changes as we are now seeing with Open Bank and Pix. Certainly, this has been a very unusual and unique year in the way we have to operate. Usually, we say in the bank that Open Bank will drive customers to be more empowered. They will decide what they want to do. So as a result, I would like to reinstate a few points. Having the customer at the center, the way to retain clients goes to customer retention. Therefore, we have to understand how that client is, how he thinks. And we have to be on his shoes to see how we can best serve that client. I already talked about digital, but 2020 was a year that led us to really expedite that digital transformation. Also in terms of having a client-centered view and to empower our clients, we see clients who favor a digital interaction, whereas others favor a more personal interaction. That's why digital is here to stay, and we just have to adapt. And specialization, this proximity that we have with our clients lead us to be more specific in terms of the way we want to operate and serve our clients. In the past, at Banco do Brasil, that acceleration, both in terms of digital, specialization and channel integration, all of that has become something very clear and part of our strategy. Certainly, now a unique year with the pandemic, and the role of the financial system and the role of Banco do Brasil in society has become very important. We already talked about that in different occasions. But we were very strong in terms of our action and the way we supported society, society and our clients as well. But as we mentioned before, everything we did was in a very responsible way with total alignment to our view and the way we operate in the credit line or credit branding line.

[Carlos Andre:]

Well, good morning, everyone, and thank you very much for joining us today during our earnings release call. Thank you, Andre, for your initial remarks. And now I will talk to you about our main numbers and indicators. First of all, on Slide 15, I think that it's important that we highlight what happened last year. I mean, last year, we needed to put in place some preemptive provisions. And these provisions somehow impacted our results. Despite all that, it's important that we start by mentioning the results of Q4 2020 that grew 6.1% vis-à-vis the previous quarter. By the same token, our accumulated net income in 2020, adjusted net income was BRL 13.9 billion, which is an ROE of 12%. It's also important to highlight that our PPOP was very resilient. PPOP is pretax and pre-provision earnings. So by the end of 2020, we reached BRL 42.4 billion, growing 5.9% vis-à-vis the same period of the year before. Now speaking about our expanded loan portfolio. By the end of 2020, we had BRL 742 billion, growing 1.5% vis-à-vis the third quarter and also growing 9% vis-à-vis the end of 2019. The main highlight involves the individuals portfolio, which grew 6.7% vis-à-vis 2019 with some lines, particularly payroll, deductible loans with good performance. We grew 15.2%. Also, when you look at SME, we grew. Vis-à-vis 2019, we grew 25.6%. And the highlight here goes to our participation in the government aid programs, especially Pronampe and CGPE. Now speaking about large corporations and large corporates and government, there was an increase of 10.8%. And probably I'll draw your attention here to our performance in the upper middle segment that is in keeping with our goal to improve the mix of the portfolio for better returns. And finally, agribusiness, which is one of the highlights of the bank, we were able to post 4.3% growth when compared to 2019. And mostly this was rural credit. Moving to the next slide. Here, we have a lot of information, and we bring a lot of details about our credit forbearance portfolio. And I know that analysts will look at this in a lot of detail. Our credit portfolio was BRL 130.1 billion, which serves 2.3 million customers. First point here is the quality of this forbearance portfolio with almost 95% in operations with AA to C ratings, with over 98% of transactions with no delinquency history, with a very long history with the bank, over 17 years of relationship time. We have 4 waves of credit forbearance. In the last 2 waves, I think if you look at the yellow bar in the slide, here, we had a relevant participation of government clients. And due to a very specific law approved by the end of November, they were able to adhere to the forbearance portfolios. When we consider the government segments, together with the payroll loans of individuals, out of the BRL 130 billion, almost 45% considering payroll, payroll loans and government, add up to 2 items with a lower risk in this forbearance portfolio. In addition to that, in payroll loans, as part of that gray bar that appears in the slide, we also have the dynamic flow of exit from grace period. That's why sometimes it's difficult for us to distinguish what is really forbearance because of the pandemic or what are natural forbearance that is carried with the operation. And SME, SME is an area that we have to look closely because of the rate. 85% of the credit forbearance were geared towards companies that are more resilient. Still picking up at the portfolio, we showed you how we were able to extend the credit. Now we look towards the future. The first point here is that over 50% of all of the transactions are already presenting good payment flow, and I would like to refer to NPL. NPL. I mean, the shorter NPLs, 15 to 90 days. In the NPL over 90 days, they are still at a very low level. 0.76 in the shorter NPL, and 0.44 longer NPLs. Well, we certainly will see adjustments in these figures. Caused by the payment dynamics, we expect to see a higher concentration in the first quarter of this year. And the remaining of the portfolio will be normalized in the next coming quarters. Now moving to Slide 19. Here, we will talk about the renegotiated portfolio. And I'd like to make a distinction between the forbearance portfolio and the renegotiated one. The renegotiated one ended in 29.5 -- BRL 29.6 billion was due to a specific case that was included in this calculation. What I would like to highlight here are receivables minus net interest that presented a good performance. We had BRL 2.8 billion, which represented an increase vis-à-vis previous years, and that was a positive performance in terms of delinquency levels with a very satisfactory coverage ratio. In regards to individuals, I would also like to emphasize renegotiations conducted through digital channel. 