Banco Santander Brasil SA (BSBR) 2025 Q2 法說會逐字稿

(interpreted) Good morning, everyone, and thank you for joining us on the results for the second quarter of 2025. We are live from our headquarters in São Paulo. And as always, we will split this event into three parts. First, our CEO, Mario Leão, will talk about the main highlights of the quarter and the directions for growth in the coming periods. Next, Gustavo Alejo will provide a very detailed analysis of our performance. And finally, we will have a Q&A session.

I will now proceed with some instructions. We have three audio options on the screen, all content in Portuguese, all content in English, or the original audio. (Operator Instructions) The presentation we are about to give is now available for download on our IR website.

And now, I'll hand it over to Mario to begin the presentation. Good morning, Mario.

(interpreted) Good morning, and welcome. It's 10:02. This is the presentation for the second quarter of 2025. I'll start with the main highlights for the quarter, and then I will go over a few slides that depict the strategic numbers, and then we will have enough time for Q&A.

As you saw before, our net income for the quarter was BRL3.7 billion, slightly below the previous quarter in terms of ROAE is 16.4%, slightly below the first quarter, but nevertheless, with a positive evolution of almost 10% in the net income and [1%] year on year.

Now looking at the main lines that we will elaborate further during the Q&A, our NII was down by 3.3%, mainly due to market NII and an expected effect of the carryover cost because Selic is higher and performance was slightly less positive in our trade line. Year on year was still positive, but we will see client NII with a positive evolution that shows that both assets and liabilities are still evolving in the right direction, even though we are not growing the portfolio.

So we started the quarter with a small positive evolution, more important than the added number, I mean, we had a relevant evolution in the quarter and some one-off evolutions despite a flat scenario. But we show here that several of our businesses are moving in the direction. We won, meaning that the franchise is evolving in several fee lines, and we are also growing fees despite a lower growth in the portfolio.

That's what we're trying to do. We're trying to extract further productivity from our assets. Cost of credit, there was an increase in the quarter because this refers to some very specific portfolios. In the entire flow we are seeing in the most recent vintages, things are evolving the way we expected, but we had to reinforce some of our portfolios. That's why our cost of risk increased.

In terms of expenses, we had a strong delivery and positive delivery, not only year on year, almost 400 percentage points above inflation, but there was a quarter where there was a drop of 2.5%. And that's why our efficiency ratio is the best of the last three years. In terms of leverages, we are still very much focused on the same thesis, meaning building a more solid and resilient operation.

We are still seeking for excelling management, our golden rules, and we are focusing on the areas where we want to operate. We are very disciplined in terms of executing our strategy. The result is not linear, but it is really earmarked to some particular regions, and we will continue to evolve in the coming periods, constantly seeking for our objective, which is to reach profitability of 20%, 21% in the years to come. And this can only happen with a lot of embedded technology with continuous improvement of the journey and customer service.

Now speaking very quickly about the customer journey because I could spend an hour talking about this. We're still growing our total customer base. We have almost 72 million customers. We are also growing the base of active customers by almost 34 million. And in terms of principality, I mean, customers that choose us for their main relationship with the bank, is also growing.

Our NPS is increasing, has been increasing for both SMEs and individuals. Now we are continue on this growth journey. We are hitting record numbers in July, and I'll talk more about this very soon. Now speaking about how we engage customers in the margin. Even more, we already talked about our One app, which is a big leap of an app that is being deployed for a while.

We want now to give you a more concrete number of how many clients are using the One app. But I would like to highlight a very specific point of One app. Not only this has to do with the centricity of the clients and the relationship with the bank because this is quite important, but the fact is that this One app was built with a very high conversational capacity. And that's why we are market leaders.

In the past 2 years or 2.5 years, we were able to build a very new CRM platform that we call a customer interaction platform, and this allows conversations within the app. They are contextualized according to the moment that the client is experiencing, very personalized. Here, I have just some data for you.

We have 245 possibilities of conversation. Our response to the stimuli is much higher. Conversion is higher by 2.3 times. So with this pilot that we are now rolling out to the entire customer base, we are getting a lot more conversations with our clients. This is already embedded in our current version. We are transforming ourselves into a major wallet. We say that we want to be a bank of all accounts.

So in this quarter, we are bringing a function of bringing your money or (spoken in foreign language), [consolidating] flows from other organizations and all of this through open, we will allow the bank to have the money, and then we will operate all the transactions through Santander. You don't have -- you don't need to have an independent wallet, but you can operate through the Santander wallet. And with that, you consolidate all your banking operation.

We are also introducing new payment experiences, and this is performing quite well. Our NPS is 86. This is one of the highest NPS with PIX alone. This is increasing by 17 points year on year. We have a very specific wallet, well, meaning we are evolving in our payment journey. Payment is certainly the most frequent contact moment of our customer. We are very much focused in this area. We are advancing with very good results.

Speaking about four of our main businesses, I will highlight some very briefly and later on, we can give you more details. Our consumer finance still makes us proud. We have the largest consumer finance in the market, but it's also the most digital, the most modern.

We have half of electric vehicles funded through our consumer finance operation. The journey is quite simplified. And this is a great lever of fees. Our consumer finance being this robust helps us with our Insurance segment. We made important advances with insurance, and this contributes to increased fees. The fact that our consumer finance is growing more after a first quarter that was a bit more timid, this really shows that we will grow in a robust manner, and we'll be able to contribute with better margins.

In terms of cards, we are still very successful in our strategy to grow. More than half of our portfolio is earmarked to high income. Of course, we also have lower-income customers in the Card segment. We grew 13% in average spending in the quarter. We have less products, meaning that the journey is more simplified and more efficiency. So the journey of cards, you will see when we talk about fees, that this has to do with principality, results, and recurrency.

In terms of SMEs, there was -- I mean, we promoted a revolution a few years back. We removed the experts from the stores. And now we talk about a bank that stepped out of the bank, meaning that, in fact, we removed the traditional concept of a manager that sat behind a desk, just waiting for the enterprise clients to visit the store. But now we increased the specialists by almost 30%. They go around the region with an iPad and a map of calls. And now they can perform four more calls than in the past.

But more than the number of visits, we want deep and more personalized visits. So the customer is more connected to the bank more ever than before. We are growing principality and with that, we are also increasing transactionality and results. I mean, we haven't been talking much about the next topic, but I would like to refer to two fee lines, which are very relevant, more than BRL1 billion year on year for us.

