Banco Santander Brasil SA (BSBR) 2014 Q4 法說會逐字稿

Good morning, and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil SA's results for the fourth quarter of 2014. Present here are Mr. Angel Santodomingo, Executive Vice-President and Chief Financial 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, at 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, 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 on the information currently available.

Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions, as they refer to future events, and hence depend on circumstances that may or may not occur.

Investors must be aware that general economic conditions, industry conditions, and other operational factors may affect the future performance of Banco Santander, 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 and CFO. Mr. Santodomingo, you may proceed.

Good morning, everyone; and thank you for joining us in Santander Brasil's 2014 results conference call. As you may see in the index, in the table of contents, I will try to cover in the next minutes, basically, an overview on the macro-scenario; the highlights of these fourth-quarter results; the evolution of the quarter; and the commercial activity; and finally, I will try to make final remarks with regards to what we presented today.

In page 4, where we speak about the macroeconomic scenarios consensus, as you know probably market expectations have clearly evolved reflecting the last government measures announced during the -- this January, in January, 2015.

Market expects 2015 scenario, characterized by low levels of activity, and inflation above the target, which will require probably higher interest rates.

For 2016, it is expected a gradual economic recovery with GDP growth around 1.5%.

The market consensus points to interest rates around 12.5% in 2015, and 11.5% in 2016, with an exchange rate that it is expected to around -- or to go around BRL2.8 per $1; and BRL2.9 per $1 for the next two years.

In this scenario we continue to believe that Brazil will overcome the short-term economic challenges, specifically with the measures announced by the government. Obviously, for us, the country continues to be a good opportunity growth in the medium and long term. We expect 2016 and 2017 to be quite positive years.

Moving to page 6, where you have the highlights of this quarter and the comparison versus the previous quarter, I would like to highlight the main messages of these results.

First, the expanded loan portfolio increased by 6% in the quarter, with growth in all segments for the first time in the last eight quarters. It is the first time that we saw this behavior -- this positive behavior in all segments.

Funding from clients moved up by 4%.

Secondly, the Bank remains with a comfortable position in terms of capital and liquidity, as has been the case in the last quarters, reflected in the strength of its balance sheet.

The capital ratio, the BIS Ratio, stood at 17.5%, out of which 16.1% is Tier 1.

The LTV, the loan-to-deposit ratio, reached 98%.

Thirdly, with regards to results, on your right, on the upper side, total revenues grew by 2% in the quarter, chiefly due to the upturn in fees and commissions, that you may see there; that climbed nicely.

Net interest income remained flat in the quarter.

Allowance for loan losses fell by 14% in the quarter, positively impacting net interest income net of provisions, net of allowance for loan losses, which climbed by 8% in the period.

General expenses remained under control increasing by 3% in the quarter, and continuing to grow well below the 12-month inflation as has been repeated during the quarters and during the year, being one of our main objectives.

Net profit totaled BRL1.5 billion, BRL1.521 billion exactly in fourth quarter 2014, growing 4%.

Finally, it is worth emphasizing that the asset quality on the bottom part of the slide continued to improve. The delinquency ratio for loans overdue by 90 days fell by 38 basis points in the quarter, while the coverage ratio reached 180%; its highest level for a long time.

These figures were accompanied by the good quality of the leading indicators, the 15 days to 90 days, which I will cover later on.

If we skip to page 8, where you have the quarterly evolution and the yearly evolution of our net profit. As I said net profit in the quarter totaled BRL1.521 billion, 4% up -- 3.9% up, in the quarter, while the annual profit stood at BRL5.8 billion, 2% higher than in 2013. The quarterly increase is also the highest out of the last couple of years.

Next page, in page 9, so the main results of our result -- the main lines, sorry, of our results.

Starting by revenues. As I mentioned net interest income, NII, remained flat in the quarter, and fell by 7% in 12 months. The main driving reasons for this evolution have continued to be what you heard from us in the previous quarters, mix change and the capital optimization plan that we did in January. There is no news there.

