Banco Pan S.A. (BPAN4) Earnings Call Transcript
November 6, 2024
Earnings Call Speaker Segments
Good morning, everyone. Welcome to the conference call of Banco Pan to discuss the results related to the third quarter 2024. This conference call will be held in Portuguese with simultaneous translation into English. To select your preferred language, click on interpretation at the bottom of your screen. The audio and slides of this conference will be streamed live on the Internet on the company's IR website, www.bancopan.com.br/ri, as well as on the Zoom webcast platform. The presentation will also be available for download after the event. We would like to inform everyone that this event is being recorded [Operator Instructions] Before we proceed, we would like to remind you that the statements that may be made during this conference call regarding Banco Pan's future prospects, forecast, financial and operation targets are based on the beliefs and assumptions of the bank's management and on information currently available to the company. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur. Investors and analysts should be aware that general economic conditions, industry conditions and other operating factors may also affect the bank's future results and could cause those results to differ materially from those in such forward-looking statements. With us today are Mr. Carlos Eduardo Guimaraes, CEO of Banco Pan; and Mr. Inacio Caminha, Investor Relations Officer. We'll now hand over to Mr. Guimaraes, who will begin today's presentation. Mr. Guimaraes, you may take over.
Good morning, everyone. Welcome to another presentation of the results of Banco Pan. Starting on Slide #2, we kept strong credit origination in this quarter, very much focused on collateral products and with a good spread overall, except for consignated loans and INSS, where margins are very tight. We expect for the fourth quarter a reduction in the offer of consigned loans because of lower margins, and important growth in conventional cards and personal credit and the alike. This combo brings good margins and engagement, and delinquency ratios became stable. Now we are going on to Slide #3. We closed the quarter with 30.9 million clients, more than half with credit exposure with us. Our portfolio closed at BRL 51.1 billion, 30% above that of the third quarter 2023. And we reached BRL 216 million in net income with a return on equity of 11% (sic) [ 11.8% ] a year. Now I'll turn over to Inacio for further information on our numbers.
Okay. Very well, then, we are going to start on Slide #5. And here, we have information on engagement. You see our 31 million clients evolving gradually in the cross-sell index and PIX keys. And we also see an important change in transaction volumes going to a new level with growth of 45% in 12 months, which shows how we want to grow with relationship engagement with clients getting more priority and also being able to advance with cards and personal credit. On Slide 6, we have information on origination that continued strong at BRL 9.5 billion in the total of the quarter. We see that vehicles was the main one with a 4.5% -- BRL 4.5 billion share. We started with new and used motorcycles. And in light vehicles, we are approximately with 8.5%, 9%. And also, we have prospects for growth along next year. And for consigned loans or payroll loans because of INSS, we have been focused on other public agreements so that this comes from there, but also from the evolution of our B2C channel that is stronger every year. Acquisition of portfolios is a bit lower because of interest rates in the market, prices are a bit tighter and personal loans still small, but we believe we have a path of growth for the future. Talking about our credit portfolio on slide set (sic) [ Slide 7 ], we had important growth, 30% in the year, basically because of origination that is stronger, but also because of a lower level of the session of the portfolio as it happened last year. Of the BRL 51 billion, we have BRL 28 billion in vehicles with growth of 40% in the year. Payroll plus FGTS, about BRL 20 billion with growth of 23% a year. So these two products really driving growth for the portfolio in the period observed. As for delinquency rates on Slide 8, basically stable. Short-term indicators continue to improve, 53 basis points in the quarter, and over 90 increased by 13 basis points. So we are very comfortable with the behavior of our products and the evolution of the bank's results. Talking about clients on Slide 9. We talk a lot about engagement and credit is a very important tool for that. We have 15.7 million clients with exposure to our credit products and we have been able to grow our client base, keeping this percentage of customers with credit. And also, in addition to growing the number of clients with credit, we also have a mission to continue to evolve in the share of wallet of our clients. That is expanding the credit exposure that existing clients without necessarily having to have other clients. So this is something that's been evolving along the year. And thinking of the fourth quarter and next year, we should continue to observe the same pace of growth in terms of engagement. Talking