Banco Bradesco Sa American Depositary Shares

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's first quarter 2018 earnings results conference call. This call is being broadcasted simultaneously through the Internet in the website banco.bradesco.com. In that address, you can also find the presentation available for download. We inform that all participants will only be able to listen to the conference call during the company's presentation. After the presentation, there will be a question and answer session where further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, Let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco'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 the general economic conditions industry conditions, and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Carlos Piret, Market Relations Department Director.

Good afternoon, everyone. Welcome to our conference call for discussion the first quarter 2019. We have today with us participating in the call our CEO, Otávio Deladario Jr., our Executive Vice President and CFO, André Rodrigues Cano, the CEO of Bradesco Seguros, Vinícius Albernaz, and our Executive Director and Investor Relations Officer, Now, I turn the floor to Leandro for starting the call.

Hello, everyone. Thank you so much for joining our first floor 2019 earnings review conference call. This party's presentation gave a sense of pride about our bank and about our almost 100,000 employees. It's remarkable how much we have accomplished in terms of financial performance so far. and we see with a lot of room to grow as we continue to accelerate investments in our people, diversity in all of our levels, product, services, and technology. The first quarter was another strong quarter for the business, with the firm generating rapid revenue and record net income, as well as a growing ROE. Despite increasing confidence level notices, In the end of 2018 and the beginning of 2019, the resident economy has not shown the expected strength in growth yet. As a result, we have revised our 2019 BGP growth expectation to 1.9%. We believe the recovery will get momentum as the pension reform is approved and the economic agenda moves forward. But we foresee a gradual but steady growth with spots before inflation control and the maintenance of low interest rates. Despite the scenario, we are very pleased with our results, which we strongly believe were due to our strategic positioning, growing client focus, and this is very important in our strategy, effort in the education of our students, and the fact that the bank is pretty much adjusted and prepared to grow. We remain flexible to face volatile market conditions, and we believe that until the patient reform gets approved, that's the market that we shall face. But we are going to be investing continuously in our people and technology, and very focused on serving the needs of our clients. The first quarter was very strong for us. As you can see on page 3, We earned a $6.2 billion in our income, up 22.2% year-on-year, reflecting a strong underlying performance across all of our businesses. Keeping the growth trends of the previous quarters, our annualized ROE reached 25.5% in growth. We are confident to keep this level. The extended credit portfolio accelerated growth pace and reached more than 500 58 billion reais, up 12.7% year-on-year. In this sense, we'd like to highlight the balance of an astounding growth that we achieved in the main lines of our effective product strategy features. We're going to get into more details afterwards. Correct quality proof again. This quarter, in the 90 days, the liquidity ratio was down 34 bps in the quarter. Finally, we highlight the further increase of 7 bps in our Tier 1 capital, reaching their 414.4%. On page 4, we highlight some of the several important initiatives we have in this portal, such as the net number of checking accounts, growing approximately 260,000 in Bradesco, our mature platform, and approximately 300,000 in X, showing that both our platforms grow and benefit from our technological and client-focused strategy as well. The healthy growth performance on individuals' relevant portfolio reached almost 200 billion reais, up to just about 80% year-on-year. And our outlook for Christ remain very positive. The creation of an incentive program that rewards the steady performance of our managers, enabling almost 30,000 people to earn performance bonus from now on, is something new and something that is pretty much energizing our sales force and giving us all the elements to believe that we shall grow steadily this year. For last, in this page, I'd like to highlight that the strong growth in the net income of our insurance business that reached 1.8 billion reais, up 16.1% year-on-year. Moving to page five, we briefly present our strategy of technology, for technology that is comprised of pretty much of two pillars. The first one is the transformation and modernization of our traditional bank, through the growing focus on client and intensive use of technology, we aim to delight our customers in every single market that we play. VIA, that is, Brabhisto Virtual Intelligence, is a more and more important component of this strategy as it acts across all of our products, across all of our services, departments, and even in different environments here. The second pillar is our digital bank, Next, our FinTech. Next is rapidly becoming an independent, full digital bank providing a more complete, funny, innovative, and convenient experience to clients than any other FinTech in the world. And the last but not the least