47.5% of renegotiations occurred through the digital channel, which brings a more positive experience to clients. And at the same time, these negotiations are more efficient on our side, and this led to almost 372,000 contracts from individuals. Now moving to the next slide. We talk about ALL and credit risk. As I said earlier on, this year had a very unique dynamic on the provision side. We introduced into our balance sheet preemptive provisions for credit risk amounting to BRL 8.1 billion. These preemptive provisions were spread in a very uniform way between all of the 4 quarters of 2020, about BRL 20 million per quarter. ALL expanded, at the end of the fourth quarter had BRL 5.2 billion being added. In fact, there was a decrease when compared to BRL 5.5 billion on Q3 of 2020. In fact, this was partially attributed to our good performance in terms of recovery of write-offs. I mean, 50% of credit recovery was done with cash payments, and this is a very significant aspect and also a reduction in impairment when we compare fourth quarter to third quarter. Anyway, we believe that we were able to build. And we indeed built a good cushion of provisions, good enough to allow us to navigate through 2021 in a very -- with a very comfortable position, offering all the print conditions that are necessary for us to improve our results. Slide 21 refers to NPL. Our NPL indicators, even if you look at the growth of the portfolio and negotiation dynamics, they are in a very comfortable position by the end of 2020. I mean, NPL over 90 days is just 1.9%, meaning that it's lower when compared to the average of the national system, which was 2.1%. And NPL 15 to 90 days is flat at very comfortable levels once again. Coverage ratio provision vis-à-vis delinquency, the balance is very robust. By the end of 2020, we had almost 350% coverage, whereas NPL formation and new NPL coverage still remains at very comfortable levels. Now speaking about our revenues, first of all, I would like to emphasize our NII. NII was up by 5.1%, reaching at the end of 2020 BRL 56.7 billion, very important contribution coming from our funding costs. Our funding costs were significantly reduced in 2020. That was an important contribution coming from the reduction of the basic interest rate. And in 2021, I think it's reasonable to expect that this contribution on the funding side would be proportionately lower. But we believe that credit revenue would be strengthened. And as a consequence, we will be able to deliver a net interest income which will be very competitive. In terms of fee income, looking from the third towards the fourth quarter, there was an increase of 1.5%. And once we compare 2020 to 2019 in fee income, there was a reduction of 1.7%, and there are some peculiarities in the way where we calculate our fee income, some lines that traditionally for some of our peers, at the end, impact the fee income. In our very specific case, there are calculated in the line of equity income, and I can talk about credit card acquiring business. And part of that revenue is captured through equity income. And also with our partnership with UBS BB in the area of capital markets, part of the revenue from the capital markets, a significant part of it, will also be calculated through equity income rather than fee income. Now speaking about admin expenses, our CEO already talked about that. It was very stable between 2019 and 2020. But the highlight is in personnel expenses, which had a decline of 0.1%, resulting in an efficiency increase of 36%. As I ended the previous slide with expenses, I think it's important that I mention our efficiency measures already mentioned by Andre. Here, the goal is to seek for further reductions of BRL 3 billion in a recurrent way. Once we deploy all of the measures, we aim at reaching an expense reduction of BRL 3 billion, a reduction in recurring expenses. And then we have what we call institutional reorganization. In fact, this is a combination of measures that starts with the recombination of our branches that we are now implementing in our head office. Also, we are making changes to our back office and commission positions. And this will generate savings of BRL 982 million, close to BRL 1 billion. In terms of Performa and new compensation plan, this was a measure that, together with Flex BB and home office and all of the eco-efficiency measures, measures that have been previously announced. And I think you might recall that we have talked about the capacity to reduce expenses of BRL 3.3 billion during a period of 5 years with Performa, Flex BB and efficiency measures. So due to the dynamics of all of the other measures and in particular, related to PAQ and PDE, we will accelerate the capture of these savings and especially with the Performa and new compensation plan. So much so that in the next 5 years, we will probably reach savings of BRL 10 billion. And in 2020 alone, our gross savings reached BRL 1 billion. And voluntary severance programs, PAQ and PDE, our calculation indicates savings, recurring savings of BRL 783 million a year. Moving to Slide 24. Here, I talk about both voluntary severance plans or termination plans. We already had the adherence of 5,533 employees that adhered to the program. Almost 75% of these employees are employees close to retirement. And there was an additional percentage of about 5% of other employees that very soon would be eligible for retirement. And as I said before, these 2 programs, PAQ and PDE, will provide us with recurring savings of BRL 783 million annually. And in the next 5 years, we will be saving net savings of BRL 2.9 billion. The evolution of our employee or head count appears in the bottom part of the slide. At the end of 2019, we had 93,190 employees. And in 2020, we had retirement or natural terminations of 1,500 employees. And by the end of 2020, we had 91,673 employees. With an additional reduction of 5,533 of employees who adhere to the voluntary program so when all of the terminations are concluded, we will end up with 86,140 employees. So a reduction of over 7,000 employees. Another interesting point to highlight is the average cost of new employees or employees that will be future employees of the bank is on average 50% lower than the current average cost. And finally, already mentioned by Andre, is always worth to mention our CET1. And at the end of 2020, our CET1 reached 13.62%. And this was a combination of some end mixes, well, net income, positive effects of mark-to-market, some adjustments that had a positive impact. And on the negative side, I would probably mention some actuarial impacts, which reduced that number a bit, and also risk-adjusted assets. An important thing to mention is that now we have a very sound capital base, and this will help in the performance -- boost the performance of our loan operation. Well, I already talked about 2020, and now we are revisiting our guidance for 2021. And I'll just highlight a few items. Our guidance for adjusted net income for 2021 is being presented here in the range between BRL 16 billion to BRL 19 billion. And contributing to this guidance is the return to normality of the provision dynamics. And we expect here that the expanded ALL should be between BRL 14 billion and BRL 17 billion. Our growth expectation of our NII is between 2.5% and 6.5%. I already talked about what we anticipate in terms of the dynamic of 2020. I mean, we have funding dynamic that should be compensated by some loan dynamics. And we still envision some additional gains even though not so high in terms of cost of funding. The loan portfolio we expect to grow between 8% to 12%. And in our view, this is a very robust growth. Fee income, I already explained. I think that it's important to mention, and I will reemphasize that. We have some peculiarity that really distinguishes us vis-à-vis our peers. And I think that these peculiarities, in part, explain our expectation to work in the range of minus 1.5% to 1.5% growth. Admin expenses, the range is minus 1.5% to 1.5%. And this takes into account inflationary expectations. We already planted the seed to reap the benefits as of 2021. So after 2021, we expect to increase our performance in terms of admin expenses. So we will work hard to be on the negative side of the range in order to deliver sustainable results in the future. And with that, I conclude my presentation, and we are now available to take your questions.

