Banco Bradesco SA (BBD) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Bradesco's conference call about the second quarter of 2022 results. The call is being broadcast on the Internet at Bradesco's Investor Relations website at bradesco/ir, where you can find the presentation for download.

We have simultaneous interpretation into English (Operator Instructions)

Before proceeding, we wish to clarify that forward-looking statement that might be made during this call in relation to the company's business perspectives, operating and financial projections and targets are beliefs and assumptions of the company's management as well as information currently available to the company. 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 occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of the company, and they lead to result that differ materially from those expressed in these forward-looking statements.

Now I will turn the floor over to Mr. Leandro Miranda, Executive Director and IRO.

Good morning, everybody. Thank you for your presence. Thank you very much for joining us and -- in this conference about the second quarter 2022. We have Mr. Octavio de Lazari, Jr., our CEO; Mr. André Rodrigues, Executive VP and CFO; Oswaldo Tadeu Fernandes, Executive Director; Carlos Wagner Firetti, Controller & Market Relations Director; Ivan Gontijo, CEO of Bradesco Seguros; Renato Ejnisman, CEO of Next Bank; Curt Zimmermann, CEO of Bitz; and Carlos Giovane, the CEO of Banco Digio.

Now I will turn the floor to Mr. Octavio Lazari.

Thank you very much. Good morning, everyone. Thank you for participating in our call about the second quarter of '22 earnings.

The scenario has remained quite complex in the second quarter with a persistent high inflation and the need for monetary tightening in the major global economy, the impact of the Ukrainian War in the main economies in the world mainly with the acceleration of the high interest rates in the U.S.

With the scenario at the end of the quarter, the concern turned to the risk of a global recession at the end of the quarter, and the still high inflation and the consequent impact on income were part of the dynamics that affected the economy during the period, including generation of the new fiscal pressure. In spite of the outlook, the Brazilian economy is a little bit better, which led us to increase our GDP growth expectation to 2.3%.

The cycle of rising interest rates in Brazil has already advanced rapidly, and this leads us to believe -- or have a less optimistic view for 2023 with 0 growth projection for the GDP.

We saw a solid result in the second quarter of '22 with a net income of BRL 7.041 billion, a 3.2% increase quarter-on-quarter representing 18.1% ROE (sic) [ROAE]. The loan portfolio of also posted an evolution of 22.5% quarter-on-quarter and 17.7% year-on-year. The more expressive value advance occurred in the portfolio point of view with 20.2% rise in 12 months, and the credit card portfolio expanded 46%. The growth at the end of the period is expected to be lower, in line with the guidance, mainly due to the comparison basis with the last year. And we point out the performance of the client NII, growing 7.1% in the quarter, and the market NII continues to be pressured by the impact of the Selic increase on the [NII] position, and this should continue throughout 2022, going back to normal in 2023.

The insurance business posted BRL 3.7 billion in income in the quarter, growing 135% in 12 months, explained in part by the comparison base with last year and a growth of 12.8% in the quarter.

Fees performed solidly with an increase of 6.7% year-on-year, benefiting primarily by the strong performance in the line of credit cards, which is favored by the client base growth and the higher spending as well.

Despite the challenges brought about by inflation, total costs were well controlled, total expenses growing 4.9% year-on-year, in line with our guidance. And we have been able to offset much of the inflationary pressure by means of our efficiency actions. And this growth that we had includes already the investments in our digital initiatives, such as next, Digio, et cetera, and additional reinforcements in the investment advisory technology and the analytics and data science teams.

We will analyze our performance in relation to the guidance later, but we can report that we were able to maintain a consistent performance, consistent with what we proposed.

Now moving to Slide #3. We have the evolution of our results considering the nominal variation of each line in the period. Both on the quarterly and annual comparisons, we had an expansion in client NII, in fees and insurance. This growth was more than enough to absorb the drop in the market NII, which is currently under pressure by the high Selic rate and the higher credit provisions, which are a consequence of delinquency returning to historical levels and growth in high-yield credit lines as well.

Now on Slide #4. The loan portfolio evolved in line with our expectations, origination for companies. The business base was higher mainly due to the base of comparison, which was affected by the second wave of the pandemic last year. And it is mainly concentrated on short lines in individuals, a lower demand for longer lines such as mortgage and the natural cadence in credit assignment that we have.

We saw a great evolution in customer financing, and these lines have higher spreads, and they have favored the growth of client NII. And the more expensive movement occurred in the credit card portfolio with a 7% hike in the quarter, 46% in 12 months. The growth of the renegotiation portfolio comes from the advance of the credit portfolio and also the origination mix with a higher share of more profitable lines.

Now on Slide #5, the cost of risk increased slightly in the quarter, representing 2.5% of the portfolio, reflecting the origination risk plus the higher delinquency in retail book for individuals and small companies. The early delinquency remained at the same level as the previous quarter, and the over 90 past due grew 40 bps, reflecting the increase in retail delinquency. And the corporate segment continues at historical lows.