And then we believe that with some effort, this number could also double in the next coming years that -- and I'm referring to premium bonds and Consórcio. Now you see here the base of 100 in terms of revenue and premium bonds is a business that has been consolidating over time. And this is now being engaged in a digital journey with a high consumption of customers.

So these are the key businesses that we wanted to highlight. We believe a lot in these businesses. We are diversifying in different lines, and we are counting on several billion BRLs coming for credit cards, insurance, and all of that to be more diversified and to have a better outcome.

And now to conclude my introduction, I wanted to emphasize our efficiency agenda. Efficiency is more than our expense account, but efficiency means the way we are transforming the operation in our business. And none of that will be possible without technology. I'm not just embarking technology in our strategic discourse, but technology has been increasingly important, technology and business.

We don't talk about business and technology. We talk about technology-driven business. And now we are increasingly talking more about business domains. But I would like to emphasize three pillars. The first one being our digital transformation. We are enhancing the experience. We created a One app. Not only this is a new app, but a new journeys within the journey of the actual app. These are different components that we are building together with the group.

So for the first time ever, Santander Brasil will start benefiting from being part of a large group. We are building entire platforms and components of the platforms together with the group. That means that Brazil is no longer doing its own, or Portugal doing its own, or the US doing its own app, but we are doing everything in a more coordinated fashion under the leadership of Brazil, because everything that is new in the market starts in Brazil. But we have to invest less in relative terms because we're investing as a whole, but we are -- we can be more competitive.

And with that, we can invest more in technology than all of the rest. We see -- you see here that we're investing 30% more in technology in -- with the base of the past few years. And of course, we are investing maybe more than in other assets of the bank. We are -- I mean, I mentioned our investment in cards, but this applies to all of the other products. We have many less products in the platform. That means less training costs, less cost to serve, lower cost to serve.

We are already reducing by 23% of our expenses in infrastructure, and we are already reducing by 11% the cost to serve in mass income -- I mean, low-income customers; I mean, the operation can only be profitable if we reduce the cost to serve. And if we select the clients with whom we want to operate. I mean in the short term, we were able to reduce that by 11%.

The second pillar is the optimization of our stores or branches. We are not talking about closing branches or stores or expenses per se. But we just have to realize that the dynamics of customers today are different. I mean only in the past two years, customers are reducing their visits to the stores by 30%, and this is happening across the board. And by the same token, they increased digital consumption by 38%. So digital is growing almost 40% and the reduction in stores was down by 36%.

If we look back some years ago, the reduction will be even more severe. So that's why we need a different hub, lower number of stores but better stores. So we are transforming two stores into one, or three into two. The terminology we use is merging of stores rather than shutting down of stores. So now our network of stores is serving our clients better.

And with that, we increased our service by 35%. We are increasing the expenditure. And by the same token, we are reducing the noncommercial job that we do in the stores by 7 percentage points. This is an ongoing effort, but we are removing the nonoperating jobs at the stores, and we are serving customers there.

And the last pillar is AI. We've been talking about this for quite some time. The market, as a whole, has been talking about it. But Santander, I mean the group -- Santander as a group decided to embrace AI. And the same thing goes for Brazil. So we created a new function, the CDAIO, the Chief Data AI Officer, and we already appointed this position in Brazil to help in our AI transformation throughout the organization. This does not only apply to chat bot or technology.

This goes across the board, legal, risk, investment advisory, and also customer service. This is across the board topic, it's institutional, and we certainly embrace that. And we will tell you some cases to you throughout the call. In one case, I would like to say that once we are updating a legacy languages like Java and others, in the past, we had to write new codes and look at it side by side and do things one by one and with Gen AI now are able to reduce by 98%, the time that it takes to do that with more assertiveness.

And at the same time, our accuracy is much higher, 97%. I mean, it takes a lot less time to update codes. Our investment advisory part has the pitch maker. And by that, we reduced by half an hour just to put a customized pitch. We say -- I mean, it takes about 30 to 40 seconds to do that with the systems of Gen AI. And chat box with something very classic that everybody talks about, we were able to reduce by almost 40% the updating time. And when we talk about mass income, that time is down by almost 60%.

And now I'll call Gustavo to talk about the numbers, and then I'll come back to talk about our final remarks and Q&A.

(interpreted) Thank you, Mario. Good morning, everyone. So let's talk about our results, starting with the loan book. The loan book reflects our active portfolio management and ongoing efforts to increase the profitability of all of our businesses. I would like to highlight the positive performance of Cards up 13% year on year; of Consumer Finance, up 16%; and SMEs, up 11%.

In individual retail, the portfolio remains stable, but there are some significant changes in the product mix. In addition to the positive evolution in the card portfolio, with good credit quality and with greater transactionality, we grew 81% in personal loans secured by FGTS or investments and approximately 7% in real estate loans year on year.

We reduced exposure in public and INSS deductible loans due to the factors already mentioned and disclosed. And similarly, we reduced our exposure in unsecured personal loans by 34% year on year in higher risk profiles. The variation in the large corporates portfolio, which was negative in the quarter, is basically due to exchange rate variation and reduced the demand for forfeit or supplier risk, advanced payment transactions to suppliers, which was the subject of IOF discussion during the period.

With regard to customer acquisition, we continue to follow our plan to increase the relative share of retail and funding through greater client engagement, building loyalty and transactionality. The growth in time deposits from individuals was very positive and growing faster than in other segments, demonstrating the evolution of our principality with our customers.

Let's talk about NII. Client NII grew 1.9% in the quarter. Client NII includes credit NII, which remained stable in the quarter despite a lower average credit volume, as you can see here, but benefited from a better mix. Liability NII evolved positively with a greater relative share of retail deposits, as I mentioned just now, in addition to the effects of CDI on the base.

Also in the annual comparison, NII growth, which is here, is higher compared with credit volume, which demonstrates discipline in pricing and optimization of the asset portfolio as a result of a more favorable mix of assets and liabilities, together with CDI increase, spreads increased by almost 200 basis points -- almost 100 basis points in 12 months.

Regarding market NII, the increase in the average Selic rate in the quarter had an effect on ALM as already indicated in previous disclosures. The Selic rate at 15% raised in the last month of the quarter and its potential to remain at this level throughout the year influences the result of this line item. However, it should be noted that the plan for the year in this line item remains the same.