[Operator:]

Our first question comes from Mr. Jorg Friedemann from Citibank.

[Jorg Friedemann:]

I have two questions. The first one, and thank you, Carlos, for that very detailed explanation about the range of fee income, but we were a bit surprised even with that range because when you look at the numbers for 2020, if you could please give us an idea of what would be that adjusted figure, the recurrent with equity income. This would be really helpful. This is my first question. And my second question is about capital. You are surprising us very positively. Quarter-on-quarter is really impressive and impressive growth of your loan portfolio. The RWA of credit risk is lower. It has been quite stable. Well, certainly due to the government program, but you had a very good management of your credit risk. But what is the destination of that surplus capital? You have 11% in terms of your CET1. Do you have any idea in terms of the destination of that capital or dividend or even the payment of that BRL 8.1 billion? Even if you were to adjust it by that, you would still have CET about -- of around 12.5% and whether that will be also discussed by your Executive Committee.

[Carlos Andre:]

Well, thank you, Jorg. I will start with some explanations. And here, we also have A - Carlos Bonetti. He is our Vice President for Risk and Credit Risk. Well, addressing your question about the income, I don't have here a pro forma number of what would be the range once you perform all of the adjustments considering the peculiarity of fee income. So I'll leave that for A - Daniel Maria. Maybe he can do that homework and give you an overview, considering all of the items that appear under equity income. And in terms of the dynamics or the components that are captured in fee income, here, we have important contributions in that line and our revenues related to checking account fees. And in this regard, because of competition, et cetera, we have some very challenging scenarios. But I would also like to mention the counter side of that, which is the improvement of our service capacity, putting more customers on board. If by one side, this competition is high, we also believe that we still have further opportunities to capture through better service and better opportunities to serve clients better and more encompassing. And eventually, we will certainly see some contribution coming forward with fee income. Another important component is admin expenses of asset management. In 2020, we made several adjustments to some product lines and some asset management to adjust them to this new reality of low interest rates. Therefore, that -- we expect that using -- I mean, good investment consulting, we want to make a transition from some products to more sophisticated products. So like products that have exposure to international markets, et cetera. So despite the competition and despite this very challenging scenario, especially in terms of fixed income investments, we will be able to deliver good results and growing results in terms of asset management. We see still some other opportunities in terms of pension funds, insurance and premium bonds. This is the first part of your question. There was another question also. I think that in practice, we present a very robust number. You should also recall some peculiarities that lead us to be more conservative on our side. One point is the item related to actuarial risks. With actuarial risk, I think you are quite aware that there is some volatility that comes to our capital index because of actuarial issues, especially related to Previ employee fund and our health care plan. And as a consequence, we understand that it will be prudent to keep a safety cushion for some contingencies. And another point you mentioned relates to capital debt index, BRL 8.1 billion. We are still looking at it and discussing issues related to probably the return of that plan to national treasuries. I mean, just during a more recent discussion, it was a safeguard to maintain legal security on the side of the asset, having us a base all of the funding that was earmarked. The funding was used for agribusiness, and the portfolio of these agribusiness transactions have a very long maturity date. So until you have the mature portfolio, I mean, it takes a long time for the portfolio to be totally mature. And during that recent discussion, they mentioned that we have to respect issues related to capital. And with all that, I believe that we have very comfortable rates, and they allow us to outperform in terms of revenues and assets. Now I'll turn the floor to Bonetti.