Commissions grew by 8% in the quarter and in 12 months. The latter, as you know, adjusted by the specific impacts in order to make a like-for-like analysis. All in all, you have an NII that is flat in the quarter and total revenues that increased by 2% in the same period.

Provisions fell by 14% in the quarter. And if you analyze the full year, 2014, they totaled BRL9.4 billion, going down 20% versus 2013, and almost 30% if we compare to 2012, where we reached BRL13.2 billion of provisions. This reflects our lower risk production growth.

The improvement was also reflected obviously in the cost of credit, which fell by almost 70 basis points, 66 basis points, in the quarter, and 120 basis points in 12 months.

General expenses, as has been the case also during the last quarters, almost eight quarters, in fact, remained under control with annual growth of 3%, as I mentioned well below inflation, reflecting our efforts to improve productivity and efficiency. In the quarter, general expenses moved up also by 3% due to seasonal impacts.

As a result of all what I mentioned, our net profit climbed 4% in three months.

Going line by line, we have in the next slide the evolution on NII. NII, the total of the fourth quarter was BRL7 billion remaining stable over the previous quarter.

The decrease in net interest income from credit-related activities was offset by deposits and others. This 1% drop in credit-related NII is explained by the spread compression that resulted from the change of mix as you can see on the right side of the slide. The spread impact per product within the same segment was actually positive. So the price evolution is positive. The mix is what is explaining the change of NII, or the drop in NII.

The change in mix can be made tangible with the following examples. Mortgages, for example, outpaced the growth of other products, and the drop in balances observed in the quarter in what we call revolving products. Another example is that large corps clearly outperform other segments.

In the annual comparison, in the yearly comparison, NII reached BRL27.6 billion with a reduction of 7%. This is partially explained by the BRL1.2 billion of credit-related NII reduction, which again is related with a mix-led spread compression; and partially also explained by the BRL1.1 billion reduction in the so-called line others.

Approx. two-thirds of this reduction in this others -- in the line others comes from the general capital depreciation plan. If we exclude that effect NII would have fallen around 4.5% in 12 months instead of the 7.3%.

If we move to the next slide, where we saw the loan portfolio. We think that we experienced another quarter in which the loan portfolio growth accelerated with growth, as I mentioned, in all segments in a positive evolution.

The expanded loan portfolio totaled BRL310 billion, with an increase of 6% in three months, and 11% in 12 months, positively comparing with the private peers sector.

Even excluding the impact of the exchange variation, if you want to adjust by the ForEx, the loan portfolio recorded a healthy growth in both periods. The large corporate segment continues to be one of the main growth engines, climbing by 9% in the quarter, and 22% -- an expressive 22% in 12 months.

In the individuals' segment, mortgages have to be highlighted moving up by 10% in the quarter, and 36% in 12 months. The individuals' performance continues to be negatively impacted by payroll loans, which also we mentioned in previous quarters. Excluding this product the segment would have grown by 3% in the quarter, and 8% in 12 months.

Consumer finance, another point to be highlighted. This portfolio recorded just a 1% upturn in the quarter, and a 3% reduction in 12 months. But it has to be explained, because despite the annual decline, Santander has clearly outperformed the market. But, as you know, it's in a declining process, and we are in a leading position in vehicle finance, with market share strongly above our natural market share.

The SME portfolio grew for the first time in many quarters by 2.4% in 4Q, showing a positive trend, thanks to the Bank's efforts to improve over time its platform in this segment.

In this year, in 2015, we expect to upgrade even further this platform and this segment will tend to evolve positively. As you can imagine, this segment is strategic for the Bank.

On the funding side, in page 12, you can see the evolution that reflects our focus on clients and on the linkage with them. The liquidity buffer reached its highest level in December 2014.

Funding from clients, as you see there, totaled BRL252 billion, climbing almost BRL30 billion in 12 months; and BRL8.5 billion in the quarter.

The 12-month evolution outpaced loan portfolio growth in the same period, which resulted in a loan-to-deposit ratio that I mentioned before, at 98%; reducing almost 5 percentage points in 12 months, and a similar figure, a flattish figure, compared with the previous quarter.

