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Edited Transcript of BRSR6.SA earnings conference call or presentation 12-Nov-19 2:30pm GMT

Q3 2019 Banco do Estado do Rio Grande do Sul SA Earnings Call

Rio Grande do Sul Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco do Estado do Rio Grande do Sul SA earnings conference call or presentation Tuesday, November 12, 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

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Conference Call Participants

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* Carlos Gomez-Lopez

HSBC, Research Division - Senior Analyst, Latin America Financials

* Tiago Binsfeld

Itaú Corretora de Valores S.A., Research Division - Analyst

* 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 Third 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. The slide show 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 one 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 actual results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Alexandre Ponzi, Head of Investor Relations. We will start the presentation. Mr. Ponzi, you may begin your conference.

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [2]

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Thank you, and thank you all for participating on our conference. And I would like to start immediately with the presentation so that we can proceed immediately afterwards to our Q&A section, okay?

We start with the net income of Banrisul in which we see that the reported net income increased 19% over the last 12 months and compared September to September '18 and with a slight reduction of 13% from the second quarter this year to the third quarter, just one.

Taking to consideration the managerial, our adjusted net income when we excluded the impacts from the incentive plan that you offer to employees to retire and the destruction of our post-employment plans, we see that there was an increase of 15.2% in terms of our net income for the 9 months of 2018, vis-à-vis '19 and slightly in deal reduction of 4.5% in relation to June's number. This reduction from June to September was mostly due to the increase of provisions that -- provision expenses that we will be discussing further throughout the presentation.

When we talk about net interest income and net interest margin, we see that they have behaved flattish in relation to the accumulated numbers of the 9 months of 2018 and '19. And with an increase of 6.2% from June to September this year, NII in terms of our total earning asset, it has been reduced from 8.32 in September last year to 7.9 in this year, but with a slight increase in terms of the quarterly numbers.

NII, it was impacted by, I would say, resilient interest income produced by credit and funding and also with a more one-off and extraordinary event related to the increasing margins, coming from credit transactions that were recovered from write-offs in the past. These write-offs was one of the reasons why our provision expenses increased almost 19% in just 1 quarter and 12% over the last 12 months. Provision expenses, they were driven by 3 different and our -- different portions of issues.

First of all, there was a slightly [decay] in terms of our credit wallet in which NPLs over 90 days, they went from 2.2% to 2.8%. Therefore, it has required additional provisions. And at the same time, it didn't produce any yield whatsoever in terms of our credit portfolio on account of precisely these events.

Also, there was the rolling over of ratings with customers that were necessary, customers that were not impacting NPLs, but they're -- they were necessary on account of the passing of the time, mostly coming from credit to companies and are related to transactions that are subject to Chapter 11 or judiciary recovery process that has been under litigation. And the higher portion of our provision expenses in just one quarter came from the fact that we did recover an amount of credits that were written off in the past, twice the amount of the average recover that we saw in the first and the second quarter of this year. This is a consequence of recovering write-offs and the impact both in provisions and margins at the same time.

We have remained with the same funding structure, increasing at real terms, 7.2% over the last 12 months, and we have maintained a very controlled funding costs. And we are still seeking the moment in which a higher proportion of this funding will be passed on into credit assets.

We have had a resilient increase in terms of our banking fees. They both behaved at the same pace, 3.7% increase over the last -- when we compare the 9 months accumulated in 2018 and '19 and from the second to the third quarter of this year. But there is one consideration that needs to be addressed, which is until May last year, we recorded, included in MDR fees, part of the interchange expenses that were then transferred to the issuing -- the issuer of the card, in the form of expenses, so that we have -- in order to compare the trend from '18 to '19, we have to exclude about BRL 51 million out of MDR fees that were recorded in last year and that are not present any longer in this year. So if we excluded this number, we would have grown almost 7.5% in terms of our fee base year-on-year. The trend of the quarter is now -- not being impacted any longer of this way of recording MDR. And this is -- in fact, this 3.7% increase in 1 quarter, it is impact of them [issuing] increasing fees overall, [which] portfolio in an environment in which competition, in terms of the means of payments, has increased MDRs. They have been adjusted to the new environment of competition, but we were able to increase fees throughout other products that we offer to -- into our portfolio.

