Banco Bradesco Sa American Depositary Shares

Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's third quarter 2021 earnings conference call. This call is being broadcasted simultaneously through the internet in the Investor Relations website, bradescori.com.br.en. In that address, you can also find the presentation available for download. We inform you that all participants will be in a listen-only mode during the conference call. 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 that 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 will turn the conference over to Mr. Carlos Peretti, Business Controller and Market Relations Director. Please proceed.

Hello, everyone. Welcome to our conference call for the discussions of our third quarter 2021 results. We have today with us, participating in the call, our CEO, Otavio DeLazari, our Executive Vice President, André Rodrigues Cano, our Executive Director and IRO, Leandro Miranda, our CFO, Osvaldo Fernandes, Next, Chief Detective Officer Renato Einesmann, and BITS Chief Detective Officer Kurt Diemermann. I turn the floor now to them.

Thank you very much, Firet. Good afternoon, everyone. I hope you are well. Thank you for your interest in participating in our teleconference to discuss the 3Q21 results. We present the highlights of this 3Q. in which we had good news regarding the COVID pandemic. Vaccinations have advanced significantly with the strong engagement of the Brazilian population. As a result, the disease is showing a downward trend, indicating that we are on the right path. Given the scenario, we initiated our return to in-person work, following very strict sanitary protocols. We have returned 100% to in-person work at our branches as they play an essential role for the Brazilian population. In our administrative areas, we have established a graduate return scheme, evolving as health conditions allow. The way we work in the post-pandemic era is different, based on a hybrid model. All of our teams are combining personal work with home office, as it offers benefits for workers, productivity, and cost reduction. The improvements in infection and death rates have put Brazil on the path to full reopening of the economy with an increase in economic activity. However, the scenario is still not entirely favorable. The agenda for reforms has not progressed and the inflation remains both high and persistent. The Central Bank of Brazil raised interest rates and has shown determination in trying to control inflation. However, this could have negative effects on the growth rate, especially in 2022. With respect to our third Q21 operations, we saw very positive results. Our net income recovered, reaching 6.8 billion reais, an increase of 7.1% over the previous quarter, and 34.5% compared to 20. Among the positive indicators, we highlight the recovery of the insurance results, the good performance in fee and commission, income in the provision expenses remaining fully under control. As a result, the ROE for the quarter reached 18.6%, and the efficiency ratio also improved. reaching 45.4% in the 12-month periods. The loan portfolio grew 6.5% in the quarter and 16.4% in one year. We were already seeing a good growth rate concerning individual clients, but this quarter, the expansion also benefited the SME segment. In this quarter, we have about a third of our credit originated on digital channels. corresponding to 30 billion reais, providing the client with autonomy and security to serve themselves. Individuals account for 50% of this total, an evolution of 58% in 12 months, with 8% of credit requests coming from the mobile channel. Finally, I can highlight the excellent recovery in income from insurance, which grew 104% in the quarter and 2.6% in the year, with the evolution of the written premiums and the consistent improvement in both the claims ratio and the financial income. These good indicators have allowed us to conduct a positive review of some of the lines of our guidance, as you will see later on in this presentation. Moving to page three, we'd like to present you the main items of these results. In addition to the net income, which grew 7.1% in the quarter, we can highlight the strong performance of operating income, which grew 11.3% compared to the second Q21 and 15.8% compared to the third Q19. The numbers show a stronger growth rate than the pre-pandemic period. The biggest contributions to the evolution of results in the quarter came from insurance, client NII, and fee and commission income, partially offset by the reduction in the market NII and higher expenses, the main factor of which being the collective bargaining agreement of bank employees, which impacted the month of September. The annual changes are explained in part by the fact that the third Q reflects the impacts of the pandemic more broadly, I believe it's important to highlight the dynamics of our results. ProDesco has diversified them with good quality mix of results with banking and insurance operations that complement each other. In the last quarter, the insurance group absorbed the impacts of the COVID effects, reflecting the worst period of the pandemic. In this quarter, it has come back on track. It has resumed its significant contribution representing 23% of consolidated income. And when we look at the table on the right and below, we see growth in total revenues, even in this complex scenario, and a reduction in total expenses, which requires discipline, resulting in a robust and growing EBIT. We'll go into detail about these lines in the next slides. Slide four. highlights the evolution of our loan portfolio. We saw a significant expansion of 6.5% in the quarter and 16.4% in the annual change. This growth reached all lines, mainly driven by SMEs with an increase of 27.8% and individuals with an increase of 24.7% in the 12-month periods. In real estate financing, we have a comprehensive position. with proprietary and partner origination channels. The origination grew 62% compared to the same quarter in 2020. In 2021, we have financed