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

Good morning, everyone. Welcome to BMG Bank. I'm Danilo Herculano, and today, we have Felix Cardamone, CEO, Flavio Neto, our Vice President. After this presentation, we will start the Q&A session where you investor analysts will be able to interact directly with Felix please. Welcome.

Thank you, Danilo. Good morning to everyone. Welcome to our conference call. And I can imagine what everybody must be thinking why is ROA down during Q3. This is an important question, and it is related to the current market situation. So today, we have high interest rates, high indebtedness from our population. We also certainly have a lot of people that are on the red, and this affects the financial market by and large, and BMG Bank is part of this market. But it's important to underscore that despite this drop, we continue having a sustainable Royal evolution of our businesses. And I do believe that this is a cycle as we've had other cycles in the past and the bank has capacity and conditions in order to continue our evolution so that our results improve more and more. We are clearly focused because we want to have a bank that is more profitable, we want closer and a digital bank this focus continues despite the current scenario. And another point that is also important to underscore is that in the case of the BMG Bank, we also face regulatory subjects that were and that are difficult on our day by day. I will give you a number of examples. There were changes in the hiring process of INSS payroll role benefit cards. We also had a ceiling of the rate on the private payroll card and another number of changes that clearly affected our operation. Now I do believe that our team was able to react quickly. changing the credit policies, adjustments in our products and evolution of the commercial platform and the training platform in order to adjust the bank to this new reality. And to continue our effort to develop our business in a sustainable fashion and even more than this. we have a clear ambition to be closer to our customers, build a relationship back understanding the needs of our clients understanding what they need, how can we improve our credit journeys, our product, how we service them in their call centers so that are almost 103 million clients of the addressable market can use our bank as the bank day-by-day bank. And this is important to leverage not only how we receive over 1,000 stores in our network and also the combination between the physical channels and the digital channels. And here, we have testimonials from our clients, which we really appreciate because of the bank in order to be close, you have to understand what the customer needs. The bank has to offer resources so that the client can resolve an emergency, they need to invest they all also need to buy insurance, they need a long-term loan and the proximity with the bank -- from the bank with the client, will be the journey of our success. This is our priority today, and this is the maximum priority because through satisfy clients, we will be able to be more profitable in the bank. Yes, there is a challenging scenario ahead of us. Notheless, we have conditions to turn this challenging scenario to develop our systems, credit engine, belling the development of the team so that we can have more sustainable results and greater satisfaction of our clients. Now I would like to call Joao to the stage so that we can continue with our presentation.