pillar is preparing the bank to run in the open bank world, taking advantage of our platform flexibility to distribute Not only do we discuss products and services through several team techs, but others, as we already do in our main portal, as well as in Agata, for instance. We believe that these three pillars put us in a very flexible and broad position to adapt to several different scenarios and combine our traditional safety and innovation and client focus. It's important to say that in 2019, we expect to invest more than $6 billion in technology. one-third of which in innovation. It's huge. Moving to point six, we present BIA, one of our transformational initiatives of the bank. It put us in the framework of a trending-edge position in the use of our future intelligence in the financial markets, not only in Brazil, but worldwide. We are pioneers in launching such a tool to clients, and we continue expanding fast. due to the use of its future intelligence. VIA is a multi-platform as it means IBM Watson, Google Assistant, Amazon Alexa, Microsoft Photonic, and it has been recognized by IBM as the largest IBM Watson bank implementation in the whole world. VIA allows us to cut costs, but it's mainly a key to improve our customer experience and in this sense to extend revenue. We have recently achieved the level of 100 million interactions of clients who deal with a 96% accuracy. Then, on page 7, we explore a little bit more these digital worlds. They are quite impressive. We highlight next, we've achieved about 800,000 clients by the end of this quarter. We are opening about 7,000 accounts daily and we expect to reach 1.5 million clients by the end of the year. 75% of these clients who joined MEXT were not their business clients, and the churn is very low, only 2%. In the first quarter, MEXT's credit portfolio grew 28%, and the past is 35%. And 28% of MEXT's customers have theoretical plans, and we are increasing this number every week. Dear customers, interactions through WhatsApp had significant evolution, reaching more than 3 million transactions in the past year. The volume of loans we needed through mobile and internet increased steadily. The figure was at 90% year-on-year for individuals and 159% year-on-year for companies. Regarding to SMEs, we can move to page 8 just to give you a flavor. And then we're going to see that to continue to extend our offerings to SMEs and micro-entrepreneurs in the best-in-banking context. That is pretty much aligned with what the central bank has removed yesterday. And so there were 314,000 fellow POs to our channels, and our micro-entrepreneur portal reached more than 864,000 users. Moving to individual credit loans on page 9, you're going to see that one of the main highlights is our strong growth to credit to individuals. It's really impressive. The main factors that contribute to this big performance are, first of all, our strategic positioning that allow us to have a stronger growth in payroll loans and mortgage, improvements in our mortgage product formalization, successful commercial partnerships, evolution in our tech modeling, which allow us to have a higher approval and improved policy process, and especially the use of income estimates through algorithms. We have more than 100 PhDs and MREAP guys working for us within our platform, and they're helping us to achieve outstanding results every day. As a result, we achieved a strong growth in the main park lines, up 32% in personal loans year-to-year, up 16% in mortgage loans, up 18% in payroll loans, and up 14% in vehicle loans. And we are still very confident to improve those mortgages throughout the years. And finally here on page 10, we would like to highlight the important value that we share with society. We have value-added to society more than 16 billion reais in this policy, out of which 28.4% was related to employees' compensation and more than 30% to taxes. We also present the relevant contribution that Sombra Desk has made to the community as it's currently providing high-quality education to more than 90,000 children and shall invest more than $650 million into the end of the year. Now, let's go to financial results. Here on page 12, we've got the financial performance of the quarter. Our MII is speeding up and increasing 4.2% year-on-year. In this quarter, credit provision expenses were 3.6 billion reais, close to the top of our guidance, but we do expect it to possibly evolve throughout the year. Our operational results was at 15.6% year-on-year, and our net income, as we have already mentioned, was at 22.3%. Moving forward, related to ROE and ROA, we can see that we reached 20.5% in ROE and we are reaching 1.8% in ROA. And the most important point here for us is that this is the highest fever since the fourth quarter of 2015. and presents and includes about 200 BIPs since the beginning of 2018. We understand that the current levels of BIPs are sustainable and may present improvement in the case of a favorable economy. On page 14, we analyze a little bit of our extended loan portfolio. It continues to grow, despite of the slow economic activity, and we believe that our possible results is founded on our stock declarations, which have been streamlined by a better process, good visitors, and improved crop models. The extended loan portfolio was up 12.7% year-on-year, or 11.4% without considering the foreign exchange variation. Corporate portfolio was a very good surprise up 14.5% year-on-year, impacted by foreign exchange variation, since it holds the largest majority of our portfolio in foreign currency. The growth of the