Banco Bradesco Sa American Depositary Shares

Ladies and gentlemen, thank you for waiting. We would like to welcome everyone to Bradesco's third quarter 2020 earnings conference call. This call is being broadcasted simultaneously through the internet in the investor relations 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 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 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 Jardisco 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 Piretis, Market Relations Director and Head of IR.

Hi, good afternoon everybody. Welcome to our conference call. We have today with us our CEO, Otávio de Lazari, our Executive Vice President and CFO, Andre Cano, the CEO of Bradesco Seguros, Vinicius Albernaz, and Leandro Miranda, Executive Director and Investor Relations Officer. For starting the presentation, I turn the floor to Leandro.

Greetings, everyone. We are pleased to welcome you to our third quarter's Earnings Release Conference Call. Throughout the third quarter, we have seen evolution in the reopening of the economy, as well as a somewhat restricted return of the various day-by-day activities in a number of regions in Brazil. At Bradesco, practically all of us have remained working from home, with about 95% of our employees from departments and affiliates working remotely. And as we had stated in the previous quarter, our work has gone very well and we have seen a high level of productivity. We have prioritized the health of our personal clients as our top priority in all of our decisions. We have made great strides in the nearly six months since the onset of the pandemic. We have introduced new solutions at an unbelievable speed that made our digital services to clients even more complete. In addition, we have been focused on providing our clients with financial solutions in order to help them navigate their way through the crisis. The search for loan extension has almost vanished. In April, we extended 32 billion reais in. In September, only 1 billion reais. We'll bring more details ahead. We intensified the restructuring of loans in order to provide our customers with loans suited to their payment capacity, and we are also offering a large volume of new credit lines related to emergency programs. We see a continued recovery in the economy for the remainder of the quarter with a pickup in formal employment, which would indicate an acceleration in GDP. a 4.5% decline for 2020, but this is a far better situation than what we saw at the time of the first quarter disclosure. Despite the anticipated reduction in the emergency aid, interest rates remain low and loan will underpin the economy. Furthermore, we see exports and agriculture play a beneficial role in the performance of the economy. We believe that the economy will fully reopen in 2021, and this will help in the recovery. There was a significant amount of money put away to save insurance during the pandemic, which also helped our collection of deposits. We believe that this mitigates the risk of default and will partially offset the end of the emergency aid. Emergency aid paid to families without income was essential, but we need to recognize that Brazil has spent more on this pandemic than any other emerging country. As such, managing public accounts will be crucial to ensure that the recovery in 2021 is not disrupted. On page three, we now turn to the results. The net income in the third quarter was 5 billion reais, an increase of nearly 30% on the quarter in an annual comparison, but still, 23% below the same period of 2019. ROE in the quarter was 15.2%, a positive trend compared to 11.9% in the second quarter, but still well below the pre-pandemic level. We believe that ROE will continue to improve, assuming that we do not have any significant worsening in the course of the pandemic and that it continues on the path of pre-recovery. Our loan portfolio rose by 0.5% in the quarter, with good performance by SMEs and individual borrowers, and a reduction in large companies. Tier 1 capital showed a solid growth of 40 bps, reaching 12.9%, closely approaching the fourth quarter 19 level. Moving on to page 4, we present the performance of some income and exit lines. We'd like to highlight the evolution of the margin with a growth of 3.5% year-on-year, despite the reduction in interest rate on overdrafts. Compared with the previous quarter, we saw a reduction of 8.4% as the net interest income in the second quarter was quite strong due to the margin with market, which was above average. It's also worth noting that loan loss provision expenses decreased by R$3.3 billion in the quarter. We will drill down on these lines in the upcoming slides. On page 5, we address a little bit more on funding loans. We show that our funding continues to strongly progress. We had a 3.6% growth in total funds raised from clients in the quarter. and a 35% growth over the last 12 months. Our loan portfolio new accounts now accounts for 81% of total funding, a very comfortable position. This positive performance in funding can be explained by the flight to quality of clients to Bradesco