Banco Santander Brasil SA (BSBR) 2015 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. Present here are Mr. Sergio Rial, Chief Executive Officer; Mr. Angel Santodomingo, Executive Vice President, Chief Financial Officer; and Mr. Luiz Felipe Taunay, Head of Investor Relations.

(Operator Instructions). The live webcast of this call is available at Banco Santander's investor relations website, www.santander.com.br/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 Brasil, operating and financial projections, and targets based on the beliefs and assumptions of the Executive Board, as well as any 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 Brasil, 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. Please, Mr. Santodomingo, you may proceed.

Good morning. Thank you. This is Angel Santodomingo, CFO of Banco Santander Brasil. Thank you for joining us in 2015 results conference call.

Firstly, I would like to turn the call over to our CEO, Mr. Sergio Rial, who will introduce and summarize our main messages. Then, I will come back to present our view about the economic situation and the results of the year and fourth quarter. Sergio.

Very good morning. It's a pleasure being here with all of you. Thank you, Angel. Thanks for being on the call.

I would characterize the year 2015 around the following messages. First, I don't need to say, there has been certainly a challenging macro environment. And I think the Bank has initiated a very preventive action plan, particularly in terms of NPL since 2014. So we're glad to report unchanged NPL levels in the fourth quarter, hardly any deterioration when you look at, from a provision level, 2014 to 2015. I believe that to be a highlight, in light of the macro environment.

Second highlight, double-digit net profit. Despite the environment, the Bank has been able to post an important double-digit net profit, a record year in terms of dividend payment; all of which, I think, reinforces the notion, hopefully, to shareholders of our commitment to value creation.

Equally important, and perhaps the most foundational piece of our strategy, is that the experience of the Santander customer has improved. We have paid a lot of attention around quality, around accessibility, digital; making customers a lot happier with the Bank as they interact with the Bank through different channels.

On the wholesale side, I think we're also glad to report that, despite the challenging environment, the Bank has been able to continue to deliver an integrated model, very, very, focused on the upper end of the corporate segment in Brazil; but also the middle segment, where I think we have shown particular expansion and growth through our merchant acquiring business, GetNet. That's another important growth pillar that I think we have been putting attention, and I think that attention will continue for the years to come.

Equally, and in terms of new growth pillars, I would also mention our payroll business, what we normally call locally Consignado, through our JV, Bonsucesso, but also inside of the Bank; and the leadership that we still have, and will intend to keep it for the years to come, in the financing side.

Despite a challenging auto-financing market, our financing business has posted a very good profit level with very low levels of delinquency, which shows that most of our models have been historically tested. And I think we know the levers we need to manage.

All in all, a solid year. And despite all I have mentioned, I think we're also proud to show that we paid quite a bit of attention on cost management.

The Bank will post, at the end of 2015, of last year, real savings of 15% in the last two years. So, not an insignificant goal, achievement. And if we compare, if we would deduct some add-ons that I think we have added along those years, GetNet, and the payroll business, Bonsucesso, that I mentioned, the savings would have reached even more than 20%.

So cost management remains an important attribute of the Company, transcends the CEO. It is ingrained in the culture. And that's something that I think we want, and will continue paying attention.

Now, talking about the Group, I think the intention of this slide is the relevance of Brazil to Santander in terms of earnings. But, more importantly, is that despite the significant deval that I think we have all seen in the real, Brazil still remains an important piece. But not so much because of the number, but because of the quality of earnings continues to improve.

I think the earnings of Santander Brasil have improved. And I hope -- I think we also, after now two years, start giving the market the reassurance of consistency; being a lot more predictable; and ensuring that what we are saying we are actually doing, and deliver to all of you.

With that, I will pass the word to our CFO, Angel. Angel?

Thank you, Sergio. Turning in to the macroeconomic situation, the market is recognizing that the adjustment process in the economy has been longer than previously expected [in between] other factors, due to the confidence level and uncertainties that in the political scenario. But we must say that the economy is being [adjusted].

We have a GDP cumulative drop in three years close to 10 percentage points, and monetary policy and currency are already playing their roles; all this with a fiscal consolidation in process.