The coverage ratio going down, as we've said, once we anticipated provisions in 2020, and they are being pursued with a delay of some of (inaudible). In our projections, we mentioned the first -- fourth -- the second quarter depending on the conditions of employment and income, and we expect the coverage ratio to continue to be consistent around -- with 200%.

On Slide #6, we include some charts that are relevant to the credit dynamics. Overall, employment levels continue to show a good growth both from an informal; unemployment rate dipping and has the level we saw in 2015. Real wages has improved, which also reflects the increase in employment and the transfer of inflation to wages we due to collective agreement.

And in this chart on the right, on the lower right, it is important to highlight this proprietary information. With the debt-to-income ratio of our clients with credit service, considering both operation at Bradesco and also with other institution, we see a relatively small increase in the debt-to-income ratio with the credit service in 2020. For instance, we had the ratio of 20.2%, then 21.1%, 22.8% and 20.6% in May '22.

Now let's go to Slide #7 about the client NII. It continues to expand, both quarterly and annual comparison, reflecting the rise in the loan portfolio by the higher-yield lines, plus the growth in revenue from funding. The market NII, as we said before, in the previous quarter continued to be under pressure by the higher Selic, partially offset by the higher result of our working capital. And we should mention the evolution of spread growth and that in the ALL on the right, higher -- 6.8, as you can see on the right of the slide.

On Slide #8, we talk about insurance. Net income improved 49% in the first half of the year, reflecting an ROE of 19.7%. We emphasize the growth in revenue for the half year, higher than 16%, and the rise is due to the increase in the number of lives covered by health as well as pension and life besides the adjustment in auto insurance.

Concerning the income from insurance, we saw a better performance according to our guidance mainly related to the improvement in the loss ratio from reduced effects of epidemic as well as a better financial result for the period. And we believe that, in our projections up to the end of the year, are in line with our highest growth expectations. We continue to see a drop in the COVID-related claims. And in the second quarter of '22, these events represent BRL 348 million, the lowest volume since the beginning of the pandemic.

On Slide #9, talking about fees, 6.7% year-on-year increase, reflecting the addition of 4.3 million clients in the last 12 months, totaling 75.5 million clients. The credit card lines spiked 32% in 1 year, reflecting a higher transacted volume in cards, which topped in this quarter BRL 73.6 billion, almost BRL 74 billion. And this growth in volume is a consequence of the larger client base and normalization of the economy and also the effect of inflation on our client spending.

Now Slide #10, talking about operating expenses. They increased 4.7% in the accumulated 6 months or year-to-date, much lower than the inflation of 10.7% by the IGPM and 11.9% by the IPCA. Personnel expenses, of course, have risen due to the collective bargaining agreement 11% last year and also investments in investment advisory, technology, analytics and data science teams.

As a result of our efficiency campaign, the administrative expenses posted a continued growth. Other expenses dipped due to the large volume of provisions that occurred last year and should not be repeated this year. The efficiency ratio was 42.4%, one of the best in our history.

We highlight the optimization that we promoted in our physical presence. We have transformed our brands, migrating to a more advisory and less transactional model. And as such, since 2018, we have opened 976 business units, and we reduced 1,691 branches. As a part of this transformation, we trained our managers with tools that facilitate remote or face-to-face service according to the wishes of our clients. Today, we have nearly 25,000 relationship managers and more than 1,000 investment specialists who promote low investment and insurance consultancy services to our clients. We will be adding an additional 700 investment specialists to the team.

We should point out one of the unique competitive advantages of our strategy, which is Bradesco Expresso, where we complement our physical presence with a significant capillarity and convenience to customer by means of 40,000 bank correspondents where the cost is very low.

Moving now to Slide 11. Our capital ratio remain at fairly comfortable levels. Profit generation has allowed us to maintain a solid distribution to shareholders in the form of interest or shareholders' equity.

This quarter, as expected, we had a reduction of 40 bps in the Tier 1 capital index over the quarter due to the regulation of tax credit treatment originating from the hedge of investments abroad with an impact of 50% in June and the remaining 50% in December '22, according to the Central Bank. In addition, we also saw the impact from mark-to-market on the securities portfolio. The additional capital increased by 20 bps with the renewal of debts that would mature progressively from 2025, taking advantage of more favorable market conditions at the moment. Liquidity ratios improved, owing to funding, particularly in CDP and notes. LCR of 168% and 120%.

Now speaking of digital experience, moving now to Slide #12, our digital experience, which is continuously evolving, represents enhanced autonomy, a better experience and more business. 70% of the account holders are already digital. Of our total transactions, 98% are carried out via digital channels, and financial transactions via mobile and Internet grew by 57%. This autonomy also drives the account opening in the Bradesco app.

