Banco BMG S.A. (BMGB4) Earnings Call Transcript

Good morning to everyone. Welcome to the BMG Bank of Q1 of 2023 Earnings Conference Call. I'm Danilo Herculano, and I am in charge of Investor Relations, M&A, and new businesses. Today with us we have Felix Cardamone, our CEO and Flavio Neto, our VP. This video conference is being recorded. [Operator Instructions] Please note that the disclosure material is already available for download on our website in the Results Center tab. Before proceeding, I would like to clarify that statements which may be made during this video conference concerning the outlook of the bank's business should be treated as forecasts. Investors and analysts should understand that general conditions, industry conditions, and other operating factors may affect the bank's future results and may lead to results that differ from those expressed in such forward-looking statements. I will now give the floor to Felix for his opening remarks.

Good morning to everyone. I am very happy to participate in the first earnings results of this quarter. I've been in bank for slightly above 1 month and I'm very excited because this is an extremely traditional sound bank with strong capital structure, with a robust customer base, loan portfolio and a high potential of improving its results. Now, obviously, during the first month, my mission has been to understand all the business lines, the distribution channels, the balance structure, funding structure, and how the team worked, to meet the professionals and also the dynamic of this market. It is important to highlight that, in my view, this bank has a major potential to improve its ROI, its efficiency index as well. And many of you have been following this closely. And we will make a major effort to control costs, to find operational efficiency, to follow closely the loan area, churning as well or collection and to develop growth levers that bring us sustainable results in the short, mid and into the long run. Therefore, I thank all of you for your participation and I will give the floor to Flavio.

Thank you, Felix. Good morning, to everyone. So, we will start our presentation today. We can start on Page 2, where you can see the highlights of our first quarter of 2023. We ended the quarter with 12.9 million customers. Our credit portfolio was BRL 25 billion and our credit income was BRL 1,771 million which resulted in a net income of BRL 23 million. Therefore, the number of customers credit portfolio and revenue with significant growth. We also announced the acquisition of 30% of the capital stock of BMG Seguros, totaling 100% of equity interests. We also announced the acquisition of 5% with the capital stock of Granito, totaling 50% of the equity interest. And as it had been declared now, we declare interest rate over shareholder's quality -- equity and now we totaled BRL 11.7 million. Now to our next page, we will talk about our business and product. As I mentioned, our client base 12.9 million, but the highlight here is that 57% our customers that have loan products or credit products and this is why they're more profitable customer and our relationship is through a number of channels, our digital accounts, also our help franchises, the retailers that are our partners, our agencies, our correspondents, and more and more. We are using WhatsApp where we have over 6 million customers registered and we are able to maintain an excellent relationship with them. Now when we go to Page 5, here you can see the volume of digital accounts. Now we have 8.5 million and more and more. There is greater engagement regarding relationship with the customer and the bank, because there's growth in transactional volume on cards with exception of third and fourth quarter. That was the moment where the benefit card grew and trend and the transaction volume on account with cash out we totaled during the first quarter a record of BRL 11.6 billion. Now on Page 6, we are going to talk about our portfolio. And as you may observe, we are diversifying. I would like to highlight with the growth of 2 portfolios, 1 of them is personal loan. Here we're talking about the anticipation FGTS account that is a safe portfolio and what is -- and also we have the benefit payroll card that was the second portfolio that grew most during this quarter in terms of the portfolio quality. There's a slight high of our NPL -- NPL caused by 3 factors. One of them would be the remix of this portfolio, because we have grown in portfolio that in the past were more concentrated in payroll and now our portfolios present a higher risk profile, slightly above. We also have the macro issue, we're not immune. This affects a number of portfolios, so this can create a little bit of deterioration. And something that was anticipated because last year we presented a strong portfolio growth and when you grow a portfolio and you work, well, this math a little bit real NPL. And now that we reduced this growth, this NPL has increased a little bit. Now when we talk about our main products, we are going to start on the external with the payroll credit card. We will see this was all the payroll products as it was obvious throughout the first quarter. There was a drop in rates by the government, which shrunk the government during, so the origination during some weeks was in existent. So there is a month of origination below with what was expected. Nonetheless, this portfolio has grown and now we've totaled over BRL 9 million, also the interest rate for INSPECTION, it is more -- it's more relevant because this took place at the end of the quarter. So this was during April. Now when we go to Page 8, we're talking about payroll loan. Now the payroll loan also suffered the same problem, a lower origination during a number of weeks. During this quarter together with this we also had -- there was this diminished. And also the credit -- granting and last year we grew a lot in the loss of PPC that is within payroll that has higher NPL levels. So this is why our index of NPL are over 90%, so slight high. Now on Page 9, here, we present our benefit payroll card that totaled over BRL 2 billion. Now of course, the origination after the boom during launching during Q3 of 2023, there was a fourth quarter, now the volumes are more normal in terms of origination, and it is robust and it has grown more than BRL 360 million in terms of origination. Now regarding our personal loan, here, we have 3 products. Here we have our emergency about the FGTS anticipation and our open credit card. Regarding the open credit card, we are being very cautious because of the macro environment of credit deterioration. Now the FGTS anticipation is a safe product with good credit quality and we see that this product is gaining momentum during this first quarter. Now on Page 11, another front that continues gaining momentum within the bank is insurance. During the first quarter was responsible of over BRL 15 million and here we have our 3 fronts. Here we have our broker with Seguradora with over 4.7 million customers. Here we have our insurance that were through the retail challenges, and we just agreed the coinsurance agreement with Generali this was the insurance company now. And now we started issuing the policies within the coinsurance agreement. We have the BMG Seguros that works with wholesale, everything with outside the main counter. This is a more volatile operation in terms of issue creatives and there were 60 million premiums that were issued. Now on Page 12 here, you can see that our wholesale affirmation is divided in a number of fronts. One of them would be our structured operations that are guaranteed by receivables, the portfolio that we fund with our partners and the franchisees and also operations or mainly with receivables from prime companies. Here we're talking about a portfolio that grows the quarter close to BRL 1.7 billion. Now on the other side, if we see the upper right-hand side, we have a portfolio of enterprises here. We're talking about additional enterprises with real guarantees with a classic sound and it dropped due to the macro environment that we have been closely monitoring the portfolio, and it was BRL 678 million. We also have a TVM, a marketable security. And in the lower right-hand side, we can show our non-credit revenue originated by the customer base, and we work with derivative operations to protect the balance of these customers, and this was BRL 15 million on Q1. Together with this, we are exploring synergies with Araujo Fontes, pointing out to capital market operation. With this, I will give the floor to Danilo, so he can continue with the presentation.