On the other hand, we have had a very behaved administrative expenses, both personnel and other alike, in which they have increased at almost flattish behavior when we compare the accumulated figures for the first -- the 9 months of these 2 years, '18 and '19, altogether, 0.4% increase, and 1.3% and when we take in consideration the accumulated numbers for the third quarter, vis-a-vis the second one. And this was driven by the fact that personnel expenses increased 5% given that it was agreed last year that the wage agreement will impact September figures going forward, and we adjusted by 5%. But when we consider personnel expenses, the accumulated figures, we saw that they increased only 0.8%. This is the benefit of Banrisul having reduced its headcount with the employees that were subject to the incentive plan that we offer at the end of '18, in which employees in the number closer to 560 left bank until the first quarter of this year.

Other operating income expenses, they have seen an increase of almost BRL 40 million in just one quarter, but it was consideration of provision expenses related to amortization of goods not for use and also with the impact of Banrisul recording discount on renegotiation of credit transactions.

Our assets held now have reached BRL 80.6 billion, increasing 6.3% in 12 months and 1.5% in 1 quarter. Our securities portfolio, above 5% of increase, BRL 23.3 billion. This is the part of our assets that we would like to see being transferred into credit assets in order to help us not only maintain, but also to increase our margins.

Credit portfolio is still being driven by non-earmarked credit portfolio, and there is one consideration that needs to be done in this slide. When it -- whenever it's read earmarked, it should read non-earmarked credit portfolio driven by the growth in terms of our individuals, 12.5% increase in 12 months and 1.3% in just 1 quarter.

Consolidated figures for credit portfolio of 9.2%, a strong, and I would say, ahead of the market credit portfolio driven by individuals that represents almost 6% of our total loan book and that are being composed by 3/4 in the form of payroll bonds. Payroll bonds that are produced with customers that operate at -- throughout our branch network and with the use of our correspondent debt offer payroll loans to INSS, retirees and employees from the federal government. They have -- they represent 75% of our total loans to individuals.

And you have the breakdown in the very next slide. And more importantly than the just breakdown itself is the fact that regardless of the distribution channel, we have seen an increase in terms of our payroll loans at paces above 12%, with customers 12% -- 21% from a -- with the use of 1 additional channels, 27% increase.

The impact in terms of provision expenses and the fact that we saw an increase in terms of our NPLs drove our provision -- total provision, vis-a-vis the loan book to increase from 7.6% at the end of June to 7.9% of total loan book. This is one of the points that we saw an increase in the -- a higher volatility and a one-off increase. But in terms of our guidance, and you will see afterwards, we have not changed anything whatsoever in terms of the amount of provision, vis-à-vis the loan book on account that we are also expecting that loan book will have a seasonal increase in the last quarter of this year.

Next slide is just the breakdown of our funding in AUM, but I would like to go immediately to the very next one in which we present our shareholders' equity increase, 6.7% in 12 months, 3% in the last 3 months, now reaching BRL 7.7 billion.

We have had ROEs within our range, 16.2% was ROE for the quarter. They are annualized ROE for the quarter, impacted by the fact that provision expenses were higher than we were just expecting. But we have maintained return on assets within 1.5%, 1.6%.

Default rates, they did increase from 2.2% to 2.84%. There was a deterioration -- is a tiny deterioration, but a deterioration, indeed, in terms of our credit portfolio, but that is being concentrated in credits with companies.

Cover rate, a very comfortable one. We have increased and improved our efficiency ratio from 51.8% to 51.1%, closer to the bottom of our guidance that we'll be presenting shortly.

And more importantly, we now have seen a resilience cover of our personnel expenses coming from this sustainable Basel ratio. More importantly, 14.9% of Tier 1 and core capital alone, and we have made adjustments towards improving efficiency in terms of our employee base.

Last slide, but not least, we have made 2 adjustments to our guidance in which we reduced the expectation of our credit growth within the segment of companies that we are now expecting to see a range of minus 2% to 2% variation at the end of this year. And in terms of our mortgage portfolio also, we've reduced to 0 -- from 0 to 4% expectation of increase of this portfolio. This reduction in terms of our mortgage portfolio is precisely one of the reasons that gave cause to the fact that nonoperating -- other operating expenses increased from the recognition of provision expenses.