This half of the year alone may have nearly topped the total of accounts opened through the app in all of 2021. There are 82% more accounts totally, close to 1.5 million openings from January to June this year. The opening of individual micro entrepreneurs, MEI accounts, follow this growth with an increase of 79% within the same period.

And as for experience, clients have increasingly sought ease and customization. And to improve their experience, we give voice to our clients. We listen to what they have to say and develop products and services consistent with their desires, needs and moment in their lives. This allows us to enhance their experiences, as we did, for example, with the revitalization of the PIX section within our app.

In addition to positive feedback, this closeness to our clients generate a lot more business opportunities. For individuals, digital origination already represents 74% of the volume of transactions. The same effect can be seen in investments, which jumped 112%, and in insurance, which grew 132%. These were also positive results in companies, where the amount of credits released spiked by 139% and investments by 111%. Consortia also grew by 70%.

Turning now to Page 13. In sustainability, which is one of our pillars of our corporate strategy, we were the first Brazilian bank to join the PCAF, which is an international benchmark for calculating the portfolio's carbon emission. In 2021, the carbon emissions from our company's portfolio were 13% lower than emissions in 2020. Just to give an idea, 20% of this portfolio comes from customers who have already made some voluntary commitment to decarbonization.

Our strategy was also recognized by GFANZ, an alliance that brings together financial institutions around the world with net zero commitments. We had two cases highlighted as a reference in the financial sector. This recognition reinforces our purpose and performance in favor of sustainable development.

In the sustainable business agenda, we remain committed to the goal of generating business with a positive impact. And by June, we have already reached 52% of our goal. Our strategy and leading role are recognized in the evaluation of the main sustainability indices and ratings, where we perform above the industry average. As you can see on the right-hand side chart, we are happy with this recognition, and we invite you all to learn more about our sustainability strategy in the integrated report.

And lastly, on the next slide, our last slide, we show our guidance in the expanded loan portfolio. We expect to close the year with a movement compatible with a range from 10% to 14%, close to the middle of the range, considering a stronger competitive base in the second half of 2022 and the adjustments we continue to make in our origination according to the scenario observed, which brings more cautious.

The performance in client NII continues along at a good pace, benefiting from the increase in spreads, portfolio repricing, shift in the mix and the impact of the higher Selic rate on our liability margin. We see growth at the top of the range -- or top of the guidance between 18% and 22%.

Fee and commission income is expected to continue being favored by the growth in the card income and loan operations. Our expectation for the rest of the year is convergence towards the center of the guidance, between 4% and 8%.

Regarding operating expenses, we continue with our efficiency and control actions that allowed for a guidance with a range well below inflation, actually 50% of inflation. Even with investments in our digital banks, next, digital -- the PIX digital initiatives and the technological evolution of our business, we should finish the year between the center and top of the guidance.

For insurance, expectations are positive with a growth trend at the top of the guidance of 18% to 23%. The result may be driven by both operating improvements with the evolution in premiums and financial improvements with more favorable index.

Finally, in credit provisions, we are looking at the movement towards the upper part of the guidance, which is BRL 17 billion to BRL 21 billion, due to the intensification of growth in higher-yield portfolios and the expectation of delinquency levels slightly higher than the current ones.

As for the market NII, although we don't have a guidance, we remain with an outlook that is proceeds of the pressure, as we said before.

Thank you for your time, and we will now proceed to to the question-and-answer session.

(Operator Instructions) Jason Mollin with Scotiabank.

My first question is about the quality of assets over 90 days past due going to 3.5%. Could you talk about the sale of the portfolio and how this impacted delinquency? 15 to 90 days was sequential for the total portfolio, including individuals.

[We apologize because we cannot hear the question.]

Thank you very much. With relation to the sale of portfolio, this is a strategy that we have been adopting for quite a few years, and we have been reiterating this with you because we have already seen, based on our past experience, that the cost of collection with the portfolio in distress is not efficient court-wise. So it is much better to transfer this to the company at a good price so that we have a higher efficiency in the organization. And we have a participation in the first credit company, [RCB]. And you can see that collection is better in this company where we have a stake.

So this is in our business plan every single year in our budget, and it is also present in our strategy for the following year. We will continue to sell portfolios because the ones that are stressed, that have no guarantee and that are over 5 years and the cost of the collection internally is much higher than if we sell the portfolios.

So we continue in our strategy. And over time, we continue to observe good opportunities for us to sell the portfolios provided we have an adequate price.

And it seems to me that the market as a whole or all banks started to adopt this as a strategy as well because it is more efficient. So this is something that is inbuilt in our strategy, and we will continue to look for good opportunities.

Regarding the delinquency rate with the sale of the portfolio, we have an improvement in our delinquency rate at 0.29. It was already in our schedule for 2022 to sell portfolios. So it improved our delinquency in -- or by 0.29 in 30 to 90 days delinquency, especially in the SMEs. We see the segment of small companies more under pressure than the others. And this is why we had a high delinquency both in individuals and small companies. But based on our model, this should go back to normal. Now this could continue to grow a little bit but just a little bit. And we see this as a more normal situation.

