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 2022 Earnings Conference Call. This call is being broadcast 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 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 Prodisco'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'll turn the conference over to Mr. Carlos Firetti, Business Controller and Market Relations Director. Please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to our conference call for the discussion of our third quarter 2022 results. We have today with us in the conference call our CEO, Otavio de Lazare Jr., André Rodrigues Cano, Executive Vice President and CFO, Cassiano Scarpelli, Executive Vice President, Eurico Fabri, Executive Vice President, and Moacir Nakbar, Executive Vice President of Bradesco. Also, we have with us Osvaldo Fernandes, Executive Director, Ivan Gontijo, Bradesco Seguros Chief Executive Officer, Curtis Zimmerman, Banco Next and Beat Chief Executive Officer, and Carlos Jovanes Neves, Banco Digio Chief Executive Officer. I turn now the floor to Leandro Miranda, Executive Director and IRO Bradesco.

Thank you, Fred. Thank you all once again for taking part in our earnings conference call. The 30Q earnings reflect the current economic moments in a market that goes through cycles. We have traversed various points in the credit cycle. When the pandemic began, bringing along unknown threats and the expectation of a worsening economy, we made significant credit provisions. As the economy improved in 2021 and the beginning of 2022, we were able to release part of the excess provisions, especially in the medium-large companies industry. Right now, we are moving to a cycle of increasing provisions that is expected to continue throughout 2023 due to the loans that have been granted in the mass markets. We are now at full speed in transforming the bank. As of today, we are undoubtedly one of the largest digital banks in Brazil, while maintaining the greatest physical presence among the peers. We transform our way of serving clients according to their preferences and needs. Customer centricity is behind our motto. Between us, you always come first. We hold a unique positioning. With the largest investment insurance company in Brazil, and in Latin America, a capillarity that unites the physical and the digital. Certainly, the finest financial products offer in Brazil, from individuals to corporates. As you know, Bradesco has extensive operations serving all segments of clients, either individuals or companies, and acting all over Brazil. As a result of this strategy, With a broad position in the market, our activities in loans and banking are correlated with the performance of the Brazilian economy and disposable income. The economic scenario, high inflation and interest rates led to a deterioration in the client's payment capacity and the consequent increase in non-performing loans, making necessary credit provision expenses above our initial expectations. The delinquency ratio grew in the low-income mass market segment for individuals and micro and small companies. Observing the delinquency of recent harvests, which already indicate improvements, and all the adjustments we made in 2022, we projected delinquency should stabilize and improve in the course of 2023. In the last two quarters, we have made provisions above the NPL formation, which should continue into the fourth Q2022. The brisk hike in the SELIC versus the natural speed of renewal in our pre-fixed loan portfolio has also affected the results of the market NII, as we pointed out in the previous quarter. This effect will probably continue in the fourth year and throughout the first six months of 2023. Our profit is expected to remain under pressure for a few quarters, but this should change more consistently in the second half of 2023. We believe that the bank will continue to be able to operate with an improved level of return. We will pursue this and continue making the immediate adjustments to return to the level of profitability. The drivers of our recovery and performance includes improved delinquency ratio, which should peak between first quarter 23 and second quarter 23, and improve thereafter, which will allow us for gradual reductions in credit provisions. A significant improvement in market NII, mainly from the second half of 2023. The evolution of the income from insurance group. Maintaining restricted cost control and the continuity of the good results in the wholesale bank with the high return level and that even record the lowest historical delinquency rates over 90 days. With respect to this quarter earnings, we saw a drop in the recurring net income of 25.8% compared to the previous quarter, primarily due to credit provision expenses, market NII, and income from insurance. The loan portfolio rose by 13.6% in an annual comparison, which is associated with the original mix benefiting the client NII, which grew 24.7% over the same period. Finally, we close about the quarter with a 13.6% Tier 1 capital, a level that points to the strength of our balance sheets. Now, we move to slide three. We compare the net income accumulated over the first nine months of the year with the same period from last year. The main items that made a