about the fee revenues on Slide 10. They did go up. We basically see an increase, especially with insurance. That was an adjustment of commissions that we get. The other components were practically stable. And these services certainly make up for the results, and we see an important growth totaling BRL 423 million in the quarter with a good progress, about 40%, compared to last year. Cards on Slide 11. We continue to originate a higher volume than what we saw in the past of new cards. The idea is to continue expanding our client base and starting with lower tickets. The strategy here is to give the credit to our clients. And we understand that this combo of cards with TPV is very important for engagement. In this quarter, we had 136,000 new cards, TPV, BRL 3.7 billion with BRL 69 million of revenues coming from the product. Insurance on Slide 12, we totaled BRL 245 million in premium with 4.1 million clients with effective policies. And this is a very important product for cross-selling present in our credit products and also in some services. And it's also a front line for us to continue growing. Talking about financial highlights on Slide 14. We have the evolution of our margin. We continue with a very strong net interest margin with that credit concession, 16.3%, and net of credit cost went to 9.8%, a movement consistent to the evolution of the bank in terms of products and risk appetite. On Slide 15, we have the main components of our quarterly results. So net interest margin specifically, we see an evolution in carry costs, observing a growth higher than the total portfolio. Portfolio assignments lower than what we saw in the previous quarter, although with similar volumes, that's much to do with mix of assigned products. As for net provision expenses, we see an improvement both in net provision and also the discounts granted, thinking of the cost of credit. Expenses as a whole of the bank, very well controlled at about BRL 1.1 billion a quarter. But this way we continue to evolve and closed the quarter with BRL 216 million of net profit and ROE of 11.8%. To close, equity and capital. We continue at 13.7%, a very countable level with net profit that is important to continue with our strategy of growth, both for this year and next year. With that, we close our presentation, and we are going to open for your questions.
[Operator Instructions] Our first question comes from Pedro Leduc.
I have two quick questions. First, other operating expenses. This line was quite high, about BRL 400 million in the last quarter. You had some civil provisions, there was a catch-up there. But in this quarter, if I'm not mistaken, there was another BRL 300 million of this line for the reversal of civil provisions. So I would like to hear a bit from you. Is it new cases, new understandings? The second quarter was not enough. So how should we look into this line from now on? This is my first question. And the second, a bit more technical. When you take a look at capital, you're -- not as relevant, but you have the prudential group and RWA grew above the size of portfolio. So I would like to know if there was anything atypical to understand the movement in RWA.
Leduc, thanks for your questions. Well, first, I'm going to start with the provision line. Last quarter, if I'm not mistaken, it was close to BRL 400 million in this quarter, close to BRL 312 million. In this quarter, specifically, we in the bank can think of contingencies with three pillars: Mass civil lawsuit, labor and strategic lawsuits, the ones that have higher volume. So we are always updating our models and our consultations with external attorneys, especially in the case of strategic lawsuits, and we had a round of conversations with the law firms, and we thought it was prudent, according to the opinions of attorneys to reinforce our provisions for strategic provisions this quarter. What do we expect for the future? Something lower in the fourth quarter, lower than the amount of the third quarter. And for next year, go back to something even lower than the third and fourth quarter and slightly higher than historical levels. This is our best scenario for provision in terms of contingency for lawsuits. Remember that the payroll loans and cards are the main offenders for mass civil lawsuits at the bank. The strategic lawsuit -- then this is a bit more encompassing, not necessarily concentrated on this payroll product. So it did go down compared to last quarter. We expect further marginal reduction for the fourth quarter and less next year. Something even below, but still above that of 2023. As for your second question, capital -- managed capital for this quarter. As you very well said, the regulatory capital is on BTG, that has a very comfortable position in terms of Basel ratio in recent periods. RWA, I do not have an immediate answer to you. At the end of the Q&A session we are going to look into that and try to answer your question.
Our next question comes from Antonio Ruette.
Can you hear me?
Yes, we can hear you well.
Okay. If you could give us a bit more color on opportunities, and especially opportunities with your controller, BTG, especially in terms of costs and funding. That would be highly appreciated.
