Banco Santander (Brasil) S.A.
Q4 2013 Earnings Call Transcript

Published: 30 Jan 2014

[Operator:]

Good day, and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil S.A.'s results of the fourth quarter of 2013. Present here are Mr. Carlos Galán, Vice President Executive Officer, CFO; Mr. Oscar Rodriguez, 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 (sic) [www.santander.com.br/ir], 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 involve 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 the word to Mr. Carlos Galán, Vice President Executive Officer, CFO. Mr. Galán, you may proceed.

[Carlos Alberto López Galán:]

Thank you. Good afternoon, and thank you for attending Santander Brasil 2013 results conference call. The table of contents summarizes the topics that will be covered

[Operator:]

[Operator Instructions] The first question comes from Marcelo Telles of Credit Suisse.

[Marcelo Telles:]

I have actually 2 questions. The first one on asset quality. I mean, you clearly had a very strong improvement in delinquency indicators in the quarter and I was wondering at what stage you think you are in terms of that improvement? Do you think that you can improve delinquency rates further? And this will probably lead to additional -- you think this can lead to additional reduction in provisioning expenses going forward? And the second question is regarding the OpEx performance. So can you remind us a little bit what you think your target is for OpEx in the years to come? I think you mentioned you want to go -- grow below inflation. Do you think this is still, let's say, possible this year if -- in a, let's say, in a rising inflation scenario, do you think they can -- and also the efforts to get new clients and improve the image further -- the image of the bank? I mean, do you think this could eventually due to be a little bit higher or closer to inflation on the OpEx front?

[Carlos Alberto López Galán:]

Regarding the first question, Oscar is going to answer you.

[Oscar Rodriguez Herrero:]

Thank you, Marcelo. We don't provide guidance in terms of asset quality and provisions for loan losses. But what I could say is that we do expect a further improvement in terms -- in the delinquency ratios. It would be at a -- with a trend that is not going to be as it was in the last quarters. It should slowdown, the improvement, and refer more to the impact in terms of the credit mix. And as a consequence, we expect as well a reduction in the provisions for loan losses.

[Carlos Alberto López Galán:]

Marcelo, and regarding the other question. Well, as you can -- as we discussed, the improvement in productivity and efficiency is a multiyear task. The bank has launched a plan for the next 3 years, including 2013. And in order to basically maintain the same pace that you have seen in 2013, not just for 2014, but they count for [indiscernible], for the years to come. This is a very tough task, given the environment -- the exchange rate environment and inflation environment that we have. But that's why the bank launched several initiatives that aim -- some of them I shared with you in the presentation. In order to assure this, that we are going to achieve this goal, not just for 2014 but for the next 2 years, as well. Basically, the fund that we made is basically -- maybe not achieving this goal, and to make sure that all the initiatives, they have enough funds and enough source of funding, in order to deploy all the measures that they're going to help us in order to deliver this trend for the next 2 to 3 years. So basically, yes, more of the same. I mean, well below inflation is the target for 2014 and 2015.

[Operator:]

The next question comes from Saul Martinez of JP Morgan.

[Saul Martinez:]

I have a couple of questions, as well. One of them is just more of a high-level theoretical question, more of a theoretical question, one is a more -- very specific question. The first question is how management thinks about returns on equity and costs of equity? Obviously, with the higher rate environment in Brazil, I think it's reference rate to 10.5%, swap rate even higher than that. You can argue that the cost of capital, cost of equity for companies is pretty high. Your ROEs clearly aren't necessarily where you want them to be, 10%, 11% the way you measure it. The capital reduction, the dividend will obviously improve that. But how does management think about the process of getting to an ROE that meets its cost of capital, over what time period do you think that occurs? And just checking -- I'd just like to know how more -- how management thinks about ROEs, cost of capital and how you plan on getting to a stage where you start to create value? Secondly, the more specific question on asset quality. Obviously, very impressive in terms of NPL evolution provisioning. 15- to 90-day NPL ratios, however, kind of flat. Did go up a little bit for corporate. They haven't really improved much and typically fourth quarter sees improvements in early-stage delinquencies. Anything there that worries you? Should we read much into that? Why -- I guess, why haven't you seen a more notable improvement in early-stage delinquencies?