As Mario mentioned, our market making operations showed good results in the quarter coming from a record result in the previous quarter. Despite slower credit growth in the partial migration of fees from credit operations to NII according to 4,966, fees have proven resilient, growing 1.3% in the quarter. Cards have benefited from higher transaction volumes and consortiums from improved performance, both due to the macroeconomic scenario and our focus on our sales force.

Now moving to provisions. Provisions in the second quarter increased by 7% quarter on quarter. This variation is basically explained by two effects. The first relates to the increase in provisions for court reorganizations, mainly in the large corporates and agribusiness portfolios, which totaled approximately BRL500 million in the quarter.

So this is related to court reorganizations and the other part is clients for whom we adjusted provisions according to credit recovery. The second effect stems from the prepayment at a loss of operations with low probability of recovery in our view. The volume of assets written off was BRL2.5 billion, resulting in the reduction in the provision cost of around BRL200 million.

On the other hand, we sold some other portfolios at a loss in the quarter, which practically offset this amount of BRL200 million in full. The total amount sold from this portfolio at a loss during the period was BRL3.8 billion. We have seen improved performance of vintages in the individuals and consumer finance portfolios, which under the logic of risk return have been performing well with [relate] payments and less need for renegotiations.

In the quarter, the percentage of NPL 15 to 90 days fell to 4% from 4.1% in the previous quarter, reversing the upward trend in this indicator observed in the first three months of the year. As I mentioned in the last earnings call and as expected, the rollover of the real estate portfolio to NPL over 90 did not materialize, reducing this portfolio in the first range of late payment.

In general, most mass retail products for individuals recorded a decline in rollover percentage rates in the quarter, although the smaller portfolio in the period did impact the denominator. In the Corporate segment, with an increase in NPL 15 to 90 days concentrated on SMEs, mainly due to the macroeconomic scenario.

Here, we are operating with more collateralized products that serve customers well in this current context. We also saw an improvement in the percentage of the portfolio in the over 90 NPL, which fell from 3.3% to 3.1%, impacted by early recognition at losses of the operations, as I just mentioned. As for expenses, we will present data on the evolution of our expenses.

We are advancing in our pursuit of efficiency, focusing on cost control and better resource allocation. We've been talking about this. During the year, expense growth was well below inflation and declined in the quarter. That is important. We observed a decrease in personnel expenses in the quarter due to a one-time increase of benefits in Q1.

We saw similar behavior in administrative expenses which also contributed to an improvement in the efficiency index, so a ratio of 40 basis points in the quarter and 250 basis points in 12 months. Lastly, I would like to share our income statement. We ended the second quarter with a net income of BRL3.7 billion, up 10% year on year. And 80 basis points growth in ROE with CET1 at 11.6%. Revenues grew more than expenses, which in turn grew well below inflation.

Our credit portfolio shows a better combination of risk return supported by funding with a better mix of instruments, customers, and prices. This performance, given the current macro scenario, shows that the discipline with which we have been managing our balance sheet over the last few years leaves us better prepared for short-term volatility, confirming our pursuit of profitability that is increasingly sustainable.

I will stop here and turn the floor back to Mario for his final statements.

(interpreted) Thank you, Gustavo. So to end, very briefly, I want to end with some strategic topics, so we can start the Q&A session. You probably have a lot of questions. So four main messages. Primary relationship and satisfaction of our clients. We are customer obsessed, obsessed about the journey of bringing a better journey, bringing customers closer to us to interact with us in a personalized and digital way and more and more engaged.

For that, we have unified in multichannel journeys, more and more powerful ones featuring a lot of embedded technology, providing the best payment experience. The One app in the second half will be more and more a reality. Technologies are major lever for transformation and efficiency. We'll hear more cases and data showing our evolution.

As I have said for some quarters and years now, we'll continue to pursue a powerful efficiency agenda. When we preserve our franchise, reinforce our franchise in all of the fronts where we need to grow, for example, technology. But we seek an efficiency agenda with revenues growing correctly and expenses under control.

End-to-end business continues to evolve. We continue to grow in the businesses we chose to grow and knowing how to fund the growth, reducing some other businesses due to profitability and capital discipline, we have to stop investing. So we have an agenda of diversifying the portfolio with a better quality of our numbers, and we continue to believe in growing profitability and results in the coming quarters.

With this, I will end, and we'll start the Q&A. Camila?

(interpreted) Thank you, Mario and Gustavo. (Operator Instructions)

Thiago Batista, UBS.

(interpreted) I have a question about ROE. In this quarter, for the first time in a long time, we saw a slight decrease in Mario. You have been mentioning that you aim to have a bank return much higher than it is currently. So I will link this with the Spain call this morning earlier today, they said that ROE could be 20%. But almost always, there was a comment about the Brazilian interest rates.

If at 12%, we could improve this return. So my question is, what are the drivers you have levers? What are the levers that you have? If the Selic rate continues at current levels, higher than expected by everyone, can we have this return on equity reaching 20% or not? Does the decline of the Selic rate to a low double level would be essential for the ROE to evolve to 20%, it doesn't need to be 20%, but something higher than the current level?

(interpreted) Thank you, Thiago. This is an excellent question, actually. Let me just put things into context. The group has talked about seeking 20% ROE as a profitability target for the coming years for the group as a whole. There are some businesses of the group that generate an ROTE above 20% and below 20%, which is the case of Brazil, some that are aiming to convert to 20%, as is the case of Brazil.

It is true that the group is looking the interest rates of Brazil up close. Of course, the group is one of the biggest FDIs in Brazil. They have several hundreds of billions euros almost EUR15 billion of capital in Brazil. So it's only natural that the group will look at the macroeconomic issues in Brazil. The group has little or no concern about our ability to execute, but of course, the macro scenario raises questions and challenges and group investors challenge those.

Investors buying shares of the group, they look at the portfolios. They look at the points of concern and the high interest rates of Brazil is one point of concern. At 15% Selic's the highest in recent years. If it were just a snapshot and then dropping, well, it would be different. But we know we will continue at double digit, at least for a few years down the road.

When it starts dropping, it will be probably in the turn of the year. And still, we will end next year at probably around 13%. So the concern about interest rates is correct for Santander Brasil investors and for group Santander investors. This is not good for anyone for the loan book, for the growth of the country and for the financial health of the sector. So I think it is an important point to be monitored and we have to deal with that.

