Banco Santander Brasil SA (BSBR) 2015 Q3 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. Present here are Mr. Angel Santodomingo, Executive Vice President, 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 website, 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 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, CFO. Mr. Santodomingo, you may proceed.

Thank you. Good morning, everyone, and thank you for joining us in this Banco Santander Brasil's third-quarter 2015 results.

As you can see in the index in the table of contents, I will talk of the four main items in this results presentation, a short briefing on the macro side, and then I will summarize both results and final remarks.

Starting on page 4, we present there what the consensus in the Central Bank survey shows, expecting different dynamics for the main economic variables. Let me share with you some thoughts.

The Brazilian economy continues to go through an adjustment process. In this environment, the amount of measures implemented and/or announced by the government is considerable. Consequently, the Brazilian inflation has reached levels of clearly over 9% in 2015, well above the 4.5% target.

The fiscal measures implemented and/or announced, as I mentioned, indicate a clear change in the course of macroeconomic policies, which should lead to a better environment in the medium term. We think that Brazil is addressing the fiscal unbalances and will solve them over time. On the other hand, the process will probably be longer than initially anticipated.

Still, the adjustments are sizeable; the economy is being impacted. In 2015, current estimations point to a GDP contraction of 3%, with quarter-on-quarter recovery likely starting over the course of 2016. We believe that after these adjustments, the economy would be in a good shape to resume a trend of sustainable growth from 2017 onwards. Consensus expects lower inflation and lower Selic rates for 2016, which is notable.

And last but not least, it is expected that the exchange rate should converge to somewhere around BRL4 per dollar, a level that is already improving the Brazilian external account deficit to a more sustainable level. These two last variables, both inflation and current account convergence, are always early indicators of a positive change in the cycle.

Moving to slide 6, which is where we show our net profit, you can see -- we can see that 2015 third-quarter net profit totaled BRL1.7b, so an increase of 2% over the second quarter, excluding obviously the extraordinary results we obtained last quarter and continuing the positive trend of last quarter. Year to date, in accumulative basis, results amounted to BRL5b, growing 16% in relation to the same period 2014.

It is worth noting that the tenure to fully amortize the goodwill related to Banco Real purchase has been extended to 2017. As a result, the quarterly amount of goodwill amortization has been reduced in about BRL0.5b, which explains part of the increase of the quarter accounting profit that you may see in the slide.

Moving to the next page, page 7, here is the main highlight I would like to underline in this quarter and the comparison of being compared with previous quarters. I will highlight four main ideas.

First, the expanded loan portfolio increase by 3% in the quarter, possibly impacted obviously by the real depreciation. I remember here that the real depreciation was 28% in the quarter. Excluding this impact, the quarterly evolution would be flat. Funding from clients moved up more than that 3%. It moved up 4%.

Second idea. The Bank remains with a comfortable position in the sense of capital and liquidity, reflected in the strength of its balance sheet. BIS ratio stood at 15.8%, with a Tier I ratio of 14.4%. The loan to deposit ratio decreased to 91%.

Third idea. The net profit totaled BRL1.7b in the third quarter of 2015, as I mentioned in the previous slide, with a quarterly growth of 2%. I would like to underline here the positive performance of our NII, along with controlled costs and provisions following, obviously, the economic pattern that we are living in Brazil.

And finally, the fourth idea. Asset quality metrics are stable or deteriorating in a limited or controlled way, even in the face of a challenging macro environment. Over 90 days delinquency figure remained flat in the quarter, while coverage ratio reached 185%, maintaining the highest level since 2009, at the same time that the cost of risk deteriorated in 12 basis points.

In the next page, page 8, we show the main lines or the main parts of our P&L. I will elaborate further on on first revenues, net income increased 2% over the second quarter and 8% in 12 months, while commissions remained flat in the quarter and increased by 7% in 12 months.

Second point I will elaborate is allowance for the loan losses that totaled BRL6.9b in the first nine months of 2015, with an increase of 5% over the second quarter and at the same time a reduction of 5% in the year. The increase in the quarter reflects the economic background.

Third, general expenses remained flat in the quarter and presented a 3% growth in 12 months, well below the annual inflation. The quarterly evolution was merely impacted by the annual wage bargaining process.