Another point. This is about -- in relation to the sale of portfolio as it gets older. We've sold BRL 5.1 billion in the portfolio in the second quarter of '21, BRL 5.5 billion. And in the third quarter of '22, we sold BRL 6.3 billion. So you can see that it is consistent here at the bank today, and we are working with more profitable operations. They have a high delinquency than mortgage loans.

We did an exercise. We did a drill simulating our delinquency in 2022 with the portfolio mix that we had in 2019. And the impact was a 0.4% improvement in our operations and our profit.

It has different characteristics. But on the other hand, as you can see, this gives us a better NII. So we have this counterpart, so to say, in NII, which is positive. And net of ALL, you can see the result in...

My second question is about revenues, operating revenues, the change quarter-on-quarter. Could you talk about your strategy in this regard? In terms of the physical presence, you have already shown us that Bradesco is taking the measures that you mentioned. And in the future, we expect inflation to go down in 2023.

Very good question, Jason. We know that ALL is important, and we tap into results in our client NII because of the geographic distribution that we have. But on the other hand, we saw really that the expansion of the branches should be done in a different way with branches more focused on businesses and with smaller physical area. This is why we did the trade-off, closing some branches and transform the remaining branches into business units. 1,690 (sic) [1,691] were closed and we opened new business units.

And of course, we will continue with this strategy because the strategy is a winner. Just to give you an idea, it represents a fixed cost of 40% less than a traditional branch when you compare to the business unit. So this continues in our strategy and our budget for the coming years.

Besides, we have an IT expense as an incumbent bank for the last 8 years. We have a legacy and we have to carry out a transformation. You have to keep in mind that many things are being migrated to the cloud, and this requires a very big initial investment. And then you recover this. next, for instance, works in cloud mostly, almost totally, and Digio as well besides all the other digital initiatives of the bank itself.

So you are correct, Jason. This year, we see a growth in expenses, which is half of the inflation that we have for the next year. For 2023, we will continue to have the same discipline. We will continue with the same discipline and make investments and reducing expenses in other areas.

In September, we have the collective agreement that could be around 11%, 12% or similar to what it was last year, and the impact on our organization is quite big.

So this is a growing challenge faced by all organizations, Bradesco as well. But it is one of our assumptions to continue to grow or evolve operating expenses always below the inflation rate. And this is the challenge that we face every single year.

The next question comes from Rafael Frade with Citi.

I have a couple of questions. The first one is about provision expenses. Could you please tell us more about it? You talked about no changes to the guidance. However, when we think about deal creation, NPL creation, BRL 75 billion. And if we hadn't had a loan portfolio sale, I think it would be close to BRL 9 billion. So imagining BRL 9 billion minus recovery, so maybe provision expenses will be BRL 7.5 billion for the next 2 quarters, assuming NPL creation of the same magnitude, which would be way above the guidance.

When do you think this should be enhanced? Maybe a better NPL creation or use coverage better? So I'd just like to understand how delinquency expenses might behave in the second half of the year in order to be within the guidance.

Thank you. Nice to talk to you. Rafael, when we work on a portfolio sale, and, like I said, this is part of our strategy for a while now, you sell the net portfolio. And it's totally clean. It's the whole portfolio.

Now for the second half of the year, we also keep an eye on portfolio sale. It's part of our radar. Stressed operations, long-term portfolio with no guarantees. As a reminder, we have [Bradesco Financing], a subsidiary that has operations for portfolios. Losango is another financing company to finance in retail. So this is in our strategy.

So like I said before, this is why we are strengthening here that our global ALL for year-end should be top of the guidance, 17% to 21% of our guidance. We expect it to be top of the guidance, considering all the strategies that were already part of our budget since late last year.

Perfect. If I may, another question, this time about market NII. I understand that most of the impact we see related to ALM, I believe there is a lot of visibility for the coming quarters. So it would be helpful if you could listen or hear more about it. You talked about pressure. But would it be reasonable to assume that we should see a gradual improvement or maybe getting to 0 in the fourth quarter or maybe first quarter of next year? What about market NII trajectory?

Good point. Good point about market NII. Based on the latest minutes of Bacen, maybe we came to the top of interest rate roads, Selic rate. So maybe some adjustment in the next coupon meeting, close to 14%. But we shouldn't see new increases, maybe a better scenario for market NII.

In addition, we also have a change in the operations of our portfolio. So there is a change in the portfolio with maturity would be from 17 to 18 months for you to use the portfolio as a whole. So for the future, this scenario is better because there is pressure, but it will be better in the future. So I would say that for year '22, we could consider 0, 0, 0.

Thiago Batista from UBS.