Now how does that reconcile with our ambition? That I stressed in the opening of this earnings call. We remain obsessed to pursue 20%. Of course, a higher Selic rate makes this challenge mathematically a little bit further out. The higher the Selic, the more expensive is the carryover of our bond portfolio.

Historically, we had an additional challenge with the high Selic, how -- which was how we fund our retail and consumer finance portfolios. Historically, we would do it with no hedge. And we've been saying this for almost a year. We have been saying that in the NII, we had, if not a full hedge but a substantial hedge of the new loan origination. So we are working more and more neutral in the marginal origination.

But we still have that stock that inventory that was not hedged plus the bonds portfolio. All of that suffers when the interest rate increases. If we believe we'll get to an ROE of 20% in the coming years. Well, it will happen.

Do we need the Selic rate for that to happen? Well, we work to not rely on the Selic. There are many other levers to improve our results. You mentioned efficiency. Absolutely the efficiency agenda is important. I had a slide about this, and I talked about this with the buy side, with you analysts.

This is a big lever. It cannot be the only one. It has to be well conducted because this is not an agenda of just cutting down costs. We have to do it thinking about evolving the primacy relationship and good service to our clients, but the efficiency agenda is a big lever. In and of itself, it will get us from high 16% to the 20%, which is basically growing 15% to 20% the current profitability.

So efficiency, absolutely. And I spoke about expenses. On the side of revenues, we can evolve a lot. We don't need to evolve materially the portfolio, although we will work to evolve the portfolio where it makes sense, but we can continue to work on the NII. We have spread discipline, as Gustavo mentioned, which is very good, both in credit.

We are growing credit NII better than we are growing the portfolio. And also in liability NII, we have been benefiting from a high Selic rate and we have been doing a good work on the mix. We are bringing the bank's funding to be funded by retail. So the bank is being funded more by retail than wholesale, that's another source of profitability because it's an NII without capital. In the fees business, I mentioned about this, Gustavo mentioned about this. Several line items evolving to an annualized base of two digits.

We have to improve in capital markets and insurance and continue the growth base of the rest, cards, Consórcio and bonds. If we have all the line items growing around 3%, we will have an annualized fees account of two digits that will bring us more efficiency of results and capital productivity. So yes, we continue to believe we can get there. Of course, the Selic rate helps.

If it starts declining next year, we'll have better results, and this will help us get our profitability closer to those 20% ROE. And we don't want to stop at 20%. This is just a threshold we want to hit, and the management is convinced that we will achieve this in the time horizon of the coming years. So thank you very much.

(interpreted) Daniel Vaz, Safra Bank.

(interpreted) My question relates to this landscape of cautious and the increase in the low delinquency. Well, I think what it is concerning is SME. And I think in the last 12 months, we saw some increase in SMEs. But when we look at some differences in the market, different activities and the financial health of SMEs, I think this is becoming more aggravated. So how much of that concerns you? I know that the bank is talking about being cautious for quite some time. So as part of your concerns, where do you see SME vis-a-vis payroll loans and reorganization of companies?

(interpreted) Here, we still believe in the SME business, in our view, this is a great opportunity, but more than a large opportunity, we have about 7% to 7.5% share, and I think we can grow more. This means that we will grow above market in terms of SMEs. It doesn't mean that we will do that every quarter because we will continue to be cautious in the way that we allocate capital. And we placed some of that growth in SMEs. At the end of the day, certainly, we want to be a more profitable bank until we get to 20% to 22%.

But we continue to believe in that SMEs. Macro really affects not only SMEs but all of the other industries. I mean all of -- I mean, immunity discourse is macro. And the SMEs are certainly affected by an interest rates that begins at 15%. And certainly, that leads to higher spread costs in addition to government lines, but -- so the risk is higher now when compared to Selic at 9%.

But even then, we continue to believe in SMEs, we believe that this is one of the areas where we should expect to grow more. And that means that we will continue to be cautious, like we are in all the other portfolios. But certainly, we want to seek for growth in SMEs by granting credit or even with -- through government lines. We want also to get additional guarantees.

All of the rest of the things that we can do with SMEs, not only loans alone, our most profitable portfolio, and I said that last quarter, is the portfolio of SMEs with profitability way above that 20% that we have in other portfolios. So we have to know how to learn with -- how to grow with the right transactionality with floating business, fees business, and the principality of that SME customer is very important.

Sometimes they do not ask for loan. I mean, this SME is self-funded by a great margin. We have a lot more deposits in SMEs rather than the loans. And that means that we continue to evolve. And this is a self-funding business, and it's much more profitable.

So the direction won't change. Certainly, we will be more cautious in the margin as we are with other portfolios, but there is still a lot more to do with SMEs in addition to loans. And we know how to do that quite well. So you should continue to wait, but this is a portfolio that will continue to grow vis-a-vis other portfolios.

(interpreted) Gustavo Schroden, Citi.

(interpreted) Thank you for taking my question. I will -- my question is about asset quality. This is a topic that is worth elaborating further. There was a worsening with SMEs, but if you look at NPL in general, it was an NPL that posted a slight improvement. But when we look at exposure, looking at it 4,966 stages, [266], there was a 100 bps increase. It went from 8.1% to 9.1% in a combination between Stage 2 and 3, but Stage 2 requires larger provisions.

I would just like to understand whether that increase from Stage 2 and 3 is also related to SME or there is another segment that also hurt Stages 2 and 3 or rural? And still speaking about asset quality, if you could talk about the write-off policy of the bank. The path is slightly different from what we've seen in the industry. I know that the 4,966 will give you more flexibility in the write-off path, but I see Santander going in the opposite direction.

(interpreted) Gustavo, I think you could start.

(interpreted) Hi, Schroden. In general, we saw the impacts in different stages. As I said it. I mean, the reorganization impact Stage 3, and that is the major move in the quarter, just like the -- we have agribusiness companies that are going through the reorganization process. Therefore, we have to add additional provisions because we believe that expected losses could be higher.

So -- and then as I was saying, the retail portfolios and the consumer finance for individuals is performing well. There are less entries and so the losses are lower in the initial stages. But we are closely monitoring coverage per stage. And I think our coverage per stage is very good, and this also matters.

