Banco Santander (Brasil) S.A.
Q4 2012 Earnings Call Transcript

Published: 31 Jan 2013

[Operator:]

Good morning, and thank you for waiting. Welcome to the conference call to discuss Banco Santander (Brasil) S.A.'s results of the Fourth Quarter of 2012. Present here are Mr. Marcial Portela, CEO; and Mr. Carlos Galan, Vice President, Executive Officer, CFO; Oscar Rodrigues Herrero, Vice President, Executive Officer, CRO; and Mr. Luiz Felipe Taunay, Head of Investor Relations. The live webcast of this call is available at Banco Santander's Investor Relations site, www.santander.com.br/ri, where the presentation is available for download. [Operator Instructions] Before proceeding, we wish to clarify that forward-looking statements may be made during the conference call relating to the business outlook of Banco Santander, operating and financial projections and targets based on the beliefs and assumptions of the Executive Board, as well as on information currently available. Such forward-looking statements are not a guarantee of performance. They include risks, uncertainties and assumptions as they refer to future events and hence, depend on circumstances that may or may not occur. Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander and may cause actual results to substantially differ from those in the forward-looking statements. We would now like to pass over to Mr. Marcial Portela, CEO. Mr. Marcial Portela, you may proceed.

[Marcial Angel Portela Alvarez:]

Good afternoon, and thanks to all of you for listening to this conference call. The table of contents for today

[Operator:]

[Operator Instructions] Our first question comes from Carlos Macedo from Goldman Sachs.

[Carlos G. Macedo:]

A couple of them, both on the guidance side, if you can you give us some color. First, on margins, since it's such a relevant topic. Your credit spreads or credit yields in the quarter declined by 60 basis points and you're talking going to next year that we should see a further compression, mostly on mix. Was this quarter mostly driven by mix or was there outside factors like lower pricing and pressure from the government that we've heard? What should we expect in terms of margin specifically going to next year? Should we continue to see a compression? And if so, by what magnitude? The second question is related to the guidance on asset quality. You did mention that credit costs will be lower going forward, the NPL ratio increased 40 basis points this quarter at 5.5%. What is the view for -- and the NPL ratio going forward? And also on the credit cost side, you did see a significant decline in your NPL coverage, I understand you feel it's at a comfortable level. What should we work with in forecasting for your NPL coverage going forward as well?

[Marcial Angel Portela Alvarez:]

I'm passing over your question over to Carlos Galan, our CFO. He will make a more precise answer.

[Carlos Alberto Lopez Galan:]

Okay, Carlos. Well, regarding margins, I would like to highlight 2 ideas. The first one is, you were asking us about the 4Q. I would like to clarify to everyone that, basically, the impact that we have in our margin contributions, basically, BRL 200 million compared to the previous quarter, was based on mix, which means mix. Basically, the overdraft and credit card frauds and the volume in the credit card, the volume that we -- our clients use to finance in their balances, both overdrafts and create cash as most important products. They reduce the -- in relative terms, their presence or their volumes in the total portfolio. And given the fact that these 2 products, they have higher spreads than the rest. They drag the total overall portfolio by 60 basis points. Basically, to give you an idea, 80% of this 60 basis points declining in the 4Q, I'll explain for this reason. The other 20 basis points, as our CEO was mentioning, was explained by the lower prices or lower spreads. So once again, I would like to highlight that 4Q was impacted by the mix rather than the prices by itself. As a second idea, and regarding 2013, the idea is that more or less, our expectation -- and I would like to correct you that this is not a guidance, this is our outlook, our expectation, and that we think that we are going to run our credit spreads in line or in the neighborhood of the 4Q levels. Having said that, I mean, with seasonal patterns, I mean, this is no linear [ph]. And when you compare, for instance, the spread that we had in 2012, that is more or less 12.1%, 12.2%, and we are talking about 60 basis for the entire year, 60 basis points declining. This is more or less what we expect. So basically, the idea is that we have more or less achieved our natural running rate in average terms for the 2013 period. Of course, we will be impacted by the mix, in how the mix is evolving, as our CEO was mentioning. But in general terms, this is the view that we have for the entire period.

[Carlos G. Macedo:]

Okay. And for asset quality?