[Carlos Alberto López Galán:]

Regarding your first question, clearly, the management is not happy with the profitability that we have been delivering. Secondly, we saw the new report about the cost of equity adjustment that you made because of the interest rate environment, et cetera, et cetera. In that case, I would tell you that the way that we see it, it's on a longer horizon. It's not in the short or on a yearly basis. So basically, the cost of credit is more stabilized in order to deliver a profitability above this cost of equity defined internally. And thirdly, I would tell you that, clearly, all of the challenge on the task that the senior management that we have here is to improve, to make a catch-up versus our competitors in terms of profitability. As I said in the presentation, it's going to be a long journey. I mean, it's fair to say that we have -- we still have, after the optimization, the equity optimization process, we have still -- have an excess of capital. But putting aside this excess of capital, the profitability has to be improved. And basically, this improvement is going to come from 2 sources. Improvement in the leverage ratio that we have, so it means that improving or increasing our commercial and credit activity. And secondly, with bearing in mind of our distribution policy that we have going to maintain for the coming quarters and for the coming years. And secondly, improving the bottom line. Clearly this is something that is going to take several years and this is part of the plan that we have established for the next 3 years. So having said that, I mean, the gap that we have with our competitors, I mean some of them is explained by the excess of capital, but some of them is clearly explained by the lower profitability that we have, more specifically, in -- when we are talking about our spreads net -- our spreads after provisions that clearly are well below our competitors. And this is one of the key factors that we should improve in the coming quarters and that should improve and should help in order to deliver a higher bottom line. Regarding the second one, Oscar is going to answer you.

[Oscar Rodriguez Herrero:]

On regards to the 15 to 90 days, the evolution, the trend that you can see in the number, it is very much the result of the policies -- the credit policies that we implemented in 2011 and 2012. And if you see each that 15 to 90 days, it already show an improvement -- significant improvement in 2012. Since then, we've been pretty much maintaining our credit policies, the vintages [indiscernible]. So some improvement, but not as strong as it was in the last quarter. And that 15 to 90 days ratio, it is very much impacted by the vintages showing that improvement. It is, therefore, the stability that you see, it shows that the level of vintages has been something that we're going to continue to maintain and very much care about the quality of the origination that we have. It is also impacted in 2013 by the increased weight that the renegotiations have in the 15 to 90 days, which is normal after the increase that, that portfolio saw in 2013. And it is within the quality standards that we plan on our collections program. I answered your question?

[Saul Martinez:]

No, that was very helpful. Just a follow-up, would you be willing to share what you do think your cost of equity is, Carlos, if you think the rate curve isn't necessarily reflective of an adequate perception of how to think about cost of capital?

[Carlos Alberto López Galán:]

It's in the range between 16% and 16.5%. But basically this is more or less the cost of equity that we manage internally. Okay?

[Operator:]

The next question comes from Regina Sanchez of Itaú.

[Regina Longo Sanchez:]

I have 2 questions. The first one, I think is also for Mr. Oscar. I'd like to have a rough idea, let's say, how much of the renegotiated loans were in previous years? I mean, nonperforming loans or out of the [indiscernible] or maybe the increase in allowing 1 billion [indiscernible] in the fourth quarter of renegotiated loans as a percentage, and how much was previous in NPL? Because that might have helped it, I mean the decline in NPL ratios in this quarter. And then my second question is more regarding the strategy of the bank in the loan portfolio going forward. I think we saw [indiscernible] lending and also SMEs portfolio shrinking in the fourth quarter and during the entire year of 2013. If you could share, I mean, if there are strategic movements to maybe start to post increase in this portfolio, especially favorable [indiscernible] lending that you see an increasing competition in the marketplace? But it's still a very good product considering it's a faith [indiscernible] portfolio and still with good returns. So I appreciate both answers.

