Banco Santander Brasil SA (BSBR) 2014 Q2 法說會逐字稿

Good afternoon and thank you for waiting. Welcome to the conference call to discuss Banco Santander (Brazil) S.A. results for the second quarter 2014. Present here are Mr Angel Santodomingo, Executive Vice President and Chief Financial Officer, Mr Carlos Volante, Executive Vice President and Financial Accounting and Control Officer and Mr [Louis Philippe Butani], Head of Investor Relations. The wide webcast of this call is available at Banco Santander's investor relations site www.santander.com.vr/ir where the presentation is available for download. (Operator instructions).

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's operating and financial projections and targets based on the beliefs and assumptions of the executive Board, as well on information currently available. Such forward-looking statements are not a guarantee of performance. They involve risk, 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 and may cause actual results to substantially differ from those in the forward-looking statement.

We would now like to pass over to Mr Angel Santodomingo, Executive Vice President and CFO. Mr Santodomingo, you may proceed.

Okay, thank you, good afternoon, I'm Angel Santodomingo, it's a pleasure for me to present for the first time Santander Brazil results. This time, as you know, will be the second Q results both through the web and through the conference call.

I will follow the presentation that we have posted today in the web with regards to this second Q 2014 results, starting with the (inaudible) presentation, I will slightly review the market economics scenario, I will then underline highlights, both the results and make final conclusions, final remarks.

Before presenting the operation, I want to go through the operation that we announced this morning, which is a joint venture in between Santander and Bonsucesso. We are now in deliberation early this morning, deliberations for joint venture, in between Santander Brazil and Banco Bonsucesso. Santander Brazil will hold 60% of the joint venture, while the remaining 40% will be in Banco Bonsucesso's hands. The baseline that Santander will complete in the first phase will be [BRL]460 million and we estimate that the proceeds will be by the end of this year.

Probably for those of you that do not know Banco Bonsucesso, Banco Bonsucesso is probably the best player, or one of the best players here in Brazil in terms of (inaudible). It is the type of lending linked to payrolls. We are developing the [joint venture] after and the strategies in the last year, year-and-a-half, in which we were retiring from what we can call the external channel for these type of loans. As we (inaudible) loans, both through agencies and through external channels, in our case was being reduced in terms of activities due to quality in the [forecast]. With this strategy and with this agreement, what we are doing is reinforcing that part of the market with one of the best players, as I was saying.

The (inaudible) with them is that we have clearly increased capacity in terms of our commercial and distribution channels. We have [access] through (inaudible) profitable commercial agreements and knowhow, so both the front office and the bank office greatly improves. Then we would also be able to expand our products because we can sell credit cards linked to these products which is not a common product here in Brazil and is starting to be developed and Bonsucesso has the knowledge and the capacity as it is already doing.

Let me go through the strategic and financial rationale very quickly. The big rationale, I mentioned some of the things, but it is a continuation of our strategy to focus on one of -- in a segment that is key for us with lower risk, but specifically with higher linkage capacities in terms of higher link with the client. We create an external channel that is what we wanted to be and to have when we started the reduction of what we had one of the years ago and we do that with a partner that brings capacity, that brings knowhow, that this is specialized and that ensures, at the end of the day, quality and profitability. At the same time, as you can imagine, the format for joint venture obviously is a way of increasing potential market of the operation.

I'll now [turn to the] rationale with some data that you may want to know. We are speaking of an initial loan portfolio of (inaudible) [BRL]1.1 billion, 60% is payroll loans and 40% is payroll (inaudible). We think and we estimate that it will be [accretive] since 2016, [following which] an accretion of ETS of around 1% by 2017. We are estimating a return on investment of around [17%] for 2017 which matches our general criteria of profitability of investment that has been mentioned publically by our management. So basically it's a big summary, this new operation, it's enabling us to grow with quality in a business that we think may be quite successful going forward.

So once, having discussed the operation, as I was saying before, maybe we start with the results presentation. The first part is the macroeconomic outlook. As you know, the data you have there is [consensual] where the market is (inaudible). The market is with an estimated [fragility] of around 1% from [9%] for this year and 1.5%, although would be lower than previous years. GDP growth has decelerated and probably will remain in the same levels or a little bit better during the next 18 months. Of course in 2015 we think that might possibly be impacted by whatever economic policy adjustments are made.

In the rest of the [areas], as you can see, the market is expecting a stable (inaudible) rates as we speak for this year, 100 basis points increase for our next year, while inflation and ForEx will have or may have some [rules] according to the market, but within reasonable ranges.