Yes, thank you Flavio. Now on Slide 14. Talking about the financial margins, we can see on the left-hand side, the financial margins improving, because of the growth of the portfolio, driven by Selic and the interest rate, which is more funding expenses. On the right, okay, the adjusted cost of credit here, we have the deduction of provision expenses and commissions. This was affected because of the slight increase of the commission expenses, because of the maturity of the portfolio and this has already been mentioned. Now on Slide 15, here we can see our efficiency its deteriorating a little bit, better than the past quarters, although I would like to highlight something, the main positive impact was the growth of revenue and the expenses of the bank were stable at the recent actions. As mentioned by Felix highlights that the main improvement drivers continue driving down these expenses. Now the contracts with -- contracts we're working on the root causes the indicator of the civil lawsuits has dropped here. Now on Slide 16, here within our strategies of our -- here we have Araujo Fontes, help!, Granito, have driven the results this quarter, but the bank is strongly investing in the ecosystem and startups, investing in Raro, iCertus, O2OBots, QGX. QGX still needs the approval. And I would like to highlight funding and liquidity -- our cash -- we have a good balance to face our obligation. But what is important here is the conservative view of the bank regarding assets and liabilities. During the quarter, at the end of the quarter, the funding had 20 months of average duration and the asset had an average duration of 18 months. Within this funding strategy, when we observed 2022, it was strong regarding securitization and the recurrent issuance of financial bills. Now during the first quarter, through CDB instruments, we are using CDB instruments to fund our liability in order to reduce our risk on our liabilities. And to end the presentation, when we go to Slide 17 here, we have a comfortable capital level. We have an MtM of government securities, something that we present to you now of this [ 0.21% ], 40% of this accrual will take place until the end of the month. So nonetheless, although there has been a nominal drop here, we are comfortable with the capital plan from the current bank, reminding you that we have issued financial bills. And one of the interesting factors is credit assignment without risk. Flavio said that we are testing the model and not only with the capital more. What is important is the return of our allocated capital with this type of operation, we can carry out better allocation of this capital with a better result and improving the intrinsic result. This is the RAROC view, not only the instrument in the capital instrument, but we are seeing the return over allocated capital. And with this, we bring the presentation to an end. And now we can go to our Q&A session, reminding you that questions can be sent through the chat section on our webcast.

The first question, it comes from [ Lucas Rodrigues ]. He is a manager. What about the bank appetite for our payroll product after the drop in the rate? So Felix can start with this.

Thank you for this point, congratulations Danilo for the presentation, also Flavio. Well, obviously in the market, we have to be more selective. We have grown significantly from '22 to '23. And now we have to find profitability and be selective regarding the mix in volumes and the ways of origination. We do believe that there will be a drop in the interest rate during the second semester that can help with in funding, but we continue with appetite. This is the core of the bank, but we have to work in a disciplined and selective fashion when we think about origination.

Thank you, Felix. Flavio, we have some follow-up question 1 is Rodrigo Chaves and Anonymous investor. What are the prospects -- for the changes in rate and payroll products, will you be able to -- will you be profitable with the drop in these, payroll rate?

No, I believe that Felix addressed this question. Now with the drop of rates, although our payroll, although it's an interesting product, although there is a challenging scenario. It has -- but the appetite diminishes, because we have lower spreads. So there is not only a challenge in terms of NPL of products with more credit risk, and you have margin with more, say, products like payroll loan.

I am going to join 2 questions from 2 investors and 1 manager. Which are the efforts plan to improve the profitability of the bank. And in this follow-up the result of Q1 was below the past result. What you expect in the coming quarters, considering a high Selic, which are the levers to increase our results?

As I already mentioned -- well thank you for your questions. As I just mentioned, we are facing 2 major challenges on one side for products of greater risk, credit risk, there is a challenge regarding NPL, which is high in the market, by and large, on the others and payroll product has a compressed margin. Therefore, this being said, we are as a main driver to improve the results. We are analyzing expenses, and we've started plan to curtail our expenses and together with this, we focus on products that are not necessarily connected to loan like insurance. We present at the page on stable of insurance, and this will gain more relevance within the bank, because of the current macro scenario.

Flavio and still on this matter [ Laurenco from Jenvi Investment ], could you give us more details regarding the measures to improve the efficiency levels you talked about revenue. You spoke about cost any more details that you could give us regarding this point?

We analyze our clients, there are number of opportunities here. We carried out our recent adjustment in terms of headcount that is something difficult to do. We are also adjusting marketing. We are being a little bit more restrictive in investments -- and we are analyzing the entire operation and our cost line and pursuing these opportunities. Of course, these type of drops are still not reflected on to what we expect to see. It reflected throughout the year.