approximately 100,000 units to date, an increase of 85% compared to the same period last year. In addition, we have a more agile process for approving formalizing proposals. This is a true benchmark. Credit card growth reflects the increasing of the reopening of the economy with more transactions and greater use of credit limits. In SMEs, growth also points to the normalization of the economy with a greater demand for working capital. In other words, we have robust growth both in the lines of low delinquency as in the lines of greater spreads, which have resulted and will result in a better net interest income. We decided to revise our loan portfolio guidance as we have already exceeded the limit established in the previous guidance this quarter. Let's move on to the slide five to talk about our provisions. ALL expenses in the quarter totaled 3.4 billion reais, an improvement of 3.7% compared to the previous quarter. As you can see in the chart, This is the same level achieved as 3Q19, even considering the significant increase of more than 100 billion reais we had in the loan portfolio. ALL expenses in the quarter represented 1.7% of the portfolio. The drop reflects anticipation of credit provisioning we did after the start of the pandemic as indicated by our expected loss models. In addition, structurally, it reflects the growth in low-risk portfolios, the good quality of recent yields, and the great evolution we have seen in credit modeling over the past few years. We continue with very comfortable provisioning ratios. The NPL coverage ratio over 90 days was 297%. It's still well above the pre-COVID level. Considering the entire renegotiating portfolio, this ratio was 115%. The coverage ratio should continue to fluctuate over the next few quarter as part of the process of normalizing credit conditions. The great performance that we are seeing in all ALL expenses also led us to revise guidance downwards. Let's move on to slide six. The renegotiation portfolio saw another quarter of decline, a trend that should continue for the upcoming period. Although it has shown a small increase, the delinquency of this portfolio is below historical levels. We can highlight the high level of provisions which anticipate effective delinquency. The current level of provisions in this portfolio represents almost four times the observed delinquency. Moving on to slide seven, the 90-day delinquency ratio rose 10 bps within our expectations. There was growth among both individuals and SMEs, mainly coming from the renegotiated portfolio, as I explained in previous slides. But it's important to emphasize that we still have ratios well below the pre-pandemic periods. In line with our active portfolio management practice, This quarter, we also sold portfolios that, in our view, did not compensate for the collection efforts of our teams. If the sales hadn't occurred, the over 90 days index would have gone up an additional 10 bps. NPL creation in the quarter was 5 billion reais. The level of provisions below NPL creation is mainly due to the anticipation of provisions after the onset of the crisis, according to the expected loss models, as I mentioned earlier. Now, let's go to slide eight. The client NII benefits from the increase in the volume of operations and the increase in spreads, interrupting a sequence of reductions. This spread pickup is very important when we think about the next quarters, and we believe it shall continue this way. In the quarterly change, the client NII grew by 4.3%. and 9.8% in the annual change. We see an improvement in production spreads in our loan operations. We believe this should benefit the client NII over 22. The reduction in the market NII is due to impact of the increase in the CDI on the ALM positions, partially offset by the higher results of the working capital. Let's move on to slide nine. We saw excellent evolution in fee and commission income, which grew 4.1% in relation to the previous quarter and 7.8% in the annual change. The volume of credit card transactions was approximately 60 billion reais this quarter, surpassing periods that preceded the pandemic and even seasonal quarters at the end of the year. This performance is responsible for the strong growth presented in this line of revenue a growth of approximately 8.2% in the quarterly comparison and 10.1% as of the four years to date. Our checking account holders base increased by 1.7 million clients in 12 months, being one of the factors for the increase in the checking account line, which showed growth of 2.7% in the annual comparison, offsetting all the revenue losses from PICS. In addition, we see consistent client growth in our related companies, underscoring our ability to diversify both physical and digital revenue sources. In asset management, growth is due to the net capital increase of $23 billion in 2021 and a more favorable mix with growth in multi-market and equity funds. In loan operations, the $8.5 percent growth is related to the expansion of the portfolio. We decided to review the fee and commission income guidance since, with the performance of this quarter, we have already reached the maximum point of the guidance that we had released previously. Now, let's move on to slide 10. Our operating expenses decreased by 2.5% in the first nine months of the year. compared to the same period last year. Personal expenses increased compared to the previous year due to the higher provision for profit share in view of the significantly higher income and also the consolidation of Back Florida as of the fourth quarter of 2020. However, the most relevant in this quarter as of September was in the impact of the collective bargaining agreement with bank employees. Administrative expenses have decreased 0.2% as for the year-to-date, despite high inflation in this period. Just to give you a flavor, GPM on 24.9% and IPCA of 10.2%, reflecting disciplined cost control, the evolution of digital channels, and the optimizing of our physical presence and processes. The growth in this quarter is mainly due to