Without further ado, I would like to conclude the presentation of the numbers and return to the mic to the analysts for the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today will come from Tiago Binsfeld of Itaú BBA.

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Tiago Binsfeld, Itaú Corretora de Valores S.A., Research Division - Analyst [2]

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I have 2 questions. First, on your operating expenses, we noted sequential gains in your efficiency ratio, which is now close to the bottom of the guidance. Can we expect this efficiency ratio to continue to go down over the next few quarters? And what would be the main cost control initiatives that you would expect to deliver in this sense? And my second question is on your payout policy. We see that your Tier 1 capital ratio is now close to 15%. This is -- this seems comfortable considering the bank's current ROE. Would you consider paying extraordinary dividends above a certain capital threshold?

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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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Tiago, let's start with your last question. No, we are not considering for this year paying further than the 40% payout ratio that we have approved in the Shareholders' Meeting by April this year. And we have just disclosed the policy for shareholders' remuneration, in which we are to maintain the mandatory 25%, of course. But also, we could pay further amounts whenever -- in accordance to the rules that is -- that are published by the Central Bank of Brazil and consider that we have maintained a 14.5% Tier 1 capital. We are above this limit. And therefore, there could be some initiatives, but we are not willingly announcing any further increase because one of the main issues for the bank is try to preserve conditions to increase credit portfolio. And we do assume that we are paying our shareholders in line to what the industry is paying; 40% is a very good return for our shareholders altogether.

Coming to other operating expenses, cost control, et cetera. What could be driving efficiency ratio? First of all, we knew that we need to adjust our personnel base. Headcount was adjusted. We incentivized employees to leave those who could retire and could be eligible to our post-employment plans that we offer through Banrisul Foundation altogether. We are now seeing to improve other efficiency issues that are not related mandatorily to reduction of the number of employees, but it will deal with fixed cost. We are assuming that we could see if there -- some savings could be seen from observing the way that our branches are concentrated and operating. We have disclosed to, in some event, that we are now seeking to pursue a more modern type of branch that will be a rather different from the traditional one. There's no guidance whatsoever, but the initial impact would be that there will be no need to handle cash. Therefore, we could reduce mandatory security expenses and even the number of employees. We are to -- about to start a pilot that could be seen what the benefits are. In some areas, whenever Banrisul has a certain number of branches, we could see if there is some savings coming from incorporating one to another. But there's no guidance in terms of reducing the numbers of branch, neither the number of employees for the time being. But we are seeking to exploit all the initiatives altogether that could help us reduce these costs. In terms of branches, in terms of operating with agent banks in order to help part of the [non-bank-arized] customers that Banrisul tenders, that is different from other retail banks in the State of Grande do Sul and also with digital initiatives that could help us to establish a different profile of branches.

No -- again, no guidance whatsoever, but we are analyzing each and every -- for the, I think, initiative that eventually could benefit in terms of pursuing higher efficiency. But for the time being, perhaps one that we are focusing on is to better use our distribution channel and increase the fee formation, fee that will not only be driven by MDRs, but from insurance, the sales of poor groups with consortium and also distribute debts as to customer base in order to increase our fees, so it's up. Overall, strategy that doesn't -- even though with no immediate guidance to disclose is pursuing to have a more efficient bank in time.

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Operator [4]

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(Operator Instructions) Our next question today will come from Yuri Fernandes of JPMorgan.

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

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I have just first question regarding your ROE. I think for this year, you mentioned that maybe should be close to the midpoint, the lower end of the guidance, so between 16%, 17%, something like that. But going ahead, how do you see the sustainable level of ROE for Banrisul? And I asked you this because today, if you consider mortgage, maybe 70% of your loan book is individuals, right? So you are becoming a much more retail bank. And when you look to peers, like other retail banks, they think you have much higher ROEs. So my question is, do you see room for the ROE of Banrisul keep evolving in the future? You did a good job like in the past there. We need expanding the last 3 years, but is the 16%,17% level the limit? Or do you see ROE going higher than that even in a lower rate environment? And my second question is regarding your -- the year-end bonus of Rio Grande do Sul state. In the last years, we saw the bank financing that payment in installment. So my question is if this year if you have clarity, if it is going to happen again. And if yes, what should be the impact for your loan book? How big would be the financing of the year-end bonus for public employees?