The second part of the question was the write-offs. Well, the dynamics is the same. We work with expected losses. So in portfolios where we believe that there will be low recovery, as our -- as part of our policy since we have that possibility today, we will anticipate our moves when we think that the portfolios will not have the anticipated or the estimated recovery level. That could happen. I mean, the write-offs are healthy.

We made some important moves this quarter. So it's important that with that our portfolio will be cleaner given the fact that we have better new vintages or cohorts. So as I evaluate and remove things that may not have the expected recovery level, I think that this dynamic is quite healthy for any risk management or balance sheet management.

(interpreted) Just to add, Gustavo, it is precisely what Gustavo said. We've been pursuing a policy of engaging in agreement, and we are more sensitive in terms of our agreement policies or negotiation agreements. So everything now includes a cash component. In practical terms, this leads to an acceleration of our position vis-a-vis -- I mean, agreements that we would do without the cash component, but we are using a cash component.

For the past year, all of the agreements include the cash component that anticipation of the write-offs, meaning that every quarter, the margin is cleaner and healthier. And that derisk, if I could call it that, gives us more room. And if the opportunity comes, we will do that more often rather than extending that attempt to get any recovery. So you should expect this kind of management going forward.

(interpreted) Perfect. Thank you.

(interpreted) Eduardo Rosman, BTG Pactual.

(interpreted) I have two follow-up questions. First off, Santander Group, they announced a one-off impact of EUR467 million. I think that this is the main reason explaining IFRS profit and BR GAAP income. So I'd like to get a confirmation from you. How do these two factors talk with each other?

My second is regarding asset quality. One of your competitors has said that NPL of the vehicle system has been showing worsening. And to them, that's an indicator of worsening in the last 10, 15 years. Do you see this? Do you see this getting worse? Do you agree that this is an important indicator for us to follow and monitor? Could you elaborate?

(interpreted) Thank you, Rosman. I will quickly answer the first question, and then Gustavo will speak about asset quality. This balance sheet reinforcement -- the reinforcement provisions the bank had, but just to put things into context, First, if you follow the group up close, the group had a super positive quarter with all indicators ticking the box. And the group would have had an extraordinary result of surplus linked to the sale of an asset. And this could be a surplus, but the group decided to use this to reinforce provisions in the global balance sheet.

And given that first question from Thiago, with the concerns about the Selic rate, the macroeconomics center in Brazil, and given the provisioning level in IFRS 9. And I'm not talking about 4,966, okay? The group said since I have this ability to strengthen the balance sheet in a conservative preventive way, not that we have anything happening. August 1 is coming, but the group preferred to boost the balance sheet in a preventive conservative way and to increase the provisioning for Brazil under IFRS 9.

How does this talk with 4,966? Rosman, it's almost a harmonization. If you follow the disclosure of the last quarter, if you look at the LLP that we had in the IFRS 9, there was some billions difference. And this creates a convergence of about two-thirds of this difference that existed in the IFRS 9 of Santander Brasil, matching 4,966. In fact, it has no impact on 4,966.

It is almost as with the change of the accounting criteria. It's almost like we already did a good part of the change in the capital. And now with IFRS 9, the group decided to use the proceeds of the sale of that asset to strengthen the balance sheet. It's nothing more than that. It's a one-time thing to harmonize, converge the two GAAP criteria to really touch the 4,966, which should be a natural concern.

(interpreted) As regards to Consumer Finance, I think it is important to take a step back. About 18 months ago or more, we have been operating with our best ratings. We didn't change anything in our risk appetite and guideline. We are operating with the highest ratings in our view. That started in the last few quarters.

And truly, we don't identify any deterioration in the ratings of our customers. We have seen performances in other ratings, and that's why we didn't move forward. If we had seen better performances in ratings 7, 6 and 5, we could think of approaching this. But we did not, and that is an important signal. And we see that there are a number of performances by rating.

90% of the market goes through our funnel, and we choose to fund almost 20%. We didn't change anything internally. So in the audiences that are of interest to us in the rationale of risk, we have been having good returns. Returns that have been increased, as Mario mentioned before, by the penetration of products and cross-selling to our consumer finance customers.

So we've seen good performance so much so that we increased the portfolio by 5% and growing one of the largest portfolios. So again, for the groups that we have defined, we have not seen this deterioration that you mentioned in NPL.

(interpreted) Excellent. Thank you very much.

(interpreted) Mario Pierry, Bank of America.

(interpreted) Thank you for the opportunity to ask a question. Mario, I would like to focus on the growth of the individuals portfolio showed stability with parts growing 13%, but payroll deductible loans are decreasing. So I would like to hear from you, how do you see opportunity in private payroll deductible loans?

In the latest data we've seen the bank has been very conservative. You haven't been growing in this product. What are you waiting to see? What do you think could accelerate this growth to offset the reduction in INSS deductible payrolls and payroll loans?

(interpreted) Thank you, Mario. I'll speak about the individuals portfolio, and then I'll speak about the deductible loans, okay? In individuals, I've been saying this for quite a while. We are relocating portfolios, reusing higher risk assets to portfolios where we can be more profitable. So in individuals, we post a slight decrease net-wise.

And it's okay if this happens. As long as we are using the risk-rated assets that we were using with less sustainability in the mass income, and we are directing that more to high income. So there's a structural move.

In individuals, we are rebalancing our exposure. We had historically high concentration in low income. And now, we've been moving to mid- to high income. We've been doing this for a while, and we will continue to do it.

Our commercial pressure would be to increase our presence in mid to high income. It's not that we are going to exclude lower income. We need low income, but we need the right low income. So we've been more selective. So this is the first move of a mix change in the individual segment. This is happening. And every quarter, we are improving a little bit. Hopefully, in the second half, we will improve even more in that direction.

Now speaking about the products, Mario, you are correct in your assessment. In the payroll deductible loans, it was a revenue growth source -- revenue and growth stream in 2022, 2023. But since then, we have been reducing more INSS deductible loans and all public ones because the private payroll loans changed.

So INSS continues to be the same when we use INSS. There is very little margin left given the ceiling of rates that continue to exist and not correlated to the cost of funding for the mid to long term. There's no correlation with the Selic rate, and the Selic is increasing and the ceiling. The cap continues at a level that is not feasible. So for the core (inaudible) channel, it doesn't really make sense to do INSS payroll loans.