I have one question about the law that was -- what you showed us about the commitment of income, 22% -- about 22% in the debt-to-income ratio, do you already see an impact of this one on banks? So no relevant impact because you have a lower debt-to-income ratio than other institutions?

And the second question has to do with insurance. You said that for this year, you should stay at the top of the guidance. What about 2023? Are you being able to transfer prices? Do you still have some residual effect of COVID for 2023? What could you tell us about the insurance operation for 2023?

I will talk about the first. And -- but please, we will be answering your second question about insurance.

We have not felt any impact of this law upon the limit for the debt-to-income ratio. But of course, we're dealing with that as an industry because it's very difficult to make or to prove.

It's very difficult to prove this because the client could come to a bank branch and say that they have so much preserved (sic) [reserved], for instance, and half an hour later, the same client goes to a department store and buys something and will no longer have the reserve that he mentioned when he came to the bank. It's going to be very difficult to implement this law. And this brings a level of concern because of what I have just said.

So this has to be certified with [FIBRA] by the federation of banks because the Central Bank takes everybody and divide by all the debt. And here, you're talking about clients that really have a debt with Bradesco, that all the clients of Bradesco, which ones have debt plus -- the debt they have in the market divided by their income.

So it's very difficult to draw a comparison. It's totally impossible to do this vis-a-vis or compare it to what is published by the Central Bank. So we have a long way to go here in terms of the implementation of this law.

And also the impact that this could have on the whole chain, people not being able to take loans or go into Chapter 11 as individuals. And there is a legal discussion and operational discussion going on about how to implement that. And we cannot see how as client owes the department store, for instance, or the companies that sell on the Internet. We only see their debt when they have a bank debt in the financial industry. And we have no access, we have no visibility about the debt of this client. So how can we guarantee that, that client has that minimum reserve? So there is a whole legal and operational discussion about that. So it has no effect yet on what is going on with us or with the bank.

This is André Cano. It was about BRL 300 for the existential minimum. This is a relatively low amount. It shouldn't bring a very big impact on financial institutions in terms of actions. Well, this number is close to 0 in terms of impact.

Ivan Gontijo will now give you some color about the insurance operation.

Octavio, thank you very much. Thiago, it's a very big pleasure to participate -- or have you participating. Thank you very much for your question in relation to 2022, which was part of your question.

We are aiming at the top of the guidance for 2022. We are profitable with the drop in the claims ratio. And as you saw in the presentation that was made by Octavio, the drop in the claims ratio over this third quarter of 2022 saw also a [decrease] in the mortality of the pandemic of COVID-19. All this, together with the increase in our businesses, increase in our revenue and also all the business lines, together with the improvement in the financial result, this serves as a basis for the income statement of Bradesco Seguros, for the insurance company.

Regarding (inaudible), it has been hurting less our results in the last quarter. In the last quarter, we saw a quite important decrease. But we must say that we are proud of the strength of the Bradesco Seguros group to pay, over the pandemic, something close to BRL 7.8 billion only regarding the COVID pandemic claims. And this shows our perennity, our strength and also our sustainability and our permanence, being true with pension plans and capitalization bonds businesses.

Regarding the second part of your question, about our prospective view for 2023, which we have very big resilience in the market, the capacity of the insurance market as a whole to adjust, and Bradesco Seguros included, of course, and we mean that there will be growth not only with this second half, looking at the second half of 2022, when looking at 2023, we also have a very positive, a very bullish view. And we should be seeing growth not only in the number of insurance policyholders in our portfolio but also increasing our capacity to negotiate in our current portfolios, which will allow us to have an even bigger relief or comfort so that we may continue to deliver the best service to our policyholders and our clients in general.

Our 16% increase in our revenues has to do with the diversification of portfolios as well as the increase in our businesses, and we feel very comfortable, and we look with very positive eyes to 2023.

The next question comes from Flavio Yoshida with Bank of America.

Octavio, my question has to do with delinquency. In the last earnings conference call in the first quarter, which was in early May, you mentioned that delinquency in the second quarter could get worse from -- maybe 10 bps, and then get flat in the second half of the year. Eventually, delinquency was slightly worse and is expected to continue to get even worse in the second half of the year. So what was the difference? What happened which is different from what you said before? Are portfolios actually getting worse faster? Or what exactly is going on?

And still along the same lines, I imagine -- if the portfolio sales activity at significant amounts actually become recurring, would you consider improving the efficiency of Bradesco's recovery infrastructure in order not to keep on having to sell and maybe leave money at the table in this kind of deal?

Thank you, Flavio. Actually, you're right. However, well, we try to be on target, but not always can we be so accurate. By the way, we should bear in mind that in the last 3 months, the scenario was worse when it comes to supply chain problems and oil prices going up in the last quarter, hit in inflation rates. And interest rates, we expect it to be better. It got worse.