In 2016, we believe we will see a lower and more controlled inflation; a gain in competitiveness; and a clear improvement in clear accounts, that we have already started to see. These three items together would usually lead to a change of cycle.

Thus, from the second half of 2016 onwards, and going in to 2017, we could see a slight improvement in the economy; not just because of a better shape of the above-mentioned factors, but also due to a diminished risk perception, and probably lower market volatility. In this scenario, we will observe economic growth already in 2017.

Going already in what are in the highlights of 2015 results, some of them have already been outlined by Sergio. But I would draw your attention to the fact that despite the macroeconomic backdrop, as was mentioned, we registered a strong positive growth, which was reflected also in a strong over performance of our stock.

Numbers that have supported this movement are net profit reached BRL6.6 billion, up 13%; net interest income and commissions climbed around 7%.

Leader in cost control, we continue to be leaders there with the cost base increasing well below inflation, in fact, close to zero in like-for-like terms.

Credit portfolio was up close to 7%, while funding was up 14%, improving our liquidity position.

NPL remains stable at 3.2% in an environment that is putting pressure there, with a strong increase in coverage ratio. We are close to 200% in coverage, and will remain, as in the past, with a comfortable capital and liquidity position.

Let me go in each of the parts of the P&L with the concrete data. Moving to slide 12, as I mentioned, net income reached BRL6.6 billion in 2015; an increase of 13.2%.

But on top of this performance, and thanks to our extraordinary results presented in previous quarters, in 2015 we increased [yield] and shareholder remuneration strongly. We have announced BRL6.2 billion in total dividends, out of which BRL1.4 billion were interest on capital.

It is worth mentioning that we have presented positive growth, as you know, in the first three quarters of the year, with a drop in fourth quarter, mainly due to three facts. Market activities within the NII line, that is, as you can imagine, market activities are volatile by nature; seasonal increases in expenses; and higher provisions, as we will see in detail in the next slides.

Moving to slide 13, we can see the main figures of the P&L, which will also be detailed in following slides.

Before I draw -- I want to draw your attention that in 4Q 2015 we had complementary provisions for a gross amount equivalent to BRL1.23 billion, or BRL800 million after tax; out of which, in NII there were asset adjustments resulting on an impairment of securities on the amount of BRL417 million before tax, BRL272 million after tax.

As well in provisions, we recognized an additional credit provision, a loan provision of BRL809 million gross of tax, BRL528 million after tax. Being 60% of this amount are complementary or generic provision for loan losses, given the economic environment; while the remaining 40% was attributed to specific cases in the corporate segment.

Those two events added, as I mentioned, to BRL1.3 billion before tax, impacted negatively the results for the mentioned BRL800 million after tax.

On the other hand, in this quarter we reversed non-recognized DTAs, generating a net gain in fiscal results of approximately the same amount, BRL800 million; thus, offsetting the provisions I already mentioned. Being more specific, these gains were originated from deferred taxes not recorded in the balance sheet after the increase of the social contribution tax that, you remember, took place in September in 5 percentage points.

The impact, thus, of all these events in net profit was zero. Thus, excluding these adjustments, we highlight the following figures. Net interest income decreased in the quarter due to market activity, which, as we previously mentioned, presents a volatile nature. But NII increased 7% in the year.

Commissions showed a good performance in the quarter, being still below our ambitions on annual comparison.

Considering our aims of an increase in customers linkage commissions should accelerate over time.

The result of loan-loss provisions totaled BRL9.7 billion in the full year, with an increase, annually speaking, of 2.9%, even in a challenging environment.

General expenses remained under control, registering annual growth of 3.4%, despite the [perimeter] impact of both GetNet and Bonsucesso. As mentioned before, we continue to be the cost control leader in the sector.

And finally, as mentioned, the net profit grew 13.2%.

Moving to slide 14, we have the net interest income, which totaled BRL29.6 billion in 2015, with an increase of 7% over the previous year, and a decrease in the quarter of 3%. Two main highlights I would like to underline here.