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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, starting from bottom up, we did say that one of the possible -- possibilities for helping paying year-end bonus to employees of the state is related to one view that the state will discuss at the legislative assembly house that upon knowing what has been offered, eventually, Banrisul could decide whether or not it will finance. It's not something for sure. It's something that has been done over the last, I would say, 4x over the last 5 years in a row. But before we could announce anything, we have to know what the conditions are and analyze if the conditions that are being offered in terms of the remuneration that the state will pay its public servant could be in terms of the financial conditions, interest rate suitable for the bank. There's no problem in terms of us increasing -- our increasing credit portfolio. But before Banrisul could announce something, we have to know what the conditions are and see if there will be positive impact in term for the bank. This is, again, expanding further disclosure of what will be the intentions of the state and Banrisul analyzing if we could follow suit or not.

In terms of resilient ROE for the bank, this number that we have now delivered closer to 16% was impacted on account of higher provision expenses being required, vis-à-vis what we would expect in terms of our budget. Therefore, we made adjustments to the ROE in terms of knock off the range itself, but in terms of the expectation. We do believe that it will be 19% from the bottom to the middle part of the guidance itself.

Some of the answers that we gave for the previous questions related to fixed cost are one of the drivers that could help us increase our ROE. We know that there may be room to reduce costs, that eventually we'll be paying out. And therefore, this will be one driver for increasing ROE.

Secondly, initiatives in order to produce both credit portfolio and fee base are also positive contributors to increase ROE. But we know and we are expecting to see trends to our -- similiar to our retail banks in Brazil, but that's one part of the formation of the ROE that we do like in relation to the other banks, which is leverage. Other banks, they are present elsewhere in Brazil, and we are -- we limited ourselves to the State of Grande do Sul. This could be one of the [limitators] to our top of the guidance.

In terms of ROE, that, again, will have to be adjusted to a new environment in Brazil with lower Brazilian interest rates. We have seen some analysts saying that retail banks will eventually could suffer some impact, in terms of their fee base on account of assets under management, in which we do assume that, probably, there is one advantage for us because we have a room to distribute products throughout the highest, the largest network in the State of Grande do Sul, with a very relevant number of customers that could help us increase leverage in this portfolio alone.

But we are more concern in Banrisul following suit what the other banks deliver in terms of ROE -- in terms of trend, not in terms of ROE overall because leverage for us would be something that will prevented us from delivering 19%, 20% for the time being. But there is room in terms of a more resilient of an environment with more productive environment, in terms of environment, corporate environment for the bank that our 16% would be higher in time. But there's no guidance going forward beyond 2019 for the time being.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [7]

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But in addition, so just to summarize, basically, you see room. For sure, you don't have like a figure for that. But basically, if the bank is able to -- or when improve fees or deliver new free -- fees or improve costs, basically improving the cost to income, improving the efficiency ratio, we could see the ROE of Banrisul moving higher than those 16%, 17% we are seeing today. That is correct?

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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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I would assume so, Yuri.

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Operator [9]

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(Operator Instructions) We have a question from Carlos Gomez of HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [10]

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You may have answered this already, but could you revisit the projected one, offering that you had earlier this year and that was eventually canceled? And under what circumstances would you come to the market again and with what structure?

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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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Carlos, no, we do not have any expectation for the time being related to any other, regardless of the type of follow-on transaction. There is none whatsoever for the time being. It was something that the controlling shareholder was pursuing. Conditions of the market are, more important, the price were not so positive for the shareholders, so we decided to cancel the transaction and haven't said anything otherwise for the time being.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [12]

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Okay. There is no time limit for -- the idea is not there right now. And you have no indication it's coming anytime soon.

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [13]

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No indication whatsoever.

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Operator [14]

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(Operator Instructions) And at this time, we will conclude our question-and-answer session. And I'd like to turn the conference back over to management for any closing remarks.

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Alexandre Pedro Ponzi, Banco do Estado do Rio Grande do Sul S.A. - Head of IR [15]

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Thanks for the audience, and we will be available for additional questions. Thank you.

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Operator [16]

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Ladies and gentlemen, the conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.