Banco Santander Brasil SA (BSBR) 2014 Q3 法說會逐字稿

Good afternoon and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brazil SA's results of the third quarter 2014. Present here are Mr. Angel Santodomingo, Executive Vice President, Chief Financial Officer and Control Officer, and Mr. Luiz Felipe Taunay, Head of Investor Relations.

The live webcast of this call is available at Banco Santander's Investor Relations site www.santander.com.br/ri, 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 related to business outlook of Banco Santander operating and financial projections and targets based on beliefs and assumptions of the Executive Board, as well on information currently available. Such forward-looking statements are not guaranteed to performance. They involve risks, uncertainties and assumptions as they refer to future events and, hence, depend on circumstances that may or may not occur. Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander and may cause actual results to substantially differ from those in the forward-looking statements.

I will now pass the word to Mr. Angel Santodomingo, Executive Vice President, CFO. Mr. Santodomingo, you may begin.

Good morning, this is Luiz Felipe Taunay Ferreira. I would like just to reinforce the idea that we'll give priority to the questions that are flowed through the webcast. I will put together all the questions related to the same subject. And afterwards, if needed, we will also answer questions that comes from the phones.

So, Angel, if you could proceed please?

Thank you, Felipe. Good morning and thank you for attending Santander Brazil's third Q results conference. Before going specifically into the results, I would like to share with you some ideas about the voluntary public offer, tender offer that was just finalized some days ago.

As you probably have seen, the addition of minority shareholders with Santander Brazil, combined with the ADR holders, represented approximately 14.7% of the total capital. Given that that did not exceed the two-thirds of the existing free float in the exchange, offer is closed. So there will be no additional period provided. So in this way, Banco Santander Group shareholding stake rises to 88.3% of the capital.

And shares and units of Santander Brazil cease to be list, as you know, now on Level 2 of the BOVESPA and began trading on the traditional segment. As mentioned during the offer, we will continue to strive to deliver increasing profitability to all of our shareholders, current shareholders, and we will continue our investor relations activities with the market as we have done in the past.

So now, changing or moving to the specific results presentation. I would like to go through the different concepts, the macro scenario, highlights from the results, the results, and some final remarks.

On slide 4, we start with the macro scenario, which is the consensus macroeconomic outlook. The markets forecast shows a macroeconomic scenario improving to a still low level of activity of around 1%, which was, as you know, adjusted during the last weeks, with an inflation hovering around the target ceiling in the next two years. In general terms, the economy is expected to recover gradually.

Market expects 2015 GDP growth to be rather gradually and positively impacted by the economic policy adjustment. After last week's interest rate rise of 25 basis points, consensus stayed at 11% for 2014 and climbs to 12% for 2015, probably to be adjusted in the next weeks. On the foreign exchange market, expectations are stable.

We continue to believe that Brazil will overcome the short-term economic challenges and the country continues to be -- have growth opportunity in the medium run.

Moving to page six, I would like to underline the main highlights of the first Q results. Let me remind you that we speak here of comparisons in between quarters in 3Q compared to second Q.

I would like to mention that as of this quarter, our results already reflect the consolidation of GetNet starting in August 2014, thus having a two-month impact on our results. Bottom line, there is almost no impact, so the GetNet consolidation shows almost 0 bottom line, while for different lines of the P&L, obviously, are impacted.

My -- let me say my view in these results. First, the Bank continues with a comfortable position in terms of capital and liquidity, reflected in the strength of its balance sheet. The BIS ratio, the capital stood at 18.8%, almost 19%, with a strong generation in the quarter and with a Tier 1 capital of 17.3%. The loan-to-deposit ratio decreased a couple of percentage points to 96%.

Secondly, we expanded loan portfolio with 5% in the quarter. I would like to underline that 5%, mainly driven by large corporates and mortgages which recorded both an increase of 9%. If we exclude the exchange rate variation which also affected positively, the growth would have been, instead of 5%, 4%. At the same time, on the liability side, funding from clients continues also to be strong with a 5% rise in three months.

Thirdly, regarding results, total revenues moved up by 4% in the same period, reflecting the increase in the net interest income and commission. On the other hand, general expenses including depreciation and amortization posted an upturn of 6.7% in three months, reflecting the perimeter impact and the contractual adjustment for wage agreements in the period.