corporate portfolio should be displayed throughout 2019, converting to the levels that we have previously forecasted, depending on the economy pace. may give further opportunity in the debt capital markets. And in this sense, we feel very comfortable with this change seen throughout the leading financial banks in the debt capital markets in Nigeria. Our FME portfolio had a seasonal decrease. Year-over-year, it was up 8.5% with highlights in the period, which is expected to accelerate further. Our individuals' portfolio was up 12.6% and as we discussed it before, highlights the personal loan up 23.4% year-on-year and payroll deductible loans up 18.2% year-on-year. As we move forward on page 15, we can see that our cartel generation pretty much continues to have a positive evolution. And origination was up 21.5% in divisions and up 13.5% in companies year-on-year. On the next page, when you turn to page 16, nine was for in the lower portion of our guidance, but we see it's growing steadily. We believe that it shall reach the middle of the guidance by the year-end. And with clients, it was up to 6.2% year-on-year, with a positive effect on volume and growth of our mix of portfolio, partially affected by a drop in spreads. Market NII decreased at 5.8%, reflecting lower gains in ALM. And we do believe that our growth shall continue. Moving to page 17, when we addressed the matter of deletion ratios. over 19 days and she continues improving as well moving closer to the end of the improvement cycle but it can still further uh see that it shall shall last a couple of months and then it shall come across uh the the same growth of revenues that we have all lines improving allowing us a reduction of 24 bits in the overall community Now we turn to NPL creation and allowance for loan losses. We can see that, pretty much, there was an improvement in the frequency in our NPL creation and cost of this program, as I have just shown on the previous page. NPL creation, which the lowest level in the series, confirmed that increase presented less work that was seasonal. Cost of risk dropped to 2.6% of the portfolio, also the lowest level in the series. And we are keeping our dinosaur provision of expenses when we aim for the center of the range and shall keep it. On page 19, you can see that our fee income was up by 2.4% year-to-year. The program as everybody expects, was impacted by a competitive scenario in the acquiring business and by the regulation imposed by the central bank on the interchange fee and debt cards. Additionally, the country was particularly not strong in capital markets and asset management. In terms of capital markets, you expect to see a deposit as the pension reform is approved. And regarding to asset management, we do not see a failure there. Pretty much because we have achieved some sort of stable yields in the country and we believe it's what we can deserve. Moving to operating expenses and paid training. You can see that it was up 5.7% year-on-year. But although it was not in the guidance, it exceeded our guidance, it was very effective measures, such as the hiring of frontline sales teams in different business. acceleration of investment in the region, and provisions related to new incentives of our compensation program. So pretty much there are variable items that are linked to revenue and shall increase our net income. We have to make those investments right now, but we shall see the return of it throughout the year. And for the next quarters, we expect costs to be in the guidance range. On page one, we show strong results from our insurance fund, with profits of 16% year-on-year, and a soaring ROE of 22% for the quarter. Green is green, 2.8% year-on-year, with a positive highlight for health, up by 8.4% year-on-year. On page 22, we continue to discuss the insurance business The good performance was mainly due to the operation enhancement. That's very good news, because this is something that you shall see the results throughout the year. The clearance ratio improved by 200 bits in this quarter. It's huge. And the compliance ratio improved by 50 base points. The operational results grew 22% year-on-year. The best improvement on that income was in health insurance reaching 103% of growth. And we remain very confident about the insurance science, although we are here clearly ahead of the guidance. Moving forward, on page 23, our DIS ratio continues to expand. In spite of the portfolio growth, we accumulated capital organically. Tier 1 recharges, 13.4%, 7 bps over the last quarter. And finally, our last slide here, we talk about our guidance. We are very comfortable with the lines of military folio, insurance and provision expenses. We understand that there is room to converge to the center of the guidance for the NII, as well as we are speeding up. In costs, we are aiming to the center of the range, but we understand that we will be within the given range. In costs, we have different initiatives that we believe will bring results mainly by digitization and reduction of branch networks by practice. And the final message that I'd like to leave to you before and for the Q&A session is to First of all, thank you very much for making the time to participate in our conference call. We are going to keep working hard and focus on our client satisfaction and continue to deliver superior results to our shareholders, employees, and general community. We believe that the value that we add is not only to shareholders, it's to our employees and community as a whole. We are now available to take your questions. Thank you very much for your time.