In our own channel, it does make sense and as much as possible, we are doing it. But there is an additional element, which is recent. Given what happened with the INSS, all of the fraud, the government, I would say, did the right thing. They implemented a methodology to validate customers via face biometrics, which is an anti-fraud measure. But in an audience that is less digitized, less familiarized with digital apps and biometrics. So they raised the bar for the right reason.

And for the whole market, biometrics, and assigning INSS payroll loans became more complicated. We like the product, but we are very disciplined in terms of profitability. And we don't see how the core [bus] channel can be profitable. If some players are managing good for them, but it is a business that does not reach the targets that we want. And as you know, we are very restrictive in terms of capital discipline.

But with our own channel, yes, but with the challenge of biometrics. There is some challenge regarding the cap, but that's manageable. We'll continue to grow where it is possible. And in private, payroll deductible loans, and we have about 30% bankers share. With the new format, we are learning as we go.

Very candidly, there was a lot of proportionate noise, something that we never expected would happen in the short term. Of course, there is volume, there are many incumbent and new players doing this. We respect them. But we tend to be more conservative because not all mechanics of collection, responsibilities, et cetera, not everything is very clear, some things are being still designed or finalized. It is only natural that a totally new process will take some time to settle.

We are monitoring this up close. We continue to like the product. We believe we understand private payroll deductible loans. We had a portfolio of BRL12 billion. Over the years, we want to continue to resume growth for the portfolio. There might be an evolution in Q3, but it won't be a leap.

The first payment defaults will tend to stabilize. We had very high levels, and we prefer to be cautious in the beginning and play more strongly in the public payroll loans in the coming months. So we will resume growth, but this is kind of a new product with a whole new mechanics. The market and the product are learning to operate everything, to be very precise.

(interpreted) Excellent. Thank you very much.

(interpreted) Yuri Fernandes, JPMorgan.

(interpreted) My question is about top line and your NII, maybe for the next 12 or 24 months going forward. I saw a very good spreads dynamic. Volumes are weak, but I think you're seeking profitability, will may increase allocated capital. But my concern here, thinking about the next 12, 24 months with spread going to towards the fourth quarter, maybe we should try to think about something to do because the portfolio is very weak. What is your strategy?

Maybe you think the volume will still be weak. You think that spreads should improve going forward? Maybe it's a matter of market NII because maybe with lower interest rates, maybe your client NII will improve or maybe will be more challenging because now everything seems good. But with the portfolio growing 1%, 2%, it's hard to keep that going on for a long time. I just want to understand your dynamics better.

(interpreted) I will start and then Gustavo can comment later. I would like to give you a few answers. First, we don't have to grow continuously our portfolio by 1% or 2%. It's not a KPI imposed by Santander Group. The management KPI is what you manage.

We want to be very obsessive in terms of the profitability level of that portfolio, and we haven't reached that level yet. So in our obsessive search for profitability, we will not focus on growing the bank very much if it's not profitable, but I think we can grow specific portfolios more than what we are growing. The consumer finance is a good example. We saw room to grow.

I mean, all of the origination cohorts that generated a lot of money. ROE was above 20%. So our origination was very good on the Consumer Finance segment. And this applies to SMEs. We grew less mainly because of the write-offs, but the growth was below that of the first quarter. We can still grow above that 20% that I mentioned for the consumer finance.

Large corporate in the first quarter, in the last two years, we have posted growth. It has been flat or sometimes a slight decline, but due to some one-off situations. I don't think that the exchange rate will appreciate so much in the next coming quarters. Maybe there will be some ups and downs. And IOF at least the drawdown risk is something already sold, not so much so in terms of SMEs or the Corporate segment because there is a cost because that hampers the financial breadth of companies.

So the drawdown risk comes back this quarter. The margin, maybe I don't think it will appreciate a lot more. But we still see a lot of room to grow with profitability on the wholesale segment. We are very disciplined. There are situations where I can sell my assets or up for some other avenue.

And I talked about high income. High income, we are still far from where we want to be. We grew a lot in the past few years, we can grow a lot more. We are focusing on individuals and high income. We know that high income is more sensitive to fees. They are more competitive, but our franchises is very robust.

We have almost 4 million clients in our select portfolio with advisories service, meaning after all of that, that the portfolio can grow more than in the past quarters is not a KPI per se, but we have enough capital to make it grow. Maybe your next question was about capital. I know you focus on the capital side. And you're right, I mean, we have a capital base to grow. We have capital to distribute, and it will not be for lack of capital that we would do it, but more -- it's more a matter of discipline.

Now going back to NII, ex volume, the credit discipline that you mentioned, we believe that we have a lot of discipline. With a lower Selic next year, we believe -- I mean, P versus Q, there will be a less P, and it's natural. We'll try to offset that with more transactionality and more volume.

To give you an idea, Yuri, in the low-income segment, we are growing mid-teens our transactional deposits. And our credit position in low income. When we reach for low income going to high income, we are reducing low income, but we are growing transactionality by mid-teens because with account, we are -- transactionality is growing. So we want to increase margin with better mix reliability volume, taking care of fees. And to close, we want to -- we draw more out of the fee line.

Some dynamics are very positive, some are not. We want to maintain the positive levels there were. And we will take care of the capital markets, insurance, so that they continue to grow 3% to 4% every quarter, and the fees line will grow four digits in the foreseeable future. I mean, between margin and commissions, we want to keep our top-line account growing mainly in clients because eventually, Selic will start falling. And so this line will give us a contribution year on year.

So 2026 will be better than 2025. So I hope I answered your question.

(interpreted) Thank you. It's very clear.

(interpreted) Pedro Leduc, Itaú BBA.

(interpreted) My first question is very quick about 15 to 90 NPL that was up in the quarter. Could you tell us how much of that increase came from protected loans like FGI that they do not materialize as a loss. I just want to hear your view. And the second question is on the expense line. The performance was very good.

I mean if you look at all the other lines, they outperformed. And looking at the quarter, Mario, I would like to hear from you what we could expect in terms of underlying, what is behind the gains, especially looking towards 2025, whereas P, in the revenue can be tougher and whether you will continue to see greater efficiencies?

(interpreted) I mean, Gustavo will start with the first part of your question, and then I will talk about expenses.

(interpreted) As I said, NPL 15 to 90 in the lines with further collaterals, I mean, 15 to 90 NPL is affected by government lines. So there are lines where we have to wait 180 days, and then after that, there will be another seven days and some other lines, 90 days plus 30. Obviously, there is an impact coming from these lines. It's not a loss, but there is the rollover of these lines in the period. And so this is what happened.