Thank you, Felix. Good morning. It's a pleasure to be here with you today. Now we're going to talk about our segmentation about our products and about our businesses. We conducted a revolution in the relationship bank strategy, we reorganized our segmentation, bringing the characteristics of each customer will be retire pensioner, salaried workers and investors. And reorganizing all the products and journey in such a way that we will pursue in each 1 of these segments. The products and the characteristics that attract the client meet the needs of the client and then understand the current moment of this client. In the sense, this segmentation has reorganized not only the way how we see our clients the way how we see the products, the way how we organized our journeys and much more than this, we offer greater proposal values, including insurance. Now talking about our journey of attracting new customers that now are of different age groups that and which we originally used to work with like pensioneers and retail. This was also driven by the private payroll and card that is an avenue of growth. So we're growing here and the origination through self-contracting allows us to understand which is the specific need of the customer and how we can service them with quality. With accuracy and transparency, this is for the customers that want self contracting. And this journey has been complemented by are public that is young. The origination Well, we want origination to be more diverse as is with greater share of profitable products and opening more portfolios, have a greater share of personnel of personal credit and private pay rollout, and this has allowed us to increase revenues per client. The discipline has not only prioritized volume but also the profit of 1 of the customers that has been mapped within our segmentation. Now speaking about payroll loan. This is a product that is the gateway for our clients. The gateway of this client, where the client goes into the bank with the product, which is economically feasible, 1 of the lowest interest rates in the market for this segment. And for the segment of customers, this is a project so the client comes into the bank, they understand us, they start working with this, and we use this portfolio in order to circulate our capital. We saw carrying out different assignments of this portfolio. Of course, the origination of this product depends on the demand. For this portfolio assignment. And we've realized that during the second semester, there was a lower demand for payroll loan assignments and then we created a more conservative operation together with our clients now when we talk about our main product, that is the benefit payroll card and the payroll card although the issuance of new plastics work stopped during the first semester. The volume of purchases are very important, and we've been very successful using this product as a means of payment for the clients that not necessarily have a credit card. To use to buy online this is an inclusion products. Rates here are the lowest rates. When the client pays in installments and obviously helps them in their cash flow once this client, not necessarily has the offer of payroll cards or other cards in the market. Now the use of this product it is important as an inclusion point, and we are certain that this is a product that will be offered once again in an intense way once it is clear, again, in the second line issuance we've offered a new package of benefits that include not only the normal benefits from a credit card but also specific benefits. That directly meet the needs of these clients that was included in the financial market because of the payroll card. A very important avenue for our growth and for the profitability of our portfolio, personal credit is conducted in a conservative way, selecting clients and using conservative measures in order to serve the clients when they need and when they're in an emergency, we do understand what the need of client is when we understand we offer this product, and we resolve a specific issue that the client may be living during that moment. Obviously, if we compare our personal credit portfolio with other portfolios, from other banks, we've realized that there is room for growth with this product. because we are still under dimensioned our portfolio is smaller than what the bank could have. There is a potential of growth with safety serving our clients according to their emergency needs now the private payroll loan, this is also a good avenue for growth. Now obviously, we have been growing this fall quarter-on-quarter. Now the growth could have been more significant because of the ceiling rate established during Q1. And during the past 2 Qs we dropped the origination because of the public selection because this could -- this should make sense according to the revenue that this product provides this selection has had an interesting result in terms of the NPL and the success of the portfolio and this portfolio should provide us more and more clients that are younger, that are more digitalized for our day by day and for a bank. We've been calibrating our credit engines, and we are more safe in the operational in all our operations that engages, for example, private payroll loan. Now diversification, for example, well, the diversified and collateral portfolio, we have discipline and reforce allocation and the origination focus on clients that are close to the bank, and we don't only have credit operation. You also have noncredit operations should be through derivatives other structured operations and other revenues where we have grown a lot with these clients. We can also see here that noncredit revenue is consistent and it has offered although in a more complex mango environment, an important contribution to diversify the bank's business. This is a port of folio that is highly resilient and is consistent, and it has provided us although a challenging scenario, low NPL rates well, I would like to thank everyone. I would like to invite Flavio, and thank you very much to everyone.

Thank you, Joao. Well, good morning to everyone. It's a pleasure to be with you once again to present our results, we will start talking about assets and liability. We will focus on revenue. What have we done in order to increase the level of the banks revenue. I would say the 3 things. One, we have dropped our dependence on INSS payroll loans, as we know, as Joao stated, INSS has payroll loan is a product of low revenue in the bank's balance. Therefore, when you reduce the size of the portfolio we open space for other more profitable portfolios. We're also paying attention to credit with active management of portfolio quality. We know that families are highly indebted, are highly indebted. So we have to be cautious when we provide credit and also a sound balance sheet management. We use are consigned our payroll loan for portfolios that have high liquidity to provide credit and we can manage our capital levels. And when we see the change of mix in our portfolio, what have we observed during Q3 of 2025 and until Q3 of 2026 that is this -- this quarter that we're publishing, we can see that the personal payroll cards and personal credit and payroll being balanced. Will we see payroll loan. This was the portfolio that drop more because we're using this portfolio within our assignment strategy. And when we see risk management that I mentioned we can see that the quality indicators of these assets have been pressured, and we have based 3 factors that explain this pressure. First one would be goes through the change of mix number 2 regarding portfolio assignments, when we have a portfolio assignment. This is done in portfolios that are -- we take -- when we see the indicators, we take away high-quality portfolios, and I would talk about the level of indebtedness of the family. This is a point of attention to the market. And for us, it's not different. Therefore, we've been more cautious with rent credit because of the macro reality in Brazil. And which -- what are the good news when we see the recent results of pay of consignment in April, May, when we implemented a number of changes in credit. And in collection, we can say that results after the state well, are better in performance in terms of credit. And when we see our coverage index today is 144% coverage ratio, which is a comfortable level. This means that our balance is covered regarding NPLs. Now speaking about our base or funding, right? Today, we have a funding for portfolio, which is above BRL 32 billion with a relevant share of institutional investors day around 36% of our funding is made up of institutional funding and also an important point of this portfolio is that during the past years, we began a recurrent issue, be it a financial bills of debentures backed by our payroll products or we've all carried out a lot of credit assignments. An example here would be during the last month, we issued over BRL 400 million at CDI 1.15 rate that has been the lowest assignment that shows the quality of funding and liabilities, and we can work at liquidity levels which are extremely comfortable when we see our liquidity coverage in short-term for the long term, the net stable funding ratio, NSFR, both of them are comfortable indicators that allow us to build an asset portfolio at a longer term because our liabilities can bear these operations. When we see the capital here, we end this quarter with a base index of 13.5% capital, 10.2% and we have a number of levers that can generate value and capital. We have generated recurring results every time we have this builds and elevates my capital base. We also have we still to have a highly liquid portfolio. So we can use credit finance in order to generate capital and deleverage the balance. We have tax credit consumption. We have consumption of tax credit in our balance. And as we January results, we will consume these credits, and we all -- so have the option to recapitalize interest rate on our all capital because we are a recurring payment of dividends and of interest rates on shareholders' equity recapitalization. So now I will call Danilo to talk about the financial results.

