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 second quarter 2019 earnings conference call. This call is being broadcasted simultaneously through the Internet in the Investor Relations website, banco.bradesco-ir-un. 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, when 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 following looking statements are based on the beliefs and assumptions of Bank of the Davis 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 Banco Bradesco and could cause rewards to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Carlos Siret, Master Relations Director.

Good afternoon, everybody. Welcome to Bradesco's second Q19 conference call. We have today with us for the call our CEO, Otavio de Ladari, our Executive Vice President and CFO, André Cano, Bradesco Seguros CEO, Vinicius Albernaz, and our Executive Director and Investor Relations Officer, Leandro Miranda. Before starting the call, I turn now the floor to Leandro.

Hello, everyone. Thank you all for joining our second quarter 2019 Army's Review Conference Call. We are very pleased to continue presenting solid results despite the many challenges facing the economy. Our business model and team have shown flexibility and excellence to thrive in every single market and replay. We are proud of our accomplishments and confident that we shall keep this path as we accelerate our investments in people, technology, and services. We'd like to thank all of our employees for this outstanding performance and continuous focus on serving our clients and communities. In addition, we have special thanks to our clients who have elected Bradesco as their bank of choice. The economy was far weaker than expected, what led us to lower again our 2019 DGP growth expectation. The increased volatility jeopardized the confidence level of consumption and investment, resulting in a tougher environment for banking. Despite the challenging short-term scenario, we are optimistic about the future. The patient reform does seem to be on track in the Congress, as it has already been voted and approved with major support in the first round in the lower house, which may allow companies to finally focus on their long-term goals without being blurred by the macro-fiscal uncertainty. Therefore, we believe that investments in growth are likely to resume over the following month. Our sounding performance this quarter came as a consequence of several changes that we have been implementing for quite a while, which allowed us to grow the credit portfolio despite the economic scenario, with excellent credit quality, while maintaining our costs under control, and with a great performance of our insurance operation. On page 3, we bring some of our financial highlights. First of all, an all-time high net income of 6.5 billion reais, a growth higher than 25% year-on-year. The operational results grew 11.1% in the annual comparison. Our ROE reached 3.6% in the quarter, an expansion of 220 bps, even with the strong expansion of our shareholders' equity in the quarter that grew 18.2% year-on-year to R$133.6 billion. Our expanded credit score grew 2.2% this quarter and 8.7% compared to the same quarter last year. and the individual's portfolio is a high life, with a strong growth of 14.8% year-on-year. As expected, credit quality continues to improve, with the overnight-based delinquency ratio falling 4 bps, confirming our view of a disco-optimal position for lending. Finally, Our tier one capital ratio reached a strong 15%, a growth of 60 bps, this quarter, and 360 bps in the annual comparison. Moving to page four, we bring the other highlights of the quarter. The first one is the strong growth in the individual's credit portfolio. We've expanded 14.8% in the annual comparison. We are gaining market share in different lines, such as personal loans, payroll loans, mortgage, and our financing. We are achieving this growth with excellent credit policy as shown by the new vintages. This growth is a reflection of the commitment and motivation of our teams, as well as the evolution of our processes and models. The second highlight is the acquisition by $500 million of BAC Florida that we have announced in the beginning of the quarter. Our objective with this move is to strengthen our positioning in the high-income segments, pretty much wealth management, offering to our customers checking accounts, cards, mortgage financing and other sources in the U.S. The conclusion of the deal is paying regulatory approval, but we are very confident it shall come in the very near future. The third highlight is in the May segment, which awards the first bank to launch the digital account. Correct origination to digital channels, mobile and internet, had an expansion in the first half of 2019, growing 53% in the individual segments and 44% in the company segments. Our second account, customer base, continues to expand. Again, in comparison, we grew 1.1 million customers, and this last quarter, 400,000 customers. Finally, next, we reached 1.1 million accounts in the quarter, and we are confident that we shall exceed our targets of 1.5 million customers by year-end. On page five, And on the