[Carlos Bonetti:]

I just want to mention the way we will use that capital. I think the most direct answer is offering credit. Our growth guidance is very robust for 2021. So this capital will be used to -- using our main business, which is loan performance. The bank has a big appetite, and we will still use this very positive year.

[Jorg Friedemann:]

Another follow-up. So that changes the view about your capital target, a CET1 target or it still remains at 11%? Or maybe we should assume that in the next quarters, you will consume the CET1 to converge to your expectation?

[Unidentified Company Representative:]

Our target remains the same at 11%, and we also believe that with a better dynamic in the economy, we will have the opportunity to allocate that capital in our credit business.

[Operator:]

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

[Mario Pierry:]

I have 2 questions. My first question is about your decision to remain offering that wave of renegotiations. For the first time, private banks were only offering 1 or 2 waves at the most. You said that most of that renegotiated loan refers to payroll loans or government credits with a lower risk. I just want to understand the bank's decision to continue to offer these renegotiated opportunity, especially in cases with a very low delinquency rate. Then PAQ and PDE, you made clear what the benefits were. But I just want to understand what is the cost of these programs to the bank. What could we expect in terms of some extraordinary expense looking towards the second and third quarters?

[Unidentified Company Representative:]

Bonetti?

[Carlos Bonetti:]

I will start addressing your first question about the renegotiation. The fourth wave that we implemented, I mean, both the third and the fourth waves had a larger number of forbearance, especially in regards to government transaction. The regulation that allowed for that extension came a little bit later. And that's why this was mostly concentrated in the third and fourth waves. These are loans backed by the federal government. And in fact, the risk is very low. But the idea here is just to organize and optimize the cash flow of these governments with the payment of the installment. So we still also had, I mean, loan portfolio forbearance from large companies, about BRL 4 billion in the fourth wave were earmarked for large companies and again, serving the needs of the bank to organize the cash flow and the payment flow of these transactions. It's important to remember that we are talking about clients that have been with the bank for many years. The relationship time exceeds 17 years. Therefore, we are very much aware of their business, and we know -- we are very much aware of the cash flow of these companies. That's why we granted that extension. And then we have a number of individuals, and this involves the organization of payments from payroll loans from the space. The idea that it was renegotiated together with the paying agents was just to give a relief to the families in terms of the deductions from their payrolls, extending the payment to a later date. Well, we know the paying company, the payer. And therefore, we decided that it was an adequate move to grant an additional payment relief plan. So in fact, you're right. At first, we have the implementation costs of some of these programs. But we expect the impact to be around BRL 800 million in terms of implementation costs on year 1.

[Operator:]

Our next question is from Gustavo Schroden from Golden Sachs.

[Gustavo Schroden:]

I also have 2 questions. My first question is about NII. Carlos talked about some pressure on the funding cost, but I would just like some additional clarity. What is behind that pressure on the funding cost and whether that has to do with this expectation of increase in the Selic rate? And after so many changes in your mix, what about today? I mean, how much of your asset today is prefixed, and how much reliability is prefixed? So this will give us a better idea about what will be the impact of a potential increase on the Selic rate and what is the dynamic of the margins throughout 2021. My second question, because it's not very clear to me when we look at the numbers, when you talk about BRL 6 billion, but for how long? This is not very clear to me. And how does that communicate with that savings of BRL 10 million by 2025? I just want to understand that window of time and how does that talks to that BRL 10 million by 2025? And whether in your OpEx guidance, do you believe that your expectation is 100% included in your guidance? I know that this is a plan. You'll have an expectation of having an improvement of BRL 3 billion. Are you already considering that BRL 3 billion improvement in your guidance or not?

[Unidentified Company Representative:]

Well, thank you, Gustavo. I will start with your first question, which is related to our margin and then you asked us to elaborate on funding. And in fact, as you put it yourself, in 2020, there was an important contribution in the reduction of cost of funding. Still, structurally speaking, on the funding side, on the liability side, most liabilities are indexed to CMI. I don't have the exact numbers, but we can tell you -- give you more details about the mismatch. But certainly, part of -- an important part of our portfolio is on the asset side, prefixed rate. Naturally, in -- we are getting into 2021, where we see an evolution of the Selic rate, and this somehow could put some pressure. I mean, not really put some pressure, but change the dynamics in terms of our NII. Well, number one, we still have additional gains to be captured on the funding side due to renegotiation of some escrow deposits or legal deposits. Some of them were already implemented at the end of 2020. So as a consequence, the benefit from more interesting renegotiations will be captured in full throughout the year of 2021. Also on the funding side, we anticipate that our treasury will be more active to capture further opportunities. Therefore, proactively, we will be able to perform better in terms of this mismatch between assets and liabilities. Just to give you an idea in terms of assets and liabilities, on the asset side, we have a higher percentage. So a higher mismatch in terms of prefixed here is about BRL 45 billion, I would say.