All in all, net profit totaled BRL1.4b in third Q, posting an increase of 2% in the quarter. Of course, I will elaborate in the different lines from the P&L and specifically on the receipts lines in that part of the P&L.

Lastly, I would like to point out the improvement in credit quality of our portfolio. The delinquency ratio over 90 days dropped 40 basis points in the quarter and the coverage ratio reached 170 basis points, also increasing from last quarter. And this was accompanied by a good quality leading indicator, the 15 to 90 days, from which I will elaborate in the next slide.

In slide eight, basically what you see there is net profit evolution. As you can -- as I mentioned, net profit amounts to BRL1,464m, with a 2% rise in the quarter. And year to date, that's the nine months results, amounting to BRL4.328b, remaining flat in relation to last year.

Let's move to the P&L, which you can find in slide nine. Starting with revenues, net interest income moved up 4% in the quarter, but falling 9% in 12 months. Evolution in 12 months, as I already mentioned in other quarters, was impacted, among other factors, by the capital optimization plan that we executed last January.

In the quarter we had an expansion of NII, driven by higher gains from market activities. In the next slide you will see a breakdown of this concept.

Commissions climbed 3% in three months and it is important to note here that the evolution both in the three months and in the nine months was affected as well by non-recurring impacts that we always explain in the quarter, and I will also try to indicate in the next slide. In any case, excluding these effects, commission would have grown in a like-for-like or a business-like or in this ratio 5% in the quarter and 8% in 12 months.

Moving to quality. Allowance for loan losses remained stable in the quarter. In the first nine months, those allowances amounted to BRL7.3b which is a reduction of 24% in the year. We continue to maintain such a strong reduction that was shown in an accumulated basis in the past quarters.

In terms of credit, also the cost of credit was reduced by 10 basis points in the quarter and 133 basis points in annual terms.

General expenses, the other important -- another important line in the P&L, we think they remain under control, with an annual growth of around 3%, again well below inflation, reflecting our efforts in this increased productivity and efficiency.

In the quarter, as you can see, expenses grows close to 7%, 6.8%, impacted by what I mentioned before, the wage agreement that was signed in this quarter, and the perimeter effects that I also mentioned a couple of slides ago. In any case, our view with regards to cost is that they will maintain a growth well below inflation.

As a result of all these dynamics that I mentioned, net profit increased 4% -- 2% in the quarter.

In the next page, with regards to net interest income, I would like to comment the main points. Net interest income totaled BRL7b in the third quarter of this year, with an increase of almost BRL300m, BRL294m, compared to the previous year. Such performance was driven by what we call other margins which is basically returning to historical normal levels of market activity as you can see in the previous columns, exception made of the second Q.

Credit-related NII presents a decline as a result of the good growth in lower spread products as is reflected in the spread chart. The reduction of the spread was due to a fall in revolving loan, offset by growth in mortgages. So what we have is a decrease of around 9% in this type of revolving loans, which is basically offset or tends to be offset with lower spread loans like mortgages. So the full drop on the spread is totally explained by the change of mix.

In the nine months accumulated 2014, NII came to BRL20.7b, with a reduction both in the margins related to businesses, change of mix, and other margins, specifically due to the effect on quarter I mentioned before.

This reduction in the others line is a result of basically two factors, lower accumulated results from our market activities, including the impact of a higher credit rate that we have commented in previous quarter, and then now an impact from our capital efficient optimization plan that I also mentioned done in January. This explains approx half of the variation of others. If we do not count this impact of the capital optimization, then the NII would have declined around 6% in the 12 months. So the impact is around 3 percentage points.

On page 11, we can move to the loan portfolio. As you can see, credit growth in general terms has clearly accelerated in this quarter in all segments. The expanded loan portfolio totaled BRL293b, posting a growth for the second consecutive quarter, with an increase of 5% in the quarter and 7% in 12 months, mainly driven by the segment large corporates which grew 9% in the quarter and 17% in total. Even if we exclude the effect of the foreign exchange variation, this adjustment posted quite an [expressive] evolution.

In the individuals segment, mortgage was a highlight. I mentioned the 9% growth in the quarter and 35% in 12 months. The individuals performance was impacted by payroll lending, as has also happened in previous quarters. Again, explaining this product, individuals loans which have grown 2%, 1.9% exactly, in the quarter, and 9% in 12 months, 9.2%.