deposits at the beginning of the pandemic, and also the migration of investments in DI funds to deposits. We will now move on to page six. The loan portfolio grew 0.5% in the quarter and 11.7% over the last 12 months. When we look at the composition of growth, we see a strong performance of the S&P line, driven by the lines of emergency aid, and a solid growth in individuals as well. We grew in practically all lines except personal loans, as we adjusted our credit models and risk to be taken. The rotating lines, personal check and credit cards, have also been used less and less. The large company's portfolio narrowed significantly this quarter, with clients repaying part of the excess working capital they took at the start of the pandemic. On page seven, we point out that Bradesco has disbursed 19.3 billion reais in lines of emergency programs created by the government, BNDF, and the Central Bank of Brazil. The lines that concentrate the most volumes are the FGI, the Investment Guarantee Fund, and the lines that use compulsory fund saving accounts as funding. Moving on to page 8, regarding the provision for credit risk, we have continued to bolster our provisioning in lower levels this quarter. is still naturally making provisions well above what they were pre-pandemic, but reducing them to the lowest level of the year. The calculation for provisioning requirements is based on our modeling of expected loss. Our expense with extended loan loss provision reached 5.6 billion reais in the quarter, or 3.4% of the loan portfolio. Over the nine months of 2020, we totaled 21.2 billion in the provision expenses compared to 14.4 billion reais in 2019. The total provisions on our balance sheets reached 44.9 billion reais or 9.2% of the loan portfolio, a clear sign of the strength and sufficiency even considering adverse scenarios. It is true that we maintain a conservative approach, but it's fair to say that the current trends are maintained. We may show a further reduction in provision expense in the fourth quarter, and we hope to have no additional provisions in 2021 as we did in 2019. We now move to page nine. We continue to show improvements in the 90-day delinquency indicator as well as stability in the short-term delinquencies. We are seeing most of our loan portfolio performing well in terms of quality. We acknowledge that NPL indicators are affected by loan renegotiations. We now believe that the peak of defaults in the current crisis will occur in the second or third quarter of 2021. Our expectations as to loan quality have improved greatly. which is why we believe that the peak may be lower than the one seen in the 2015 and 2016 crisis. This depends, of course, on current expectations coming through and that no further economic slowdowns occur. On page 10, we show the NPL creation. We have a low NPL formation, impacted also by loan extensions and renegotiations. but with good news as we are going to present ahead. Page 11 illustrates the coverage ratio. With the further decline in the NPL ratio and growth in the stock of provisions, the 90-day NPL coverage ratio continued to grow. Considering the breakdown by segment, we saw an expansion of coverage in all of them, with the exception of the portfolio of large companies. Coverage remains virtually stable in an expanded coverage concept, where we include a portfolio renegotiated at 90-day MPL. Now, on page 12, regarding to extended portfolio, we'd like to emphasize transparency. So, we present some very important information for you. which shows a really good view of the extremely positive performance of extended loans, way better than what we could anticipate in the beginning of the pandemic. The total extension, the second quarter, came to 6 to 1 billion reais. Of that amount, 39 billion was back to normal on scheduled payments after the Great Spirit de-empted. 21 billion was still within the Great Spirit, and those in areas amounted to only 1 billion reais. At the end of September, out of the 72.7 billion reais of extended loans, 53.3 billion had already returned to normal and scheduled payments. 18.3 billion reais was still in grace field, and 1.1 billion reais were in arrears, equivalent to 1.63%. We have another 9.2 billion reais coming out of the grace field in October, 6.7 billion reais in November and only 2.4 billion December onwards. With the information we have available today, we are confident that the loan quality of the clients who are still coming out of their grace period will also be good. We expect the portfolio that is in grace period also to have the same behavior of the portfolio that is starting to be repaid. And we are very comfortable with that on the current basis. On page 13, in accordance with our strategy of supporting clients during the challenging time, our renegotiated loan portfolio grew by 4 billion reais in the quarter, mainly due to customers that prefer to renegotiate their loans with longer tenure instead of extending the due dates. The renegotiated portfolio has a high level of provisions. with provision accounting for 61.7% of the loan portfolio. On page 14, the total net interest