[Gustavo Schroden:]

Now how's fixed?

[Unidentified Company Representative:]

It's flat. So this most important mismatch where we have BRL 45 billion on the asset side, this is the position by the end of last year in terms of our funding. But it's also important to say that, number one, this is not a very significant number. And point number two is that the recycling of this portfolio occurs in a very short period of time, which allows us to go back to some positive and competitive levels in terms of NII. And I think you have a second question. Daniel, I think you can answer the second question.

[Daniel Maria:]

Well, I still have a comment about this question. Gustavo, I really -- I recommend you to look at this information later on. This mismatch, we have, about BRL 400 million. And this is carried over, as Carlos Andre said, to savings in the other party index in figures. But 60% of this amount is priced in up to 1 year. And because of that, the impact is almost neutral. In some transactions, there was a shock of 100 basis points in the curve would mean something around a reduction of BRL 100 million in terms of NII. And I would like to remind you that this higher interest rate will occur gradually. And this, at the end, mitigates the impact in terms of NII. Because of that, the behavior is almost neutral. One more point. Your second question was about the dynamic of the way we capture savings, right?

[Gustavo Schroden:]

Yes. I just want to understand the dynamic behind that BRL 3 billion and what is the time frame? And how much you're considering in your OpEx guidance? I mean, how do you consider the capture of that BRL 3 billion? Whether this is considered in full, or you consider that this -- in the guidance you already believe that this will be in effect in 2021, or are you being more conservative?

[Carlos Andre:]

Well, the first important point is that the guidance considers what, in fact, we believe, will be captured throughout the year of 2021. And during my presentation, on Slide 23, our gross savings would be for BRL 1 billion in 2021. And in 2021, this is a year where somehow, our implementation costs will be in effect that BRL 3 billion. The full implementation of each of these areas will happen in a time line, but it's a short period of time. So in a short period of time, we believe that all of these measures will be fully implemented. And I would say that most likely, most of these measures will be captured in the next 3 years. Well, certainly, some of them will occur in that time line like Performa and new compensation plan. You might recall that we made changes to the fixed compensation of commissioned positions with a reduction in the fixed compensation, and there is a reduction in variable compensation. The capture of this reduction due to lower fixed remuneration occurs as the turnover of our staff occurs in that time frame. And with the implementation of PAQ and PDE, our expected head count turnover to capture savings throughout time in our Performa and new compensation plan was down because employees leave the voluntary severance program. So that turnover was accelerated. And with FlexyBB and eco-efficiency plan, we will capture these savings in that time frame as we deploy both the restructuring of our real estate occupation and also capture of energy efficiency.

[Operator:]

Our next question comes from Nicolas Riva from Bank of America.

[Nicolas Riva:]

I have one question. Can you comment on your discussions with the government to pay for that BRL 8 billion of debt after the decision from the accounts court? Could you comment on the timing of that?

[Unidentified Company Representative:]

Here is Bonetti.

[Carlos Bonetti:]

Well, the discussion about that return is still ongoing. We don't have a time frame yet. But there is an important assumption, which is to follow the schedule of rural credit schedule, which is captured by that capital. So we are talking about following that repo schedule. That schedule is long. It's up to 10 years. This is the time that these transactions will remain in our portfolio.

[Operator:]

Our next question is from Otávio Tanganelli from Credit Suisse.

[Otávio Tanganelli:]

I just have one question related to the assets. Do you -- well, we still see some pressure coming from asset pricing. Strategically speaking, do you anticipate maybe a migration in the assets to a more risky asset that charge higher management fees or whether there is something to be done in this area? Or maybe you can -- we can engage in some partnership or whether it would make sense to have an asset in the bank or maybe you think about some divestment? I would just like to understand what is your view.

[Unidentified Company Representative:]

Otávio, here is Carlos Andre.