The consumer finance portfolio, which is another important line, remained relatively stable in the quarter. I remind you that this line is basically car financing. And as you know, although the vehicle financing market is slowing down, we continue to gain share here. We have become believers in credit origination with a market share over 20%. This is the first time we rank first in the market for a long time.

In terms of SMEs, we can see that the evolution is improving in the quarter as a result of the Bank's strengthening in this segment aiming to begin in [2015], basically in the first quarter of next year, with a stronger proposal which we also mentioned in the past which is Santander Advance. The performance of the quarter has gone from -- has improved and has gained acceleration as the quarter moved on. As we have said in the past, this segment is strategic for the Bank both locally and globally.

On the funding side, on the next page, the evolution is also quite positive. This reflects the evolution on deposit activities. Our focus is on our clients and the linkage. Liquidity buffer currently is at its highest level, with very comfortable levels of liquidity ratios, both the LCR and the NSFR well above the already-known minimum levels.

Funding from clients amounted to BRL243b, an increase of almost BRL34b in 12 months and BRL12b in the quarter. In both periods, growth was higher than the increase in the total credit portfolio, and as a result, the loan-to-deposit ratio, as I mentioned, went down to 96%. This is almost 9 points drop in 12 months and almost 2 points drop in the quarter.

Total funding plus assets under management amounted to BRL436b, with an increase of 9% in the quarter, that is BRL35b, and 17% in 12 months or almost BRL63b. As you can see, assets under management amount to BRL161b, which also rise significantly both 12% and 5% year on year and Q-on-Q.

Moving to fees on the next page. We are -- as we mentioned before, we had different impacts basically non-like-for-like impact and perimeter impact. In the first nine months of this year, fees totaled BRL8b, BRL8.1b, increasing 3% when compared to last quarter and to the same period in 2013. As already mentioned, this annual growth is impacted by the way the life insurance policies was renewed, as well as by the sale of the asset management operation. These both things have been commented extensively during the last quarter.

Insurance fees dropped three months and 12 months. Excluding the financial effect they would have grown 10%. So the business, like-for-like activity of this line is growing 10%.

In the same direction, in relation with asset management, the revenues from this unit would have grown 8% or are growing in a like-for-like basis 8%, instead of the drop of 18% that you see there.

In the quarterly evolution, we have a non-recurring impact from the accounting reclassification between cards and tax expenses. As you can see on the cards line, the -- again, the business like-for-like evolution is 5%, but this reclassification between lines makes that drop to 0% in the quarter or flat in the quarter. In any case, fees are reflecting the evolution of the business in a like-for-like comparison, showing quite a positive trend.

Moving to general expenses or to the expenses on page 14 we have the following things. Total expenses excluding depreciation and amortization so basically administrative and personnel have increased 6% in these three months and 2% in the 12 months. If we include everything, as you can see there they have increased 3% year on year. The increase in expenses reflects mainly the wage agreement that was signed by the sector and again the perimeter affect that I mentioned.

I would underline the 12 months effect which is still a good performance in terms of expenses that we expect to continue of course in following quarters as a result of the productivity and efficiency program that we plan to continue during next year. In any case, costs will grow well below, and I underline well below, inflation.

On page 15, we go into the quality part of the portfolio and we have the quality ratios, the delinquency ratios. I would like to underline and to highlight the improvement, the general improvement on the quality of the portfolio both in the current quality or in the leading indicators part of it as well as the coverage ratio. We have a 90-day delinquency which fell 79 basis points in 12 months with an improvement both in individuals, 87 basis points, and the corporate segment, 66 basis.

In the quarter, the delinquency ratio declined 40 basis points with a more expressive improvement in the individuals segment. So we run at a 3.7% NPL ratio over 90 days which is as you can see the lowest in the last five or six -- at least in the last five or six quarters that you see in this slide, but it's even more.

If we think to 90 days, the leading indicator that we normally target, also presents a strong improvement of 72 basis points in the quarter continuing after second quarter improvement and also in a year-on-year comparison to 4.3%.

