Banco do Estado do Rio Grande do Sul S A : Conference Call Transcription 1Q22

Banrisul's 1Q22 Results Presentation

Conference Call - May 13, 2022

Operator:

Good morning and thank you for standing by. Welcome, everyone to the conference call of Banrisul to discuss results relative to 1Q22. Today with us, we have Mr. Claudio Coutinho Mendes, CEO, Mr. Irany Sant'Anna, Risk Officer, Marcus Staffen, CFO and IRO, Mr. Osvaldo Lobo, Credit Officer, Mr. Nathan Meneguzzi, Executive Superintendent of Investor Relations, and Werner Kohler, Accounting Executive Superintendent.

We would like to inform that this event is being recorded and has simultaneous translation into English. All participants will be connected in listen only mode during the Company's remarks. After that, we will start a Q&A session exclusively for analysts and investors. And then further instructions will be provided.

Before moving on, we would like to state that forward looking statements made during this conference call concerning the Company's business outlook, as well as financial and operating targets and projections are based on assumptions and beliefs of the Company's management and also on information currently available.

Forward looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions in their operating factors might affect the future performance of Banrisul, and thus lead the results that will differ considerably from those expressed in these forward looking statements.

I would like now to turn the floor over to Mr. Claudio Coutinho Mendes, CEO of Banrisul, who will start the presentation. Please, Mr. Coutinho, you may carry on.

Claudio Coutinho Mendes:

Thank you. Good morning, everyone. Also good morning to my colleagues, my executives, and superintendents. I will start the presentation then. I think you all have the presentation with you. I would like to start on slide number three, if I may, where we address the context of the state of Rio Grande.

As you know, Banrisul is a Bank which has a very large local coverage in the South of Brazil. We cover about all cities and the states and also in the states of Santa Catarina. And we do have branches in Sao Paulo, in Brazil, but we are mainly concentrated in Rio Grande.

So the economic environment of the state of Rio Grande, has a direct impact on our activity. And as can be seen on slide number three, economic activity in Rio Grande for the past year and even now has been very favorable. Has been positively performing when compared to the country.

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The state's GDP grew more than twice as much as the national average. We grew 10% in our GDP when the country's GDP grew by 4.6%. That is based on growth of the agrobusiness. The GDP grew 67%, but even the industry GDP grew significantly close to 10%. And in services we grew in line with the national average.

Combined with that, we have an environment in the state in which the state government made an important realignment of its public accounts, public budgets. Now we have a fiscal surplus. We were able to address expenses with administrative reforms, welfare reform, different tax reforms.

We are, of course, paid, the state paid off creditors and also is in line with civil servants salaries. Everything has been paid. So there was no need for funding to pay civil servants in the States. And that is, of course, important because it creates a favorable environment in the states. And, of course, the Bank benefits from that.

There is also an important element, which is the credit stock. In the state, the amount of credit when compared to the country we see a favorable gap, which also creates opportunities for growth for our credit portfolio.

Another highlight is of course, the agro business and the growth in exports coming out of Rio Grande. So a growth of 50%, which is quite impressive. Also Rio Grande has a GDP per capita, which is 25% higher than the national average.

Now moving on to slide number four, if I may. And we talk about our loan portfolio. I would like to put the 1Q in perspective here. Just as a reminder, the omicron virus was first identified in December last year and had a spike in cases in Brazil, and in the south, of course, of Brazil, in January this year.

So in January 2022, the beginning of the 1Q, we have been impacted by the omicron variant of the virus, Covid virus. Of course, that hinders our performance in the month of January. We had to close down some of our branches, about 100, until the health protocols were done internally here and the Bank could be changed and then we had new protocols in place.

And with that, we were able to simply send employees who had been contaminated, home and the branch could still operate. And of course, the closest colleagues were also sent home. But to summarize, the branches were no longer shut down.

And of course, seasonally, the first two months, we see a decrease in economic activity because people are going on vacation, they go to the beach. So it is a seasonally weaker period for the Bank. Of course, the local economic activity along the coast increases.

