Banco Santander Brasil S A : 1Q21 Transcript

Conference Call Transcript

1Q21 Results

Santander (SANB3 BZ)

April 28, 2021

Operator:

Good morning, and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil S.A.'s results. Present here are Mr. Angel Santodomingo, CFO, Mr. Andre Parize, Head of Investor Relations, and Mr. Sergio Rial, CEO.

All the participants will be on listen-only mode during the presentation, after which we will begin the question-and-answer session, when further instructions will be provided. If you need any assistance during the presentation, please call the operator by pressing *0.

The live webcast of this call is available at Banco Santander's Investor Relations website at www.santander.com.br/ri, where the presentation is also available for download. We would like to inform that the questions received via webcast will have answering priority. If you wish to ask a question via phone, please press *1. Once your query is answered, press *2 to leave the line. Each participant is entitled to ask one question. If any further information is required, please, reenter the line.

Before proceeding, we wish to clarify that forward-looking statements may be made during the conference call relating to the business outlook of Banco Santander Brasil, operating and financial projections and targets based on the beliefs and assumptions of the Executive Board, as well as information currently available. Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence depend on circumstances that may or may not occur. Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander Brasil and may cause actual results to substantially differ from those in the forward-looking statements.

I will now pass the word to Mr. Sergio Rial. Please, Mr. Sergio, you may proceed.

Sergio Rial:

Very good morning. I am really happy to be part of the 1Q release, which I tend not to be part of, and the reason why I am here today is because I think in the last 4Q I was also not able, I was in Europe at that time. So I think it is at least appropriate that I show up here.

A couple of thoughts I have here, Angel Santodomingo, our CFO, and André Parize, the Head of IR and the rest of the team. But I will try to provide some frame to the results you have seen, which of course are a function of what we had done back in 2020, particularly in the 1Q.

I have seen that perhaps some of the analysts in particular have been more negative on the results of the 1Q than we had anticipated. So we certainly surprised the market positively. In one way it is good, but in another way, it also sends us a signal that there is an opportunity for us to narrow the gap in terms of what we are doing and how some of the analysts on the sell side are modeling the Santander Brasil story.

Let us go with some facts. One of the things that I think has characterized the Bank and the Organization has been growth, profitable growth. And I think now, entering into my sixth year of leadership as a CEO, I can say with a certain level of confidence that the

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Conference Call Transcript

1Q21 Results

Santander (SANB3 BZ)

April 28, 2021

culture responds well to look at the spaces where growth exists. And I think we have been very diligent in searching for pockets of growth in what has been a very difficult macro environment in the last six years.

Where has that growth come from? Just a couple of thoughts and bubbles. One, we were one of the first banks to go into the interior of the country, opening branches and creating a bigger infrastructure than we had in the past.

Second, we certainly saw the agro opportunity much earlier than perhaps the rest of the industry had seen, positioning ourselves not only with new stores and points of distribution, but making 300 stores totally and fully destined to serve agro-related customers.

Other piece that has been very important in our history has been creating and building what we would call best-in-class recovery processes. We have recovery teams in a number of consumer related businesses that I would say today they are best-in-class. And that is a function of technology, that is a function of process, and that is a function of us believing that you cannot be in the consumer business if you do not have very strong skills, technically, technologically, but also from a human capital point of view, in order to help us to navigate what it is today still choppy waters.

The other component from a strategic point of view that I would like the market to really reflect, over the last couple of years, I think the market has been very much of a prisoner around denominations of companies. Banks, fintechs, broker dealers, insurance companies. And one of the things I would encourage the market to pay more attention is to what companies do, and not necessarily how they are described.

And I think the risk of defining an analysis of a company just by its name, 'bank', I think it is a potential big mistake. And I think we have proven that, despite being a bank in the eyes of many, we have been able to portray a very consistent growth story.

And why is that? Because inside of Santander platform, there is a number of pockets of growth and cells that are growing much faster, and it is upon us to make sure that we provide visibility and transparency to these growth engines. So let me give you some more color to that.