income showed an 8.4% drop in the quarter. This was due primarily to the reduction in the market portion, which has been well above the average of the second quarter, and also the reduction in the decline portion due to the still low use of rotating lines. companies as well as individuals, and the growth lines from emergency programs. For an annual comparison, NII grew by 3.5%, with a 2.3% increase in the client portion, despite the cap in the overdraft that began in January 2020. We see the market portion remaining a good performance over the next few quarters. The client portion is expected to react to volume growth with a more favorable mix. We will now move on to page 15. Fees rebounded in the quarter due to the improvement in the economy compared to second quarter. we still see a negative quarterly performance in the line of loan prorations, impacted by the reduction in loan originations in portfolios with contracting fees. In the annual comparison, we positively highlight the investment bank and brokerage activities. Despite the recovery in the quarter, significant lines such as credit cards and asset management are still decreasing. In credit cards, the reduction occurs due to the drop in the volume of transactions in asset management due to the reduction of the management fee of fixed income funds, as well as the migration of resources from these funds to deposits. This effect obscures the solid improvement we have seen in the mix, with a growth in equity funds, multi-market funds, fund of funds, and mirror funds by independent managers. Now, We move to page 16 where we are going to discuss operating expenses. We continue to deliver an outstanding cost performance and we do expect that it continues this way on a monthly basis. In the annual comparison, we can see the signs of the cost adjustment. We saw a 7.9% drop in administrative expenses for the four-year loan and 3.3% over nine months. Personal expenses declined 13 by 3% in the quarter and 7.6% over nine months. Accounting for total expenses, including others, we reported a 5.7% decrease in the quarter comparison and a 3.9% decrease over nine months. We are in the process of making major cost adjustments within the bank right now, which should allow for reduction in costs in nominal terms for 2020 and also 2021. In order to address the expected cost of implementing these adjustments, we carried out a restructuring on recurring provisions of R$ 879 million to the quarter to help us to change our cost structure. On page 17, you may see information on the optimization of the fiscal presence. Basically, we have a number of adjustments in our branch network. We are already performing an essential adjustment since the beginning of the year, but this adjustment was intensified by the acceleration of client digitalization trends and the reduction in the use of branch tellers. We will be reducing our total number of branches by 1,100 in 2020, 700 of which will be converted to satellites or business units, and 400 will be definitely closed. We estimate that we can attain cost reductions of around 30% to 40% with the conversions into down-sided formats. So far, we have reduced 683 branches, 163 were closed, and 520 were converted. Now, moving to page 18, We show a series of businesses at Bradesco that we believe deserve to be highlighted due to their strategic importance. Next, our native digital bank. We reached the mark of 3.2 million customers. Agora continues to expand its base reaching 409,000 customers. This year, we have already added 150,000 clients to the base. Launch of this quarter beats our digital portfolio, complements our product and service offering, and has just acquired . In addition, we highlight a series of business and specialist banks such as Losango, Verdesco Financiamentos, and Consorcios. To complete in the next few days, we will complete the acquisition of BAC, DAC, and BFI, for which we have already obtained all regulatory approvals. Finally, and also recently announced, an agreement with JP Morgan to transfer its private banking activities in Brazil to Bradesco. And with that, we bring an excellent team of bankers as well as R$21 billion in assets under management. Page 19, we present our performance in insurance, which continues to be adversely impacted by the financial results. which is still constrained by low interest rates, low IPCA, an elevated general market price index, and that affects our ALM heavily. On the other hand, we saw a reduction in the operating income of insurance due to increased claims. It's natural due to the recovery of the economy. Despite this, we saw a 3.8 growth over the last year. The ratio of claims grew primarily because of life insurance, in which we decided to honor the coverage of case-related pandemics for humanitarian reasons, even though the policies do not provide coverage for this. There was an increase in claims for health insurance, but it remained at levels below those in the same period of 2019, 84.6% in the third quarter of 2019, 2020 versus 87.9% in the third quarter 2019. In this quarter, we made 151 million reais in provisions for the adverse