Banco Santander Brasil SA (BSBR) 2013 Q2 法說會逐字稿

Good afternoon, and thank you for waiting. Welcome to conference call to discuss Banco Santander Brasil's results of the second quarter of 2013. Present here are Mr. Carlos Galan, Vice President, Executive Officer, CFO; Oscar Rodrigues, Vice President, Executive Officer, CRO; and Mr. Luiz Taunay, Head of Investor Relations. The live webcast of this call is available at Banco Santander's investor relations site at www.santander.com.br/ri, where the presentation is available for download. All participants are in listen-only mode during the conference presentation, after which we will begin the question and answer session, and further instructions will be provided. (Operator instructions) We would like to inform that questions can only be asked by telephone, so if you are connected to the webcast, you should email your questions directly at IR team, at ri@santander.com.br.

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, 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 guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events. They involve risks, uncertainties and assumptions, and hence, depend on circumstances that may or may not occur. Investors must be aware, general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander and may cause actual results to substantially differ from those in the forward-looking statements.

We would like now to pass the word to Mr. Carlos Galan, Vice President and Executive Officer, CFO. Mr. Galan, you may now proceed.

Good afternoon, and thank you, you -- to all of you who are attending this conference call. The table of contents are a quick view about the macroeconomic scenario, highlights of the first semester of 2013, the evolution of the second quarter performance and commercial activity, and I will finish then with final remarks.

Regarding the macroeconomic outlook, I'd like to highlight four ideas. First, there is the previous quarter market consensus for 2013 and 2014 has reviewed a GDP growth a few times reaching 2.2% in 2013, and 2.6% for next year in the last survey. Our research department has also reviewed its forecast downwards to [2%] growth for both years.

Second, regarding inflation, market expectations, we have the same view. Implies the Central Bank will manage to keep inflation within the inflation target ceilings for 2013 and 2014, reaching 5.8% in 2013 and 5.9% in 2014.

Third, looking at interest rates, the market forecasts more rises, and in 2013 and 2014, at 9.25%. In our case, our research department is forecasting a higher [hikening], reaching 5.9% ending 2013 and 11% in 2014.

Fourth point. In terms of exchange rate, we and the market project a moderate depreciation of the Brazilian real, and in 2013, in the range 2.25-2.30, and in ending 2014, in the range 2.30-2.35.

Even though Brazil's macroeconomic outlook remains challenging, (inaudible) recent financial market volatility is occurring, we are confident in the long term, and in terms of employing [stability].

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Going through the highlights of the first semester of 2013, I'd like to share six points. First, net profit amounted to BRL2.9 billion in the first semester, 10% lower than the same period last year, and reached BRL1.4 billion in the second quarter.

Second, expanded credit portfolio grew 4% in the quarter, and increased compared to the last quarter, and 9% throughout the year.

Third, revenues. Net interest income plus fees declined 1.5% quarter over quarter, and 3.5% year over year. Net revenues, after allowance for loan losses, remained unchanged in the quarter, and decreased 3% on a [yearly] basis.

Fourth, operating expenses, excluding depreciation and amortization, increased 2.6% in the quarter, and 1% over the first semester of 2012, well below the annual inflation.

Fifth, NPLs improved 60 basis points in the quarter, with improvements both in individuals and corporates. Allowance for loan losses decreased both on a quarterly and yearly basis.

And finally, we show a strong balance sheet. The Bank remains in a comfortable position in terms of coverage ratio, liquidity, and capital.

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The second Q 2013 results amounted to BRL1.4 billion, 4%, or BRL53 million lower than the same quarter last year, and 7.2%, or BRL109 million lower than previous quarter. The first half of 2013, we have a net profit, including 100% of goodwill amortization of BRL2.9 billion, 9.8% decrease, or BRL318 million in 12 months. This implies an annualized profit per unit of BRL1.52 in the first semester of 2013.

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As we discussed a few times, we are dealing with a structural movement in the credit products mix, with lower spreads, but also, lower cost of credit. In this environment, the Bank is seeking for a structural efficiency productivity improvement. The timings of these dynamics are not always aligned.