[Oscar Rodriguez Herrero:]

Regina, with regards to your first question, I would like to point that most of the improvement in NPLs is been generated by the improvement in the quality of the origination. So out of the 80 basis points that we see improve, around 50 basis points it's explained by the better quality of origination and 30 basis points is explained by the effort in the collections process and the renegotiation of the portfolio. You can also consider that, even when we look at the NPL formation, including charge-offs and renegotiations, it still shows an improvement of 20 basis points in the quarter, stressing the improvement in the overall quality of the credit.

[Carlos Alberto López Galán:]

Regina, regarding the other question, I would tell you 3 or 4 points. The first one is that it's true, when you are looking at the credit portfolio that this year has shrunk versus the previous one. But bear in mind that part of the credit activity with SMEs is focused on the acquiring business and the acquiring business is not included in the credit portfolio. So basically, when you include the acquired business in SMEs, for instance, in the 4Q, the performance was slightly positive. As I mentioned, something around 1%, 1.5%. Having said that, well, as a second point, well as I mentioned, we are more focused on the linkage with the SMEs. So the deposits and fees were much, much higher than the credit performance, including the acquiring business. And this is the priority with SMEs, to create a much more stronger customer base with them, with more relationship with them. And thirdly, the third point is that in this cycle, yes, the bank tightened the origination, prioritized more the linkage and the profitability with these clients. And bear in mind that basically, we are in a new stage of the cycle. We expected that to recover the same pace of growth that we have seen in the credit portfolio for SMEs previous to 2013. So basically, what you could expect for 2014, it's more of the same, the growth that we had in previous years. And after one -- once that we normalize the cycle with them and that, clearly, it's a segment that we strongly believe the bank has a gap versus our competitors and that we should increase our SMEs customer base.

[Operator:]

[Operator Instructions] Our next question comes from Jorge Kuri of Morgan Stanley.

[Jorge Kuri:]

I have 2 questions. The first one is on your merchant acquiring business. I noted that a year ago, in your 4Q '12 presentation, you mentioned that your market share was 4.5% and that the target for year end 2013 was 10%. In your current presentation, you now have 5.8% market share, so roughly a little bit over 1 percentage point gain over the last 12 months, and you no longer have a target specified there. So can you just walk us through why you didn't get to the 10%? Why you only won 1 percentage point? Is it going to take you another 5, 10 years to make 10 percentage points? Is that no longer the case? I just want to understand what the dynamics in that business are, which clearly you haven't delivered as, I guess, the market expected? That's the first question. The second question, and again, I'm sorry, I know this is something that a lot of people have asked, but exactly a year ago you said that the industry was going to grow around 15%, which was the right forecast. We saw yesterday from the numbers reported by the Central Bank that total loans in the industry grew 15%. But you did say last year that you were going to grow faster than the peers, faster than the industry. And you actually grew half of that, you grew 7%. So now the message is the same now, you're saying the industry is going to grow probably around 15% and we are ready to grow faster. So I just -- if we can get a little bit better level of confidence on why this time around that will be the case? What has really changed for you in order to be able to do that? I think that will be great.

[Carlos Alberto López Galán:]