Credit revenues increased in the year, even considering the spread compression. And this is an important point: the spreads have reflected the change of mix in products and segments. Even with this effect, over the past five quarters the spreads were stable at around 8.5%, as you can see in the slide, since the impact of the change in portfolio mix has been offset by the positive price movement. And this is pure management initiatives.

The line others, which is the main reason why the NII goes down, as you can see, considers, among others, results from the Bank's balance sheet structural interest rate gap and revenues from customers in treasury activities, which increased 27% in the full year in 2015. However, in the quarter, its decrease more than offset the increase in customer activities coming from two quarters which were extraordinarily high, I would say, and we mentioned this in the 2Q and 3Q results, both in absolute terms, and compare historically.

On slide 15, we observe that the expanded credit portfolio totals BRL331 billion, an increase of almost 7%; 6.6% in the year.

It is true that volumes have reflected the economic slowdown. However, it is noteworthy that, in line with our efforts to offer a high-quality product to customers, we expanded our customer base. This allowed us to mitigate the economic recession effects in our portfolio.

In fact, the individuals loan portfolio increased 8% in 2015, driven basically by payroll loans, the Consignado that was mentioned before, and mortgages. This also reflects our de-risking portfolio strategy, which is reflected on the risk side of the presentation, as you will see afterwards.

In consumer finance, there was a decline of 7.7%, mainly explained by the slowdown in vehicles in the auto sector. Our business model has both positioned ourselves as a sector leader, while maintained NPLs.

SMEs, the segment has been affected by the economic scenario; but it has showed resilience due basically to, as we mentioned before, our distinctive model, which provides, for example, in the same offer, current account and acquiring services. Unique in the market.

Corporate loans grew 12% in the year, supported basically by the exchange rate movement.

On slide 16, we see our funding evolution. The customer funding reached BRL287 billion, almost BRL288 billion, with an increase of 14%, 14.4%, compared to last year. Including assets under management and others, it increased 14.2%, or BRL515 billion.

We continue, therefore, presenting a solid growth on the funding side, which is one of our fundamentals for this business. We think this is basic, going forward. We want to grow our client business, not only through assets, but also through liabilities, providing profitability gains at an appealing level of risk.

The difference of growth in between the liabilities and the asset side would, of course, be reflected in our liquidity position, as you will see in the following slides, in the loan-to-deposit ratio.

Moving to the next slide, we have also strengthened our commissions' revenues. In 2015, we reached, or it reached, almost BRL12 billion, BRL11.9 billion, increasing 7.3%. The performance was basically or mainly driven by current account increasing 11.6%; insurance, 10%; and the lending operations, 10%.

Above all, we ended the year going up in terms of [revenue].

In 4Q 2015, even considering the natural seasonality of this quarter, basically, all products presented positive growth in commissions. The negative variation in asset management, which is the unique there, reflects the sale of the custody business that we already announced to the market.

The increase in commissions is strategic for the Bank. It diversifies revenues and brings more recurrence and stability of our results, resulting in an increase in the linkage and transactionality of our customer bases.

On slide 18, entering in to the quality part of the book, we see the evolution of the non-performing loans, which, undoubtedly, was the biggest challenge of the year, and where we had a good performance, both individually and up to the first quarter, which is the public information we have today, in relative terms versus peers.

Starting from the left, the 15 to 90 days overdue portfolio, however, saw an increase of 70 basis points in 4Q 2015, fully explained by one specific fact: in the corporate segment, and, consequently, it does not suggest a wider spread worsening in the segment. Indeed, if we exclude this individual fact then the indicator would have been almost stable. We would have had 4% in total, the total ratio would have been 4%; and in corporate it would have gone from 2.4% to 2.6%.

Obviously, I cannot speak of names, but as we speak the client is being regularized, and, thus, the leading indicator would and should come back to levels similar to the first quarter. This is the 2.6% and 4% I already mentioned.

On the other hand, the 15 to 90 days overdue of individuals' portfolio showed an increase over the previous quarter.

If we move to the NPLs over 90 days, it closed, as you can see, at 3.2%; 10 basis points below the previous year. This was due to a combination of our efforts that we have already and also commented in previous quarters: a credit mix more focused on low risk products, a more robust model of customer knowledge and portfolio monitoring, and an increased collection capacity.