If we go to total funding, this means including assets under management, the total came to BRL450 billion with a growth of 16%, which means BRL63 billion in the year; and, 4% in three months, or BRL16 billion. Both figures that are quite important, as you can see.

Assets under management total BRL162 billion (sic - see slide 12, "BRL164 billion"), with a 13% increase in 12 months and 2% in the quarter.

Moving to fees, in the next page. You can see that the total fee income totaled BRL11.1 billion in 2014, with an increase of almost 4% in the year.

As I have mentioned in the introductory words, and also in previous quarters, the annual growth was impacted by the change of the recognition of life insurance policies, and by the sale of our asset management activities.

Excluding these effects, fees and commissions climbed what we call the normalized total, an 8% in 12 months, a like-for-like comparison.

In between the different lines, I would underline insurance commissions that fell by 1% in 12 months; again hit by this kind of non-like-for-like issues. If we exclude this position, they would have increased 8% in 12 months, which is what reflects the real business-as-usual evolution.

In asset management, again, with the same type of like-for-like analysis, revenues would have grown 10%.

As I mentioned in the quarter, total commissions grew 8%, primarily fueled by higher commissions from insurance, cards and lending operations. The 33% increase in insurance fees reflects the concentration of policy renewals in the quarter.

Moving to general expenses, in page 14, we give our breakdown of them. Total expenses, excluding depreciation and amortization, increased by 4% in the quarter and 2% in 12 months. Including depreciation and amortization, total expenses moved up 3% in the year and in the quarter.

So, it is worth underlining that in 12 months the expenses have continuously evolved well below inflation.

The quarterly upturn was mainly due to the perimeter impact, GetNet, and the collective bargaining agreement. The good performance observed in 12 months, with the mentioned evolution well below inflation, is a result of our productivity and efficiency programs, which will continue throughout this year. We still expect costs to grow below inflation.

On page 15, next page, you can see the quality indicators or the delinquency indicators, which continue to reflect the quality improvement of our loan portfolio.

The NPL ratio over 90 days fell by 36 -- sorry, 37 points, almost 40 basis points in 12 months, with an improvement in both the individual segment, 26 basis points; and the corporate segment, another 36 basis points.

In the quarter, delinquency fell by 38 basis points, also with an improvement in both mentioned segments. The leading indicator, the 15 to 90 days NPL ratio, also fell by almost 20 basis points in the quarter.

And finally, the coverage ratio reached 180%, which is an increase of 10 percentage points in the quarter, remaining at a very comfortable level and, as I mentioned before, at a historical level. We expect our portfolio to continue growing while maintaining its quality.

In terms of allowance for loan losses, in next page, they came to a total of BRL9.4 billion in 2014; a decrease of 20% versus 2013; and another 10% versus 2012. As I mentioned before, this amount reached BRL13.2 billion in 2012, which compares quite positively with the BRL9.4 billion that we registered in 2014, with a total drop of almost 30%.

Cost of credit reflects this improvement as well as the previously mentioned change of mix, representing a decline of 120 basis points in 12 months, which compares positively with the 100 basis points that you saw, the drop that you saw in the credit spread, reflecting what I mentioned, the change of mix.

Performance ratios, in next page. You can see that the efficiency ratio stood at almost 54%, with an increase of 300 basis points in the quarter.

The recurrence ratio reached 67%, with an improvement of another 280 basis points in the same quarter.

Finally, return on equity. On average, equity reached 12% -- 12.1% in fourth quarter, increasing 45 basis points over the third quarter, and a remarkable 160 basis points in 12 months if we compare 4Q 2014 with 4Q 2013.

In the accumulated 2014, the return on average equity improved another 55 basis points. So, as you see there, we have positive trend.

Finally, liquidity and capital ratios. As I mentioned in the introduction, the Bank maintains an adequate position in terms of liquidity, with stable funding sources and an adequate funding structure.