Okay, Ruette. We have had an integration with BTG in several areas. This is already going on. For example, most of our funding today is centralized at BTG. So BTG provides Pan the funding that the bank needs to operate. So we have a funding synergy, which is complete. We have just the raising of our own funds when it comes from our app on our retail platform. All the others are concentrated at BTG. As for other types of synergies, especially in support areas, we already have several people from BTG on our day-to-day so that we can not only optimize costs but also improve practices with the exchange of information between Pan and BTG, and BTG and Pan. So the integration is already a reality. It has already yielded fruit to us, not only in terms of cost, but also better efficiency in terms of quality. And we still believe there is further room for improvement. So we are very encouraged, results are starting to show and will show even further in the future, not only in cost but also in efficiency. And funding is completely, or almost completely, except for the app, centralized with BTG.
So would you say that most of the work, especially in OpEx has already been done? Or is there anything else to be captured in efficiency?
There's still to be captured in terms of efficiency. The integration has started but efficiency in terms of costs and better products that still has room for the future.
Our next question comes from Brian Flores.
I also have two quick questions. The first is taking at -- early delinquency. It seems that your ratio is improving, as you did mention. I would like just to understand how you reconcile that with your risk appetite? Because you had mentioned, perhaps resume risk in terms of personal credit and cards. But in terms of origination quarter-on-quarter, we did not see relevant acceleration. So just to try and understand how you see the segment and your risk appetite. A second question, in terms of deposits, Cadu, you just mentioned funding from retail, and we do see a deceleration of deposits quarter-on-quarter. Just to understand what dynamics is like. That would be really helpful.
Thanks for your questions, Brian. First, risk appetite. As Inacio mentioned in our snapshot of balance sheet, we have 55% of our portfolio with vehicles. So we already have a huge difference in this product. Not only motorcycles, but as used cars, we went through several economic cycles, and we are very comfortable with the mix that we have in our current portfolio. And we do expect for the future, another important growth in the vehicle portfolio. Payroll is a product with low loss and low credit risk, very traditional. But this is a product with very tight margins. So if we do reduce this product for the future, we expect if the cap interest rates continue like this, we are going to reduce and that may affect our delinquency indicator. But remember, what concerns most for us at the bank is the final bottom-line results. So the reduction of payroll products and INSS could affect the delinquency line. However, profitability would increase because this product has a very tight margin. And for the future, our expectation for the fourth quarter is substantial increase in card origination and personal credit. These are products that are sold together and our products that bring us good margins. But they also have a higher delinquency rate than the portfolio that we have to -- today. But remember, we are always looking into the diversification of the type of risk, not totally correlated in between them so that we can use capital funding and profitability to our favor. The second point, deposits. I'm going to talk about retail deposits. With retail deposits through our bank, we are aiming at increasing the funding base from retail, where we believe that credit cards and personal credits that are to be accelerated in the fourth quarter, will not only bring more revenues, but also engagement. And engagement mainly in the form of deposits. And this is what we are prepared for the fourth quarter, and I expect the results to show in our next conference call.
Could I just ask a follow-up question? Do you have an estimate of the impact on regulatory changes on net equity for 2025?
Well, an estimate. A lot -- at least not a final estimate, no. We are looking into that. We already have our release in IFRS, but there are some differences between IFRS and 4966, we are still investigating the differences. So I prefer not to give you a number, but that shouldn't be that different at first from what we have released on IFRS. But again, we haven't completed our investigation yet.
Our next question comes from Eric Ito.
I also have two. The first follow-up on Brian's question. I would like to understand a bit more about the risk, a bit more risky in the fourth quarter, personal cards, personal credit. So what should we expect in terms of expansion for the fourth quarter? And then Cadu, you did mention that delinquency rates could be slightly higher, perhaps decrease a bit payroll loans because margins are tight. So what could we expect in terms of lines ex assignments for the fourth quarter and '25? OpEx, my second question. We see a bit more of commission expenses, a bit lower. I think it's in line with the more challenging scenario for you to grow in payroll loans. What should we expect for OpEx for 2025, and if the low commissioning should be continuing to operate in your favor?
