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Edited Transcript of BRSR6.SA earnings conference call or presentation 14-Aug-19 2:30pm GMT

Q2 2019 Banco do Estado do Rio Grande do Sul SA Earnings Call

Rio Grande do Sul Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco do Estado do Rio Grande do Sul SA earnings conference call or presentation Wednesday, August 14, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Pedro Ponzi

Banco do Estado do Rio Grande do Sul S.A. - Head of IR

* Marcus Vinicius Feijó Staffen

Banco do Estado do Rio Grande do Sul S.A. - Financials & IR Officer and Member of the Management Board

* Werner Kohler

Banco do Estado do Rio Grande do Sul S.A. - Head of the Accounting

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Conference Call Participants

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* Marcelo Fedato A. Telles

Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector

* Yuri R. Fernandes

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Banrisul's Second Quarter of 2019 Results Conference Call. Today with us, we have Marcus Staffen, CFO and Investor Relations Officer; Werner Kohler, Head of Accounting; and Alexandre Ponzi, Head of Investor Relations.

We would like to inform you that this event is being recorded. (Operator Instructions) The audio and slide show of this presentation are available through a live webcast at http://www.banrisul.com.br/ir.

This slideshow can also be downloaded from the webcast platform in the Investor Relations section of this website. There will be a replay facility for this call for 1 week.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banrisul's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Banrisul and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Marcus Staffen, CFO and Investor Relations officer, who will start the presentation. Mr. Marcus, you may begin the conference.

(technical difficulty)

Pardon me, it appears the speakers' location has disconnected from the call. We'll try to rejoin them in just a moment. Please stay on the line.

This is the conference operator. The speakers' location has rejoined the call. I'm going to turn the call over to Mr. Marcus Staffen, CFO and Investor Relations Officer. Mr. Marcus, you may begin.

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Marcus Vinicius Feijó Staffen, Banco do Estado do Rio Grande do Sul S.A. - Financials & IR Officer and Member of the Management Board [2]

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Thank you. Good morning. My name is Marcus Staffen, I'm new CFO and IRO of Banrisul. I've been working to Banrisul since 2002. Quickly, I'd like to highlight our process on retail, both for individuals and companies. Also we continue to develop our digital [expansion]. We have almost 1 million users of our app and more than a half of transaction has been through digital channels. Now I call to Mr. Alexandre Ponzi to make the presentation, and then we will be available to answer the question.

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [3]

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And we should move right away to our net income results, please, if you will. Net income both reported in managerial ones the increase at more than 20% based year-on-year. It's a very strong reconstruction of net income. And when we talk about managerial issues, we have to address that we were impacted by the positive results coming from the migration of defined benefit plans in which Banrisul as a sponsor concluded the process throughout the month of May this year.

On the other hand, there was a slight reduction in terms of our quarter-on-quarter net income managerial one on account that we saw an increase yet minimal in our provisions. But when we talk about NIMs, we have seen that NIM is stable in the last 12 months and even stable when we compare numbers from March. They are impacted by funding that has been growing at a pace of almost 9% year-on-year in which the cost of funding has been maintained below 90% of the Selic rate, which increasing effective terms in the last quarter on account of a higher number of working days. Cost of funds then controls is a positive issue for the bank if there is any likelihood of the Selic being reduced to closer to 5%, but this will be beneficial for short-term. And then there will be a non-Brazilian impact in terms of margins because, on account of the use of the funding, it's been allocated mostly into secured portfolios.

Secured portfolio is Selic-rated and, therefore, is impacted through the reduction of the Selic rate and our credit portfolio, which has been growing at a 7% year-on-year pace is being driven by credit to -- nonearmarked credit mostly reaching the individuals that is driven by payroll loans. Payroll loans are -- nonearmarked credit grew almost 8% year-on-year, but payroll loans have increased 44% now of our total credit portfolio, growing at a ratio of 22% year-on-year.

Companies, on the other hand, even though Banrisul has stressed and rectified that it's been focusing on SMEs, it is still a portfolio that's been reduced quarter-on-quarter, 6.5% negative growth when we compare from June last year. Positive issue in the segment is that we have seen an increase of 2.3% in terms of SMEs, which we assume is not a punctual in the nonrecurring event, but that will be the trend going forward in relation to credit to companies. But the rates, the spreads and the rates that we charge, they have been reducing quarter-on-quarter, year-on-year, et cetera, et cetera. Even the rates that are being charged nowadays are lower than the average rates that were applicable to the portfolios.