positive contribution to the profit were client NII, which presents an increase of 9.5 billion reais, reflecting the growth in the loan portfolio and spreads, in addition to the origination mix that has been more concentrated in the short-term lines that have higher margins. Income from insurance, which grew 2.5 billion reais benefit by higher premiums and increased financial income, despite the increase in the claims ratio. We also have two items that reduced profits by nearly the same magnitude. Market NII, which posted a reduction of 6.8 billion reais as a result of the impact of the accelerated increase in high-level maintenance of the SILIC rate on our ALM. 6.6 billion reais higher credit provisions reflecting the portfolio growth, origination mix, and increase in delinquents. This amount includes one billion reais that we made as a supplementary provision this quarter. Now, we turn to slide four. Let's talk about loan portfolio, which grew 2.7% compared to the previous quarter and 13.6% compared to last year. Origination for individuals is 10% lower than last year, but with a superior credit quality. The adjustment was made mainly to the low-income mass markets, which presents more credit risk, as we restricted the criteria for approval given the scenario for high delinquents. An example of this is that today we approve 48% of credit proposals compared to 58% a year ago and 68% in the pre-pandemic period in 2019. The 38.8% growth in credit card reflects the increased penetration of cards among our high-income clients. In addition to the increase in average expenses after the pandemic and inflation over the periods. Here, we are also very restricted with the low-income segments. In aggregate credit, The 3.5% surge is due to our focus on agribusiness through our 14 agro platforms. The crop year began over this third quarter and this portfolio should expand even further. The renegotiated portfolio remains stable as a proportion of the loan portfolio. Turning now to slide five, as we said, The delinquency over 90 days was affected by the economic cycle. The ratio grew 0.4 percentage points with an increase concentrated in the mass market lines, individuals and micro and small companies, segments that were most affected by inflation. The early delinquency has remained stable for two quarters, reflecting the adjustments we made in origination. This quarter, the gross credit provision was once again higher than the NPL formation, and as a result, the cost of risk reached 3.3%. The coverage ratio for the NPL 90 days remained at a very strong level of 201%. Now we go to slide six to talk about NII. Overall, NII has risen by 5.7% in the accumulated nine months. Client NII continues to expand, benefiting from portfolio growth and favorable spreads given the product mix, in addition to the positive impact on the deposit margins due to the increase in the ceiling rates. The increase over the year is 23.4%. In the charts, at the bottom of the slide, we highlight the client NII net of credit provision, which is 10% higher compared to 2021. and 25% higher than what we had in 2019 pre-COVID. Client NIM also continues to evolve. Up 10 bits in the quarter, while the net NIM impacted by the higher provisioning posted a reduction. In market NII, the ALM portion continues under pressure. We can say that the performance in the fourth quarter should be better than the third quarter, although it's still negative. The recovery of this line should be gradual during 2023, with the second half better than the first one, considering the current expectations of interest rates and portfolio repricing. Now, let's move to slide seven. Let's talk about the insurance group results. Accumulated net income expanded by more than 28%, with a major contribution from the operating results which offset the financial results, influenced by the dynamics of the financial indexes. We highlight the growth in revenues across all business lines, 18.9% in the third Q and 17% higher in the year overall. Therefore, the income from insurance hour guidance continues with a very positive performance, growing 32% in the year, with an emphasis on operational performance. The volume of claims directly related to COVID in the third Q reached 289 million reais, the lowest in the series, and 1.1 billion reais in the year, around 73% less than the same period last year. Our loss ratio is already showing a reduction from the previous quarter and from the third Q21. The insurance group continues to grow and improve its operating performance. with an expansion in the number of insurance clients and items, thus reinforcing our strategy and confidence in the segments. Turning now to slide eight. Fees grew 4.8% for the year. Card income increased by 3.8% in a quarterly comparison, and 22.2% for the year. The transacted volume has demonstrated a progressive growth And it's worth mentioning, we have increased our base, especially in the high-income segments, which reached 39% share, a group with lower risk and higher return. We reached 76.8 million clients, an annual growth of 4.3 million clients, which contributed in maintaining the level in the checking account line offset a substantial part of the drop in revenue from service packages and from the use of