So if we consider the size of Bradesco and diversity in our lines, it's not always so easy to hit the target. So at least you give us some guidance of what might happen. Anyway, Flavio. I believe the main message here to be highlighted is the diversification of lines that we have in the bank and also diversity in customers. And it gives us some comfort in terms of how delinquency will behave and also the client NII that goes higher than delinquencies. So we have a natural trade-off here.

If we only had a single line, you could tell exactly what delinquency results would be. But because we have multiple business lines in the bank and multiple customers, different types of companies, different size of companies, different sizes of individuals, then you're subject to these factors. But the important thing is to try to deliver and bring margins so you can offset this increase in delinquencies.

So our expectation for the second half of the year, maybe there would be some increase. But when we check the delinquency lines from 15 to 90 days, which is short-term delinquency, this is not absolute, but at least it gives us a perception of what we should face down the road. So total delinquency also went down for 350 now. And individuals, which was 941, is 475. Companies also went down.

And when we consider -- and by the way, let me give you a figure that we don't usually disclose. But I think it's important to mention to you at least to give you some color, when we consider, for instance, the credit line -- credit card line, which is what increased more, credit cards, despite a growth of 46% in volume of the portfolio of credit cards, the share that is funded remained flat, 16%, 16% to 17% of the total funded portfolio.

Please bear in mind that credit card, when it's used by the customer, we need provisions, around 3% to 4% of provisions, which increases naturally our ALL. So we can see that over time, you begin to bring revenues for exchange and fee. So that's a natural trade-off, like I said. A little bit more delinquency.

But, on the other hand, you can also have more margin with customers, client NII. And this mix is very favorable to us because when one of them is not doing so well, the other takes over. So we have a balance in the business. So that's how we want to go when it comes to delinquency in the second half.

And the other question has to do with our structure for credit recovery. Right, this point about structure, look, we have already tested our models, Flavio. And we keep on testing our models. Naturally, when you had Selic at 2%, you had improved pricing of the portfolios you're selling because interest rates are cheap. You had better pricing. But with a higher interest rate, pricing might go down. We already see this move. We already see this change in pricing. In other words, lower pricing because the cost of capital is much higher. So that's something that we keep on considering all the time.

So the structure of collection from the credit recovery area in the bank is still set, and they keep on doing collections. Look, I'm referring to the internal area of the bank for collections. It is still prepared to work on the first collection when we have shorter overdue time and it's easier to make collections. But when you think about credit card portfolio, individual credit at Losango which has been overdue for 5 years, it's very hard to be successful in collection. That's why the fact because we have the RCB share is very good for us because at any time, we can gauge this comparison. Where am I more efficient? You always run tests with a control group and the group that is bought by RCB, and we check where we are more efficient.

So this shows those changes or distractions that high interest rates or high inflation rates might cause and growing with volatility. Because if interest rates is -- are high but are flat, you know exactly how to work and you have a more easy outlook for the future. However, when you have the volatility that we had, things are more challenging and then you have to work on this all the time. But you're right, that's something we'll have to keep our eyes on because if it's better for us to collect, we better have internal team.

Just adding to what he said. When we do assessments in the portfolio, we have a very clear picture of what we see in terms of probable statistics and internal recovery. So this evaluation compares what we can recover, bring back to the market, and we try to go beyond what we could recover internally.

And how easy is it for these players to buy? Well, they use these portfolios in their strategy to work on that composition. And that's how they can bring some value. So we don't leave money at the table considering what we can recover, already considering that the recovery process is already quite good.

Got it. Crystal clear. I have another question about the insurance business. If we check the results of the second quarter, if we do simple math and replicate it over Q3 and Q4, the result for the year exceeds the guidance. So my question is, maybe why did you to change the guidance? Because you're being conservative? Or should we see expected surprises over the second half?

Flavio, nothing that might add pressure to the results. Quite the opposite. We expect to see things better. That's why Ivan said that it's the top of the guidance, because that's our true expectation. We should remember the comparative base of last year, the fact that we had a deflation in July. And now in August, we're going to have deflation again possibly. So that's why we are considering the top of the guidance.

And it wouldn't make sense to revisit the guidance now because there is uncertainty about interest rate and inflation rate. However, we're very comfortable when it comes to the top of the guidance for our insurance operation.

Marcelo Telles from Crédit Suisse.

I have a follow-up on the previous question about provisions. You have already reiterated that we expect provisions to reach the top of the guidance. In this expectation, do you believe it will be more positive for the next few quarters because of the debentures? Could we expect this for the second half? What about your risk appetite in this environment? Do you still see opportunities to grow in the individual segment?

This is Leandro. Thank you for your question, and we believe that our level of provision should be reaching the top of the guidance, as we said before. And we also see some pressure coming from delinquency on our models. That means -- lead us to believe that this is the correct provisioning.

Regarding the segments with a higher delinquency, we have individuals and the micro and small companies, very small companies, in the short lines more under pressure. But what guides us is the net spread, and the net spread has been growing about 0.1% per quarter.