In that respect, our consumer finance business has been a phenomenal growth business. And that is not only the auto business, which in itself already commands a significant market share of 25% plus, but also consumer goods.

So we started to develop a much more robust consumer goods dealer inside of the inside of the consumer finance Santander Financiamentos, and that is a business that it is going to be R$1 billion business in the coming years, and it is not five years, it is something that could be in our hands in about two years.

We have launched a very successful open channel digital credit platform called Sim, where in less than a year we are able to reach R$1 billion of total assets, with very manageable cost of credit and transforming that platform already into a profitable stream.

We have embarked on a much bigger investment into what I would call the equity space. On Friday, we are going to be formalizing the acquisition of Toro, which is a very focused broker dealer out of Minas Gerais, with a particular focus on being 100% digital with a

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Conference Call Transcript

1Q21 Results

Santander (SANB3 BZ)

April 28, 2021

strong educational piece. We have integrated Pi, which was our fixed income platform into Toro, and together with Santander Broker Dealer and Toro, we will continue to develop a robust distribution platform for Brazil that it is more into the equitization phase.

We have created inside of the Company a very strong culture on cost, but not cost for the sake of cutting items, but making really deliberate efforts on reaching levels of efficiencies that I think we have not seen in many other companies.

For example, not only our cost income is best-in-class when you look in the world, 35.2%, it is world class and that is under BR GAAP. If you put that under IFRS, we would be under 30%, and that is only one bank in China that has a gross income lower than 30%. That did not come on the back of just cutting items. It came on the back of us redesigning, in a deep manner, processes, which we did announced three or four years ago.

So we start telling that we would go for a much more industrial process, redesigning and attacking the linkages that exists in a universal bank platform where there is quite a bit of waste, if you do not really look in the level of detail end to end on a variety of processes.

When you look at the 1Q, this is the result of the discussion that we initiated three or four years ago, and it is really serving us well in a very difficult environment.

Let us look now at the credit cards. We had made a deliberate decision in 2019 to slowdown credit cards on the back of my concern of bad credit, particularly Brazil going to a single digit rate and everybody borrowing and the leverage capacity of the country increasing tremendously at the individual level.

As we come to 2020, we were a lot more modest in our growth trajectory on cards. The pandemic comes, we are able to experience and test, in the first month right after the pandemic, we adjusted and improved our risk models. We put a lot more effort on defining, profiling, figuring out different segments, and our credit card business is growing at an incredible pace.

Just to give you a sense, in the month of March, we were able to generate 640,000 new cards, most of them with consumers and clients of Santander that had limits for cards, but were not being actively optimized or used.

So when you compare the experience of a Santander card to any other player, be it a single mono-liner or a more classic universal bank platform, we come out very strongly.

I could go on a number of fronts of things that we are doing with deep knowledge and involvement in the business, but I would like to end my discussion on the transformation that we are doing around the Santander as we call it, and what we are, which is the buildup of four significant distribution platforms.

The physical branches network will continue to expand in the interior of the country on a completely more tailormade model, nothing to do with what you have seen from a classic bank branch, but stores that are really catered to serve specific segments where Brazil growth, which is in the interior. That will continue to exist.

All the other branches, as we call them, they are very close to that to become absolutely paperless. We are looking at every channel to become a point of sale. Our ATMs, which are now active sales points, are now selling credit. So a consumer and a customer can

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Conference Call Transcript

1Q21 Results

Santander (SANB3 BZ)

April 28, 2021

walk into a Santander ATM and line up a loan and get the money out of the machine and the loan digitally, signing from the ATM. ATMs today represent a very important point of sales, which was not the case.

So the physical infrastructure is being completely reconfigured. The second, which is not dissimilar from any other organization, is the digital channels. The difference with us is that - and I would not call it 'difference', but that what we pay attention - the cost of acquisition in Santander moved from over R$100 per customer to somewhere in the vicinity of R$50.

So we were able to reduce significantly cost of acquisition on the digital channel, and the digital channel today already represents on renegotiation on loans take up somewhere between 50% and 60%. So it is a new engine with profitability that did not exist four years ago. And that is an element that explains why NII has had a good performance, why we have grown in the way we have grown, because we are adding new distribution channels with a very clear eye on profitability.