So spoken a little bit, as I said, about the environment, let me go through the results. First highlights, I would like to highlight several ideas. First, with regards to the balance sheet and speaking about the capital and including the strengths of the Bank, as you probably know, we are in a comfortable position in both [concepts].

The (inaudible) ratio has reached 17.9%, well ahead of the minimum of 11% that is the minimum unit level. We have got a [bit of a one-off] at 16.3. The loan to deposit ratio has gone down to 106 points in the quarter to 98%, specifically because of our good growth under [relative results].

Speaking about the loan portfolio, the loan portfolio has grown 2% in the quarter, mainly driven by (inaudible) which grew 4%, while as I mentioned, the funding from clients grew 3% in the quarter.

Secondly, in terms of results, net profits remained flat-ish, around 1%, with a (inaudible) amount of [BRL]1.4 billion in the second quarter, with different behavior throughout the P&L. First NII went down 4% in the quarter. I will further elaborate here because there are too many ideas. One is that the business remains flat, that it is not going well in terms of NII, so have different impacts in all the NII that, as I say, I will elaborate when we go through the slide. [Fixed] grew 2% over the first quarter and expenses continue to perform in a positive way, as you may see grew only 1% in the quarter, which reflects the efforts that we are doing in terms of [persistence].

Finally, in terms of risk, the NPL ratio has gone up close to 30 basis points, 28 basis points in the quarter with a quarter ratio of 150 [loans]. But let me elaborate on those two concepts when we get to the risks.

If we move on to the net profit, slide number 8, what I mentioned before, the net profit remains at around [BRL]1.4 billion, 1% in the quarter or 0.6% in the quarter. We've had Q growth, we've had Q number of around [BRL2.8] billion, an increase of [2.2%]. [Arguably], this comparison in terms of semesters is impacted by the capital operation that we announced and executed in the first Q. In terms for like-for-like, adjusting that, the net profit will have increased 5% year-on-year.

On the next slide is the P&L situation. I would say that they're on terms, the Brazilian commercial sector is obviously adjusting to the environment that I mentioned before. You have impacts on [various things] from banking activities, you have some sense of mixed dynamics and we have to analyze all these items to try to [concrete] and to see how they [concrete] on the P&L.

But let me give you the first draft of where we are. In terms of revenue, the NII, as I mentioned, we're now [focused ending] the quarter. This [evolution] was explained in part by the loan portfolio growth, from clearly lower results from market activities and clearly from the capital optimization operation that I mentioned. I will elaborate on the spread [evolution] because it is important to see how that is evolved. [This information] was increased 2% in the quarter [not only by basis] by both sides, again affected by basically two operations. But both of them were already partly explained in the past. It was [through those two] that the growth will be [7% to 8%].

On the [lower rules] provisions, we remain with our [EUR]2.4 billion more or less provision for the quarter, [EUR]4.8 billion the semester. It has gone up in the quarter 4%, but still the cost of credit remains around where it has been in the last three quarters, 2.6%, 2.8% and then a strong decrease in annual returns.

Finally, two points, general expenses. General expenses control continues to be reflected on the P&L. We are seeing those numbers are maintained, situation (inaudible) [below] inflation and sometimes flow through to see the 1%, which I think is a reflection of the strategy of the Bank.

Moving to different concepts, net interest income, net interest income I would say you have two main kinds of ideas from that slide. On the left side you have the total evolution of the NII. That total evolution shows that the red part, which is the NII coming from the credit, which is the main source of business, remains fairly stable. It [goes on] in [BRL]16 million in the quarter, but shows that the different dynamics of the business are remaining stable and probably are going, but there is (inaudible) that has implemented some times, [or even] probably are symmetric in between the [inference] and the [real], but in any case, that is starting to be seen on the P&L.

That goes down significantly in the quarter and then on the year-on-year comparison is [the others]. [The others], in the QoQ that go basically from [EUR]1.3 billion to [EUR]1 billion, that drop is caused by two items that we have to have clear in any mind. One is, I mentioned, markets, lower results from markets. Of course being impacted by the high (inaudible) position of the balance, it is affected by a higher (inaudible). The second impact is the capital optimization that I mentioned. As a matter of fact, the impact of that capital optimization explains about 50% of that quarterly evolution that I was mentioning and 40% of the yearly change. In fact those were (inaudible) that capital optimization where we plan a 4.5% would be a, or had been a return of 2.2.

Let me remember that what has happened is that we have provisioned in second Q, the interest rate cost of the Tier 1 issuance that we made in first Q, changing the criteria due to Central Bank instructions from deducting that interest rate cost from capital to deducting it from P&L. For the second period you have two effects. One is that we are provisioning the full semester, as we did operation by the end of January or early February. You also have three months of provisioning in second Q compared to two months that come from - [or the one], the second Q came consecutively from the first [Q]. That is the main impact of all of that.