the higher business volume and higher client acquisition expenses, especially at max and bids. The change of the line of other income and expenses is explained mainly by the change of the non-technical insurance provision. The high inflation scenario implies challenges for managing expenses, as many of them are indexed to price changes. We will continue to act with discipline to keep costs under control seeking growth below inflation. We went 21 with the closure of 179 branches and the transformation of 377 branches into business units, which will result in 556 branches either closed or modified in their service and business models. Another highlight is Bradesco Expresso, which has more than 40,000 partners, A network is structured around variable costs, which starts operating in a fully digital manner this quarter, with a number of products such as checking accounts, loans, payroll, deductible loans, credit cards, and insurance, in addition to our bit digital wallets. Moving now to slide 11, we can see our insurance operations once again. saw significant growth in revenues and excellent recovery in results, even with the events related to the pandemic. We can highlight the expansion of operations, the increase in the number of policyholders in almost all of the business lines of the insurance group. Costs related to COVID-19 were approximately 1.4 billion reais in the third Q and 4.4 billion as for year-to-date. It's worth noting that COVID-19 events in the third quarter were 26% lower than the previous quarter, reflecting the impacts of vaccination and a reduction in the number of cases. The financial income was also very positive, reflecting the effects that economic financial ratios in the period had on our financial investments. Our net income presents robust performance, in line with last year, despite the five increase in the CSLLL rates. Were it not for that, we would have seen a 2% expansion compared to 2020, even with all the effects of COVID-19 and 21. Like in the previous quarter, the scenario is still challenging, but based on what we have observed and what we have learned so far, we are reviewing the guidance again as we look ahead. Now we move to slide 12, in which we have examples of the strong growth in revenues of our insurance segments, confirming our perception that this is an essential service and a core business for Bradesco. We have managed to capture the opportunity based on our wide offering with diversity of products and channels for each profile and moment of life of our clients. Slide 13, as we did for the previous quarter, shows the per week history of the pandemic related hospitalizations in our healthcare operation. As you can see, we are the lowest levels of hospitalizations since the beginning of the pandemic. On slide four, going forward, we show the data from the previous slide, but in a monthly view, we believe this trend of improvement should continue. We now move to slide 15 to talk about our capital ratio. Our T1 ratio was 13.7% this quarter, very robust and well above the regulatory minimum. And the same applies for our liquidity coverage ratio and our net stable funding ratio. We saw a 40 bps drop compared to the previous quarter, caused by the growth of loan portfolio and the mark-to-market securities. Moving to slide 16, we have a significant increase in the use of digital channels, as you can see, which offer our clients a greater convenience. The volume of mobile financial transactions increased at 92% compared to the previous quarter. The number of accounts opening this channel also grew 84% in the same period, exceeding 1.2 million accounts. This year, we already have 62.5 billion reais in loans from digital channels. This represented 29% of the total origination from the bank. If we focus only on the performance of the individual segments, digital already represents 53%. The numbers show the evolution and diversification of our distribution channels and business sources, the digital Bradesco. It shows a reduction dependence on the branch for transactional activities. The future of branch fundamentally depends on the evolution towards a more consultative role for clients. They're gonna grow and grow more and more into business units. Moving on to slide 17, we launched BIA in a pioneering manner, as you know. It's the application of technology to support and assist clients depending on their questions and needs concerning products and services. BIA gradually adds new information to interaction with clients, thus becoming more robust and assertive. The total number of interactions with clients reached the remarkable mark of 396 million this year alone, which represents an increase of 29% compared to last year. On WhatsApp only, We had 39 million interactions. Currently, BIA is responsible for 100% of the first level support on Bradesco Fone Facil helpline, and it's also responsible for the first level support in the employee call center. BIA is currently able to share knowledge on more than 90 products and services. We have a dedicated BIA squad, and soon it will be connected to the CRM and we'll start making proactive offers, always according to the needs and expectations of our clients. Now we move to slide 18. Following our strategy of digital transformation with client at the center, taking into consideration of pillars of people, technology, and business, we create the Bradesco Experience, a department that integrates experience, digital channels, and platforms. for the creation of intuitive and customized journeys of financial services leveraged by partnerships. All of this using data intelligence and the voice of the clients themselves, which helps us understand their behavior regarding the use of each channel and their respective transactions. This way, we enable more fluid experiences within and between channels. The department has very high skilled professionals, in digital strategy, platforms, new design disciplines, journey analytics, and already has an agile mindset, which means that our professionals are positioning