next page, we bring some numbers of our operations in the digital arena. As mentioned in the previous slide, Next reaches 1.1 million clients, and 77% were not Redisqus clients. We aim to reach more than 1.5 million by the year end, and our CEOs are confident that we shall reach even 2 million clients by year end. In Bradesco Group, we closed this quarter with 16.4 million digital checking account clients, an expansion of 1.9 million in 12 months. As you can see on the next page, via Bradesco Inteligente Artificial, that's our artificial intelligence, had more than 144 million interactions and 1.4 million customers through WhatsApp. Credit origination through digital channels in the individual segments totalled R$11.8 billion in the first half, a growth of 53% in the annual comparison. In the company segments, it totalled R$14 billion, a growth of 44%. These numbers show that our traditional banking clients are quickly adopting the digital channels even for credit products. Coming to page 7, a great pride of ours, Radisco Foundation is one of the largest educational projects in the world. The foundation has a budget of approximately 650 million reais, bringing benefits to more than 92,000 students with basic education of high quality. On page 8, we show the value that we add to the Brazilian society. In terms of value added, out of 33 billion reais, 30% was paid to government and 29% to the compensation of our employees. Moving to the financial results of the second quarter, we see here on page 10, The growth of the financial margin in the annual comparison was 7.1%, and in the first half it was 5.6%, close to the center of our guidance. Extended loan loss provision reduced it 3.2% in the quarter to 3.5 billion reais, remaining on the upper part of our guidance. We are doing really well on insurance operations. with expansion in operational results of 16.9% in the first half. Our net income grew 23.7% in the first half, and operational results, 13.3%, show a solid performance of the localization as a whole. We will go into more details on the following page. Moving to page 11, our ROV grew again to 20.6%. This is the fourth quarter in a row with expansion in our return, even with our shareholders' equity presenting a significant expansion of 18.2% year-on-year. We understand that ROE may remain at these levels or even expand a little for some time, as our CEO has pointed out. Our ROE was 1.85%. On page 12, we may see that our track force portfolio grew 2.2% this quarter and 8.7% when compared to the same quarter last year. The acceleration of the annual comparison is mainly due to a larger comparison base in the second quarter of 2018. I would like to remind you that in the second quarter of 2018, there was a large expansion in the corporate portfolio, mainly due to devaluation of our currency by 16% and also due to a large transaction of Brazilian reais that quarter with a great Brazilian company. As highlighted earlier in this call, the individual's portfolio presents a growth of 14.8% in the annual comparison, which highlights the personal loans, which is growing 29.2%. Payroll loans growing 33%, car financing growing 17.5%, and mortgage growing 15.9%. It's really an incredible year. The good performance of the individual segment is a consequence of our market positioning. Improvement in correct operations, evolution of correct models, with intensive use of data, and our highly motivated sales force. In the company segments, in addition to the effect of the comparison base that we have already mentioned, the operations surface from low level of investments by companies. And we understand this line should pick up with improvements in the economy. In the SME segments, the growth is also affected by relocation. In the first quarter of 2019, approximately 6.7 billion reais in loans from the SME segments to the corporate segment as part of Bradesco's new segmentation in companies, which increases the growth in the corporate portfolio and reduces in the SME portfolio. Turning to page 13, correct origination for business day continues to have a good evolution. In the individual segment, growth was 17.3% in the quarter and 39% year-on-year. In the company segment, the growth was also good, 15.4% in the quarter and 21.9% in the annual comparison. On page 14, we present our NII, which grew 2.7% in the quarter and 7.1% in the annual comparison. The highlight is on the NII pro-market operations that presented a growth of 7.3% in the quarter and 25.9% in the annual comparison. The annual comparison is also impacted by the weak comparison base in the second quarter of 2018. The NII from client operations grew 1.9% in the quarter and 4.2% in the annual comparison. It benefited from the credit portfolio expansion. changing product mix, and a quantity of days in the quarter, affecting the reduction in the average spreads. We understand that this alignment continues to present positive performance as a consequence of the growth in the correct portfolio, despite the trend of spreads contraction. We expect an acceleration in this line during the second half. Turning to the liquidity ratios on page 15, You can see that it continues to