On the right, you have spreads and the main message there in the spreads is that we remain fairly stable, around 9.8%, 9.9% throughout the quarters. You have almost four quarters in (inaudible). The change of mix is still happening but also the pace and the speed and intensity of that change of mix is clearly reduced. How we see it going forward as rates would remain around the current levels, and in terms of volumes the quarter evolution is also affected by the pace of commercial activity.

We move to the volume cost, you can see the loan portfolio on the next slide. The total portfolio, what we call here expanded portfolio which includes not only loans, but the rest of the exposure, increased 3% in the quarter and 5% in 12 months, which compares positively or very positively, I would say, with the trends over the last Q, that is you remember where (inaudible) we were at the (inaudible) 1.5 (inaudible) 1.6 in first Q versus fourth Q.

I would underline what is impacting (inaudible) the loan portfolio. Well basically two concepts, payroll lending and SMEs. Payroll lending, because I already explained with the operation of Bonsucesso, that on the external channel, we took that strategic decision some time ago. Going forward, when this operation is closed and it starts to deliver what we are expecting, which is a strong growth, we should see growth coming from here.

On the second part, in terms of SMEs, this has been made public in the past, we are still revisiting the SME model. Our idea is we work with aim of starting in 2015 with that new model which is the Santander Bank's concept in the (inaudible) Group and we should start to see different behaviors, as I say, volume (inaudible) 2015 not before that. It is an esoteric segment for us and we want clearly to reinforce and to have all the tools aligned before starting to grow again.

In terms of segment, in [deliverables] the performance was impacted by what I mentioned. It is clear the payroll [problem], the external challenge. Excluding this, [in the medium-long] we have grown 1.3% QoQ and almost 11%, 10.7%, year-on-year. On the consumer side, I would like to underline that the conditions of the auto market was really affecting all banks. In our case, the drop, not a drop, because we remain fairly stable, the relatively stable versus the rest of the sector, is strongly positive. In fact, we have gained 120 basis points in the last year for market share in this business. This is due to our agreements that we have with Hyundai, with Renault, with Nissan, that are paying off clearly in terms of volume and profitability.

If we move to funding, this is good news in the quarter. As you can see, the growth is strong. The total funding from clients is around [EUR]231 billion, that increased almost [EUR]30 billion, [EUR]26 billion in 12 months. Given the [different behaviors], they're (inaudible) [credits], this is why there is a drop of the [ATV] ratio to 98%.

I would underline, between all the lines that we have there, the good performance of our, what we call, (inaudible) deposits which is the demand deposits and saving accounts, which we are speaking of 2% in the Q and 18% year-on-year. I will also underline assets under management of balanced funds, because you can see one quarter we are growing almost half of a full year, 3% [versus] 6%. So (inaudible) funding plus assets under management, we are speaking of around [EUR]400 billion, 3% in the quarter and 8% in 12 months.

If we move to fees in the next page, you can see there the evolution in terms of the total amount of fees. We are speaking of [EUR]5.3 billion, 2% over the last quarter and like the same compared to the same period in 2013. Now again, here you have a few impacts, just let me remember them, because you probably know both of them. One is the life insurance policy renewals that we had, we moved the (inaudible) 2013 due to that movement, two times in January and December and now from that year it happened only in December. So when you compare with first Q last year or first semester last year, it was affected because it was accounted two times in a year. It used to be accounted the full year in January and we moved to December. The number you have there, the 6.7% is the like-for-like growth.

The other concept that is affecting obviously (inaudible) is the asset management operation. Again you have there that like-for-like evolution instead of the [manual] 7% (inaudible) in terms of or minus one from 2% in QoQ. Broadly, to understand how the business is evolving, it is the 8% you have at the bottom line, at the bottom part of the slide, year-on-year growth that shows the business evolution and how the business is being developed with regards to commissions.

Moving to the rest of the account, you have general expenses, next page. I don't think here are many news, but they're all good and positive. Total expenses, without including depreciation and amortization, increased only 1% in three months and 2% in 12 months. We continue to be focused in the control of expenses and the [level of] efficiency plan that we have been sharing with the market and implementing definitely is paying clearly off. For the future, we continue to (inaudible) cost growth well below inflation.

Moving to the risk part, you can see in this slide a number of those things, the three probably main concepts with the exception of the cost of credit. [We have] too many (inaudible) [occasions], there were 90 days and the [50] to 90 days. The over 90 goes up 30%, clearly [oppressed] by (inaudible), while the short term is behaving positively, a [little] indicator that is on a positive or has a positive behavior in the quarter, with an improvement of 30 basis points.