the various squads of the bank in multifunctional groups. Just to give you a flavor in the Bradisco experience, we already have more than a thousand professionals involved in the whole relationship journey with our clients. In total, our squad's stripes already add up to more than 3,000 professionals. Just to give an example, in addition to acquiring some startups like ZinZin and Forward and investments of our private equity funds, we have also created and developed our whole digital environment. Moving on to slide 19, Agoda reached 706,000 clients and increased by 70% in net funding compared to the previous year. The small drop in volume under custody in the quarter reflects the natural market to market due to the increased volatility in the markets that we saw in the quarter. Next, we reached an impressive 7.7 million clients base above the 7 million target for this year, and the new target is 10 million clients by year end. This represents 131% growth in the annual comparison Next is a comprehensive bank and its missions to provide clients with innovative solutions. And it's increasingly a platform for products and services. And now also the marketplace with the launch in November. Bits, the digital wallet we launched at the end of last year, has reached also a very remarkable 2.1 million accounts. And this week it surpassed 4 million downloads. It has become the entry-level solution for people entering the banking markets, and thus plays an important role in client banking. It counts with an extensive network of correspondent banks, Bradesco Espresso, with more than 40,000 serves of points. Bits and X are totally separate from Bradesco, and they have full autonomy in their decision-making process. Now, on slide 20, we move to Digio. In this quarterly, as you know, we made a purchase offer to obtain 100% of Digio's shares and we are awaiting regulatory approval for that. Digio was created as a credit card operation and has since expanded to become a bank that offer accounts, personal loans, and cashback solutions. It has over 2 million cards and a long portfolio of over 2.5 billion reais. Digio complements our portfolio of digital companies and we will remain separate, as it's in a moment of significant expansion, and we do not want to alter that. Moving on to slide 21, in Bradesco, sustainability has always been embedded in our purpose. We are committed to the positive impact agenda. In the context of COP26 discussions, we are present in Glasgow. following the agenda and reinforcing our commitment to mitigating climate change. As a financial institution, we took a lead role on that, engaging our clients in the transition to a greener and more inclusive economy. Climate change is part of our sustainability strategy. We adhere to the net zero as the first Brazilian bank taking part in this commitment. We also highlight Our recent partnership established with NLX, which should reach a reduction of 12,140 tons of CO2 equivalent per year of our actions have been confirmed, though the recognition of the main ESG ratings and indexes, in which we have been evaluated as being above the market average. Let's look at slide 22 in our guidance, as we have been discussing throughout this time. We made changes to four lines, loan portfolio, fee and commission income, insurance, and expanded ALL. In loan portfolio, we have reached 16.4% growth compared to last year, and we decided to change the range. to a more aggressive 14.5% to 16.5%. In client NII, we are at 4.7%, and we believe that we ran the year more like the top of the range. And fee and commission income, we are at 5%, already at the maximum point of the guidance that we published at the beginning of the year. That's why we decided to change the guidance, which now ranges from 2% to 6%. In operating expenses, we are at a reduction of 2.5%, and we believe that it will end the year with a reduction of 1% in the whole year. In income from insurance operations, we are at minus 19.5%, and we decided to review the guidance as the evolution was better than expected in relation to COVID and financial income. The guidance for this line is now from minus 10 to 0%, and we believe that we shall be closer to zero. Finally, in expanded ALL, we have 10.8 billion as for year to date, and we revised the guidance to 13 billion reais to 16 billion reais. We believe that we'll be between the middle and the top of this guidance. Now, moving on to slide 23, We want to extend the invitation to all of you to participate in our Bradesco Day, which will take place on November 10. Before, thank you for your attention. We would like to share our view on 2022. We believe that 2022 will be a year of growth opportunities. We shall continue with a very good growth in our portfolio and increasing clients and I.I. We also shall see growth in fees. Costs and expenses shall continue under control. Any increase in delinquencies will be protected by our strong coverage ratios and provisions. Historically, and we believe in history, Bradesco has strived in all challenging years, particularly the pre-election ones. 21 is a year in which we do not have the economy at full throttle. as we shall see in 2022. We see GDP growth, especially from agribusiness, in which we are the leading private-owned bank as a very important source of growth. We believe the economic activity shall increase the level of employment and we shall have more clients from that. We see individuals and companies overall low-leveraged, so we have room to grow. We also see states with one of their largest cash availability ever in history to boost expenditures. Finally, our digital initiatives, Next, Deezu and Beats, are bringing new 10 million clients. And it's important to notice that out of this 10 million clients base, 75% do not have any sort of relationship with Bradesco. And so we are adding new 7.5 million clients to our 41 million client base. Having said that, we believe we will continue our positive trends. I thank you definitely now, and we put ourselves available for the Q&A. Thank you.