It is an important part of the roll over. There are some basis points on top of that 15 to 90 NPL. That's why I said that 15 to 90 comes from macro. But to be more specific, it is precisely what is happening. These lines are delinquent, and we have to follow the normal flow of collections attempts.

Once that doesn't mature. I mean, if they do not pay, there is 30 days for people to pay and then you give them an additional seven days. So this is exactly what is happening. We are not concerned because there are collaterals, but that 15 to 90 NPL for SMEs have an impact, like you said.

(interpreted) Now speaking about expenses. And I'm glad I have a chance to talk about the outlook. We are shrinking the expenses in a sequence. I mean, I've been talking about that in several occasions with the sell side. And I've been saying that we will try -- consistently try to beat inflation.

Throughout the years, we are doing like sub inflation, but not -- maybe the difference is not so high so much so that we'll move the needle. But this quarter, we are trying to beat inflation in a more forceful way. I mean, maybe 1.3%, we had a reduction of almost 400 basis points -- I mean, 400 points in terms of actual gain, and this is something relevant, but we will not stop there.

So what can I tell you about what we anticipate going forward? This agenda will be pursued throughout the year. It's not an agenda that I think will be concluded at the end of '25 because it involves efficiency, transformation, in some cases, reinvention. We want to continue with that agenda throughout 2026 and maybe '27.

Why can't I do everything now? Because there are things that depend on other investments that we started in the recent past and others that are about to come to have more automated journeys to eliminate redundancies of some legacy systems or core systems like cards. We are still running two systems today, the new system that we developed together with the group. This will help us a lot with the operation in terms of increasing efficiency, but we still have the (inaudible), which is a legacy system where we ran our mainframe for years.

So all of that takes time because it's just a matter of completing the new system. But the transformation agenda processes, automation and transformation, et cetera, the reduction of redundancies and the prioritization of the management is something that is happening at full force. So I think you could demand for -- demand a positive performance in the coming quarters, and this is part of our positive outcome.

I think that we also have to grow the top line. So your previous question is very important. That's why we want to grow the top line, but without just having this huge appetite to grow the top line in detriment of [ALL], but the management now is more asset, I would say, on the expense side so that we have a positive breadth throughout the next two years.

And with that, we will create a more sustainable base for the bank. And this is part of how we will achieve profitability of 20% plus with a lean management. We will still take care of the top line, but this will transform into middle line with a better quality of credit and this will reduce the ALL portfolio. So in a snapshot, this is the equation of how we will converge towards that profitability that you would rightly so should demand from us.

(interpreted) Thank you.

We will now switch to English with Carlos Gomez, HSBC.

I wanted to ask about a specific business, which is the rural portfolio. We see that it is declining quite significantly for you. The corporate part, 5%, individuals, 17%. That's a lot. In the past, you wanted to grow this portfolio, obviously, there are problems now. We know that in the main player. How do you see it from your perspective? What are the prospects? And has it been impaired permanently?

And second, if you could just comment how do you feel today versus three months ago in terms of the macro and the general situation?

So I'll start, Gustavo, please feel free to chime in. Well, we grew a lot our agro portfolio, and I've shared this with you through the times. Between end of '21 and end of '23, you almost doubled the portfolio. It became, on the credit portfolio, close to 10% and on the expanded portfolio, close to 7%, 8%. So it became a relevant portfolio.

We don't regret having grown our agro franchise the way we did. But obviously, 2024 was not foreseen by us and by the market. And the mismatch for some of the commodities, particularly grains between the price in reais of the commodities sold versus the supply -- the cost of supplies, agrochemical supplies and the financing costs that didn't work well for grains, particularly last year. It is better already this year, but it's that the portfolios -- the farmers are still tainted with the negative results they had last year.

So that was unforeseen. How did we deal with that? We dealt very closely with the clients, restructuring whatever we needed to restructure. There were much higher clients, much larger clients filing Chapter 11 equivalent in Brazil than ever. So we had to deal with that as well.

Most of the portfolio, Carlos, is secured with either fiduciary lien or mortgage. It takes time for us to take over the farm and potentially sell it and monetize. That -- we are probably in the valley of that cycle whereby the Chapter 11s are still taking place at a slightly slower pace, but still relative to two years ago, still higher. But we're still aggregating Chapter 11 filings and working on the recoveries as fast as we can, but there's a process. There's a, let's say, trial for you to undertake that. It takes at least 12 months in practice.

So we are already working on the recoveries for the Chapter 11 filed last year. And probably next year is going to be an important year for recoveries as we undertake the final proceedings related to the newer Chapter 11s and those from '24. So how do we look at the agro going forward? First of all, agro is a lot of different commodities. I mentioned the grains, soybeans, and corn, particularly, but sugar has performed super well, coffee, super well, cocoa, and some other products.

So we continue to work on those subproducts where nothing happened almost and growing those portfolios. In grains, we're not away from those producers anymore, but we are more cautious in looking at the numbers and looking at those producers that did not -- were not affected by the pricing challenges last year. And at some point, we're going to resume growing.

So right now, we are more working around the portfolio where we had more challenges at the margin where we didn't have challenges, we keep growing. The net can be a reduction, yes, but it's not because we want to reduce per se directionally our exposure to the agro business. No. We're just in the point of time where we are digesting more of the portfolio as opposed to looking at growing.

But at some point, we will have digested the portfolio probably next year onwards, and we will resume growing more broadly. So hopefully, that answers the question.

The question regarding the sentiment on macro, at the margin compared to three months ago, marginally worse, given -- well, rates peaked at 15%, well, hopefully peaked, but I do believe they are peaked at 15%, but it's a very, very high level.

The performances overall, we just saw two days ago, the Central Bank data for June and for the quarter, there's a marginal deterioration in delinquencies. We are seeing that. We just saw in our numbers. Some portfolios are suffering more. Corporates in general, pay floating rates, so the higher Selic for a long period of time, which we will unfortunately have poses a challenge.

And on the more global arena, the tariff scenario is not great, obviously. So we hope Brazil closes a deal with the US, but God knows, but that is a potential cloud in the horizon as well. So at the margin, I would say, marginally worse, but we keep progressing. We keep willing to grow the bank, grow the balance sheet, grow the different lines, like I said before, and obviously grow profitability.