Regarding coverage, it showed a strong increase, as I mentioned in my introductory words, of 19 percentage points, which positions us at a very comfortable level.

In general terms, we expect that the current slowdown of the economy would lead to moderate negative trends in credit quality in the following quarters, as we have been stating during the past quarters.

Moving to the next slide, loan-loss provisions totaled BRL9.7 billion in last year, in 2015, with a slight increase of 2.9% over the previous year; and an increase of 12.8% in the last quarter. The result of the [year] reflects a challenging scenario, and, at the same time, the confidence in our risk model.

As you can see in the upper part of the slide, the credit cost was stressed by the increase in provisions in the last quarter. The increase of 30 basis points in the quarter reflects, again, a more adverse economic environment.

We continue to believe that the cost of credit will rise moderately during 2016.

On slide 20, we see the expenses evolution. As we previously mentioned, cost control is a cornerstone for Santander to grow in a sustainable way. In fact, in 2015 we maintained our cost disciplines and the expenses grew less, much less, than half the inflation.

Expenses, as you can see there, totaled BRL17.3 billion; an increase of 3.4%.

Considering a constant [perimetry], in a like-for-like way then, if it means excluding the impacts of GetNet, our acquiring business, and Bonsucesso, our payroll joint venture, the expenses would have been stable in the year, this means almost zero, compared to an inflation close to 11%.

Additionally, the rise registered in the last quarter is seasonal and is basically due to the collective bargaining agreement. It is not [extrapolatable] to next quarters.

All in all, as Sergio mentioned in his introductory words, we closed three years, 2013, 2014, and 2015, with 15% saving in real terms against inflation; and in a like-for-like calculation, 20% real savings. I would say an outstanding delivery to our shareholders, and a way of managing to which we commit in the future.

In the next slide, we can see the operational improvement observed in 2015 that was reflected in three indicators that we consider central: efficiency, recurrence, and return on equity.

As revenue growth was both the -- the growth of expenses, expenses growth, the efficiency improved 100 basis points and ended below 50%, at 49.8%.

Recurrence increased from 66% to 68.5%. I must say that every time that we improve this indicator we bring to you, to the market, more predictability and resilience in our results.

As a result of all these advances, the return on equity increased to 12.8%. This evolution is important. But we know that we can, and we expect, to go beyond. We push increasing results in order to improve profitability and meet our shareholders' expectations, but always maintaining good solvency levels, which differentiates us from the market. And this can be seen in the next slide, on slide 22.

We may see that we remain with a solid capital and liquidity position, a stable source of funding, and adequate funding structure. The index loan-to-deposit reached 90.6%, 91%, improving almost 7 percentage points in the year; a comfortable position, reflecting the higher growth on the liability side.

In terms of capital, the [Brasilia] index stood at 15.7%, the same level as the previous quarter. In addition to having this comfortable level, we have a Tier 1, a Level 1 capital of excellent quality, at 14.3%.

Now, to conclude, I would like to give the floor to Mr. Rial.

Thank you very much. Really appreciate. So, a couple of remarks looking at 2016, and also ending the year we just spoke about.

First of all, focus on asset quality. I think you can be reassured that we will remain very, and I repeat, very attentive to asset quality.

The spike on the short-term NPL, I hope it was very well explained by our CFO, totally incidental, related to one case, not structural in any form or shape. And as you can imagine, no names can be mentioned at this point in time. So asset quality is a very important one.

Second, we are committed to grow profits in local currency. In the year 2016, most likely as challenging as the one we just saw, will still pose opportunities. Not everything is weak or bad. And the opportunities are, particularly as we see also on the liability side, we have historically not paid a lot of attention to the liability side of the Bank.

And in a high interest rate environment, as the one we have in Brazil, both myself and Angel, we're going to try to look at the liability and see how we can exploit the quality of the balance sheet that we have; how we can also take advantage of being the only scalable international bank in this country. Making sure that we also, besides having an undivided attention to the asset side of the balance sheet, start developing even a more ingrained look, from a profitability point of view, on the liability side.