have a tough evolution in all segments, in line with what we have been pointing out in previous quarters. We still see the possibility of further improvements, but we are approaching the end of the normalization process of the credit cycle. We hope that it comes by the year end. The strong loan growth in the individual segments reduce the room for improvements. As you can see on page 16, OPL creation increases this quarter, impacted mainly by individuals and corporate segments. In the individual segments, the impact is related to the growth of the portfolio. Expanded loan loss provision improved to 3.5 billion reais this quarter, representing 2.5% of the extended credit portfolio, the best level ever in our historical series. We still see room for reduction in the provision levels in the coming quarters. However, the expansion in the individual scribe portfolio reduces space for reductions, but should be compensated somehow by a positive impact to the financial margin. Fees are presented on page 17. The growth in the quarter was 2.6% and the annual comparison 1.3%. The checking accounts line has a fee revolution growing 9.5% in the annual comparison due to the growth in the customer base and evolution of our segmentation. The pressure on fee income is related to cards revenue, which are pressured by the competitive environment on the acquiring business and the reduction on that cards interchange fees. Asset management revenues, which are pressured by the reduction on management fees loan operations revenues pressured by a reduction in the volumes of sureties and guarantees. We understand that 2019 is a year of adjustments in this line and we may resume growth in fee income by 2020 with a stronger economy and with an adjusted revenue base. We are positive with Brazil. On page 18, we bring the table with our operational expense, which are both the guidance presenting a growth of 6.2% in the first half. We had an excellent performance on administrative expenses, which grew 3.3% in the first half and 2.2% in the second quarter on a year basis. Below the inflation, the performance would be even better Haven't we made an anticipation of payments due to discounts or between the negotiation of costs, so it's very positive for the bank as a whole. In personal expenses, we had a growth of 9.1% in the first half. The main pressure comes from the non-structured portion, mainly from higher profit sharing provisions, related to extraordinary performance program as we continue to make provisions assuming maximum performance and from higher provisions for labor claims. Expenses would be growing by 4.6% if we were to exclude the effects of this payment anticipation and higher profit sharing provisions related to this extraordinary performance program. So pretty much we believe that we shall keep them below inflation at level five. Moving to page 19, insurance results, we had again this quarter a very good result, with operational results growing 16.9% in the first half and 11.6% in the annual comparison. The distance we grew to net income was 1.83 billion reais, a growth of 1% this quarter and 15.9% in the annual comparison. Insurance premiums grew 3.3% year-on-year, with highlights to health insurance segments, which presented growth in number of customers. Technical provisions totaled R$265 billion, expanding 5.2% year-on-year. A few more topics on insurance represented in this training. In the annual comparison, net profit in the first half grew 16%, and ROE reached 23.6%. In the second quarter, overall claims ratio had an increase and reached 72.5%, but it's still lower than the same figure in the second quarter of 2018. The best way to see it is on a semi-annual basis. The main impact on the ratio was caused by health segments, mainly due to the lower impact in the first quarter as a consequence of carnivores in the end of quarter and due to the higher quantity of business day in the second quarter. For a better comparison, as I have pointed out, we should consider that first half total claims ratio is reduced from 74.4% in the first half 2018 to 70.5% in the first half of 2019. We are confident that claims ratio have a better performance in 2019 than in 2018. Turning to page 21, our capital ratios continue to evolve, as you can see, organically through retained profits. Core equity tier 1 and tier 1 both expanded 60 bps in the quarter. And finally, on page 22, we bring our guidance, which had no change. We understand that considering the full year, we'll be within the guidance range from credit portfolio growth, total NII, extended credit provision expenses, and fees. Our insurance operational results will be better than the top of guidance range, which is 90% growth, which are increasing by far. In the line of operating expenses, we'll also be slightly above the range. with expenses growing a little bit more than 4% due to legal claims and also the compensation program that I have pointed out. In general terms, the current performance does not change the return target since the guidance initially released in January. Therefore, we now conclude the presentation. We are open for your questions. Thank you very much for your attention.