[Oscar Rodrigues Herrero:]

Yes. Carlos, thank you very much for your question. In terms of the credit quality, as Marcial pointed out in his presentation, I prefer to talk differently by segments. And as we have seen in the presentation, individuals in the fourth quarter in terms of NPLs already saw acceleration in terms of the ratio, that we, together with the fact that the early delinquency, it has been going down for the third quarter in a row. We're expecting to see a normalization and room for improvement in the first semester of 2013. On the corporate portfolio, as we said, there is a natural trend justified by the evolution of the mix towards SMEs. And also has been negatively impacted by the renegotiations in the last quarter. Again, as Marcial pointed out, the growth of the renegotiation were significantly lower than the average of the last quarters. And if you adjust by that, it will explain a significant part of the jump of serving in the last quarter. This is important because these renegotiations, when done, will maintain the level of provisions on it, which helps to understand why the increase in the NPLs have not have an impact in terms of allowance for credit quality. Going forward, in the corporate, we are expecting normalization in the first half that will show a room for improvement in the second half of 2013, always subject to the economy performing as expected, because this is a portfolio that is very much impacted by the growth in the GDP.

[Carlos G. Macedo:]

Perfect. Just so that I understand, so given that -- what you explained with respect to the renegotiation not having -- not changing the provisions on the loans, we should work with a coverage ratio in, generally, around where it is now going forward, right? Is that the expectation that you have for the year?

[Oscar Rodrigues Herrero:]

Yes. I think it's basically around where it is adjusted by the impact that it had the renegotiations on it, which means that if we -- as we're working on, we improve the -- better negotiations in the next few quarters, which will go back to the levels around 130%.

[Operator:]

The next question comes from Philip Finch of UBS.

[Philip Finch:]

Two questions for me, please. First, is on your loan growth expectations. Given that you clearly are shifting towards SMEs, so if you can give us any color on what to expect in light of improving microeconomic outlook? And also related to that, the potential change in your loan mix that we could expect to evolve this year. And secondly is regarding the fees, why you had decent growth last year and clearly, you've highlighted on the call earlier that you would look to grow this to help compensate, maybe, any pressure on the spread front. Could you explain what sort of expectations you have for 2013 and what could be the key drivers for that?

[Marcial Angel Portela Alvarez:]

Thank you, Philip. Related to the expectations we have for the GDP growth for this present year, we believe it should be, our position, is that the GDP could grow something around 3% in the year. It will probably take a little longer than initially expected so that the first quarter is difficult to see robust growth. But I think, as far as the year is going through the second and the third quarter, we will see this 3% GDP growth quite easily. Related to credit growth in the system, we believe that the nominal growth would be about 9%. So a reasonable leverage should increase the credit and the credit portfolios to something like 15%. This would be similar to what was at the end of year 2012. But the mix in terms of sectors if the industry, as far as we see today, it should be different. So that private-owned bank should grow at something like 15%, 16%. Our competitors are, given this view also to the market and the public- or state-owned banks they should normalize, probably, the rate of growth and not repeating such an aggressive growth as in 2012. So altogether, we expect to grow in terms of loan portfolio something similar to the market, this would be around this 15%. And if the GDP growth and the credit market conditions allow, we would like to grow a little bit over the market, it could be at 16%, 17% and not much more than that. Related to the mix in our loan portfolio, certainly, we are not going to change substantially the mix in 1 year, but our action that it's very much connected with our strategy, will work in the following direction. Related to corporate, we are going to grow the weight of the SMEs in the corporate portfolio. So this, we are going to do very carefully, but we believe we have the tools and the instruments to achieve a good performance in that growth of SMEs segment. And in terms of individuals, what we are going to see is a mix of credit, where collateralized credit will represent more substantial part than it represents today. So real estate or mortgages will grow faster, actually, it has been happening in the last 2 years, faster than consumer loans. And altogether, after, let us say, 3 or 4 years, will represent a real change in the mix so that the credit risk we will have in our loan portfolio will be lower. Certainly, less risk in the portfolio will represent also, less spread, and so the net interest income will be according to that mix of the credit portfolio. I do not know whether you have any other question.

[Philip Finch:]

That's very helpful. And the second question was to do with your fee growth expectations and what could be the drivers for that?

[Marcial Angel Portela Alvarez:]

Yes. The fee growth, we expect for 2013 will be something double digit, something similar to the previous year, to 2012, so around this 12%, 14%, more or less in that direction. And a very important driver will continue to be all our acquiring strategy close to the -- very close to the SMEs and some services like cash management, et cetera, where we are starting a very good performance in 2012.

[Operator:]

The next question comes from Marcelo Telles of Credit Suisse.