PICs. Continuing the service items, slide 9 outlines our performance and growth in the private banking segments. We are currently the second largest private bank in Brazil, with around 22% share in the local markets, and a notable growth in recent years. Since 2019, we have grown the volume of managed resources by 52%, arriving at R$ 389 billion. We have also continued to advance our specialization and increase our bankers and consultant team with a solid value proposition, which was reinforced with the acquisition of Bradesco Bank, formerly Bradesco Bank Florida. We will continue on with our strategy of observing acquisition opportunities and signing agreements and partnerships, such as those with JP Morgan, BNP Paribas, and the independent wealth management with Banco BV. with a view towards increasing our share in the industry by providing the best offer to our clients. We will now take a look at slide 10. Operating expenses posted a 4.6% growth in the year, a mark below inflation for the period. IPCA at 7.2% and IGPM at 8.3%. The personnel line grew by 11.6% impacted by the collective bargaining agreements of 21 and 22. We also continue to invest in enforcing and improving our investment advisory, technology, data science teams in an effort to enhance our processes and provide a better experience to our clients. We continue our focus on optimizing the physical presence and investments in digitalization of client services. These action and trends have helped to contain the increase in the administrative expenses at 6.2% for the year. But at Desco Expresso, our banking correspondence network complements our physical presence with great capillarity and convenience for customers in a structured base on variable costs. We will now discuss capital and liquidity on slide 11. Profit generation and deposit positive market-to-market on securities over the quarter, more than offset the distribution in the form of interest on shareholders' equity, and the consumption by weighted assets, increasing our Tier 1 capital by 30 bps, which continues in a very strong level. Our estimate for the fourth quarter suggests that we'll finish the year with a level closer to the current one. Even with the impact of nearly 40 bps in December, with the completion of the application of the rule for handling tax credits originating from the hedge of investments abroad. We closed down the quarter with a high level of LCR. Turning now to slide 12, making sure our clients' digital experience is always improving. We are committed to keeping them at the heart of our decisions. This is a strategy that provides increased autonomy and a better experience for them and results in a lot more business. Currently, 71% of our account holders are now digital and 98% of all transactions take place via digital channels. In an annual comparison, the opening of accounts directly through the app grew by 62% for individuals and by 66% for micro-entrepreneurs. The frequent upgrades that we perform in the app, which introduce new features and experiences based on data and aligned with the needs of our clients, have been an enormous success with clients, evidenced by the 90% level of overall satisfaction with our app with official stores NPS. Turning now to slide 13. With respect to the sustainable business agenda, we remain committed to carrying out our activities with a positive social environment impact, and we have already achieved 63% of the goal. We have over 20 products that boast social environmental benefits in our portfolio, and two solutions should be highlighted for the growth within the last two years. First of all, financing for the purchase of solar panels, which reached 1.2 billion reais, and financing for hybrid and electric vehicles, which rose 4.5 times. For environmental issues, we would like to point out the importance of our historical partnership with the SOS Mata Atlântica Foundation, an initiative that we are proud of. We have supported SOS since 1989, and over 34 million native trees have been planted in nine Brazilian states over the spirits. And finally, at this time, The 27th UN Conference on Climate Change is taking place in Egypt, which we are participating in. We include the climate agenda and the sustainability strategy and follow all major trends to ensure that Bradesco is maintaining its pioneering spirit in this very significant and relevant issue. We now move on to slide 14, our last slide today. Considering our performance up to the third Q, we believe that we'll be able at the lower part of the range for loan growth and fees, at the top of the range for costs, insurance, and client MII. With regards to credit provisions, we decided to revise the guidance. According to our projections, the credit provisions for 2022 will be in the range from 25.5 billion reais to 27.5 billion reais. This performance reflects the points recovered on the correct cycle in the mass markets, despite a further strong performance in loan quality in the wholesale markets. On market NII, as we mentioned earlier, we should return to positive levels in 2023. In the fourth quarter, this line shall remain negative, but better than the level of the third quarter. Thank you very much for your attention, and now we'll begin the Q&A session.