Okay. First, for the fourth quarter, our increase in personal credit and cards is going to be timid. Remember, we have 5%, 6% of the portfolio with these products. All the others are collateral products. So we are going to grow in the fourth quarter with cards and TPV, but still not substantial to really affect in a relevant manner either our indicators or our cost of credit. This is something that is going to happen gradually along the coming quarters. But as you very well know, these are products that have higher delinquency rates, but a higher expected profitability than payroll loans that is very, very low. What happens in the dynamics of payroll loans? Our origination of payroll loans, 65%, 70% is on the B2B channel. And the difference is on the B2C channel. So when the ceiling pressures and interest rates go up, we have to optimize costs. And these costs, when they come from B2B, we reduce the commission of banking correspondents. And you invest less in digital marketing. So this is how we are trying to survive given the important reduction of the ceiling of payroll loans and in parallel, the interest rates -- future interest rates for 2 years going up. This is how we price our product. So we are going to continue reduce commissions because of the pressured margins and the cost of credit along time may increase because right now we think we are going to replace the payroll business in our balance sheet with personal credit and personal cards. So when you think of the line of cost of credit, the cost of credit of payroll loans is lower than personal credit. But because margins are too tight, we believe that the profitability of the bank as a whole is going to increase. And in terms of overall costs, we do not want to increase costs for the future. I would say we are prepared to gain operational leverage and continue growing without increasing costs at the same ratio.
Very clear. A quick follow-up in terms of margins. I think this year in the fourth quarter, you still have the installment of payment for [ CDB ]. What can we consider in terms of payments for this quarter going on to '25?
Indeed, after the fourth quarter, perhaps there is a residual value for '25, but much smaller than what it was along the last years. But it is a decreasing trend this year, we had less than last year. But for the coming year, it's really going to be relevant. We have the breakdown in our financial statements. And I think you can do the math. I don't have it by heart right now, but it's a simple math for you to identify.
[ BRL 300 million ] are going to be paid up in December, then [ BRL 300 million, ] June next year, [ BRL 300 million ] in December next year, and then we 0 the liability.
Yes, it doesn't seem much, [ BRL 300 million, ] but the cost is very high. But I think you can do the math very comfortably just for you to see the effect on the balance sheet and compared to previous periods. It's quite straightforward.
Our next question comes from Olavo Arthuzo.
I have two questions. The first topic is a bit of a follow-up on Brian's questions. As for 4966, I'll try just to ask the question differently. Because looking at the bank's financials, we do see a gap in reserves and provisions. It went up to BRL 2 billion from last quarter to BRL 2.1 billion this quarter. And as we know, the impact according to the resolution is after tax, we might see a difference of slightly above BRL 1 billion. So I would like to hear from you, if it makes sense for us to work at something close to this number that is BRL 1 billion as the impact of the change when we see the final implementation of law 4966? And my second question is the end of FGTS and the change to the private payroll loans. I would like to hear your narrative about this new product, Cadu, the private payroll loan. Do you think it is going to offset the FGTS? I know this is a phase out. I would like to know if this new payroll product that I suppose is still being finalized, but do you think it will offset or even more than offset the end of the anticipation of the advanced payments of FGTS?