Fourth, in the quarter, income tax expenses outgrew profit before tax, which grew 12%, as you can see, leading to an increase of the effective tax rate. This reflects the change in goodwill amortization as well as the fiscal expenses that we had during the quarter.

And five, as a result, net profit climbed by 2% in the three months and 16% in the year.

I will start going line by line in next page. We can elaborate on our NII evolution.

In the quarterly comparison, net interest income totaled BRL7.6b in the quarter, growing 2% over the previous quarter. NII directly related with client activities, which is credit plus deposits, continued to grow at a rate of 1% in the quarter, showing the effort we are doing with client related activities.

Market operation maintained a very good performance, and I would like to underline two ideas in this regard. First, clients NII, which clearly continues to grow on a quarter-on-quarter basis 1%, and credit spreads on the loan book that remained flat in the quarter, with the negative impact of the change in mix being offset by higher spreads per product, leading to that 8.5% flat figure in both quarters.

In the yearly comparison, net interest income increased 8% -- 7.7%, mainly explained by the evolution of line others. The credit related NII remained stable. Again, the spread by product evolution as well as volume offset the change of mix that we have been sharing with you during the past quarter, and also happened during this quarter.

Page 10 shows the loan portfolio. The expanded loan portfolio totaled BRL332b. The exchange rate in between the real and the dollar variation had a major impact on the portfolio growth metrics. Filtering out that impact, we see growth deceleration. The yearly evolution of the expanded loan portfolio grew 7% and the quarterly evolution is flat.

Going by segments, the large corporate segment is more impacted, obviously, by the exchange rate variation. The annual growth amounted to 6% (sic - see press release "6.9%"), 26% if we consider the ForEx in the period. In the quarter, this loan portfolio decreased, in fact, by 3%. Excluding the real depreciation, as you can see there, it grew 6.9%.

Going to individuals, the individuals segment presented a growth of 8% year on year, 2% Q on Q. The yearly evolution was impacted, remember, by the incorporation of the Bonsucesso portfolio. Business as usual, like for like, mortgages and payroll lending continue to be the main growth drivers.

Consumer finance. The portfolio decreased 4% in the quarter and 7% in 12 months, obviously reflecting a weaker car market. Finally, SME portfolio, which increased by 1% in the quarter and 2% in 12 months, which also reflects our already commented in previous quarters investments.

On the funding side, next page, page 11, you can see the evolution that reflects our focus on clients and on the linkage with them. Funding from clients totaled BRL288b, climbing almost BRL44.5b in 12 months and BRL12b in the quarter; remarkable figures.

There was an increase on reserve requirements in the quarter, as you can see there, substantially or mainly explained by two factors. First, the decision of the Central Bank of Brazil to remunerate all the reserve requirements by the Selic rates, discouraging the use of both vehicle and working capital loans as reserve requirement reduces. And secondly, there was also an increase of the base of reserve requirements.

Funding continues to outgrow the loan growth, that 4% I was mentioning compared with the 3% I mentioned before on the credit side, leading to an improved liquidity position, as we will see in a couple of slides.

Finally, total client funds, including assets under management, came to BRL512b, with a growth of 18%. 18% in absolute terms is BRL76b, also a remarkable figure, in 12 months, and 4% or BRL18b in three months. Assets under management totaled BRL187b, with a 16% increase in 12 months and a healthy 5% in the quarter.

Fees and commissions, moving to the next page. The total fee income totaled BRL8.7b in the first nine months, 7% higher than the same period of 2014 and flat quarter on quarter. In the quarter, cards, asset management and current account fees presented a good momentum.

So, dynamics in the wholesale business, which is quite understandable in the current environment, and insurance, influenced by the traditional first Q seasonality, led to a flattish overall fee evolution in the quarter.

In terms of annual growth, insurance, current accounts and fees from lending operations explain two-thirds of the annual growth in fees of almost BRL600m, or 7.1%.

General expenses, in page 13, in which we give a breakdown of expenses, excluding depreciation and amortization, increased 4% in the quarter and 3% in 12 months, well below annual inflation levels, which has been our continuous message with you. The quarterly change was impacted by the annual bargaining process and the yearly growth was impacted by the non-like-for-like incorporation of GetNet and Bonsucesso.