The loan-to-deposit ratio closed at 98%, declining almost 5 percentage points in 12 months, and with a small increase in the quarter. The 12-month improvement reflects a good funding performance, being loans totally funded with deposits from clients.

The BIS ratio stood at 17.5%, I mentioned in the introduction, which is, as you already know, basically composed of Tier 1 instruments. The 128 basis point reduction over the previous quarter was, essentially, due to the increase in credit risk, as a result of the expansion of the loan portfolio, client-orientated operations. In any case, we expect an important part of this to reverse in first Q due to the end of year operations.

As a conclusion, in the last slide that I wanted to present to you, the main messages that I would like to share with you are the following.

First, the loan portfolio maintains a recovering trend with growth in all segments, with a change in the risk profile for the better, leading to an improvement in the loan portfolio quality. This improvement has been reflected in the spread net of risk, as mentioned in previous quarters.

Also, as we mentioned in the past, in the previous quarters, 2014 has been a year of pressure on our revenue line.

In addition to the compression of spread that I have already mentioned, mainly coming from our change of mix, we also had the impact of the capital optimization plan of last January; January 2014, obviously.

However, revenues are already showing a positive trend, with fee and commissions income recording healthy growth.

Third, general expenses remain under control, with annual growth well below inflation. The productivity and efficiency plans are generating the expected results.

But, once again, the most important point is to continue concentrating on transforming the Bank into a client-focused organization. We continue to invest in between BRL3 billion to BRL5 billion per year, and we aim to maintain these investment levels going forward.

In this direction, we are working on our commercial model, that you probably have heard about it, focusing on sustainable growth. At the end of 2014, we launched the new commercial model, CERTO, which aims to simplify processes, improving service level, and increasingly devoting more commercial time of our branch network teams to activities with clients; those initiatives that we have shared with you during last year, like our SME and individual segments strategy, with commercial models and organic movements, such as the acquisition of Superbank, Bonsucesso, GetNet and others, will prepare the Bank for a stronger performance in 2015, which we'll strive to obtain and to present to you.

Management's priorities are to continue delivering results, while we improve the performance on the upper part of the P&L, as mentioned during the previous quarters.

Thank you and we are now ready to answer any questions you may have.

(Operator Instructions).

Regarding NII, we received one question from Saul Martinez, JPMorgan. The question is can you discuss why your lending margins continue falling, even as lending spreads have been increasing at the system level? And your competitors, who have also had mix shifts towards lower-risk margin products, have seen stable to rising financial margins since 2Q 2014.

Okay, thank you, Saul, for your question. Well, as you mentioned in the question, yes, lending margins continue to fall. But they are, basically, and when I speak basically I am speaking of more than 80%, between 80% to 90%, of the fall explained by the change of mix.

For example, if you just analyze the quarter, we had a remarkable drop in what we call revolving, in the rotativos segment. We had a drop of 9%, which explains a lot of both the spread and the NII evolution.

That change of mix is also reflected, as I mentioned, in the cost of risk. And it will continue to put pressure in the P&L, as we move towards less spread and less-risky products or as the economy moves into less spread and less-risky products.

Probably -- I always mention this, probably the best way to analyze this evolution is either the NII net of provisions, which climbed 10%, or 8% or the estimate of risk. Whatever, it's the same concept in terms of ratio or in absolute terms.

Compared to this 10% that I was speaking drop on revolving, on rotativos, you have expressive growths like 36% in real estate, in mortgages; like what we presented in terms of SMEs -- in companies, and specifically large corporates. They tend to have lower spreads, lower cost of risk.

So we remain comfortable in terms of evolution. We are confident in terms of revenues and in terms of what we are building of both relationships and the type of growth that we are working going forward.

Regarding asset quality, we received another question from Saul Martinez, JPMorgan. The question is: can you discuss your exposure and the risks to credit quality related to Lava Jato Car Wash, a weakening economy and possible rationing? How should we think about this? Do you see a risk in the improving credit quality you have been showing?

Okay, thank you, Saul, again for the question. I will say here several things, because we tend to have in these things a lot of noise around and probably things get to be a little bit more [factual].