Okay, having said that, we continue to have a positive reading in terms of our provision. And if we see that there is a reversal in the trend, then, of course, we will be decreasing the intensity of these lines so that we have always a very positive management of our added value.

Regarding the longer lines, this happens in a more favorable macroeconomic environment where you see a higher demand from clients and a lower specific risk assessment.

The next question comes from Henrique Navarro with Santander.

My question is in line with Flavio's question. I would like to understand the trend for delinquency in the future. Could we consider 20 to 30 bps for delinquency over the third quarter?

And the second question is about the scenario. Considering the strong growth in portfolio today and 30 bps increasing in the third quarter, it doesn't match what will happen next year. So things will have to change. Either GDP will go up or we'll have to lower loan origination considering the flat delinquency and stability in Q4. So when should we expect to see a change, a stronger change in Bradesco's levels? Would it be in Q4? Or are you going to lower origination? I would like to have a better understanding in the macro scenario considering 2023.

Henrique, thank you. That's an excellent point. Actually, we have already reduced origination. If you check the originations we performed compared to previous quarters, it was slightly higher but not so much this quarter. But for individuals, origination is already lower. And this has an impact on the credit models. Naturally, when you have an increase in interest rates, as we see now in Selic rate, naturally the model already excludes part of those customers who are asking for credit naturally owing to the higher interest rates and in debt-to-income ratio. So that's about it. We keep on working on this and putting pressure on this. I don't think we need to squeeze any more.

Like I said before, sometimes, we seem to be -- improve delinquency. So it's a fact. We expect to see some worsening over Q3 and Q4 with a better outlook next year. However, that's something that we have to consider on a daily basis because there's not another way out. Every day, every month, whenever we have new information on delinquency and growth in NII, we have to make it happening, working in the capital of the bank. So that's the most important thing we should keep our eyes on constantly. So that's it.

And by the way, if there is no growth in GDP and no reduction in employment and no increase in income, naturally our models will show a reduction in higher-risk lines.

My first question was about 20 to 30 bps for delinquency in Q4. Is it right to assume that?

We prefer not to give any guidance because as we speak, we are reversing our trends. Like Octavio said, 15 to 90 has performed well. We believe we're very cautious right now. And for the moment, what really matters is that we have a positive growth in net spread. We expect not to reach that level, Henrique.

Perfect. And my last question, coverage ratio, 18 -- 2% -- 218%. I think it's close to historical levels. Do you believe this is going to be flat? Or should we have a chance to go for 200%?

We expect to get close to 200% of coverage by year-end. Historically, we already reached 180% -- as a reminder, we had already mentioned last quarter that we should close between -- or around 200% or 220%.

Pedro from Itaú BBA.

Delinquency going up gradually close to 4% already. The level that we had before the pandemic went up to 90%, stable. Maybe this is not so good. I see that it always drops. In the second quarter, the portfolio has already decelerated a little bit. But I would like to know the behavior of your portfolios in the -- in all the portfolios. And do you know already about [pro-90]? Do you have any information about the levels?

Basically, what we have been seeing is that the concentration of delinquencies in the individuals area, personal loans, credit cards and in our very small companies up to BRL 50 million, that sometimes it's mixed up with the [individual one] and working capital. And we have been seeing a drop in delinquency in the medium-sized company and the large corporations. So they are very comfortable, and we believe that this is a trend that will be maintained. And as you said yourself, as we see a reduction in interest rate and the inflation rate and the trend is kept from 15 to 90, we will see a lower pressure. We believe that these are the major trends.

In relation to [pro-90], do you have any expectation regarding pro-90 ?

Well, it will start on Monday. So Octavio could maybe -- it will be as of Monday. But the volume should be lower than last year because of the available volume. And we will be operating in the same way as we did, already preapproving the operation for the client so that we can contract directly on the Internet banking so that he doesn't have to go to all the bureaucracy at the branches. But I can say that it will be lower than last year. But your answer has been very useful.

I would like to mention that we had conserved regarding delinquency. We are looking at delinquency here, but we need to expand the spectrum of our vision. We see 3.5%, but we are talking about the Selic here of 3.75%. If we look back when we had a very high Selic, the delinquency rates were higher than we have today. So you have to look at the wider picture. We always see changes in the scenario. Interest rate went from 2% to 13.75% in less than 12 months, and it has an impact on people's lives.

As I said before, our loan portfolio was much more real estate loans, and the mix of the portfolio has changed ever since. So the characteristic of delinquency is different now. 0.4 percentage points come from the difference in the mix of 2019 to today. And this is what we -- what Octavio said about our NII.

A very quick follow-up here. It has to do with credit card. Your focus is more on the growth of internal clients. When you talk about next and Digio, thank you for explaining the performance, do you consider them as internal clients as well?

No. No, they are separate companies, next, Digio. They are separate companies, and we look at them as a separate companies. So they're not included in this calculation, okay?