Overall, credit rates, they have been reduced 25 bps over the last 12 months, but at least they had been stable when we compare numbers from March. Same trend that we have seen in individuals and companies alike, but the reduction over the last 12 months was a little bit higher in the segment of individuals, 30 bps. This is why margins, they have not following suit the growth of the credit portfolio. But eventually, we do believe that there will be a more resilient of a pace, and we are eager to produce different but positive margins on account of increase of credit portfolio regardless of the segment.

Provision expenses, as I had mentioned before, they have been reduced by 0.5% in relation to June last year, and there was a slight increase of 3% this quarter on account of the fact that companies that we have recovered from previously written-off portfolios, they are impacted. All the customers are now filing for Chapter 11 protection. Therefore, Banrisul has to make adjustments to its provision expenses policy.

And also we do reassess all of our credit portfolio in relation to issues that eventually could affect negatively the formation of expenses. But this is in line to what we were expecting when we compare the amount of provisions for the whole year in relation to what we had in previous one. We had the guidance that has been discontinued on account of the manifestation of the state in relation to try eventually and sell part of its voting shares, but we were expecting that provision expense could be reaching closer to 3% of our total credit portfolio.

In terms of our funding, we have been growing at steadily, 8%, 9% of a pace driven by time deposits, which is perhaps the better advantage that we have in comparison to our peers. And our funding is being obtained from customers' retail-oriented and retail costs as well, 90% of the Selic rate. And we are looking forward to improving this loan-to-deposit ratio in which we are now consuming less than 70% of our funding.

Banking fees. Same pace if we compare 12 and 3 months altogether, 2.2% increase. But it has to take into consideration the fact that until May last year, there was recognition in terms of MDR fees of interchange expenses that were composed of the fee base for Banrisul Cartões. If we were to exclude those numbers, we would have to diminish this BRL 970 million that were produced in 1H '18 to closer to BRL 920 million. Therefore, the increase in relation to what we produced this year until June would have been closer to 8%.

Very strong and a very positive factor that is being contributing to increased and improved efficiency. Not only we are containing administrative expenses that have been growing overall a little more than 1.4%, but both personnel and other administrative expenses, they have been growing behind inflation ratios. And in terms of personnel, we are to assume that going forward, from the second quarter onwards, there will be some savings in relation to employees who left the bank by the end of March on account of incentive that we offered for them to retire if they have full conditions to retire according to the National Pension Plan. Still very contained -- controlled administrative expenses that are contributing to efficiency.

Other operating income/expenses, they had some effects regarding to the migration of -- between plans in which Banrisul had required costs of migration expenses being the sponsor of the plan. But we also obtained some revenues on account of the actuarial reassessment of this plan when excluded the participants that migrated from the defined benefit to the variable contribution plan. And we also had to reverse provisions that were made by December last year in relation to employees who've been targeted for the incentive retirement plan. We were expecting 600 employees with Banrisul, only 550 plus left. Therefore, a slight reversal of provisions took place in this half period of 2019. And on account of this number of employees leaving Banrisul, we saw an increase in terms of labor lawsuit provisions. This is controllable, the benefit has been there, and we are seeking to be more efficient of a bank.

In terms of our balance sheet. We have assets growing 5.5% per month, almost BRL 80 billion, BRL 79.5 billion of total assets which puts Banrisul within the 6 largest retail banks in Brazil or 6 largest bankers in Brazil. Securities portfolio is the excess of our liquidity that we have obtained from customers that are not being allocated into spread portfolio, increasing at 6.2%, a paced BRL 22.1 billion in terms of our cash that we have in order to produce more profitable interest-earning assets.

Credit portfolio, 7%, increased in the last 12 months driven by nonearmarked credit portfolio even though earmarked one, they have been increasing altogether, focusing on real estate lending, but also we are now focusing increasing our agriculture segment as well.

In terms of the breakdown of our credit portfolio. Individuals, they comprise the largest share of all of that 59%, in which payroll loans represent 44% of our total loan book. Almost BRL 15 billion that is being produced and originated in 2 important channels: branches with customers and also what we had, our banking agent that produces credit portfolio -- payroll loans that are target to INSS retirees and pensioners and also federal public servants.