As we mentioned previously, in this transition, we didn't -- that the first semester of 2013 is a more challenging period in terms of credit related NII dynamics. On the other hand, we start to see the offset period in the allowance for loan losses and the cost-based dynamics, which should have more enduring behavior going forward.

It should be noted that part of the mix shift has been driven by the Bank, as it is changing the commercial purpose and creating policies towards more collateralized products. The second quarter results reflect this transition. Let me run through the major lines.

Revenues affected by moderated credit growth, important part of mix change, and a sluggish economic growth. Net interest income decreased 3% in the quarter, and 8% in 12 months. Fees and commissions, up 2% in the quarter, and 13% over the first half 2012.

Lower allowance for loan losses, as we anticipated. Allowance for loan losses totaled BRL6.6 billion, a decrease of 5% both if it were year over year. Reduction of the cost of credit in 40 basis points compared to the first quarter of 2013, and 70 basis points over the first half of 2012.

General expenses, controlled, with running rates well below inflation. Total expenses increased 2.6% in 3 months, and 2.4% in 12 months. Excluding depreciation and amortization, operating expenses increased 2.6% in the quarter, and 1% in 12 months.

Profit before taxes, in line with previous quarter, while higher taxes and minority interest brought us to a 7% decline quarter over quarter in the net profit.

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NII came to BRL15.1 billion in the first half of 2013, a reduction of 8% over the same period last year. In a quarterly comparison, NII decreased 2.9%, or BRL220 million, which is composed of two main drivers. 70% of this decrease is explained by the line Others, and 30% related to the credit margin.

Regarding the line Others, which includes capital remuneration, (inaudible) positioning and (inaudible) results, the decrease in the quarter is basically explained by the effect that we saw in the previous quarter were quite strong, [a base] effect. Taking into account market conditions, the results in this quarter were relatively solid, and it could have some volatility in the quarters to come.

Regarding credit margin contribution, although we had a better evolution in credit growth, with 2% Q over Q in average balance, it was not enough to offset the 50 basis point drop in the spread in the same period. This is due to the fact that two thirds of the spread decrease is driven by mix effects, and one third by price changes per product.

Although the Bank was working in a compressed scenario, the speed of the decrease in the spread was bigger than expected. Last quarter, I shared with you this forecast, in a more moderated [tongue], but it was not the case. This is due to the fact that product mix change continues to take place -- to take place at faster pace than anticipated. In order to make it more tangible, the balance of revolving products with much higher spread decreased by (inaudible) year over year, while the overall credit portfolio grew 1 digit.

Looking forward, we expect that the pace of these trends will be normalized, which implies that in the next quarter, this dynamic should be more stable. Thus, we will later review, in this presentation, how allowance to loan losses has started to come down, and in result, we expect the credit-related NII, after provisions, to start to pick up in the next quarters.

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Looking at the loan portfolio, it has been growing in line with prior competitors. The expanded portfolio reached BRL266 billion, an increase of 4% in the quarter and 9% in 12 months. We have a good diversification in our credit portfolio, between second -- half with individuals and half with corporates. Here, market credit remains the growth highlight both for corporates and households.

By segments, we have loans to individuals at 1% quarter over quarter, and 5% year over year, with mortgages as the main driver, with 31% growth in 12 months. Consumer finance total BRL37 billion, up 2% in the quarter, and 1% 12 months. SMEs decreased 2% quarter over quarter, and increased 6% in 12 months.

I would like to bring your attention to one technicality. In Brazilian GAAP, the discounting of (inaudible) flows is not accounted in the credit portfolio. Since we are focusing in this activity, the evolution of credit related activities in this segment is understated.

If we adjust for this, the quarterly and year evolution for this segment would be 0.5%, 0.5% in the quarter and 9.8% year over year respectively. Corporate increased 8% in 3 months, and 10% over June 2012.