We continue to deliver on the cost target. As we have been commenting during a long series of quarters, costs continue to be controlled well below half the inflation. In current depreciation and amortization, total expenses remained flat in the quarter and moved up by 3% in 12 months, again well below annual inflation. The drop in depreciation and amortization in the quarter results from the impact over time of the software and payroll asset impairments that were already reported in the second Q of this year.

If we move to quality, on page 14, we may underline that the NPL ratio over 90 days fell by 47 basis points in 12 months, with an improvement in both the individual segment, 55 basis points, and the corporate segment, 24 basis points.

The 15 to 90 early arrears or early indicator NPL ratio decreased by 23 basis points in the quarter and by 3 basis points in 12 months. In the quarter, NPL for companies led the movement, as I have mentioned.

The real devaluation impacted the figures, as well as the traditional also seasonal effect on third quarter. Excluding this ForEx effect, the third one, in the quarter, 15 to 90 days NPL for companies and for the total portfolio would have been flat, flattish.

In the quarter, the NPL ratio over 90 days remained flat, with individuals increasing 24 basis points and companies decreasing 13 basis points. So, the behavior for companies was again influenced by the devaluation of the real. Excluding again such effect, NPL for companies would have been flattish and the total 90-day NPL ratio would have increased 15 basis points in the quarter.

We believe that, given the economic background, the asset quality metrics showed that they are under control. I would like to underline that we have been sharing -- what we have been sharing in recent years -- quarters, sorry. We expect a gradual and controlled asset quality deterioration, reflecting the country's economic reality.

Last but not least, on this slide, the coverage ratio reached a remarkable 185%, remaining at very affordable levels.

In the next slide, where we move to P&L, in terms of allowance for loan losses, they came to BRL6.9b in the first nine months, presenting a decrease of 5% due to the better behavior of early quarters, while in the quarter they increased 4.7%.

Cost of credit dropped on a year-on-year basis, again for the same reason, 60 basis points, and increased 12 basis points in the Q-on-Q comparison. This evolution currently reflects my earlier words about quality performance. We see gradual deterioration on the margin, but limited and controlled.

Moving to the last part of the presentation, in terms of performance ratios, good evolution, I would say, in the efficiency ratio that moved 200 basis points -- 215 basis points, in fact, in the quarter down to 48%. The recurrence ratio reached 68.1% in the quarter, also increasing 38 basis points, and the profitability ratio, both over assets and equity, remained flat in the quarter.

Remember that we are comparing obviously with a second Q in which we exclude the more than BRL3b of extraordinary results that we presented to the market.

Liquidity and capital ratios on the next slide, finally. The Bank maintains a strong position in terms of liquidity and solvency, with stable funding sources and an adequate funding structure. The loan-to-deposit ratio continues to improve and stood at 91% in September 2015.

The BIS ratio decreased to 15.8%, mostly composed of Tier 1 at very comfortable levels. On the quarter, the ratio decreased 223 basis points. Mainly to remember that we declared a BRL3b dividend coming from our extraordinary results. That's one of the main reasons, and also obviously the increase of the loan portfolio and other assets due to the devaluation of the Brazilian currency in the period.

Finally, in the last slide, as a conclusion, I would like to share with you my main thoughts. Our third-quarter 2015 main messages are basically two.

First, regarding results, revenues continue to present a positive trend with general expenses that continue to evolve well below inflation. Allowance for loan losses presented a moderate growth, reflecting the current economic environment. Balance sheet remains strong, both in terms of liquidity and solvency.

And finally, I would like to remember what I said about dividends. We declared dividends amounting to BRL3b, coming from the extraordinary gains that we obtained in the second Q 2015.

The second idea is that we continue to invest in our retail franchise. Results are visible in terms of increased client satisfaction and reduced complaints at a rate of 20% per year. Also, we continue to invest in building a state-of-the-art multichannel platform, improving on digital channels, as we commented in the investor day we did in September.

We are very confident in the customer centric model we are following, a model designed to provide sustainable and more resilient long-term results.

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

(Operator Instructions).

The first question we received came from Philip Finch from UBS. The question is in the third Q did you recognize any gains on tax revaluation arising from the 5% rise in social contribution? If not, why not?