This is the breakdown of our credit -- payroll loans portfolio, 22%, 23% growth year-on-year, a very sustainable one with interesting rates and more, importantly, with a very safe default ratio.

Total provisions vis-à-vis our loan book is stable at 6 -- 7.5%, 7.6% of what we have produced. This is slightly increased in the last 3 months. It is more related to the fact that it was also a slight decrease of our credit portfolio, but even though much better than what we had 12 months ago and with the same trend that we produced over the last quarters.

Next slide. Just the breakdown of our funding and asset management portfolios. If you wish to discuss further, we'll be free to answer your questions.

Shareholders' equity, BRL 7.5 billion, 6 -- almost 7% increase in the last 12 months, which gives us an opportunity to start producing credit portfolio on account of the Basel ratio that we have, not only the indicators of our performance, 17.5% ROAE, 1.6% ROAA, 2.2% default rate -- 90-day default rate, 345% cover rate on 90 days already. Efficiency ratio, improving in the last 12 months, fees now covering slightly over 100% of our personnel, but I was mentioning Basel ratio. We have 15.8% of total Basel ratio, which are mostly comprised by 14.5% of Tier 2 (sic) [Tier 1] capital. When we talk about Tier 2 (sic) Tier 1 this is all core capital for the bank, so there is room for Banrisul to use this excess liquidity that we have and to make use of these comfortable capital conditions that we have been maintaining overall.

Having said that, we have reached the end of the presentation itself. Now we will turn the mic to the floor so that we can start Q&A right away. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Marcelo Telles with Crédit Suisse.

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Marcelo Fedato A. Telles, Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector [2]

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I have a couple of questions. The first one, we saw, I think, a big increase in credit recoveries from the first to the second quarter. And I was wondering if you could tell us how much of that increase was cash recovery and how much was noncash recovery. Just to try to get a sense of what was the level of recoveries that were also followed by a similar increase in provisions.

And the second question is related to NII. We saw a decline in NII quarter-over-quarter. And how should we think about NII going forward? I mean you think you're going to be able to start increasing NII, maybe towards the end of the year or next year. How should we think about sequential NII performance in the coming quarters?

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [3]

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Well, starting from -- bottom to the top. Increase in terms of NII. It's likely that if nothing changes, the trends that we have seen NII being stable or increasing behind the credit portfolio fees to be maintained on account of what? We are still getting rid of our company's portfolio in which we would like and we are focusing on SMEs, but the production is not sufficient enough in order to mitigate the fact that our life-sized corporate customers are not renewing their credit portfolio. And in terms of our payroll loans, which I mentioned, is 44% of our total loan.

It's been object of competition throughout all retail banks in Brazil. And therefore, the rates that are been charged, they suffer some compression in terms of what we could practice, vis–à–vis what could be offered. It's a market competition that targets both customers and noncustomers alike. We dispute the formation of payroll loans throughout Brazil. We do have this avenue of having one channel that is addressing public servants and INSS throughout all the territory in Brazil. But therefore -- but we are looking forward to this trend in terms of SMEs. They are starting to produce, they are starting to increase and to take a higher share before any change in terms of NIM could be seen.

Of course, given that our lighter periods, our [postfix month], whenever the Selic rate goes down, there will be a slightly and positive increase in terms of margins that will be immediately offset by the fact that credit portfolios are being renewed. And we have seen a reduction in terms of the duration of credit portfolios overall be them payroll loans or other types of credits as well, but the duration is lower -- smaller than they were in the past.

In relation to credit recoveries that we have been included in our numbers what was recovered and what's transformed into credit assets. What we are seeing is that cash recoveries are related to smaller tickets of credits that were written down, not higher than SME sizes. What is positive is that we got rid of what's a huge portion of our credit portfolio over the last 2, 3 years. And now that conditions, the environmental condition, market economic one, they tend to increase the formation and the renegotiation of previously written-off credits. And therefore, they will be of higher tickets implicating that some volatility will be seen in terms of the margins. But in terms of the bottom line, there will be no bankrupt whatsoever because whenever they are recovered into credit assets, similar size provisions will be booked. This is one of the reasons that I mentioned that we saw a slight increase in relation to March in terms of our provision expenses.

But there is room, and there are conditions, I could say so in terms of Banrisul being more sustainable into trying to recuperate credits that were written off in cash whenever possible and lower in smaller tickets, in assets in terms of credit portfolio going forward whenever we are talking about corporate-sized loans. I don't know, Marcelo, if that has been helpful for you. But if you have any doubts, please let us know.