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In terms of credit indicators, first, the (inaudible) from 15 days to 90 days continued to show a positive trend, and presented 40 basis points of improvement in all segments against the previous quarter, reaching 4.5% in the total, 6.4% in individuals, and 2.7% in corporate.

In 12 months, total (inaudible) delinquency improved 60 basis points, 120 basis points in individuals, and 10 basis points in corporate.

Second, the NPL over 90 days reached 5.2% of the total credit portfolio, down 60 basis points in the quarter, and up 30 basis points in 12 months. The evolution in the quarter is slightly better than we had anticipated. The delinquency ratio of the individual segment reached 7.1%, a decrease of 90 basis points in the quarter, and aligned with our expectations. The delinquency in the corporate segment decreased by 30 basis points in the quarter, to 3.5%.

It was a positive trend, since it was estimated in the first quarter the delinquency peak for December. Also, the NPL formation presented a reduction of 13% in 12 months. It's important to bear in mind that the magnitude of the future improvement in credit quality depends on the economic environment.

The allowance for loan losses total BRL6.6 billion in the first half of 2013, a decrease of 5% in the quarter and in 12 months. The quarterly movement in allowance for loan losses can be broken down in two parts. Gross allowance for loan losses decreased by 2%, while the income from recoveries from written off loans increased by 30%.

The annual evolution of allowance for loan losses [in place] decrease of 70 basis points in the cost of credit, in line with our expectations. We continue to see a moderated and gradual improvement in the cost of credit.

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Looking at fees and commissions, fees and commissions income in the first half of 2013 reached BRL5.5 million, an increase of 13% over the first half of 2012, and 2% in the quarter, mostly due to more business and success with our clients.

It's fair to mention that the seasonality of the insurance fees related to concentration of life insurance product renews in the first quarter of the year, plus the overall quarterly evolution of fees. Excluding these effects, total fees increased close to 9% in the quarter, and with good diversification.

The highlights, in terms of annual revenues growth are, securities brokerage and placement grew 47% in 12 months, and presented a good evolution in the quarter, growing 32%. Card fees presented a 33% growth year over year, supported by the faster pace of fees related to the acquiring business. And insurance fees grew 16% over the first half of 2012.

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At the [front] of our strategy to end up the Bank to a new environment, we aim to improve our commercial productivity and operational efficiency. The Bank has implemented a plan which includes, among others, increased operational leverage, optimized processes and instructions, usage of cheaper distribution talent, service level differentiation for client clusters. As a result, operating expenses, without depreciation and amortization, increased 2.6% in the quarter, and 1% in 12 months.

All the expenses, including depreciation and amortization, presented an increase of 2.6% in 3 months, and 2.4% over the first half of 2012. Those numbers reveal that the Bank is maintaining an important investment agenda focused on adapting the Bank operating platform for this new environment, while striving to contain operating expenses.

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Regarding performance ratios, the efficiency ratio reached 45.2% in the first semester, an increase of 250 basis points over the first half of 2012. Recurrence ratio reached 69.2% in the first half of 2013, an improvement of 630 basis points in 12 months. Return on assets growth in the first semester of 2013 at 1.3%, a decrease of 30 basis points year over year. Return on equity reached 11.4% in the first half of 2013, a reduction of 200 basis points against the same period of 2012.

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Assets total BRL457 billion, an inquires of 5% in the quarter and 8% over June 2012. Equity amounted BRL53 billion, a growth of 3% in the quarter and 9% in 12 months. Considering the goodwill, equity totaled BRL64 billion.

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Coverage ratio over 90 days closed at 132%, increasing close to 800 basis points in relation to last quarter, and continues to be a comfortable level. BIS ratio reached 21.5%, same level as the previous quarter. And it's basically composed of Tier 1 capital, thus, Tier 1 capital ratio amounts to 20.3%, while Tier 2 capital ratio equals to 1.2%.

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Total funding on balance amounted to BRL127 billion, presented a growth of 4% in the quarter and 16%, or BRL32 billion, year over year. It's important to note that our funding sources are growing at faster pace than our credit portfolio, which leads to improvements in liquidity ratios.