Finally, the coverage ratio reaches 170 basis points, again increasing 4 percentage points in the quarter and almost 20 bps, 19 bps in comparison to September 2013. We remain quite comfortable with these ratios even if, as you can see, in an increasing trend. All in all, quite comfortable and positive quality ratios that should lead to no surprises in the future.

Turning to the P&L in the next slide, we can analyze how both expenses and ratios in terms of quality have evolved. Allowance for loan losses totaled BRL7.3b as you can see in the first nine months with what I mentioned in the introduction, almost a 22% decrease compared to last year. In the quarter, the allowance losses for the provision cost remained flat. For the fourth consecutive quarter we remained at similar volumes.

If we speak of cost of credit as you may see in the red lines it declined more than 130 basis points in the last 12 months and 10 basis points in the quarter. Given the trends mentioned in our credit portfolio, we should expect also positive trends going forward as a reflection of lower spread and better quality evolution on the cost of credit.

Finally, performance ratios in the next page, let me underline the main points here, you already have all the data there. Efficiency ratio came up to 50.6%, increasing again 113 basis points in the quarter reflecting mainly the pressure on expenses that I mentioned. Recurrence ratio 64.3% in the quarter, producing 227 basis points increase in three months. And the return on equity maintained 11.6% which is the same level as in the past quarter.

Finally, with liquidity and capital ratios on the last page, again, let me underline that we are at very comfortable levels in terms of liquidity we have several finance sources and quite a strong and adequate funding structure. The loan-to-deposit ratio, as I mentioned, reached 96% in September with a fall of almost 2 percentage points in the quarter and 9 percentage points in 12 months, reflecting what I already mentioned several times, a good funding performance with a positive asset growth in third Q 2014.

On the BIS ratio that stands at 18.8%, so almost 19%, probably -- well, it is the highest among Brazilian banks as you know. It rises 87 basis points above the previous quarter and being mainly composed of Tier 1. The main reason of the improvement, as you can easily imagine, is the new measures that were approved by the [Bafin], the bank -- the central bank in Brazil in August with regards to lower capital consumption of different loan portfolios. That explains basically the increase of around 100 basis points of core capital.

Let me finalize with my main final remarks. As you have seen, third quarter results indicate that, first, our balance sheet remains quite solid with strong and comfortable levels of capital, liquidity and coverage ratios. Total revenues increased in the quarter reflecting the favorable evolutions in the net interest income, fee income and commissions. We had a good recovery of the loan portfolio growth which was followed by an improvement in the quality of our assets with a delinquency of 90 days improving almost 80 basis points just in a quarter.

In terms of expenses, allowance for loan losses remained virtually stable, while general expenses posted some growth, or a significant growth due to the growing [commitment] and the non-like-for-like events that I already elaborated in.

As we have said in the past, 2014 remains a year with top-line pressure. This is not a surprise because we have been underlining that situation. Besides this [comprehension] relate basically to the change of the mix, we also have the impacts from the capital optimization plan. In any case, trends tend to be positive as I have elaborated both in the credit portfolio and in general terms in the P&L.

Finally, our productivity and efficiency plans are delivering the expected results but the most important point is to maintain our focus on transforming the bank into a client-led bank that will help it reflect on the upper part of the P&L. Our management priorities are to continue delivering results while we work on that part of the profit and loss accounts.

Thank you very much. We open the floor now for questions if there are any.

Thank you. (Operator Instructions).

We've got a few questions in the webcast. The first one regarding the loan portfolio is, Santander is accelerating credit growth while the overall growth in the system is decelerating. What explains such behavior by Santander? And what are the risks involved?

Thank you. Sorry, I was on mute. Thank you very much. I would like to underline the first thing that with regards to the portfolio, as you know, both SMEs and payroll financing have been a drag in the past. In SMEs we are remodeling the offer. That offer which I mentioned briefly in the presentation is called Santander Advance which is basically a full-package service that is going to be offered to our SMEs and that will come into force probably around June 1 next year.

In any case what we start to see is that dragging effect of SMEs in the past is kind of shading away. We have seen that in this quarter SME lending growth has gone from being negative to almost being non-negative at the end of the quarter. So we see a kind of an improvement on a marginal way in terms of SMEs.

In terms of payroll you already know the story, it's basically we reached an agreement with (inaudible). We are in the process of setting that up, trying to make it work and start to be active in the way we design and we present it to the market probably starting off next year. So these two things that were kind of negative in the past are, let me call it, less negative now compared to other quarters.