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Operator [4]

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Next question comes from Yuri Fernandes with JPMorgan.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [5]

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I have a question regarding your asset quality. Your 90 days NPL reached historical lows, 2.2%. How do you see this trending, like are you close to the inflection point? Like should we start to see more stabilization, maybe some increase in NPLs? And if you can comment also we observed an increase on the at-risk bucket. So at risk if you could just -- not really this quarter. So just asking if this is like a one-off case or this is related to Telles' questions on the recovery. So the BRL 90 million of recovery you had basically was classified here. So that's my first question.

And my question second question is regarding your number of clients. If you can provide any number, any trend and how the number of current accounts of Banrisul is tracking. How is it growing? Just to have some idea. And how you are perceiving the competition from digital banks? So just some color on the trend on the number of clients.

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [6]

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Again, same trend from bottom up. Number of customers, 4.2 million. Of course, not all of those could be targeted for full potential and to improve customer loyalty to being subject to cross-selling, et cetera, et cetera, et cetera. But then, 4.2 million and Marcus had mentioned that we have almost 1 million users of Banrisul digital app. This is increasing, now represents about 1/4 or 1/5 of our clientele base, which is growing at a faster pace, and this will give us some room in the future.

I'll cannot say if near or short term one in which efficiencies will be sought. Efficiencies because that is likely the change in terms of branches, the way that they're going to be used, we work on a transactional mode and we are looking forward to moving into what we call a business-oriented one in which part of the costs related to security and safety-related costs could be reduced on account of what Central Bank of Brazil demands that our full branch has to carry. Also we could target what we call banking agents that could operate on behalf of Banrisul for transactions and not for business. And the more our customers use the app, the more features will be included into the application so that we could target -- even though a traditional retail bank moving into the digital arena.

As a matter of fact, for public servants, state public servants, they are in conditions of doing whatever type of credit transactions, payroll loans they wanted. This has been a safe environment that's been able to allow us to increase at a faster pace, credit portfolio, especially payroll loans. So this is what we're looking forward. There is a legacy that we take care of in terms of traditional customers, vis-à-vis, the generation -- the digital generation whatever. But it's nothing new for the bank in terms of this to operate within just -- this environment. Just for the sake of an example, we have held this year the 11th International IT Forum, banking oriented, in Brazil that also target companies and individuals. So we are using this event in order to reinforce all of our spectrum toward being more of a digital bank, yet maintaining our traditional instance on account of the impact of our ratings. And the first question that you made, I'll let Mr. Werner to try and answer you.

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Operator [7]

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(Operator Instructions)

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [8]

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We are still responding and replying to Mr. Yuri from JPMorgan.

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Operator [9]

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My apologies.

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Werner Kohler, Banco do Estado do Rio Grande do Sul S.A. - Head of the Accounting [10]

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To answer that, talking a little bit about our provisions, launches about credit, we can see better the regular provisions about the credit are lower than in the past. But we are recovering some credit that we wrote off in the past. And because of this, our allowances in this -- our provision in this time is a little bit higher than in the first quarter. But this kind of provision, we call the good provision because it's connected with some situations that we can see now one way to receive these credits. And because of this, we are accounting this amount bigger than the first.

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [11]

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And Yuri, you may remember that we announced that in the first quarter, there were some events of companies that were in our credit portfolio, but were facing this quota and some of them filed for Chapter 11 protection. Therefore, their ratings has been reduced quarter-on-quarter. One of the companies had a slightly higher average credit ticket and therefore, part of this increase from BRL 300 million to BRL 500 million in terms of the F rating that you mentioned is related to these specific items of customers that were nondefaulted yet.

They have sought different avenues that prevent us from renegotiating or creating different conditions. We are waiting for the conclusion in relation of the recovery process. But in the meantime, we will have to reduce one launch every 30 days in terms of their rating and therefore, increasing provision expenses.

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Operator [12]

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(Operator Instructions) Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Marcus for any closing remarks.

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Marcus Vinicius Feijó Staffen, Banco do Estado do Rio Grande do Sul S.A. - Financials & IR Officer and Member of the Management Board [13]

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Thanks for the audience, and we are available to any additional question. Thank you.

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Operator [14]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.