Loans to total funding on balance improved 10 percentile points, and it's below 100%. And loans to funding from clients improved [4 point -- percentile points], and reached 106%.

Total funding less assets under management increased more than BRL12 billion, or 3% in the quarter, and BRL38 billion, or 11% in the 12 months. Assets under management reached BRL144 billion, an increase of 2% in the quarter and 4% in 12 months. The Bank believes that in order to strengthen (inaudible) with clients, we must enhance the funding activity with (inaudible).

Finally, I'd like to finish this presentation sharing some final remarks. First and foremost, we are facing a transition of the banking model in Brazil in view of lower spreads. The challenges related to this transition have been increased in the short term, given the sluggish economic activity that impacted our credit growth.

We want to grow our credit portfolio in line with prior peers, with at least the same quality of the new origination (inaudible). In addition, the Bank is dealing with a change in the product mix portfolio, which has spread from present process. We think that most of the impact was already (inaudible), and the (inaudible), looking forward, should be gradually (inaudible).

Second, linked to the previous statement, our asset quality starts to benefit from the mix shift. Our cost of credit is decreasing, and it's suggesting that our net credit margin should progressively improve.

Third, our business model is evolving alongside this new environment, deepening the client segmentation in order to ensure that client demands are better met with an appropriate cost base. This process also aims to strengthen the client linkage and to intensify our activities with clients over the credit relationship, such as services and deposits or investments.

Last but not least, we have been working on reducing the structural costs. The Bank has a multi-year productivity efficiency program, in order to adapt its cost base to this new banking situation. We expect to grow well below inflation for a long period of time.

Thank you very much for your attention. I'm pleased we are open for Q&A.

Thank you. We will now start a Q&A session for investors and analysts. (Operator instructions) Mr. Carlos Macedo from Goldman Sachs would like to make a question.

Good afternoon, gentlemen. Carlos, I have a couple of questions. The first question is regarding loan growth. I mean, loan growth decelerated again in the quarter, and you're talking here about growing at 9%. Could you give us -- if I remember all the guidance, over a 3 year periods, it's around 15% loan growth. Do you believe you can reach those levels, given the current outlook for the economy in the next 18 months, or is that something that we should just think will happen within this 3 year window?

The second question is regarding coverage. With NPLs declining significantly, as you've shown this quarter, and likely to continue to decline going forward, given the trends and a slowdown in loan growth, your coverage ratio is now 132%. Should we expect that ratio to continue to go up over the next few quarters, or is that something where you're satisfied with the level where it is now, and you could see provision expenses not increasing as much -- or actually, declining, going forward? Thank you.

Thank you, Carlos. Well, first question, I'll be answering the first question, and I'm going to pass the second one to Oscar, who is our Chief Risk Officer.

First of all, we have to recall that -- you remember, we didn't make any guidance for this year, (inaudible) formally. We sent that to the local regulator, that the guidance we made in 2011 for a multi-year period of time was discontinued. And having said that, I mean, one of the questions about why this continued, this guidance, because basically, market conditions and the macro conditions changed in a very important manner, where we structure, we made this forecast.

But in order to answer it more accurately, your question, I would tell you that more or less, what we expect, it's the -- seasonally speaking, the second half is slightly better than the first half, and given the fact that our (inaudible) portfolio is around 9%, well, we can expect more or less this run rate and a slightly better in a yearly -- for year over year basis.

Looking forward, well, it's going to depend on the market conditions, and the macro conditions as well. We strongly believe that in a sustainable long-term horizon, the credit growth for Brazil could be 1.5 times nominal GDP growth. Maybe, nowadays, we have been running, the credit system is running around 16%, slightly higher. But with a different mix, and prior competitors growing well below this 16%, while the public banks were about this level.

Well, we think -- or, we expect some convergence in terms of private and public dynamics. Maybe it's going to take longer than we expected, but in any case, we think that low double digits for longer horizon is sustainable, looking at the Bank.

And Oscar, please, can you answer --

Just a second, Carlos -- if I could just follow up on the first question. So, for the end of the year, even though the second half is stronger than the first, last year probably will be stronger than this year.