But despite all of that we had the best 1Q in terms of credit for the past ten years. We saw an important growth in the credit portfolio in the 1Q despite all of those problems I mentioned, we grew 3,3% our loan portfolio, quarter on quarter. And credit granting on the right hand side of the slide grew by something close to 22%. So 30% in agriculture, commercial 32%, real estate 100%, impressive numbers.

So the portfolio reached a level of R$42 billion, a growth of 50% in the year. And we are quite confident that we are going to meet our guidance. And so the 1Q is proof of that continuity of our robust growth on the credit front.

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Now moving on to slide number five, if I may. In terms of still talking about credit we continue to pursue our strategy, which we always come back to during our earnings call to say that our credit is quite fragmented across very robust lines in terms of guarantees and risks. So we are concentrated on cosigned loans, real estate credit with fiduciary assurances.

Also corporate loans based on guarantor funds and different lines of credit to guarantee those loans. So our strategy is to operate always on the safe side. We are growing steady but maintaining the same credit standards that we have put together throughout time based on robustness and on diversity. We do not operate in large corporate alone. Right.

As you can see on the right hand side of the slide, we have a breakdown of our portfolio. The 50 largest debtors hold only 7% of the portfolio. In the market, that number averages around 15%. The ten largest debtors account for 2% of the portfolio, whereas the average in the market is something close to 6%.

In other words, our portfolio is quite diversified with quality credit. If we look throughout the last 12 months our level moved from 89 to 91,6, and our default levels, delinquency levels, are now at a very low level.

Of course, this is due to our work on trying to find quality credit and our nine day line is now at 1,95% default level, a low historical level, and we have a very comfortable coverage. Index way better than the industry at 315% of coverage and provisions, 315%.

Now, moving onto slide number six, if I may, here, once again, we see that our provision expenses coming from our portfolio are very conservative and that number has been coming down 13%, very close to what we had last quarter. So a very comfortable level. Just as our provisioning ratio is at 6,2% trending down, but still maintaining the excellent quality of our credit portfolio.

Our provision expenses stayed above last quarters, but a relevant amount of that is on recoverable credits written off as losses with no impact on the final numbers. Those were recoveries for which you had new provisions, and that provisions were also impacted by the growth in the portfolio once the portfolio grows or expands in nominal terms. You also need the provision for that growth and that, of course, leads to an increase in our provisions.

Now moving on to slide number eight, net income came out at 164 million, adjusted net income for the 1Q. On the left hand side of the slide, a drop of 40% when compared to last year. Our loan portfolio shows the 12 month snapshot, which was quite robust, as I mentioned, the largest growth in ten years, 50% of growth in 12 months.

Payroll loans also growing by 11%. Rural agricultural credit with impressive 44% increase, also on a 12 month basis. Banking fees grew by 3%. And default ratio, a low historical level.

And the coverage ratio also very comfortable, have maintained our personal expenses flat, a growth of 0,4% despite collective bargaining agreements, which happened in September with a growth of something close to 11%. Despite that, we were able to preserve our annual expenses with personnel almost flat or unchanged.

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Now, on the next slide, profitability, when compared to last year, we saw an important drop in income. But we believe that in terms of adjustments, especially in what relates to margins coming from an increase in the SELIC rate that is past. Right.

We have a much more concentrated operational on individuals with pre-fixated rates than the average in the market. We do not have an important large corporate operation. Our main clients are individuals and we are talking about the payroll, as I said, payroll credit. So that adjustment in margin comes from that fast growth and the Selic rate of more than 10% in a year.

So we are now reaching some sort of stability around our margins. So we believe that this quarter was the worst moment of that adjustment. We also know that that payroll portfolio, even though it is a long term portfolio, it does come from a need from those clients to revisit the operation to receive cash from time to time.

So we have a lower average term for that portfolio. That is in the best interests of the clients. And because of that, the rate has to be adjusted at a faster pace. So I think we are reaching the end of the cycle or at the very least we are close to the end of that cycle and we will reprice that portfolio.