In terms of coverage of ratio, the coverage ratio is 166% to 159%, increases in the quarter but I would say that would remain at very comfortable levels. Year on year has a strong increase and we will probably see this ratio being or maintaining comfortable levels going forward. Probably one important about those ratios, because as you know, specifically NPL ratio is a ratio that only explains part of the situation, is worth commenting the cost of risk that we have in the next slide. You have all [concept] that the provisions that were (inaudible) in the quarter, from there you can underline the cost of risk that as I mentioned in my introductory words, remains stable around 3.6, 3.8, depending on the [quarter]. The decrease in year-on-year is still strong, but I would say that the QoQ behavior is sustaining (inaudible) levels.

To end my presentation, a couple of the slides, one is with the key performance ratios in terms of efficiency and profitability. Efficiency reached 49.5% in second Q and with an increase of [30] basis point on the quarter [prior], basically explained by the pressure I mentioned on the top line. The quarter [SE] ratio stands at 66.5% with an improvement of 28 basis points, so worth more elaborating on profitability and specifically on return on equity. The return on (inaudible) remains fairly stable, but return on equity, I would say that, well increases, as you see, 0.4%. Total equity is clearly good with amount to [BRL50] billion with increase of [0.4% in the quarter], while decrease in focus in 12 months.

Probably the evolution of return on equity, the other side of the coin of the capital optimization plan that I mentioned before and that was affecting (inaudible), here you see the positive side, obviously and that is reflected on the 11.6% of return on equity.

Finally, liquidity and capital, I mentioned the LTD ratio and also the (inaudible) ratio going 100% to 98% due to the (inaudible) I mentioned in terms of the deposits, the positive performance of deposits. The capital ratio was [nullified] last Q with the assurance of the Tier 1 and Tier 2 bonds, remains at 17.9%, as you can see there, with a [quarter capital] of 16.3%.

So final remarks, with regards to this result and the performance of the Bank, I would probably like to underline five key points. First one is that the Bank remains within a strong balance sheet, maintaining strong and comfortable liquidity coverage and capital levels. Secondly, that obviously the lower economic activity impacts as the [base] of business [moves]. This has meant that the portfolio increased 2% and funding from clients improved 3% in the same period. The first key line would be asset quality. We have the NPLs rising 28 basis points with the early [leading] indicators improving.

Fourthly, as we mentioned first Q conference call, we see the year with top line pressure. We already [certainly] announced that our performance would come more from the lower part of the P&L than the upper part of the P&L. As I mentioned, evolution on the NII reduction in the second Q was specifically impacted by the change of accounting system in optimization plan of the capital and on the activity in the markets. That was offset specifically the capital optimization plan by higher ROE.

Finally, we continue to deliver what we said, which is productivity and efficiency plans that are [delivering already] expected results. Finally, the most important point is to continue with your focus to transform the Bank into a client-led bank, by continuing the effort that we are doing on the commercial side, increase (inaudible) increase [transactionality] that will not be reflected in the short term, but we expect it to be reflected more in the medium term. (Inaudible) the priorities have to continue to deliver on the lower part of the P&L where we continue to build that other part of it. This, as I mentioned, should be the case for the following quarter.

With this, I finalize the presentation and I guess that I open or we open then the floor for questions.

Thank you. We will now start the question and answer session for investors and analysts. (Operator instructions). Our first question is from Natalia Corfield of JP Morgan. Please go ahead.

Hi, thank you for the call. My first question is with regards to asset quality. You mentioned that early [billings] has improved, whereas 90 days has deteriorated. How do you see that going forward, given that the economy review is showing weak [messages]? That's my first question.

The second question is with regards to the market protection measures. I'd like to know if you think this is going to impact your result, if you're thinking of lending more because of what the - what you are going to have with the liquidity front, the impact on your valuation? If you could give more color on that it would be great as well. Thank you.

Okay thank you [Natalia]. I would say on the quality side, I will mention we have different [views] there. Probably you have a little bit of everything. You have a little bit of environment affecting the situation. You have also, you probably remember by the end of last year, we had some (inaudible) that are probably now doing [their effect] on the NPL ratio. But probably that is more a (inaudible) issue. In February we mentioned that the early indicators are included specifically in (inaudible).

I will say going forward that we should (inaudible) with how the macroeconomic situation was. I always prefer to speak about cost of credit. I feel myself much more comfortable there because it probably (inaudible) a little bit better what is undergoing on the quality discussion. Probably the cost of credit, it will remain (inaudible) but I wouldn't expect huge or strong changes Q-on-Q. I would expect to remain at similar levels or even with some increases, but I'm underlying the fact (there). I'm not -- I don't want to send any message on a different direction.