It takes less capital. It's certainly less riskier. And we certainly have the means, the products, and the people, and certainly the balance sheet, to extract more value out of that part of the balance sheet. So that's, perhaps, a slight [loss] going forward.

Costs will remain a strength. I think we are committed to keep it under inflation as we go, as we have seen it over the last three years. And I think that should not change.

The other piece that I think is important is on the wholesale side, both corporates and large corporates. What I can reassure you is that capital management, it's a very important piece of how we see it; not because we don't have it, but because it should be treated with the care, from a profitability point of view, that it deserves.

So we are not expecting significant spikes in capital allocation for the wholesale side, much to the contrary. But we do expect, and I think sometimes investors don't fully appreciate, the capacity to reprice not only the new transactions as they come, but also the existing portfolio.

Wholesale portfolios in Brazil have relatively short duration, which tends to allow banks, over time, to reprice it. I think, hopefully, more of that should happen over time, even if volumes do drop as we start putting more limits around capital.

All in all in our organization, there will look, on the liability side, that we remain very committed to asset quality; that will, as we mentioned on our investor conference, committed to be, as far as NPLs are concerned, in line with the peers in the market; and also giving you a sense of stability, consistency, because that's the other important piece in the organization.

We have a stable organization, highly engaged. We just received our engagement score levels of last year. We have an organization that is not distracted with the present macro environment, much to the contrary. I think Santander sees itself as a challenger and as a player that can actually grab quality market share from, eventually, public banks, or even some of the private banks that can be, from time to time, distracted.

But that's not all what we do. I think it's important also to end with our commitment to society.

This is a country that has pretty significant social differences. And I think we're glad to show you an important contribution that we have done to society in Rio de Janeiro, which is what we call the Museum of Tomorrow. It is the largest single investment of a private institution in culture in the country. We haven't used any tax benefits for that, so this is really out of the pocket.

On one hand one can say, why? I think society deserves. Second, Rio, it is where we have one of our largest client base, so there is some tangible commercial benefits to our retail franchise in the city of the Olympics this year.

We have also done an investment to Inhotim, which is today the world's largest open-air art gallery in Andujar. We have put a gallery that basically focus on the Indians, or the tribe, in the northern part of Brazil.

Second, still giving back to society. Santander is today the world's largest investor in university education in the world; and in the case of Brazil, having had a fundamental impact since 1996, as you can see on this slide.

What we have to do here is to really -- we have been able to form a very profitable segment in the universities, as we call it. But we need to make -- we need to probably devote more time and more brain power to extract more value out of students, as existing and future customers of our retail franchise. This is something that where the digital world comes in hand, where branches and ATMs are important, but not as important for that segment.

So more to come out of universities, and graduates in general, in terms of opportunity for us to expand our retail.

Last, but not least, it's what we call Amigo de Valor. This is the third largest investment or program to children in the country, after [Global] and after [AFT] program, and we're very proud of the contribution of the Bank.

So, all in all, a company that has its role in the Brazilian society.

With that, I end, and I assume Q&A will follow. Thank you very much for attending.

(Operator Instructions).

This is Luiz Felipe Taunay. I will start running through your questions that we received in the webcast. We received various questions regarding asset quality from [Guillermo Colter] from BBA; Saul Martinez from JPMorgan; Philip Finch from UBS; Tito Labarta from Deutsche Bank. I will make a summary of the questions regarding the same subject.

The question, basically, asked you elaborate on why the early delinquency has increased sharply in the corporate book in the quarter. If it is possible to share which sectors were impacted by this; and if this is somehow a first signal of a widespread deterioration in our corporate book.

What is the overall delinquency outlook that we have for 2016? And if somehow these dynamics can pose any kind of threat for our results in 2016.

I would like to start answering these through the question of it's a wider spread situation or not. The answer is clearly, no. I mentioned in my presentation that, first, we cannot speak of names, as you know, but we are speaking of one name. I also mentioned that the client is being regularized as we speak.

Our expectation, we believe that even within this same month that leading indicator would come back to the levels I mentioned, which would be a stability around the top indicator, around the 4%. Or specifically the corporate one that we are speaking, it will move from 2.4% to 2.6%, I think was in the quarter.