Let me try to address the three points you mentioned. The three are the weakening economy; the impact of the rationing of the water situation; and the Lava Jato impact or the Lava Jato exposure.

In terms of weakening economy, well, you saw the consensus. Our idea is that the economy obviously this year will perform clearly in a worse trend compared to 2014, which means that volume growth will not be -- how can I say this, remarkable. Volume growth will remain in the single digit, obviously. I'm speaking of private banks. And we are totally conscious of this situation.

We believe that it is probably a year that the activity will be focused more on the spreads than volume. But this does not mean that the capacity of growth disappears at all. We have gaps compared to competitors in different segments to close. I'm speaking of BNDES, I'm speaking of [rural], we have good performance in segments like the car financing.

We have to climb up on the payrolls, both through the internal channel and through the external with Bonsucesso. GetNet has to be also a successful story and is in the process of being both by itself and as a commercial tool.

We are launching this SME initiative I mentioned in the presentation. We are launching this -- well, it's already launched. We are launching this commercial new model, in which we optimize commercial activities and time with the clients.

Let me give you a very short example. We already have installed it during the last, basically, couple of months, because we started to implement and to announce by early December.

And, we have seen an increase of client contacts, more than 50%; an increase of sales or activities in different or specific products, around 20% to 30%. And this is just because you organize what I mentioned, the time and the way things are being done in your branches or in the different channels.

For us, it's also an opportunity the launching of the different channels. I'm speaking of mobile, Internet, ATMs, etc. So, yes, the economy is weakening. I think the government is taking the right measures that are being announced. So we are moving into a territory in which probably the economy will digest those measures that are totally needed for a brighter -- clearly brighter 2016/2017 and onwards.

Second point on your question was the possible rationing. Well, we have made, obviously, our estimations, our calculations, etc., in terms of what the water situation may mean.

I would like, first, to address a couple of points of information and then I will answer your question in terms of impact in the economy.

The first thing is that 82% of the consumption of water in Brazil is done by agricultural activities, which have a weight of 4.5% in GDP.

The second thing, and specifically I would like to share with you, is that industries tend not to be concentrated in one region, while the water situation that is leading today in Brazil is clearly concentrated in the Sao Paulo area.

For example, you have the beverage sector and they are present in different areas of the country, and what the analysts say is that they can move production from one side or the other.

Or, for example, the food sector, which obviously specifically the protein producers tend to be affected by water shortages, 20% of the production -- only 20% of the production is concentrated in the southeast region.

Last example I'm going to give, because I don't want to here, today, to give a glass of water consumption, for example, 70% of Sao Paulo industries, which represent 30% of GDP, 70% of them use recycled water; and this is 50% of the consumption in the Sao Paulo area.

With all these, well, if we go for a rationing -- and this is a pure estimation, but if we go for a rationing of 15% to 25%/30% probably you have two impacts. One is inflation, obviously, around 0.1% or 0.2% per quarter that the rationing stays. And the second one is GDP. And we estimate probably somewhere around 0.4% of GDP as a negative impact.

So all in all, in terms of activity or in terms of growth of the loan portfolio. As you can see, obviously it will impact, but probably less than what is being said around.

Finally, the Lava Jato, the car washing question you were mentioning. As you can imagine, we have identified, analyzed in depth, and implemented and revisioned all our risk policies where, if they were necessary to do.

We remain comfortable with our exposure. It's something that the management is following, obviously. I could not say another direction. But, as I mentioned, we remain fairly comfortable with this exposure.

Probably, the discussion here is more than quality, because obviously there will be impacts. But we feel, and what we have mentioned, that they are totally absorbable. But probably the question is more growth than quality. There will be -- I don't know if more than sectors, companies in which growth will be either limited or low, depending on their risk profile; as could not be in other way.

So the discussion in this case, once all the media noise, etc., goes through, it is that sense. I've made an answer quite long, I guess, but I wanted to clarify.