Thank you, Flavio. Well, I will proceed with the presentation. We will talk about the financial margin. Well, it rose during this quarter due to the remix that we've seen in our portfolio with more profitable. We have personal payroll cut and private payroll loan. And as we've mentioned the provision expenses increased, and they impacted our financial market after the cost of credit with a slight drop during this quarter and to face the stub, the market continues a rigorous cost control, pursuing constantly for efficiency. And we can see that our expenses year-on-year Q3 '26 vis-a-vis of 2025, grew according to inflation. That shows the cost control and the pursuit for efficiency in the past years. As a result, we have we have the cost to serve of BRL 30 per client per month. And here, we have net operation provision expenses stable turning because -- and we've seen this because the environment in the INSS payroll card. And I have to talk about the evolution of our actions to our shares, our LTM appreciation, 49%. The 0.8x reflecting the important growth of the bank. Our dividend yield of 10.3% percent puts us as the best of the sector and the stock liquidity has allowed us to be part of an under index, which confirms the moment of the bag and the principles of governance. And to end our presentation, I would like to call Felix for his final remarks.

Thank you, Danilo. And now we will go to the final remarks of our meeting now important messages that I would like to highlight here. Number one, our -- the client is always in the center of our attention. We are changing the bank in relevant fashion for a bank that would focus on production volume contracts, business toward a relationship bank. This takes time. You need a cultural change for this, but we do believe that this is the right pathway in order to have a sounder and more profitable bank. Another point that I would like to highlight would be the evolution of our businesses in order to have a relationship bank, we need to be constantly evolving. In terms of journeys, we need to develop products or to evolve a number of our existing products. And obviously, we also have to adapt ourselves to new technologies to regulatory matters. As I briefly mentioned before handing addition to all of this, there are a number of objects that we will never waver. We will continue new pursuing a better financial result regardless of the scenarios that we face we will be conservative also. We will be disciplined in our balance with good liquidity within our balance and also taking care of our employees we cannot have a bank that is good and serve a bank that is good in relationship with our employees are not engaged and encouraged with our objectives. And I do believe that we're on the right pathway, I believe that the results show us the bank as we are a public bank, this has shown that it is because of the value of our shares. But before we go to the Q&A session, I would like to show you the testimonial of a number of our clients. [Presentation]

We will open questions now.

[Operator Instructions] Our first question is from Arthuzo. Regarding the payroll portfolio, what do you expect in terms of growth if you could share the short-term NPL behavior of the private payroll card could you Flavio, could you answer this question?

The payroll, the payroll credit card loans and cards are our main products and the growth of this portfolio depends more on our capital limitations and the limitations in terms of assignment than the size of the portfolio, we want to portfolio to continue relevant, but the diversification of personal credit card and the private payroll credit card. Now regarding NPL. When we see the over 90% of the payroll card we've seen this figure month over month. Generally, when we see the statistic of the central bank in BMG, we're 10.5% Central Bank is 90%, slightly the average of the market. But this is a moment of cautious. When we see recent results how do we compare it to the past results or the bank's results for decision-making process, we see the shorter delayed indicator. We use the over 30 MC4 months after origination for you to have an idea of the behavior of this well, we've observed in results until March and April. This indicator was around 13% now after April, May, June, you can see this indicator at a level of 7% half of other results. Because of this, we expect an improvement in product NPLs throughout the upcoming months and quarters.

And the next question from Andre Gucho, from HQ Investment, good more the combined profit of insurance and brokerage house. So BMD has dropped, what is the reason? What do you expect? What do you expect in the future for this segment?

Nilay. Well, insurance has undergone an intense reformulation because of the regulatory changes in terms of -- the loan insurance, we've reorganized the insurance area, and we are focused on providing insurance that protect the public that not always has protection. So today, the main product of assistance has grown a lot. We are -- we reorganized how we reorganize traditional insurance products, and we're working with private pay loan protecting this public that didn't have protected makes sense, and we want this portfolio to resume the results in the upcoming quarters.