The answer is clearly, no, there is not a wider spread impact. We moved this client in to this 15 to 90 days as in the same day of the presentation the client was not regularized. As I mentioned, it is happening right now.

In terms of outlook, I would say that we haven't changed our view. Obviously, the macroeconomic scenario would impact this part of both the ratios and the P&L. As you are seeing, the cost of credit is trending upwards.

We see we have outperformed strongly during the last two, three years both the sector piece, etc. We remain today probably the best player in terms of quality. We expect to maintain that situation and move, probably, with the sector or with the general trend in terms of deterioration.

We see marginal deterioration, or there will be, but we see marginal deterioration. And we expect, with that deterioration happening, that 2016 results will maintain the positive tone you have seen in the past.

We've received one question regarding the outlook for 2016 from Philip Finch of UBS. The question is could you please provide us any color on the outlook for 2016 in terms of loan growth, margins, costs, and asset quality?

Starting, firstly, through the balance sheet, I would say that, again, and speaking about the environment that we will have this year, as you know, the consensus is close to a 3% GDP growth, and I mentioned in my presentation meaning already in three years a 10% drop almost in GDP, volumes will not be as strong as in the past.

We are expecting up to mid single-digit maximum, I would say. So modest growth; negative in real terms, on the asset side. That will, probably, be the main balance sheet driver.

On top of that, we will continue with our policy of improving spreads and mitigating, or trying to mitigate, the change of mix that is happening. That change of mix also has driven us in a position in which the de-risking of the portfolio in general terms has provoked what I mentioned before in terms of evolution of quality and what we expect going forward.

With regards to the P&L, as you perfectly mentioned, we do not give guidance. But I can comment a little bit on some of the trends.

In NII, I already commented both volumes and prices.

NIM would really depend on the evolution of volumes, but I would expect positive territory in general terms, and we will see the strength of that positive territory.

We are putting focus, as I mentioned, in commissions. We do have a space there; we expect to cover that space gradually during the next three years. So 2016 should be one of a continuation of the positive momentum we are starting to see.

This is a clear reflection of linkage, this is a clear reflection of growth of clients, and this is a clear reflection of management priorities in terms of having the right clients with the right services and the right products. So I would expect that to perform positively.

And the other two, asset quality, I already mentioned.

In terms of costs, as Sergio mentioned, we will continue with our focus on costs. That means that, obviously, if you compare the next three years with the past three years the trend should go towards inflation. But the management objective will be to maintain costs below inflation. We will see how we deliver. And we can finally deliver it, because as we go forward, obviously, the difficulty is high.

We received a question from Saul Martinez, JPMorgan, regarding cost decision. The question is, the Brazilian tax authorities have recently start to rule on tax disputes involving goodwill amortization, especially in the case of privatized companies. Some of the rulings have been unfavorable to corporates. Do you worry about the implications these rulings might have related to the tax disputes you have with the authorities, notably, involving the acquisition of Banespa?

I'll take that one, Angel. I think it's an appropriate question, relative to the environment. My answer to that is, no, it doesn't worry us.

I think we have a strong case. This is just part of normal course of businesses. There are a number of disputes on different fronts, so nothing that I would necessarily be worried at this point in time. I would let it be run through the system, through the normal processes we have seen before. So nothing to worry, as far as we are concerned.

We have received a question from Mario Pierry from Merrill Lynch. Your free float is only 10%; what are the benefits of keeping your shares listed?

Thank you, Mario. Well, I would say, as you know, since the IPO was done the commitment of Santander Brasil, and Santander Group in general terms with the market, has been a best practice in all senses.

So, the benefits are obvious. We maintain our pro-market way of dealing with things, and that involves a lot of things. That involves the information that you receive; that involves our interaction with you, with the market, which is, I would say, good and positive for both sides; it involves management, also pressure, in terms of achievements, in terms of profitability, in terms of usage of capital. So I would say that there are positives on both sides, so for the market and for Santander Brasil.

We maintain our commitment. And we said this quite clearly when the bid offer was done a couple of years ago, that we maintain our commitment to keep on being present, informing and having dialog with the market; and this is what we are doing. And we are doing it because we think it is positive, as I said, to both sides.