[Carlos Andre:]

Thank you for your question. I would even benefit from my previous position because I used to be CEO of BB DTVM, and this will help me to answer your question. Well, as you put it yourself, we've been seeing a very important move in the inventory in terms of repricing, repricing of some product lines. And in particular, some fixed income products or capital funds to market is more competitive. Not only that, macroeconomic conditions are requiring some further repositioning in these particular product lines. On the other hand, what we see is number one, in fact, here, we have the opportunity to promote a better fund allocation. So to diversify into better added-value products like funds that are allocated in assets abroad, not only we will be able to deliver a better portfolio to our clients but also we not only will be able to compensate for some eventual necessary adjustments from those more passive products, but it's important to highlight another move that we are currently implemented just announced by Andre during his presentation, which is to strengthen our investment advisory area. We are adding more than 900 expert professionals in asset management. We are also focusing on our -- investing in our style clients, so as to give them a more personalized service. By the same token, we are focusing on investing in our digital tools so that investors that are more independent in terms of their investment decisions that they can find not only advice but additional information to help them make investment decisions. So we want to grow our investment base. We want to improve the mix somehow to some product -- products that are more profitable so that we can work with admin rates and better products. And we also mentioned a more strategic move involving our asset management area. One point that I would like to mention is that this is a very important activity that we can offer our clients, meaning that investments are not out of the radar of what we want to offer our investors. We have a very relevant footprint. We have about 20% market share. This is a relevant presence. But again, we want to strengthen our credentials. And by doing so, we will somehow envision strategies that will help us to strengthen our capacity to manage and offer these products. And certainly, this is in partnership. It's an option. We do not call them divestments, but it's just a partnership to strengthen our capacity to develop solutions and, in particular, considering this current scenario.

[Operator:]

Our next question comes from Victor Schabbel from Bradesco.

[Victor Schabbel:]

Still along the same lines of Otávio's question, especially now regarding to emission, what do you think looking forward considering that this segment is becoming more and more competitive when you're looking at issuance of credit cards by fintechs, and you also have other players offering cash back? And you keep 100% of the cost and 50% of the revenue. How do you think you can equate that situation, considering cost and commission and competition for volume, considering the fact that digital banks are growing right now?

[Carlos Andre:]

Victor, thank you. This is Carlos Andre. Thank you for your question. I will talk about some of the aspects you mentioned. In the universe that we call means of payment, and I'll try to be very encompassing, it's -- you already said it yourself that it's important that we take into account the market dynamic. In fact, this is a market segment that is going through enormous transformation with new players, new players being very disruptive vis-à-vis traditional models. Therefore, we have to take into account the market dynamics. Another point mentioned by Andre is that products related to payment means and solutions related to payment means like acquiring business itself are all businesses and solutions that are important and strategic in regards to the banking relationship that, obviously, not only we want to maintain but also strengthen. And moreover, in all of the different segments, if I take the entire means of payment offering, we also have to take into account the format of all of our initiatives and strategies. In some cases, we have some specific partners. And in other instances, we work with listed companies and with minority shareholders. Therefore, it's important. What we can say about it is that okay, undoubtedly, this is a segment that is certainly going through a very quick transformation in competitive terms. The second point is that we understand that certainly we do have some solutions in some business lines that are important is that they remain in our basket of offers to our clients in favor of our relationship with them and all of the banking relationships that we intend to develop further. And also we have to take into account the partnerships and the relationships that we have when it comes to thinking about the solutions that can strengthen our position. I think for now, this is all I can say. I don't know whether that was helpful.

[Victor Schabbel:]

I have another follow-up. Do you believe that some potential solutions to optimize or to unleash additional value in this context of means of payment could also be built up in a reasonable time line of 1 or 2 years? Do you think this is something that you can structure in a good time frame, particularly in view of this very quick change that the industry is going through right now?

[Unidentified Company Representative:]

Well, we believe yes. We certainly have to look for alternatives and solutions that can be deployed quickly. It's difficult to tell you what would be the ideal time frame. But considering what I said before and what we are noticing from the market, I think it's reasonable to expect that our expectation would be to grow and look for measures to strengthen our business. It's difficult to give you a time line, but we want to move as quickly as possible.

[Operator:]

Our next question is from Jason Mollin from Scotiabank.

[Jason Mollin:]

Congratulations for having just 1 earnings release call rather than 2. I like that efficiency. And I think you answered most of my questions about efficiency gains. But my first question is with 100 -- with a decrease in head count by 2021, do you see the possibility of coming up with other additional programs for voluntary severance or termination in the future or -- and also changes to your distribution network? And my second question is about joint venture with UBS and the outlook for future joint ventures. You already mentioned an amazing number of transactions concluded and attributed mandates. So the question is your current net equity, is that appropriate? And what should we assume in terms of profitability for that subsidiary? Moreover, could you give us some more color about your strategic objective to pursue further asset sales or divestments?