[Marcelo Telles:]

Two questions. The first one on your asset quality. I know you already approach that issue, but there was indeed a very significant increase in NPL, in new NPLs, about 40% in the quarter. I think, as you see, the most likely -- I mean, this was lots -- quite a renegotiations in the quarter, so that might have led to an increase in NPLs. But my question to you is, what is the level, additional provisions that you would expect? I know when you renegotiate a credit, you don't change the provision you had at the time. But then, in some way, you could delay the amount of provisions you need to make, especially if you're doing more in segments that have -- like collateralized vehicle loans, for instance, you might have to provision for the future. So what can we expect in terms of provisioning growth in 2013? Should we expect growth or should we expect a decline? How that dynamic to a renegotiated credit would play out? And my second question is regarding the operating expenses. We saw a good contributor on the positive side was much lower contingency provisions and there was a meaningful decline in that line. I was wondering what has changed? I mean, did you change the methodology of expected losses in terms of labor or civil law suits? And what should we expect in a sustainable level for the future?

[Marcial Angel Portela Alvarez:]

Thank you, Marcelo for your question. Oscar is going to answer the first part and I'm going to take over the 2 final questions.

[Oscar Rodrigues Herrero:]

Marcelo, thank you. If I understood correctly your question, you said -- what you're asking is whether the NPLs, the increase in the NPLs in the fourth quarter will represent an early warning for increases in terms of the allowances in the next year. Well, as far as I -- as I tried to explain in my first answer, there was -- the NPLs were significantly impacted by the lower growth in the renegotiation. If you look at the increase in all the book including renegotiations, that increase did not happen. And therefore, the NPL growth do not represent an early sign to an increase in allowances in the future, which also impacted the level of coverage. The second question is, okay, what to expect? Well, we don't make a guidance in terms of allowances in the future. But our expectation or the way we're looking at the allowances is that we could see some normalization or stabilization around the levels of the 4 quarter in the next 2 quarters around it, and room for improvement in the second half of the year.

[Marcial Angel Portela Alvarez:]

So Marcelo, related to operating expenses, the level we see for 2013 is something like, say, half the inflation. So they could grow this year between 3% and 4%, something like that. But I want to make always a differentiation because -- one thing is, the investments we are making to grow the bank in 2013, similar to the one we made in 2012 and '11, will be a big amount of money that we will see in the depreciation and amortization in the years to come. What is exactly the expenses, the personnel expenses or general expenses is what I see growing at about half the inflation rate of this year, or something similar. And probably, we are going to enter a new efficiency pattern so that with the same amount of costs, basically, we should be able, through our revision of our business models implemented in the years before, we should be able with flat costs, almost flat costs, we should be able to generate amounts of business much bigger in the years to come. We are working hard because we see it as a very important leverage for the P&L account for the next years. And related to contingency provisions for litigations, et cetera, I think this -- we have to put focus on it because, as you know, this country produces an enormous amount of labor and civil litigations against institutions. So we have put in place some, we've called it factories, so that we negotiate very early with people who want to litigate so that we reduce very much the cost of these litigations. And certainly, we shouldn't expect a reduction like the fourth quarter -- the one we had in the fourth quarter, for this year. But they will grow at a very reasonable path during in 2013. I do not know whether this was the answer, the right answer for your question.

[Operator:]

The next question comes from Saul Martinez of JPMorgan.

[Saul Martinez:]

I have 2 questions. One is a very, very general high-level question and then I have a very, very specific question. The general high-level question is related to your view on 2013. Marcial, you mentioned some amount of optimism about 2013, you said 2013 would be a much better year than 2012. Now with conditioned on the expectation that GDP will grow and economic growth will recover, having said that, GDP continues to disappoint. There have been a number of downward revisions for quite a long time now. If the economic activity does not recover and we have another disappointing year in terms of economic growth, say, 1%, 2% type of growth, will 2013 still be a better year than 2012? And I have a follow-up question as well.

[Marcial Angel Portela Alvarez:]

Thank you, Saul. My answer is that in both scenarios, the year 2013 will be better than 2012. First, well I'm not too, by nature, I'm not such an optimistic person but my view, when I'm talking every day to firm leaders, entrepreneur and to CEOs of companies, I see a very determined wish to invest this year and to take advantage of the year 2013 and of some projects the country has that are very important. So they -- this makes me comfortable to expect a GDP growth better than in 2012 that could reach that amount of 3%, about 3%. I think optimistic would be a GDP growth above 3%, but 2.5% to 3% could be something really -- quite realistic. In case these normal scenario, this base scenario changes to a GDP growth of 1%, I think, banks -- the industry, in general and specifically Santander, we are better ready to cope with such a scenario than we were in 1.5 years ago, we were expecting the year 2012 very positive and with the credit growth of close to 20% or something similar, so we are taking already some decision in terms of credit admission and also in terms of costs, et cetera, that will allow us to react much quicker and we reacted at the end of 2011, beginning of 2012.