Two more questions coming from Merrill Lynch. Can you be more specific on cost measures being taken? What should we expect in terms of branch closures and layoffs?

And the second one is you had a 90% payout this year. Given the weak macro environment, and, thus, weak outlook for loans growth, as well as high capital ratio, what should we expect for payout in 2016?

I'll take the branch network one. I think, unlike some of our competitors, of course, we have 3,500 branch networks. So scale is -- we certainly have scale that we believe to be appropriate, but not to a degree that it's actually a disadvantage.

Where we see ourselves is, actually, in certain parts of Brazil we probably need to expand some branch network, particularly to the west side.

The Bank has now with some more emphasis on the agri/industrial side, which is a side and a segment in Brazil that continues to expand. Traditionally, Banespa, one of the acquired banks, was very strong in that segment. And I think, over time, the Bank has lost a little bit its roots in a segment that only really one private bank is operating, besides Banco do Brasil, so I would expect some branch openings towards the west side of the country.

And then, to the rest of the network, just a normal optimization. So where I think what you're going to see is different sizes, branches being more segmented to the spaces, becoming a lot more intelligent as we run real estate. I always say banks are in real estate, sometimes we forget, and there's quite a bit of capital deployed to that real estate.

On the other side that I think sometimes markets are not necessarily observing is understanding the mix between owned and rented. I think we certainly have a number of them that are actually leased, and I think that's one of the areas what we're going to continue pursuing savings.

Having a four-, or five-year, a 10-year lease agreement with Santander today, it's quite valuable to a number of landlords. So there's quite a bit of still cost opportunity to continue optimizing our infrastructure, as we see it, but just to give you one example.

On the payout, I pass to our CFO. Angel?

Thank you, Sergio. You are right, we had this payout ratio. And the reality, I would answer this question in two ways.

The first is you know our criteria, so far. Our criteria has been to optimize the usage of payout as the environment consumes less or more capital, and we plan to continue in that way.

So we will -- the Board will decide in each of the years, in each of the moments up to what level the optimization of that payout has to do with the capital level and the generation of profits. But I would -- that's the kind of a short-term answer.

No, I would like to address this in a little bit more on a medium-term way, which is you shouldn't manage the capital ratio depending on the moment of the cycle. I would say this is a medium- and long-term big error, because you will always tend to give too much capital out when you are on the lower part of the cycle and ask for capital in the upper part of the cycle, specifically in these type of countries in which you tend to consume capital when the cycle is positive.

So I would say I would like to manage capital across the cycle. We have capital, obviously. We will optimize that usage of capital.

I have mentioned in the past that if there are opportunities we have the duty to analyze them. We are not thinking of doing them. But if there are, we will analyze, as we have done in the past. Our idea is to inorganically grow the franchise strongly going forward, and use up capital across the cycle.

There is one piece of the question that I did not address, which was related to layoffs, and I don't want to give an impression that I just overlooked it. A couple of things only [answer].

One of the things that's it's important for me, and I think for management, is what I call human capital metrics. Productivity is going to be something that we're going to start paying even more attention and start measuring.

And what do I mean by that? For example, when you look at our consumer finance company we have the leading finance company in the country. And many -- and some of the activities that are today performed by the Bank, and certainly be performed differently as we embark on a more digital space.

We have the leading car finance, or car website, which is WebMotors, in the country. We are looking at different ways, through different partners, in this case Accenture, for example, how can we actually provide a better experience, be faster, be better at what we do in car finance throughout the country, so that we can actually secure that leadership? Then we'll go through redesign and improving the way we handle processes.

So productivity is what's going to lead in to, sometimes, rationing of individuals and infrastructure, but not related to what I would call the classis branch infrastructure. That's not what's leading us.

At the same time, I'd like to mention that I think we're paying a lot of attention to the quality and skillset of our people. We're glad to announce that this year our people, on the back of the BRL6.2 billion dividend yield and the earnings that also included extraordinary, we're going to have one of the highest profit-sharing programs paid to our employees in the retail franchise.