[Andre Brandao:]

This is Andre. Thank you for your question. I think your first question was about additional voluntary severance programs. This certainly depends on the market. Clearly, we see that with further digitalization and the reduction of physical transactions, this certainly has an impact on the transactional move. We decided to do what had to be done to anticipate our move due to other criteria as well because our employee base, our head count base and the age bracket is very different when compared to our peers. But I think the main answer I could give you, to be very transparent, is that this will be done according to adjustments to the model. I believe that the industry as a whole will continue to be impacted, and efficiency is just part of our everyday operation. Our guidance will be a bit tighter. And therefore, this will be a reality looking forward as you can clearly see happening abroad. Now in regards to your second question about our JV with UBS BB, as I said before, it was a very good start. We certainly changed our relationship dynamics and the content as well when we talk to our clients. And as I also said, the pipeline is growing significantly beyond transaction. The Brazilian capital market is evolving as well. Therefore, I'm very optimistic and I'm very optimistic as well in terms of the potential growth looking forward. Therefore, we want to increase our balance sheet capacity with our content proposition to our clients. This is still in its infant phase. Certainly, we are already a large bank for several clients, and the idea now is to strengthen our position. Our main clients, we are now coming up with a list of different categories of clients for capital markets, et cetera. And the idea now is to evolve in this process. And as I said, we are just starting. And as we said before, last year, this JV not only increases our funding capacity in the Brazilian capital markets, but also it increases our distribution capacity as well, both for wealth and also on the institutional side. It's a win-win for both parties. We are improving. Not only we are improving on the relationship side but also on the content side. We are adding new people to provide content in terms of M&A and on the capital market side as well. We are very pleased with the beginning of this transaction. And this tends to grow, certainly, depending on the evolution of the capital markets in Brazil. But the trend is very positive. In terms of other partnerships, Carlos Andre just mentioned a potential alternative that involves the asset management area of the bank. What we see is in our track record. Banco do Brasil traditionally uses partnerships to expedite distribution processes to best serve our clients. We did that with insurance many years ago, and this is just a trend. I briefly mentioned that. But more and more, Banco do Brasil understands that the way to accelerate our technological capability and also to offer more products, it's through partnerships. Considering this current momentum with fintechs, et cetera, we don't have a lot of time to develop everything internally because there are other alternatives available in the market. We can -- different offerings to clients in terms of technology, et cetera. So announcements of further partnerships will continue to appear, and there will be more comments.

[Operator:]

Our next question is from Mr. Yuri Fernandes from JP Morgan.

[Yuri Fernandes:]

Congratulations on your initiatives to improve the bank's efficiency. I have one question about taxes. I don't think anybody has asked that question yet. Can you tell us about what happened this quarter that the tax rate was very low. When we do the reconciliation, there was some adjustments coming from equity. Can you explain what happened? And what is your view for 2021? I know that equity income helps your average tax rate. I have another question about investment on digital. You talked about BRL 2.3 billion in the next 3 years. And how does this compare with what the bank was doing before? There are some investment at the past about an investment which would be -- which will mean a higher average compared to digital. How does that number compares to your track record? And the third question is about your fee. I think you already talked a lot about that. But very quickly, a number of clients, I mean, even increased. Is the bank changing its strategy or it's becoming more aggressive? What is your view on that specific line in terms of fee income?

[Andre Brandao:]

Let me just kick off this discussion, and then I'll give the floor to Daniel. In terms of digital, I would just like to draw your attention to 2 aspects. Number one, it's a significant growth, but in fact, we are focusing more on analytics and AI. When I look year-on-year, just this year when compared to last year, the growth is over 120%. We are growing, and we know that we won't be able to invest in everything or in every area. That's why I said that we will have to team up and have partnerships with fintechs to expedite the platform. And we already said last year that we have a venture capital area to invest in fintechs to help them to accelerate their growth. With a larger commercial critical mass, we will have additional gains, and we'll be able to accelerate that process. The growth is really significant. But investment will never be as much as we would like because things happen much more quicker, and we know for sure that we won't be able to follow things at the pace that they happen. So please take that into account. Now investments, about BRL 3 billion a year. And those BRL 2 billion come in addition to what has been done . Yuri, here is Carlos Andre.

[Carlos Andre:]

Thank you for your questions. You talked about taxes. I think you answered your own question. The main contribution was a change in that possibility to do distribution. Through interest on capital, there was a cap of dividend payout of 20% imposed by the Central Bank, which was increased to 30%. And that would be the net amount that could be paid out to shareholders through interest on capital. And sometimes, the percentage could even be higher. That was the main item of contribution when it comes to tax payments in 2020. And then this is part of the natural dynamic throughout 2021. There isn't much else we could add about that. Now you also ask about fee income and how we see the dynamic, especially in terms of checking account fees. The main aspect that I would like to highlight here is that at first, due to the fact that the market is more competitive, those lines were a bit more pressured. And again, I repeat, probably we will have further opportunities because of the improvement of the fact that we are rendering further investment advice to our customers. We can offer them better products, and this will be translated into better opportunities. And in turn, we will have a more positive performance, especially in these lines of checking accounts. In my previous presentation, there are some lines that you see some more positive performance like asset management. We expect to see some growth despite the fact that the market is now more competitive. In regards to consortium and insurance products, pension plans and premium bonds, we anticipate some positive results and a positive contribution to that fee income line. I think that was all.

[Operator:]

Our next question is from .