[Saul Martinez:]

Okay. Great. That's helpful. I hope you're right about the economic activity. Second question is much more specific. I guess, I don't understand the increase in the 60 basis points for commercial credit. I understand the mix shift, the mix shift can explain gradual increases in NPLs, but a 60 basis points sequential increase, it seems to me to be very difficult to be explained by mix shift -- at any given quarter. Can you comment on what specifically drove that 60 basis point increase? Where are you seeing underlying deterioration on the commercial side?

[Marcial Angel Portela Alvarez:]

Thank you, Saul, for the question. José is going to answer you.

[José Antonio Álvarez Álvarez:]

The increase in the commercial side as we said, is a combined effect and I aggregate a mix effect does not happen over a quarter. But if you look at the trends, the economy deceleration started in the last quarter of 2011, and we've been growing the SMEs portfolio maintaining the NPL over 90, basically stable over the last 3 quarters, around 2.6%, 2.7%. So there is -- from the mix side, that is part of the impact in the fourth quarter, definitely. And in addition, if you look at the renegotiations number, the impact that we estimate, we have in the NPLs, it's in the house of BRL 800 million to BRL 1 billion of portfolio that was not renegotiation in the quarter. And this explains another significant part of the 60 basis points that you were asking about. And obviously, in the quarter, as the economy continue to show its lower growth than it was expected, it was also a negative impact in terms of the delinquency in the commercial portfolio. We were expecting to have a lower delinquency level on the commercial side. On the SME side, it's still very much under control. But our expectation was that it should have been lower throughout the year and impacted again in the fourth quarter.

[Saul Martinez:]

Okay. Just to be clear, because I must have understood the earlier comment. The renegotiation had roughly BRL 800 million to BRL 1 billion impact on NPLs in the commercial portfolio in the quarter, is that correct?

[José Antonio Álvarez Álvarez:]

That impact is in the total portfolio, most of it in the commercial side.

[Operator:]

The next question comes from Regina Sanchez of Itaú.

[Regina Longo Sanchez:]

I also have 2 questions. The first one is if you could give more color on the transaction of the investment of Santander Holding on Santander Brasil insurance brokerage business with restructuring. And if you could clarify the equity pickup gain of BRL 148 million, was a onetime gain? And the second one is, also if you could detail more what was the restructuring expenses in the amount of BRL 242 million, as mentioned in the release, which was used to partially offset the BRL 335 million gains related to the real estate mutual funds?

[Carlos Alberto Lopez Galan:]

Thank you, Regina. Carlos is speaking. Well, related to the first one, this is part of the -- I would say, the business' usual restructuring, corporate restructuring movement that we do. And regarding the movement that you asked me or you're asking, basically, this is an increase in the equity, in the capital. It was not a sale. It's an increase in the equity. Basically, we incorporated -- bear in mind that even though this is the brokerage insurance, that mostly of their premiums or their fees received for their sales, insurance sales, they are booked in the bank. So basically, this company is now -- or this booking center, is now incorporating all their extra activities such as, for instance, to give you an idea there, the company take bond, they sell with the policy that we have with older banks with the ATMs. Or for instance, the WebMotors, which is a website where we can sell or finance cars. Or for instance, our activity in private equity. So basically, what we have been doing or what we have done is restructuring in this company all these business, and this is just for our corporate perspective. Why? Because we would like to expand our business in several areas. And for legal purposes, it was much better to restructure it in this way. And the second one is, yes. Well, basically, all the -- as our CEO was mentioning, part of the bank or part of the strategy for 2013 is to face a lower cost level. And part of this cost level is some reorganization in the headquarters and part of the severance on the payment that was affected in the 4Q, was offset with the real estate fund that we created. So basically, if you see -- the volume is BRL 240 million for the severance and BRL 340 million positive for the real estate fund that we sold in the 4Q, more or less offset. They are all there -- I mean, less important issues that basically amounted to BRL 60 million. So basically, what I'm saying is, no recurring of extraordinary events. They were offset, the positive with negative, so the business, really, the structure that we made in the 4Q.

[Regina Longo Sanchez:]

Okay. Perfect. Just to follow-up on the first answer. I agree with you, it was not a sale, it was an increase in the equity. But now Santander Brasil has 60% of this company and Santander Holding has 39.35% stake, is that correct?

[Marcial Angel Portela Alvarez:]

That's correct.

[Operator:]

The next question comes from Jorg Friedemann of Bank of America.