Which I think that it's really fundamental in an environment where people are not even thinking about getting variable comps, significantly higher than they have seen in the past. Which, if it's well managed and well communicated can actually create the right environment for highly focused and energized organization for 2016, which we will definitely need.

(Operator Instructions). Eduardo Nishio, Banco Plural.

In 2015, if you look at your -- the level of provisions then including the one-offs you had an increase of almost 24%, as allowed for loan losses. Just wondering what is the -- for 2016, what would be the outlook for that, for allowance for loan losses? If you can give us some color how you see that evolving in 2016, I appreciate it.

And my second question is on your managerial accounts. You had an adjustment for allowance for one-offs of BRL809 million and NII of BRL417 million. Just wondering, the origin of that, those adjustments? I assume that you had some adjustments in the third quarter, so wondering if you had further adjustments this quarter, one-off gains that you offset with those adjustments? Thank you.

Nishio, since you know you're asking about details about very detailed things, I think it's better that we talk afterwards offline and we can go through all the details that you are posing. Okay?

Okay.

(Operator Instructions). Victor Galliano, Barclays.

A couple of questions from me. First, on NII, and looking at that breakdown that you give us on page 14. So talking about the others segment there, if you see that and you expect that to normalize then should we expect that to come down in to the level of much more as it was in 2014, where you saw a contribution there of about BRL5.2 billion, BRL5.3 billion? That's my first question.

My second one is, I'm afraid, returning to the issue of asset quality. And just looking at the 2H portfolio, and obviously that has increased sharply in Q4, by my calculations it's now back up at over 7% of total loans. Would you expect this to reverse in the coming quarter with the one big corporate that you've got going in to the 15 to 90 day NPLs? That's my second question.

And what do you think is a reasonable level of coverage of your [E2H] portfolio, going forward? Thank you.

Thank you. With regards to the first question in terms of NII, you have seen the historical series. The part that is what we call others, which is basically the non-client activities, tend to be volatile.

So I wouldn't say that it has to come back to historic levels, I would say that it will depend on a quarterly base. It tends to generate around 20% of the total NII, but that's kind of a very rule of thumb that could vary, as we have seen in the last three, four quarters.

I would underline probably here the other way around, which is if you see the credit, the loan part of the NII continues to trend positively. In the last five quarters or four quarters it has trended positively. Our aim is to maintain that trend; and, as was mentioned also, to improve the liability side of it.

And we will manage with the volatility of the markets trending. And I mentioned also that we expect positive territory for NII, so that means that we should -- or we will strive to achieve a positive evolution on total NII.

With regards to credit quality, you're right, the increase in that portfolio in the E part is the name that we have been speaking that has provoked that 15 to 90 days' increase.

The normal thing would be that, that name goes in to what we would call the normal part of the E rating, which is companies that are performing. And this is what I was mentioning that when I said as we speak it's been solved and regularized.

I would say the total amount would not move, but what we will see is within that classification that amount being classified as normal. And this is what we are currently managing and seeing if we find a solution, or we do not find a solution. So I would say the answer will be, no, the total amount will not change; it would change the breakdown.

Okay. And in terms of coverage, what do you foresee there versus the 2H portfolio? Would you expect that to trend back up north of 90%?

That depends always on the situation in these type of cases. That depends on the situation of each of the companies, the internal rating that we assign in our knowledge, because, as you can imagine, these type of companies and information is detailed and analyzed by our risk department. So, it totally depends on that type of analysis.

As you can see, because you have there the percentages that we published, they vary, obviously, and they increase. I'm not going to give you a number, a specific number, because, as I mentioned, the process is on its way, but you can see the general coverage ratios that we have by letter in the public information.

Okay. Thanks, Angel.

(Operator Instructions). Thank you. The Q&A session is over and I wish to hand over to Mr. Sergio Rial for his closing remarks.

Well, nothing -- not a lot more to add, just to thank you. I really appreciate the time.

And we continue working for keeping the same trends that I think you have seen over the last two years of the Bank. Hopefully, 2016 will be better than 2015, as 2015 was better than 2014. That's what we're going to try to do for you.

Thank you very much.