The third distribution platform is what we call remote channel, which is a combination of what I would call the second line to make the digital customer that went into a digital channel profitable, which is the human interaction with intelligence. It is when you have a follow up call with a customer that has become a Santander customer through the digital channel to see what else can we actually do to make that customer a lot more, as we say in Portuguese, vinculado, with a higher degree of loyalty to the Organization.

We have 2,500 people today working in that remote channel, and most of those people are not even in what we call big urban centers. So the remote channel is almost going to be another Santander Bank happening as a force to back up the digital channel. So that is the third.

And the fourth and the last is what I would call the outside world. So how do we engage with other players from independent ex-Santander bankers, other bankers, other fintechs that are providing and having access to a world of consumers in Brazil that we can connect smartly as another potential distribution platform.

The four platforms are receiving from myself, as CEO, a very specific focus, and I plan to transform Santander in one of the most effective distribution platforms of this country.

With that, I stop. I would like to, once again, thank you for your interest, your support, and believing in the story of Santander. So I pass now to our CFO, Angel Santodomingo. Thank you very much, and have a good day. Thank you.

Angel Santodomingo:

Thank you, Sergio, for your words. You made a very good summary of where we are and what are our growth capacities and prospects. I will elaborate on some of the ideas that Sergio shared with us through the slides that we have already posted on our website, and then we will open forum for Q&A, as always.

Starting with the first slide, I will, as always, begin the presentation with an update on our strategy, followed by an overview of our quarterly results, and finally, my closing remarks and, as I said, opening for the Q&A.

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Conference Call Transcript

1Q21 Results

Santander (SANB3 BZ)

April 28, 2021

We are on slide four. We started the year with the best quarter in our history, as we mentioned, not only in numbers, in net profit, but in several metrics and performance ratios, with revenue, as you can see, growing around 7% year on year, in an increasingly linear structure, as has been mentioned, and profitable market share gains in key segments of our businesses, like the four examples you may see in the slide.

As a result, we were able to post a record net profit of just over R$4 billion, delivering almost 21% return on equity, return for our shareholders. This has been recognized by the market, as you can also see in the bottom of the slide, with several awards that we have received in these recent months.

Next slide, we understand that, in order to keep delivering high levels of profitability, efficiency must be one of our top priorities. Over the last three or four years, as Sergio said, we have looked into ways of how to boost efficiency in our production with the goal of lowering unit costs.

Let me give you some examples. We have improved, for example, mortgages for all the real estate lending unit cost by close to 20%, or in the of consumer finance, more than 20%. In the capitalização, a Brazilian unique product, it has gone down by over 70%. I mean, we have been building a culture of lower unit cost, and we have several examples in that sense.

So we have contributed to make a good process, a good evolution, and at least until the last quarter, we are the best-in-class in the industry in this efficiency ratio that, as you can see, it has improved to 35.2%. That means 180 bps lower than last quarter, and it reflects that we continue, as we mentioned, to manage the Bank in that way. So we continue to work to optimize expenses by giving our customers solutions with streamlined processes.

This was the first part in terms of our shareholders. In the next three parts I will speak about people, our communities and about our clients. So in the second part, which is about people, in order to achieve sustainable results, what we try is to have employees aligned and engaged with our vision, and we believe this is one of our main assets.

We have built a corporate culture with very strong values based on meritocracy, committed to doing things the right way, in close communication with the leadership. As you can see in the slide, for example, the Café com Rial, which had more than 90% of our employees connected.

We care about the well-being of our employees, which is why, at this still sensitive time, we provided medical assistance via telemedicine and advanced the full payment of the 13th salary in the month of April instead of the usual 4Q payment. And because we believe that diversity is built through concrete steps, we have established an agenda as an internal priority.

On next slide, which will be my third part in this introduction, speaking about communities, as you can see, we continue to work with them, with the communities in which we operate, as we aim to contribute to the development of a more sustainable future.

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