Does that mean that you will be -- have more appetite for credit in the second half of the year, or really, just a base effect from last year being weaker? Sorry, weaker than this year.

Carlos, I mean, we would like to -- first of all, we establish as our priority that the new origination, the new credit portfolio has to maintain the same quality of standards that we have been showing in the latest quarters. This is the first priority.

Having said that, if it fits in with our credit portfolio or slightly higher grade portfolio growth in the second semester, well, we are going to try to do it. And seasonally speaking is because, for instance, for SMEs, it's always better third Q compared to the previous two quarters, and there is a seasonal effect that is going to help the Bank in terms of credit growth.

So, what we -- I am saying is that we are not obsessed to grow the credit portfolio, and we are first established as a goal to grow in line with prior peers, to try to gain some pace in several products. But once again, considering the origination standard and the quality of the asset, new credit portfolio as good as the new vintages are showing at this moment.

Okay, thank you.

Coverage ratio, as we have mentioned in some other conference calls, we do not have a target for the coverage ratio. But if you look at the historical trend of (inaudible), when delinquency goes up, you see it going down, not up to around 120%, and when the [renegotiating] improves, it goes up to levels between 135% and 140%.

So even though we're not saying that this is a target, this is what did -- the trend, that we'll [be able to] see in the evolution of the -- on the coverage ratio. I don't know if I answered your question.

No, that's a good answer. That's the historical trend, and if we want to forecast that in our models, it would be a reasonable assumption.

Regina Sanchez from Itau BBA would like to make a question.

Hi, everybody. I also have two questions. The first one is regarding fee income growth in the quarter, that we saw that was helped by credit cards and asset management business. But major peers are posting even higher growth than Santander Brasil, and we also know that Santander, for the asset management, next year, so probably there will be some impact of the sales asset management business in the fee income line.

So I would like to know, what is the strategy to grow fees, in light of your speech that it is a more challenging scenario for credit growth regarding these spreads, but it's important to grow more fee income. And then I'll ask my second question. Thank you.

Thank you, Regina. Well, the asset sale, which is not a sale in the whole asset process, because you remember, first of all, we are going to implement or execute the transaction in the fourth Q. Secondly, we have not impact in this quarter with this movement, with this corporate transaction. And third, regarding this transaction, you know that the distribution fee, which was the most important, and that total fee that we received from our services, which is basically [17%] of the total fees that we received from the asset business, will be maintaining the Bank, and this distribution fee is the same in the insurance business.

So basically what we have been doing is selling the [factory (inaudible)] to concentrate our efforts in the distribution and commercialization channel, which, once again, has the most important part of the fee composition, or the fee distribution.

I agree with the idea that you mentioned about the -- well, that we are going to be focusing on the -- to improve the fee income growth. As a part of the new -- or, as a part of our strategy in -- regarding this new environment in terms of spread compression. And basically, the strategy is very simple, and to try to become the first bank of our -- most of our customers. And basically, what I'm saying is, to increase the linkage, and increase the relationship with them.

This is the -- basically, the sense of our strategic movement. Basically, we think that with the segmentation in the -- in our customers that we have been doing, you know that we are opening a new segment in order to enhance a relationship with them, in the top of the pyramid of the individuals. And now we are dealing with a new segmentation in the corporate side as well, in order to be closer to our clients.

We are convinced that we are closer, that we understand much better the necessities of our customers. We will be selling more services, and we will be offering more transactions to this customer. This is more our sense.

In a complementary movement, we have been adding some added value with other movements, such as GetNet, where basically, you know, that this is an important business for our Bank, the acquiring business. And basically, of the movement with GetNet is aiming to increase and improve the services and the commercial fee that we receive with the acquiring business. Do you know that it's more focus on the SMEs at the beginning, but the idea is to expand this commercial offering to more -- bigger retailers. And this is the way that we are going to focus the strategy and fee income growth.

Okay, Carlos, thanks. I think that the GetNet point is very important. Do you expect to turn off the transaction by the end of this year?