The next question comes from Domingos Falavina with JPMorgan.

Two questions about provisions. And I would like to understand other accounting lines. One of them is other revenues at Bradesco. This is growing a lot, almost BRL 4 billion. More specifically, a provision line, reverse provisions, operating -- reversal of provisions, something that was around BRL 700 million or BRL 800 million. Now it's BRL 1.7 billion this quarter. I would like to better understand, what exactly is driving this reversal? And what about this line for the future, be it consolidated or not?

And the second question. I don't know if you addressed it before, but long-term interest rate is going up. So how do you consider an effective rate or a soft guidance, a reasonable guidance, to work considering this highest interest rate?

Oswaldo speaking. Let me begin by answering your first question. I imagine you're using the explanatory note of other operating revenues. For us, ideally, if you check, you should consider both other revenues and other expenses. For instance, on Page 25, we have this jointly assessed. But considering the explanatory note, it's important to see that the daily operations of the bank bring reversals and provisions that match in the accounting line. However, we have other provisions that also hit another accounting line.

So if you check, for instance, Page 24, which is condensed, and then other and other operating numbers, you can see that the 4 lines had a drop. Commercialization of cards was reduced. And if you compare Q2 of 2022 with the second quarter of '21, the number is nearly the same BRL 446 million. And contingencies also had a drop, tax contingencies. If you consider year-over-year, it's nearly the same, BRL 103 million and BRL 88 million.

And the next part, claims of fraud this quarter vis-a-vis the previous quarter, there was a drop. But if you compare to the same quarter of the previous year, a slight drop.

As for others, which brings together other expenses, this was positive. But basically, allocation are provisions for insurance and technical provisions at the top. So in this case, these are our moves this quarter vis-a-vis others.

Another point that you mentioned about -- well, [TGLP] increased in the first quarter from BRL 608 million to BRL 682 million. So we improved our tax benefits here. So it has an impact on our tax rate, just to give an idea, around 1 or 1 point -- percentage points. Our tax line was benefited from that. And this quarter, it's already BRL 701 million, another positive impact vis-a-vis tax benefit for [IOSE]. So up to 3 percentage points would bring a benefit to the tax rate.

So our soft guidance vis-a-vis the tax rate vis-a-vis this change is from 30% to 32% now. And obviously, for the year, obviously we don't know what it will be in the Q4. So our estimate is a slight difference owing to the change in interest rates.

Crystal clear. For accounting purposes, and about insurance, in this line, it's close to BRL 1 billion. Does it include -- in reverse provisions, does it include insurance as well? Or is it labor or tax?

Well, insurance is included because that's a consolidated balance sheet. Include our companies, including companies that are consolidated like Cielo, the Alelo group and all companies of the Bradesco group.

Luis Azevedo from Safra Bank.

About delinquency, you said that the trend would be worsening. Oswaldo said that if the mix of the portfolio is -- goes back to normal, it would go to the levels of 2019. What would be a more normal delinquency from now on? This is the first question.

[We can barely hear the analyst.]

This is Octavio. Delinquency at corporation is at minimum levels. Then we could conclude there is no perspective of change. When there is a problem in the large corporations, we already know and this is published, it makes the headlines. So we see no problem for the large corp in a scenario, let's say, up to the end of this year or something like that.

For smaller companies, the ones that face more difficulties, I would say, when you have generation of jobs and income and the interest rates stop going up, which is like the situation that we all have for the next year, this improves.

And for individuals, the lines that have a higher delinquency are the ones that you have a better profitability, such as credit line and personal loans -- credit cards and personal loans. So the others will -- real estate loans and vehicles, et cetera, they are in line. There has been no increase in these lines.

If we see a growth, I think you have a very good perspective because the delinquency for the end of the year and beginning of next year, it could maybe reach 4%, tops. I believe that the models and the agility that we have in terms of adjusting our credit models, bringing this to a lower delinquency level, is much better than we had in the past. Just to draw a comparison, in 2017 when the interest rate was 13%, 14% and delinquency for 90 days was 4.75% and today we have 3.5%, so the range that you gave, the 3.5% to 4%, is adequate.

Payout is my second question. If we consider the dynamic that you mentioned, in order to consider interest on equity, it could be 40% maybe. Do you believe it could be higher than 40%?

We will reach the 40%, which is what we have been doing for a few years, since 2020, around 40%.

Thank you. This concludes the Q&A session. Now I give the floor back to the final remarks.

Thank you all, ladies and gentlemen. Thank you for your time during this call. We'll be here at your service, our whole Investor Relations area and Market Relations. Firetti, Oswaldo, Leandro, [Joycee], [Peru], they are all here for you, and even André Cano. We are all here for you for any additional questions about more details.

So thank you very much. Have a great day and a great weekend.

This concludes Bradesco's Earnings Conference Call. Thank you all for joining us. Have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]