Thank you, Jorge, for your 2 questions. Okay, regarding the first one, it's true what you have said. I mean, we -- and I mentioned before, we accelerate, somehow, the pace of increasing our market share in this product in 2013. Nevertheless, we have to bear in mind that we start from scratch in 2 years, 3 years ago, and that we prioritized all the acquiring business, firstly, with our SMEs segment. And with the SMEs segment, we are quite happy. We basically, in a proxy [indiscernible] because they are not official figures, but we think that we have reached the 10%, or close to the 10%. And clearly, in order to achieve the 10% in the total portfolio, clearly we have to accelerate the pace with the big retailers that maybe they are not as profitable as the SMEs, which was their focus on the beginning of this process, but they give you more volume. In order to achieve the 10%, the big retailers are a key segment in order to change and to work with. So that reason that we would like to accelerate and the 10% is still a target for the bank. We have been trying to make an agreement with the GetNet in order to accelerate the pace for all because for the big retailers, the proposal is a little bit different versus the small and medium companies. We have to adequate the offer in terms of IT solution. And for that reason, one of the decision taken is to be more flexible in the time-to-market process with GetNet. We've seen that in a couple of weeks, we will be announcing the final agreement with them. And with one -- one of the purposes is to accelerate the pace in servicing the big corporates and delivering the IT solutions with a complete, or with a more accurate opportunity. The second point -- regarding the second point, yes, it's true. But there are 2 important facts, that the events that happened in 2013, while different that we were foreseen at that state. The first one is that, when we discussed the 15%, we were discussing that the fund conversions in terms of public banks and private banks. It didn't happen. As a matter of fact, it happened the opposite. And we widened [indiscernible] the pace between publics and privates. Once again, maybe we are going to make a wrong outlook for 2014. We think that this convergence is going to happen more in 2014 rather than 2013. That's why we think that the private banks, so Santander is included in these private banks, should be improving and should be growing slightly better than 2013. The other important event is that, clearly, we in 2012, or the end of 2012, enter in a delinquency cycle. And the bank prioritized the improvement in the quality -- in the asset quality and improvement in all the delinquency ratios, more than to grow the volume and more than to gain some market share. We discussed that in the middle of this year. And while the bank thinks that all the asset quality is in comfortable levels, that said, now we are -- we should enter into a new cycle where basically the bank is not going to gain market share in all segments, in all products, in all activities. No, the bank first is going to prioritize to maintain and to remain the levels of delinquency at the minimum, the 4Q ratio that we have shown. And to be somehow aggressive in several fields and several products where the bank has -- is comfortable or we think that we have a differential approach. Such as, first, acquiring. Then, even though we reduced the pace, we have a still gaining some market share. This is the idea for 2014 and for the coming years. More specifically, it should be even strengthened by the GetNet agreement. Secondly, we feel that the bank is not happy with several tier markets, such as rural [indiscernible] or it is [indiscernible] products. So the bank is trying to improve the performance in these 2 markets, basically because we have a low market share and we should aspire to improve or to increase our presence closer to our [indiscernible] -- to our market share. And the third is clearly the payrolls. The payrolls where the bank didn't perform in line with peers for several reasons. I explained some of them that the older channels outside the net core branches were not very good managed. We were not successful in the -- how to manage and deploy profitability with other internal [indiscernible] channels. And the bank is trying to improve, first, all these products. Payrolls -- we are convinced that payrolls should be for 2014 an important product in terms of growth. Collateralize [indiscernible] both, we expect that [indiscernible] such as mortgages, payrolls, they are going to grow faster than other products and that's why the bank has to make the turnaround and improve the profitability first in the internal channel and later complementary with other initiatives that maybe we are going to add some added value and some other volumes in, in this both [indiscernible]. So what I am going to say you is that, first, the priority is to maintain the asset quality as a first vector. And the second one, to be or to -- we are experiencing this, to gain some market share in several products where either the bank has low market share or we have -- we think have a different approach proposal or that they are going to give us some opportunities. And this is in a context where, for the private banks, we think that 2014 will be an environment more positive in terms of credit evolution.

[Operator:]

[Operator Instructions] The Q&A session is over and I wish to hand over to Mr. Carlos Galán for his concluding remarks.

[Carlos Alberto López Galán:]

Well, thank you, everyone, for attending this conference. And if you need further information, please don't hesitate to contact us. Thank you very much.

[Operator:]

Banco Santander's conference call has come to an end. We thank you for your participation. Have a nice day. You may now disconnect.