Yes. Our expectation is that we have -- we are under the (inaudible), and we think that there is an execution of the deal will be early in the fourth Q, and we will be sharing with you all the information, the rationale, the figures, and all the business case.

Okay, great. And one second question, or maybe it's more to Mr. Oscar. It's related to the write-offs. We know -- notice a huge increase in this quarter relative to first quarter 2013, up 32%, almost BRL1 billion, if we did the math correctly. It was almost BRL4 billion in second quarter, compared with BRL3 billion in first quarter.

But my question is this charge-off that helped also NPL ratio to decline in the quarter, if it was more -- if it was already expected, and a consequence of the maturing of the loans, or if there was any sale of portfolios in the quarter. I mean, I couldn't find any in the explanatory notes. I think there wasn't, but I just want to confirm that it was more a consequence of maturing of loans, and if you were already expecting this level of charge-off, and if we should expect to see decline in these levels in the next quarters. Thank you.

Thank you, Regina, for your question. And related to write-offs, you know that this is -- this goes by a regulatory schedule, whereas we have to write off the credits six months after the transaction is 100% provisioned.

It is true that we've seen an increase in the write-offs in this second quarter. But when we look at the overall bad debt generation, it remained stable, at 1.8% of the credit portfolio. And therefore, we see this as a normal evolution in terms of the different lines, and that -- are related to the delinquency of the Bank.

In terms of the what is the [tender], the expected write-off, we don't give guidelines in terms of this indicator.

Did I answer your question?

Yes, perfect, Oscar. Thanks a lot. I really appreciate that. Thank you.

Mariel Santiago from HSBC would like to make a question.

Hi. Thank you for taking my question. I have two questions. This quarter, you had a big loss from trading securities of BRL1.2 billion. How should we look at this line going forward, and for the rest of the year? And what's the top rate, effective tax rate that we should be working with for the whole year 2013?

Mariel, excuse me. Can you repeat the first part of your question? It was a little bit disconnected there, the connection.

Can you hear me well now? Can you hear me?

We do now.

Okay, so my first question was, you reported BRL1.2 billion loss in trading securities this quarter. How should we look at that line going forward for the rest of the year?

Well, I'm a little bit lost with BRL1.2 billion trading loss that you are mentioning. I don't know that you are looking at the available for sale, or what are you exactly meaning?

Available for sale securities.

Yes. Well, the movement in the quarter was well, well below all our competitors, and when you compare the movement that we have impacts, have the impact that we have in our portfolio, in terms of a net impact in the quarter, it was in a net impact of BRL700 million.

And basically, this is explained by two things. The first one, it was the movement in the interest rate that we had in 2000 -- in the second quarter, and secondly, the active management that we have in our balance position. And basically, to give you an idea, the Bank has, as I mentioned before, an outlook in terms of interest rates, the more [hikening]. So that's why we reduce the valuation, more or less one third of the valuation that we had in the first quarter was reduced in the second one.

And what we expect for next year, in order to give you an idea, our sensitivity to a 100 basis point parallel shift, 100 basis point parallel shift for one year, always in a static view, it's BRL215 million for one year. So this is more or less the (inaudible) that we have been running the Bank in this moment.

Okay, thank you. My second question is, what do you -- what's the effective tax rate that we should be working with, (multiple speakers)?

Well, this quarter was a little -- slightly higher than the previous one, basically because we didn't distribute (inaudible). And that's why the tax -- the corporate tax in this quarter was slightly higher than the second one. And more or less, there -- for the entire year, we were expecting something between 4% and 6%, something like that, between this range. It's more or less what we expect for the entire year.

Thank you.

(Operator instructions) Thank you. The Q&A session is over, and I wish to hand over to Mr. Carlos Galan for his concluding remarks.

Well, once again, thank you to all of you who attended this conference call, and please consider to contact the Investor Relations department in order to help you and to clarify all details. Thank you very much.

Banco Santander conference call has come to an end. We thank you for your participation. Have a nice day. Thank you.