With regards to the [market protection] measures, if they are going to impact us, yes. The answer is yes. They are going to impact us in two ways. One is, in taking (inaudible) as you know, the new measures put the focus on more of increased lending and acquisition of portfolios in certain type of portfolios, then (inaudible) working since last Friday to see and to minimize the impact as quickly as we can of that measure, then to increase on the [car] lending and the [payroll] lending et cetera, so that we are able to (inaudible) it. But I will not [discard] certain impacts, [what that means] some impact in the first of two months until we are able to generate that activity.

We are speaking now [our case] of around [BRL6.5 billion] for you to [have] that quantity in mind, and this is what we want to color or to be able to generate in the next few months so that we are able to offset (inaudible).

Okay. (Inaudible) valuation?

Sorry, could you repeat that?

In your (inaudible) ratio?

[Ratio], yes, we have around [25] basis points.

All right, thank you.

(Operator instructions) Your next question is from Timothy Puls from Morningstar. Please go ahead.

Hi, thanks for taking my question. I was just wondering if you could expand a little bit about what some of the individual sectors in your long portfolio. It looks like you had some good growth in industrial and it looks like the services and other categories fell a bit, so maybe if you could just expand upon what's going on in those sectors with the result?

Well yes, you have a strong growth in the market in mortgages. We are growing strongly in that segment. You have in the rest of the segments -- I already explained payrolls. In the rest of segments, you have different behaviors but we are outperforming in cards. I also mentioned, the market is growing -- depending on the (inaudible) close to 10% and we are (inaudible). In payrolls, I mentioned, I mean the market is strongly going up and we are strongly going down, but after a proactive decision that we took, as I mentioned one year ago - or a little bit more than one year ago. Now we are maintaining the (inaudible) of being in that segment, but (inaudible) growth coming from that segment.

I would say those are the main lines of - or the one that [may be] in the (inaudible) is the [behavior] of the [personal lending].

Thanks very much.

(Operator instructions) Our next question is from [Philippe Suliman] of Morgan Stanley. Please go ahead.

Hi gentlemen. Thank you for (inaudible). Actually it's a follow up question on a previous question. When you say that the (inaudible) impact of the market (inaudible) measure was at [BRL6.5 billion], you are talking about the amount of (inaudible) that will no longer be remunerated by (inaudible) is it through (inaudible) loan or through (inaudible)?

(Inaudible) by the way I didn't (inaudible). Yes, I am speaking of the amount of liquidity that goes into the [no remuneration] part of (inaudible) of the (inaudible) and that we are working hard to as soon as possible find ways by acquiring portfolios, by lending [operational quality] (inaudible) by lending in the (inaudible) that were disclosed by -- from the [Central Bank] (inaudible) but in any case will have some impact, because we are moving as quick as we can, (inaudible) or in one week or in 10 days. We are not going to have (inaudible) in the first week or weeks. This is the impact (inaudible).

Okay [very clear]. Just another follow up question on this and the impact of 25 basis points on the (inaudible)?

It is positive, yes.

Okay. That's good. Thank you very much.

(Operator instructions) Our next question is from Francisco Kops of Banco J Safra. Please go ahead.

Hello everyone. I'd just like to discuss a little bit about credit spread. We have seen from Central Bank data that spreads are going up, in some ways sharply. I know there's a mix effect here but I'd like to explore a little bit more, the credit spread and what we can expect going forward based on these trends you are seeing on the overall market. Thank you.

Well I would say that (inaudible) in a general terms are paralyzing in some case -- our experience of this is that production [spread] are improving. In fact, out of the valuations that we see in [NAI], the spread impact is -- the mix impact is important, but the spread -- the [logically] on the [product] side is improving.

So - well we have got it to [work] because we have (inaudible) here. The segments that we are growing and how we are [growing production]. But I will say that we are not kind of worried in terms of (inaudible) spread. We (inaudible).

So when we looked at the [little] decrease of [10 basis points] - on your credit spread, we think the products, we could expect (inaudible) but basically it was just a mix effect here, right?

(Inaudible) yes, what we see is that the trends [is kind of flat]. We will not go into one direction or the other, but basically (inaudible).

Thank you.

(Operator instructions) Sir, no further questions. Thank you. The Q&A session is over and I wish the call back over to Mr Angel Santodomingo for his concluding remarks.

Okay well thank you very much for being there and for attending this call. Anything you need from now on, we are all at your disposal, specifically investor relations team and hope to see you in the next call. Thank you.

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