Credit provision also had an impact of the growth of the portfolio. That is why we see an impact on the income when you compare year on year. That does not mean that our portfolio has worsened in quality terms, it is quite the opposite. The portfolio has improved in quality as we move forward quarter on quarter. We are, as I said, at a historical low in terms of default.

On the next slide, slide number ten. We talk about the managerial NII margins, as we see now in numbers what I mentioned before, the sterilization of our financial margins. Even though we had an increase of 250 points in the period, of the Selic rate, as I said previously.

We already see a stabilization of our managerial margins that mostly comes from the repricing fact of the portfolio because of that quicker turned over that I mentioned previously. So we are now confident that we will, going forward, to continue to reprice that, but on better basis when compared to previous quarters.

Now let's move on to slide number 11 now. Our capital, we have a great rate of funding, 78% of Selic rate on average. For CDB the cost is 87% of the Selic rate. So our cost is very, very low and very fragmented. So we are very reassured that our credit portfolio is tied to a funding which is cheap and fragmented and spread across the marketing.

February this year, we settled that which was issued in 2012. We had already issued a year ago a subordinated debt of USD$300 million to replace that previous one, which had no impact on our capital index. And it was just settled at R$3 billion. From the point of view of results, that was neutral because it was hedged for BRLs, so the whole operation was undone in February 2022.

That in a way leads the percentage of our CDB to move from 66% to 71% because of those 3 billion and subordinated debt. But we still count on those USD$300 million which were issued last year to level to capital needs.

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We also have a very fragmented funding, as you can see here, the funding concentration, there 100s, top 100 clients, they only hold 12% of the total funding. So it is quite fragmented, quite diversified. So this is a very good asset for us, our funding arm.

Now the next slide, capital. We are also in Basel ratio, quite comfortable. We have strong basis to continue to grow our credit portfolio. The participation of the subordinated debt in our capital is influenced by the US dollar because it's a U.S. dollar debt, backed that so what discount is this subordinated debt per se.

So the US dollar had a drop between December 31st, 2021 and the closing of the quarter, and that lead that portion of the debt which is subordinated to slightly drop. Now the US dollars are picking up again so that effect will be offset. But we have a very comfortable capital position and we are ready to continue growing our credit portfolio.

On the next slide, slide 13. SG&A expenses and Banking fees. We have a collective bargaining agreement with Bank workers for an 11% increase to be paid as of September last year. But despite that, as we can see here on the slide, our expenses across 12 months for employees remained flat, grew only 4,4%.

And our headcount has been optimized, as you can see, our workforce as of March 2020 until now, we saw a decrease and headcount of 1,351. We now have a total of 8,800 and some employees. So that is under control, employee expenses, I mean.

Also when we look at the combined numbers, when we talk about administrative expenses as a whole has grown 4,3%, which is below the inflation level in the period. Even administrative expenses saw a growth of 8,7% in 12 months, which is also below the period's inflation index.

So we have been making great efforts to control expenses and we have been successful overall, given that administrative expenses grew 4% vis a vis an inflation rate of over 10% in the period.

As for Banking fees, we saw some reaction, a growth of 3% on an annual basis and with positive recent numbers, we continue to have a coverage index for our personnel employees. Very, very reasonable. In other words, we continue to cover with Banking fees all our payroll expenses.

So basically, that is all I have. Thank you all for your attention. And we can now start our Q&A session to address comments and doubts you may have. Thank you.

Flavio Yoshida, Bank of America:

Hello. Good morning. Thank you for taking my questions. I have a question about the guidance specially for portfolio, which you have announced and also about margins vis a vis the performance posted in 1Q. When we look at the guidance for portfolio for the year, which is a growth of between 24 and 29% in 1Q, that growth is way below that level.

And we are looking across segments both for individuals and corporate, growth levels were well below those numbers. So what do you expect to see happening throughout the year to reach that guidance? Are you going to increase your appetite for risk, for example? And if that

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