So we remain optimistic mid to long term, but obviously, with some concerns on the short term, which we need to handle, but nothing preventing us from keeping growing the franchise and the results.

Thank you so much.

Jorge Kuri, Morgan Stanley.

Thanks for the opportunity to ask questions. I wanted to ask about market NII. You had telegraphed that, that was going to be a more complicated quarter given the movement in rates. I do think that the magnitude was probably worse than what the market anticipated, and that's why your operating income shrunk a lot quarter on quarter.

How do we think about the next couple of quarters if Selic indeed is now going to stay at 15% for the rest of the year, is there room for that market NII number to be a much lower negative figure for the next two quarters? And then just because it's such a big part of your revenues, how do we think about 2026? If we start an easing cycle and the consensus is right and Selic rate ends 2026 at around 11.5%, 12%, which is where most estimates are, how big could that market NII be on an absolute basis?

Thanks, Jorge. So Gustavo, please.

Well, Jorge, as I mentioned, the -- what I think in terms of total number for the NII, the market NII and more specifically the [ALM] part, the number -- the figures that we think are the same regardless of this higher Selic because we did some measures to get there. I cannot anticipate what -- how much will be the figures in the third quarter and the fourth quarter. But something that I can tell you is the number and the figures that we thought in the last quarter and also in the fourth quarter about what's going to be the shape or the number for 2025 is the same.

So nothing changed despite the fact that we have a higher Selic -- a higher average Selic year on year than we budgeted. So is everything under control. But I'm sorry, but I cannot anticipate the movements on this NII for the next quarters.

But I think we can complement, which goes along with the previous expectation, as Gustavo was saying, Jorge, the market should not expect -- I mean, it's a price versus volume thing. Again, it's mathematical, right? So the Selic consolidates at the 15% level average in the third quarter. In the second, it was already high, but not full 15%, right? So there's a consolidation at the higher level in the third quarter.

So it's unlikely that we reduce materially the negative number we saw in the second quarter if the average Selic, which is the funding cost of our ALM portfolio, got marginally higher in the third Q. And by the way, in the fourth, which is probably going to be the same level.

So I would not expect a material decrease in the negative number in the next two quarters, simply because the opportunity cost will remain at that high level close to what we saw in the second Q and slightly higher when you compare third Q versus second Q. There's the other element, which is market making, the trading position, which also consolidates in market NII. That's very hard to predict.

We had a positive second Q, but we had a record first Q, which helped us on the first Q. But on a relative basis, there was a decrease, although the franchise keeps very solid, very strong. But that one is really hard to predict because it depends on the flows, the auctions, the tradings, et cetera, client flows, particularly. And we hope, as we have a very solid franchise, we hope that we're going to have solid third and fourth quarters, but time will tell.

But on the bigger number, which is the ALM piece of the portfolio, it is volume versus pricing. So I wouldn't expect a material change there.

And then in '26 onwards?

Yeah, '26 onwards obviously depends on the average Selic and I hope and potentially the average Selic is lower. So we'll potentially see a delta '26 against '25. That is natural. So we'll be hedged and the carry and the Selic, the rate will be on average lower than '25. So potentially, you'll see a positive delta in '26 against -- over '25.

Yeah. So we hope we're going to progress in that line in '26, hopefully, again, '27. Time will tell, but we believe we have peaked the rate scenario at a very, very high level. And from here, taking aside the next few quarters where we still accommodate the average Selic. But for the next few years, we believe that is going to be one of the points where we have at the margin, more earnings momentum.

Thank you, Mario.

(interpreted) We'll switch back to Portuguese with the last question from Tiago Binsfeld, Goldman Sachs.

(interpreted) Thank you for taking my question. My question is about fees. I would like to hear from you what you expect going forward? There are three lines, especially insurance, capital markets, we see some potential for improvement, if that's what you expect by the end of the half year. And if you think it's sustainable to grow cards by -- in two digits from now until the end of the year?

(interpreted) We talked about fees. Some dynamics are already running at the level we would like to see for longer. You also mentioned cards. It's hard for me to precise the magnitude of this growth because the denominator growth has the base increases.

But what I can tell you about cards is that we still want to grow in this line because cards together with the limit of the account and payments as a whole because we see everything as being one single thing, the capacity to invest, to spend and transfer, we see that as something integrated. So this is still, the pillar of the strategy. We will continue to put capital in this area, and our focus will be in improving technology, people, et cetera. So this line will continue to grow.

And together with that, comes transactional deposits. I mean they are not together. But as we said, we are growing retail transactional deposits. So things are moving along very well, and we hope that this line will continue to grow two digits year on year. But with the bar or deposits increasing, this will -- we will look at cost of risk and also profitability.

Insurance, the quarter was about flat. I mean, certainly, resuming growth in this line is crucial. I mean, granting last credit in more expensive products where you have more cross-selling in insurance poses a bit of a challenge when compared to previous years. So I would say that the quality of our insurance origination and productivity in terms of our credit has to be higher. And so that's what we are looking for.

So there was one other product that we didn't have, we are launching it now. Now we launched the insurance for the checking account and credit card, and that is selling like popcorn. So we will launch high-income insurance just to add up to our offering. So we are just filling into some historical gaps.

Our -- we are strengthening our sales force in the Insurance segment. We have another external channel with people that work for us, but they are dedicated to the Insurance business. And so we are just making this team more robust. And finally, we are aligning that to -- with incentives. And so I do believe that starting in the third quarter, our Insurance segment will resume growth. And this is a crucial line.

And the capital markets certainly depends on our effort, but it depends pretty much on the market. As you know, the first half was a bit slower than historically. We are not in some operations for our -- because of our own discipline. But in the third quarter, the pipeline will be stronger. In July, we already did a few things.

My feeling about the third quarter and going forward, especially debt because equities is still not performing, M&A, we see one thing here or there, but we are excited about capital markets, and we believe that will continue to grow. So the fees dynamics should have a very good performance in the second half of the year, and we are putting a lot of our efforts in this area.

And again, with that, we will increase productivity, profitability to extract more value out of our capital because we have to continue to grow, and we will grow.

(interpreted) Thank you, Mario.

(interpreted) I would like to thank you all very much for joining us this morning. So after this video conference, myself and the entire IR team for Santander Brasil, will be available to clarify any further questions. Thank you very much. I wish you a very good day and a very good week. Thank you, all.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.