[Jorg Friedemann:]

I just would like to start with a follow-up on the corporate restructuring related to the capital increase of Santusa and the -- a brokerage insurance company. Could you explain to me what is the expected growth that you have in the insurance brokerage company and what kind of revenues, if any, you could expect also from TecBan in which Santander Brasil has increased its stake? And then I will follow-up with a second question.

[Marcial Angel Portela Alvarez:]

Thank you, Jorg. Carlos is going to answer your first question.

[Carlos Alberto Lopez Galan:]

Once again, I mean, focusing our insurance business, if you remember, after the policy that we made in 2011. We've suited it, basically. You can see them all these services and fees received from our insurance activity in the bank. Once again, I would like to clarify that this -- I mean, even though this is the insurance brokerage company, their earnings are the results that they booked it very, very small. It's a very small company and the idea here is to use as a booking center to expand all these initiatives, all these special. One of them, you were mentioning the one possibility that we have is to increase our participation in the bank, that's why we needed to expand our equity in this company in order to face this reality. But it's the same with other business that are embedded in this company. For instance, I was mentioning the private equity or for instance, the WebMotors activities. So it's not just the brokerage insurance, which explained the activity here. At most, I would say that the most important expansion maybe, it's coming from other business which are inside this company. And that, for corporate reasons once again, was better for us to restructure in this company in the 4Q.

[Jorg Friedemann:]

Okay. Just a follow-up in that part Carlos, if you'll allow me. I understand that TecBan is a cost center and not a revenue center, is that correct? And if it is a cost center, could it be related -- you have this higher stake allocated in Brazil, could it be really related in any way to a bigger movement? I remember that some time ago you were discussing about potential initiatives to evolving, to sharing ATMs with other banks or if it is only related to your internal goals and opportunities?

[Carlos Alberto Lopez Galan:]

Both. I mean, they are -- regarding TecBan, just because -- maybe we can, we would like to be active player in the restructuring that we began facing in this company. But on the other hand, it's not just for TecBan, we would like to increase our activity in the private equity that I was mentioning. So that's why, I mean in both sides, that's the focus that we restructured the company in the 4Q.

[Jorg Friedemann:]

Okay. And the second question, I'd like to ask Oscar if he could clarify to me the evolution of provisions under IFRS. I think it showed a slightly different trend that the one mentioned by Mr. Portela on his presentation. So IFRS provisions are growing. And we do know that IFRS model is base on expected losses, could in any way this growth symbolizes some additional -- the duration ahead, at least in the first half of 2013 that could contribute to provisions under Brazilian GAAP is to advance?

[Marcial Angel Portela Alvarez:]

Oscar please, your turn.

[Oscar Rodrigues Herrero:]

Thank you very much, Jorg. The allowances for NPLs in IFRS in the fourth quarter were impacted by a change in the methodology of calculation -- not of calculation, of the -- we account for transactions that were already written off and are renegotiated. Those transactions under the Brazilian regulation, need to be reactivate into the balance sheet. Whereas now, in the fourth quarter, applying a more conservative view. In the IFRS, and in line with other practices outside of Brazil, we are only considering them on a cash basis. With this change in the methodology and resulted in an increase in write-offs of around BRL 700 million. That together with the increase in the written offs in the quarter, explained the difference in allowance. Why do we explain it? Because in IFRS, when the transaction is written off, it is not yet 100% provisioned. Whereas in Brazilian GAAP, the regulation state that a transaction needs to be 6 months, 100% provisioned to be written off. So therefore, that to say is the explanation. It is a technical question and by no means represents any guidance or representation of future provisions in the portfolio. Is that clear you? Did that clear your question about it?

[Jorg Friedemann:]

I think so. So just to confirm this understanding, if this accounting change in the way you look into the write-offs, does not imply increasing write-offs under Brazilian GAAP, so you are not expecting Brazilian GAAP future provisions to go up, is that correct?

[Oscar Rodrigues Herrero:]

It is correct because the way we -- I mean, they are written off in Brazilian GAAP, it is regulated. And it states that after 6 months of the transaction, being 100% provisioned, I need to write-off that credit, so there's no change in that, yes.

[Operator:]

The Q&A session is over. And I wish to hand over to Mr. Marcial Portela for his concluding remarks.

[Marcial Angel Portela Alvarez:]

So thank you very much for your attention. As I mentioned before, we are building up this future with a strong commercial activity. We are investing, we are sticking to our strategy. And in spite of the difficulties of the year 2012, we see the bank much better prepared to cope with the year 2013. That initially, as with the data that we have today, we expect to present a much positive year for the industry, and specifically for us. Thank you very much for your attention.

[Operator:]

Banco Santander's conference call has come to an end. We thank you for your participation. Have a nice evening. Thank you.