[Unknown Analyst:]

I have a question about the one-off items. What were the one-off items, especially in terms of legal risk? Because this is not very clear by reading the release. And how do you see the evolution of the legal risk looking forward? We saw a trend towards improvement, and we believe that this trend will continue in 2021. And the other question is about provision. The guidance, through my calculation, think I see a 30% reduction in provisions, and you're already talking about BRL 3.9 billion per quarter versus that BRL 5.2 billion posted in the last quarter of 2020. How do you see the evolution in 2021? Is it something that should be normalized in the first half of the year? Or we should expect this trend upwards throughout the year?

[Carlos Andre:]

Well, you ask about legal and one-off risks -- I mean, legal risks and one-off items. In our Investor Relations area, I mean, we anticipated by 2021 a tough guidance of about BRL 1 billion of legal risk per quarter or something like that. But when you look at the accrued numbers throughout 2020, I think we were within that range, something like BRL 4.2 billion in legal risks. But in practical terms, in the last quarter, there was a more specific move. And when we talk about legal risk, we are basically talking about labor losses and civil losses. In terms of labor suits, there was one specific event when there was a change in the likelihood of successful outcome on our side. In terms of civil legal claims, we have some models that use artificial intelligence, whereby we try to capture all the need for additional provisions due to the fact that sometimes we feel that we need additional provisions. And this is pretty much in keeping with our predictive models that indicated what the amount to be or what the additional amounts could be certainly linked to the legal risk. You also asked about one-off items. In terms of one-off items, there is one thing related to reconciliation of accounts because of the government because we are the managing agent of the program. This is part of our run-of-the-mill operation. This is by itself a one-off item, and we post it as an extraordinary item. And this accounts for most part of what you're asking. Now speaking about provisions, I think, was your last question. Bonetti can give some more color about that and how we expect to see this evolving this year.

[Carlos Bonetti:]

Well, I'll just revisit the aspect of the legal risk because there is another strategy that we implemented in 2020 that is worth mentioning, and this is the acceleration of our agreement. We have a very important strategy to accelerate agreements. And you know that when you do that, you also accelerate expenses but with the intent of having savings as a result. And you also asked me about trends looking forward in 2021. That strategy will be accelerated in 2021. We will try to engage in further agreements in 2021 to preserve value in the future. This will be an important part of our management strategy to manage that legal risk, and our projection continues to follow on an improvement trajectory. Now speaking about provisions, our reading is that in 2020, we had a potential prepayment to support increasing in NPL in the future, therefore, what is our recurring portfolio in addition to what we intend to grow in terms of credit disbursement, with that, we would be able to go back to our normal evolution of the portfolio and normal evolution of provisions without any additional need to post additional provisions. And we are talking about a very positive throughout 2020. 2021, we will resume normality, very close to what we had in 2019. That's it. I hope I answered your question.

[Operator:]

Our next question is from Mr. Felipe Martinez from Morgan Stanley.

[Unknown Analyst:]

My question is about asset quality, especially NPLs. You said some quarters ago that we expected to see a peak of NPL in the second or third quarter of 2021. So how does that stand right now? You see that your NPL is very low, is below that of the market. How do you see the performance of NPL for 2021?

[Carlos Andre:]

This is Carlos Andre. In fact, our NPL, NPL is posting a very positive performance. Well, certainly, as I said before, there are some elements that contribute to that performance, given the growth of that portfolio and the migration of some portfolios to losses. So I think the most important aspect has to do with the dynamic of the forbearance of the portfolio that we did in 2020. As you can see through some of our slides, we have a prepayment schedule where there is a higher concentration throughout the first half of this year. So it would be fair to say that based on this schedule, that is mostly concentrated in the first quarter, after that, you will start to see, after that first quarter, an increase in NPL levels. And we believe that we will probably be close to higher NPL levels at the end of the first half of the year or maybe throughout the third quarter of the year. At the end of the second half, my colleagues are correct me -- correcting me. That's true. We do not anticipate NPL levels to reach the peaks that we had back in 2016 and '17.

[Unidentified Company Representative:]

I just want to add something. We are updating NPL projections as things evolve and uncertainties are lower. So our projection for the end of the year is that we will reach the peak of that projection. But the good news is that we believe NPL will resume the levels that we had at the end of 2019, so the expectation to supersede that level. I mean, this is already history. So everything indicates that NPL will perform better than what we expected before. That's good news. And that just reinstates that our provision, the provisions in place, will be enough to cover that new period.

[Operator:]

We now conclude the Q&A session. Mr. Andre Brandao will now continue with his final remarks.

[Andre Brandao:]

Well, thank you so much for joining us today. Once again, we are available. As I said before, our IR team is always available to talk to you and also myself and Carlos Andre. We want to have a very close relationship with you. So please don't hesitate to contact us, elaborate on our figures and then feel free to contact us. Have a very good day, a nice weekend, and I'll go back to all of you.

[Operator:]

Banco do Brasil's earnings release call is now concluded. We would like to thank you very much for participating, and all of the materials used during this call is available through the IR portal of the bank. Have a very good day.