Thanks, Olavo, for your questions. Well, first, law 4966 and IFRS. As I said, there are two differences -- some differences between these two methods. We are still trying to absorb the difference. But right now, still subject to assessment. We do not think that this number that you mentioned, BRL 1 billion, is going to be true. But -- again, perhaps you're right, between BRL 1 billion, BRL 1 billion something, can be our best estimate for now. But again, we are still analyzing the topic. So this is number 1. As for FGTS/private payroll loans, FGTF (sic) [ FGTS ] in the last 2 years, received several comments from the government saying that the product is no longer going to exist. But it's been a lot of back, forth there. Last week, the administration said that right now, the advance of FGTS withdrawals and also the withdrawals on birthday dates were at a pause. I don't think that the product is going to be put to an end. We might have a change in the birthday withdrawal. Small adjustments in the rule for this type of withdrawal that will impact very little the FGTS loans we work with. Again, this is my best estimate today. And if we did have the change, which I don't think will happen, then this is my personal opinion, we would still have a 1 to 2 years' time for this to happen with FGTS. As for the private payroll loan, as you should be following, this is a very nice product. I think it's going to really increase substantially. To date, this is very much restricted to large companies and few banks. So I think that the offer of this kind of product is going to increase. And consequently, these fees -- rates are going to go down, which I believe is going to happen and we are getting ready for the first quarter next year to have the product ready and start to operate with it. We have an advantage, we believe, that this product is going to be built as a combo of three products that we have already operated and a very knowledgeable about, which is payroll loans, FGTS and the Auxilio Brasil product. We worked with them 3, and what's being discussed is a combo of these 3 products, which is going to be the platform for payroll -- private payroll loans. We are very excited about this product. We think it's going to come out. We don't have control over when, but we really believe that the market as a whole is very optimistic about this product. A good product is going to be good for clients, and it will reduce the spread and increase credit offer to people that some right now either do not have access to credit or have access to very expensive credit. So we believe that this is going to be a good product, but it's not going to put an end to FGTS. Again this is something that has not been decided. But this week, I would say that FGTS end is out of the context, and private payroll loans are to be implemented as soon as possible.
Very clear, Cadu. If you allow just a quick follow-up about the first point, the 4966 regulation. Any type of impact, and even the one that you mentioned that might be in the ballgame of BRL 1 billion? Because it is managerial and the release that you showed in terms of capital, perhaps, you can confirm that would be talking about a substantial impact from the controller -- the controlling company that would absorb more this amount. Just for us to understand what the controlling shareholder -- what would be the part of the controlling shareholder there?
Okay. As I mentioned, this is -- we work with the regulatory base of BTG and not Pan's, and BTG has excess capital. And obviously, we have been discussing internally together with BTG, the impacts of 4966/IFRS, and in any calculation, this is irrelevant number for BTG. So this eventual variation with this -- not close number because we still have to close our analysis or even a slightly higher amount, does not concern the group given the amount of capital and Basel ratio that BTG has today.
Our next question comes from Pedro Leduc.
A question on profitability on the granting of credit. I see payroll loans at about BRL 2 billion, gradually going down, but still close to previous quarter. When I do the math on profitability, it dropped by almost half quarter-on-quarter. I would like to understand from you what happened? These are portfolios that had already been originated with a higher ceiling. The buyers are with a different type of negotiation. Just to understand because that was a bit of a sharp decrease.
Yes. The main reason, Leduc, was indeed tighter margins for payroll loans. So we have been discussing the feasibility of this product. When I talk about feasibility, it's not to offer it for everyone. It's different from vehicles, for instance, with vehicles you have a different rate for different types of risk. In payroll loans, this is a bit more difficult to become operational. So when margins get tighter, and the ceiling comes down -- and remember that the ceiling is coming down regardless of the age of the client. So when you have a single ceiling to different ages, then you have to optimize and see what clusters are still going to be profitable, and what clusters are not. So we have been doing our homework. Margins are very, very tight. And a bit of this very tight margins have to do also with the granting of credit. It has a consequence on the profitability of credit. So from now on, we are more and more considering the future of this kind of product, the future of granting payroll loans. So there's a lot going on internally about the product.
And going back to RWA that you had asked Leduc. We had some financial assets in nonfinancial companies that are under Pan, and we just brought this to the bank, not to these companies. So these companies originally are not part of the bank -- the capital of the bank, but we've relocated it to the bank. But that was done, and we don't have any other assets of this nature. It was a one-off movement.
Our next question comes from Eric Ito. Mr. Ito, you may go on. Our next question comes from Pedro Leduc.
I already asked the follow-up question. I'm no longer in the queue.
[Operator Instructions] Our next question comes from [ Rodrigo Chavez ]. Mr. Chavez, you may go on. Since there are no further questions, we are going to hand over to Mr. Guimaraes for his final remarks.
Well, thank you all for attending. I hope to see you back in our next conference call.
This concludes Banco Pan's conference call. Thank you for attending, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
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