Thank you. Ladies and gentlemen, we will now initiate the questions and answers section. If you would like to ask a question, please dial star 1. If at any point your question has been answered, you may remove your question from the queue by pressing star 2. Please hold while we collect your questions. Our first question comes from Mr. Thiago Batista with Itaú BBA. You may proceed.

Hi, guys. Thanks for the opportunity. I have two questions. The first one about the open banking. If you can give your view about the possible impact of the guidelines of open banking with the US Federal Central Bank. So I know that you mentioned a bit in your initial speech, Leandro, but if you can give a little bit more of a view about the possible impact. The second one is about payout ratios. Do you believe it's possible to assume that the payout ratio should increase next year, or is it too soon to expect this possible increase in payout ratio? Thank you, Tiago. This is Leandro speaking. Pretty much, we are totally aligned with what the central bank has renewed yesterday. This is something that we are...we're expecting. We have already our main portal that aligns that. for some time also, released in press, talked to investors. Open Bank is our third pillar in technology. So this is something that we do not see as a threat. We see it as an opportunity. We are ahead of our competitors in terms of Open Bank, and we are going to try to collaborate the more we can because we are very interested in this platform that will bring, for sure, benefits for the bank as a whole. Regarding to payout ratio, I mean, we also expect that our net income shall continue to grow and perform according to our guidance. And in this sense, this is something that we shall evolve in terms of internal discussions and address this matter related to the market at that time, the opportunities that we shall have. It's very difficult to say today what we shall have to do in a market that we still have not seen the reforms approved, the market reaction, and all the opportunities that we have. So, depending on the scenario, this is something that we shall consider. Okay, thank you. Thanks for that.

Our next question comes from Ms. Mayra Huberbo with Wells Fargo. You may proceed. Hi. Thank you for the opportunity. My question is regarding the income from credit recovery. which was about twice the amount that you reported for Q18 and also for the first quarter of 2018. If you can provide a bit more power on what caused your higher income from credit recovery and also what is your expectation for ALL expenses quarterly for the rest of the year.

Thank you. Okay. Thank you, Maya. This is Carlos Suretis. Basically, the increase in credit recoveries in the quarter mostly didn't have impact in earnings. As we put in our release, basically we have about 1.8 billion reais in credit recoveries related to mostly two companies. One of these companies, much larger, that were off balance. Basically, they were in court with recovery and this process finished. With that, with the restructuring of this credit, we had the credit recovered. That's the way we have to account it. This loan, this $1.8 billion, went back to the loan book. in credit rating H. So we made 100% provisions on this loan. So basically, the credit recovery directly to your question is related to this large corporate restructuring related to the end of a corporate recovery process for two large companies without impacting on earnings on a net basis considering the recovery versus the provision, and also without impact in MPLs. In terms of expectations for provision expenses, we believe we will, throughout the year, converge to the center of our guidance for provision expenses for the year. That is, the guidance range goes from $11.5 billion to $14.5 billion, we are pretty much comfortable with that.

Thank you. I would like to remind you that to ask a question, you just have to dial Start When. Please wait while we pull for questions. Excuse me, ladies and gentlemen. Since there are no further questions, I would like to invite the speakers for the closing remarks.

Well, this is Leandro Miranda speaking. Thank you all for making the time to be with us. After this call, of course, I'm going to be available for any sort of discussion, clarification of matter that you may wish. And we remain here and positive with the coming up of the results. Thank you. Have a great day.

That does conclude Banco Bradesco's conference call for today. Thank you very much for your participation. Have a good day.