A question from Timothy Lambert from Loomis; what are Santander's loan exposure to oil and gas and construction sectors?

Well, I think we -- the type of public information that we give is already input in our website. So you have the different the exposures that we have, organized in the way that we publish them, in terms of sectors and segments.

In terms of the different activities that we have covered and exposure to this, what we analyze specifically more than the full exposure, etc., is within them name by name, obviously, the top x%, the concentration we think then what is building, what is non-building related, what is services, etc. What I said before, we remain comfortable in that segment, in that sector and I refer to my previous words to Saul's question.

A question from Andre Riva from GBM; a follow-up on the NII question. What would be the target portfolio mix for the Bank? In which level are we supposed to see the mix stabilize so we could expect spreads to gradually increase, or stop falling at least?

Okay, yes, let me -- thank you, Andre, for your question. Let me elaborate a little bit what we see as evolution and how this business.

If you analyze today the loan portfolio, you have basically one-third in what we call the pessoa fisica, the individual. You have a little more than one-third in large corporates, and the other one is more or less half and half in between consumption, basically car financing, and SMEs.

What are the trends that we will probably see? We expect SMEs to continue on a positive trend, so they should gain weight within the portfolio.

Within retail, I think what we have seen will probably be a profile of behavior, going forward. Specifically I'm speaking of real estate related, mortgages, etc., or more-collateralized lending versus the non-collateralized one. And, as I mentioned before, I expect also the payroll loan segment to evolve more positively, compared to 2015.

Large corporates are a little bit a tricky question, because, as you know, this depends on their eagerness to use the capital markets, or the financial system.

In any case, we have been delivering good growth in this segment in the past, and I do not see a reason why we should not see this in the future. Probably, we may see activity in terms of deals etc., and that will be reflected more in fees than in NII.

But at the end of the day for us which the main question is revenues, so total revenues per client and relationship linkage, etc., it will be about -- we will reach the same target.

And finally car financing, well you know how the sector looks like here, we are clearly outperforming, grabbing market share, we have market shares around 18% to 19%.

As I mentioned in the presentation well above our natural market share. Probably here it is more important environment than the individual relationship.

So I would not expect here very good news in terms of total volume, but the profitability of this unit is clearly something that is evolving very positively and we expect it in the same way.

So all-in-all, well, as you know we do not give any specific guidance, but I would not expect in terms of volume that we differ a lot from the private sector here in Brazil, probably focusing more on spreads and profitability, and with a little bit of change of mix being more positive on what I mentioned: on SMEs compared to what we saw in 2014.

Francisco Kops from Safra. Considering the market share increase in acquiring, as well the increase in cost that you show in credit cards, why card revenues are growing slower? Is there a pressure in MDR?

No I mean here we have a little bit of a mixture of differences.

You have first the kind of the behavior of the market, and probably you have heard that Christmastime was not the best of the last years. But at the same time, on our -- in our case we have the kind of the first steps of an already-established company, which is GetNet, and all the acquiring activity and the commercial activity that goes around it.

As you mentioned, we are strongly gaining market share there. But we are speaking of a company that this if you analyze the full business cycle of this company, it's clearly in early stages, no, in which you tend to invest, you tend to increase market share strongly, as we are.

We are a clear gainer of market share there, but you have to make it more profitable; you have to improve efficiency; you have to improve revenues; and you have to go into the right -- in the right direction.

So I would say today our acquiring, and I think I have mentioned this in previous quarters, our acquiring offer is a leading one, leading meaning at least 12 months ahead of the next competitor, and this is a strong commercial tool for our different areas. I'm speaking of obviously of SMEs; I'm speaking of companies.

So I would say that it is more a question of how this is being developed, and is being integrated in our commercial activities.

In any case in the quarter, as you probably saw, card commissions grew 4.8%, almost 5% if I remember correctly, which I would say that it is a nice growth just for a quarter.

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

So thank you very much for your presence again with us. We hope we answered all your questions. Obviously, our investor relations team remains totally open for your questions. We look forward to presenting you in three months' time our Q1 results. Thank you very much.