At the same time we are growing in lower-spread higher-quality loans. The portfolio I already mentioned the dynamics, good growth in corporate, in large corporate, in real estate and drops in revolving that generate interest rates. A 9% drop in the quarter in revolving that generates interest rates which means that you have pressure of course both on the NII and on the spreads. But I also mentioned that that's to be reflected in the cost of credit in the next quarter.

Obviously we are quite [diligent] in terms of asset quality issues that is something that has always been underlined. And as you may see the credit quality is clearly under control. Thank you.

We have two questions on the NII topic, one regarding spreads and the other one regarding the line others. The one regarding spread is the decreasing spread in the quarter was quite strong. You have mentioned that mix explains the decrease. Could you provide more details? What should one expect in terms of spread evolution going forward?

And the question regarding the line others is the following, this line has improved substantially in the quarter. How sustainable is this improvement?

Okay, thank you for both questions. Let me elaborate a little bit more in NII. As I mentioned just in the previous question the change of mix is strong. I mentioned the 9% drop in those revolving loans, that is a part of revolving loans that generate interest rates. A 9% drop in -- on the Q is quite strong. This is obviously something that we have been executing during the last quarters and now in this quarter was more intense. Obviously we don't expect this to be extrapolated to other quarters.

I would say that a general comment is that probably that change of mix or normalization of spreads is something that structurally, and I'm thinking here more in the medium and long-term, probably we will see on the Brazilian financial system going forward. Obviously a discussion here is the pace, the acceleration or not, the moment where this happens and here visibility is lower. But I would say that the trend is there to stay.

With regards to others, well, I think I already elaborate a lot on this, but basically the idea is that we are returning to -- in a volatile line, because we have quite a volatility in the P&L. We are returning to what we can call -- if we can call this an average of the history, we're returning to that average. Remember that we have an impact of the accounting of the Tier 1 instruments in the second. It was one of the reasons why we saw an extraordinary low level of others. And basically we are returning to what you have seen as an average in the previous quarters. I don't think there is nothing more or less extraordinary there.

We've received one question regarding the fee issue. The question is the credit card fee growth seems to be weak for a company that is still an entrant on the [acquiring] business and has integrated GetNet in the quarter. What explains this, how GetNet integration is behaving? Was there any major accretion related to the integration?

Okay, with regards to fees, we have several things there. I already pinpointed the different issues in the year on year and on the quarter. The year on year were already known. On the quarter we had this kind of readjustment in between lines. So I would underline that the business is growing, what I mentioned, the 5% q-on-q. So I would say it has more to do with accounting things and nothing more than this type of reclassification that we have to do. We thought of doing restatements but we thought we would make it more kind of less clear, so we still prefer to explain it as it happens.

In any case obviously in between GetNet, our [Actelencia] business and being one of our main products, credit cards, obviously the growth in this line will continue to be important.

We have one question regarding asset quality and the question is, asset quality has improved in the quarter. What is the perception for 2015?

Well, I also think I mentioned a lot about the credit quality issues. The general trend is quite positive either you take a balance situation, you take P&L ratios or whatever. So I think that both current and leading indicators are positive and pointing in the right direction. We expect the change of mix of course to be reflected on that evolution. And we'll continue to have a strong focus on credit quality and credit standards.

I would also invite you to see, I think it's on the annexes, no, Felipe. We have the vintages, the (inaudible), we have the vintages there and you see all of them are also pointing in a kind of quite a positive direction I think. I'm trying to find it, here, it's slide 34 if you want to look in the presentation in the annex. And you can see that individuals, corporate and even car finance that have a little bit of a peak in the previous quarter, they are all pointing down. So the trend is positive. We don't have any kind of concerns or anything that could mean a concern for us. So that's it, thank you.

We have no more questions coming through the webcast. If anybody wants to pose a question through the phone, please?

(Operator Instructions). As there are no questions, audio questions at this time, so I'd like to thank you and the Q and A session is over. And I wish to hand the call back over to Mr. Angel Santodomingo for closing remarks.

Okay, thank you very much to all of you for being there in this third Q results. I see that we have answered basically all the questions posted, any additional things please do come to us and we will try to respond. Thank you for being there.

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