And question number two is the effective tax rate increased in 3Q 2015 to reflect a higher social contribution. From 4Q 2015 onwards, what should we assume as a normalized tax rate?

Thank you, Philip. The answer to the first question is yes. We recognized approximately BRL2b due to the change you were mentioning, and we offset basically all of it with the write-off of those carry-forward items. So, net/net, it was up -- it was basically netted.

The effective -- the question on the effective tax rate was, sorry? That it climbed and what we should assume. The normal evolution of the tax rate, as we have been saying, that has reflected in the change in the CSLL from 15% to 20%, we should expect that to maintain an upwards trend. And we will optimize that with the evolution of both the amortization of the goodwill and the different parts, as I already explained on DTAs, etc. Felipe, do you want to mention the --?

Yes. We gauge that, going forward, the effective tax rate should hover around 13% to 18%. We have ways -- you can see that the amount of balance DTAs that we have amounts to about BRL2b, and also the reduction in goodwill amortization increased the room to increase the payment of interest on capital. So, overall, the effective tax rate should hover in between 13% and 18% going forward, in average.

The second question came from Guilherme Costa from Itau BBA. Good morning. My question is about the sale of loan portfolio. We observed that you sold about BRL238m of loans during the third Q 2015. Could you comment what would be the impact on your NPL ratio if you had not sold this portfolio? Furthermore, was the portfolio 100% provisioned?

Yes. Let me comment briefly my thoughts here and Felipe can give you a little bit more detail.

I would say that first the selling or not selling of portfolio in general terms is a kind of business-as-usual activity. So we do obviously optimize. Our policy is that we have a trade-off in between managing our services or obviously selling it to external parties, and we measure that. And when we optimize the internal usage, we do it internally, and when we see that it makes -- from the financial point of view, it makes sense to sell to external parties, we do sell it externally.

When we sell portfolios, they are totally written off or they are 100% provisioned. So, we have not considered certain portfolios are not 100% provisioned.

On the impact on the quarter, Felipe can elaborate, but basically I would say that the impact that we have seen in the quarter is marginal. We are speaking of BRL240b of portfolio. Now, Felipe.

Yes. So basically you can make an easy calculation, which indicates that this sale would have impacted NPLs in about 10 basis points, which is not critical for us. Certainly, the impact on the results in the quarter was relatively marginal.

Victor Galliano, Barclays.

Hi. Yes. Can you give us some more -- I hope you can hear me okay. Can you give us some more detail on the capital situation? Was that primarily really because of the depreciation of the real that we saw the capital come down? I am sorry. It was not a very good line whilst you were giving the discussion.

Victor, thank you. I will try to clarify. I mentioned it in my presentation. I will try to clarify. I said that we had 223 basis points of impact of capital. Out of 100 of -- out of that is the extraordinary gain that we directed to dividends. Remember that we presented or we announced, I think it was at the end of September -- no, during the month of September, we announced BRL3.05b dividend, and that consumed, as said, around 100 basis points.

Then you have business as usual. These weighted assets' growth were obviously impacted also by the ForEx situation, due to our exposure in non-real loans. And finally, also, you have in the rest of the assets the impact of the ForEx that has also meant additional consumption of capital in the month. And please also remember that we have mark-to-market impact due to the different portfolios that we hold, in between them, the ALCO portfolio, for example.

So, if you add all that, I think I am speaking of 80%, 90%-plus of the variation of the capital in the quarter.

Okay. So 100 bps from the dividend, the FX depreciation, the FX portfolio, the depreciation impact would have been another 50, 60, and most of the balance in mark-to-market, is that about right?

I think we are close to the reality. The ForEx hits you in different parts, so it is not an easy one to individualize the ForEx, but more or less it's what I am saying.

Okay. Thank you.

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

Thank you very much for your attendance. It looks like we have had some technical issues. I don't know if we have been able to transmit the message fully. If this is not the case, I will clearly invite you to contact us through the investor relations department in the parts that have not been heard in the right way, if this is the case. I just heard Victor saying that he didn't hear very well, so that's why I am making this comment.

Again, thank you for the presence and we remain at your disposal for any doubts that you may have.

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