Banco Pan S.A. (BPAN4) Earnings Call Transcript

Welcome to Banco Pan's Conference Call to discuss the results for the Fourth Quarter of 2024. The conference call is being conducted in Portuguese with simultaneous interpretation in English. [Operator Instructions] Both the audio and slides of this conference are being streamed live over the Internet and the company's Investor Relations website www.bancopan.com.br/ri, as well 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] Once the presentation concludes, there will be a Q&A session, during which additional instructions will be provided. Before we proceed, we must clarify that any statements made during this conference call regarding Banco Pan's future outlook, projections and operational and financial goals are based on the beliefs and the assumptions of the company's management as well as currently available information. Forward-looking statements are not guarantee of future performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not materialize. Investors and analysts should understand that general economic conditions, industry conditions and other operating factors may impact the bank's future performance and leads to results that will materially differ from those in the forward-looking statement. Joining us today are Carlos Eduardo Guimaraes, Chief Executive Officer of Banco Pan; and Inácio Caminha, Head of Investor Relations. I'll now turn the floor over to Mr. Guimaraes, who will begin the presentation. Cadu, you may go ahead.

Welcome to one another presentation of Banco Pan. I'm starting with Slide 2, the highlights for 2024 portfolio growth by 20%. Two factors explain that. First, origination, which was stronger by 22% in '24 compared to '23 and also the credit assignments were lower by 40% when compared to 2023. Delinquency stayed at the same level even with a higher share in the vehicles portfolio inside our mix. The margins of the cost of credit continues to improve with very robust levels. Our app evolved in a relevant manner along the year. And I would like to highlight three points here. In sales, all our credit products are already available for sale on our app. And for after sales, we have more services being made available thus reducing our cost of service. And in addition to that, both for sales and after sales, we had a significant improvement in the customer experience of our app. Now I'm going to move on to Page 3. We closed '24 with 31.5 million clients, considering half with credit exposure with us. The credit portfolio closed at BRL 52.7 billion even with a significant drop of the origination of payroll and credit card loans -- I'm sorry, workers severance guaranteed funds, we stopped that in the channel of B2B because of the economic difficulties of the ceiling. We reached BRL 855 million of net income with a return on equity of 11.7%. Two additional comments here. First is that we expect for 2025 a return of profitability of payroll from the INSS and therefore, higher origination compared to the fourth quarter. And another important comment is the private payroll loans. We are very much excited with the potential of this market. Obviously, there are still some definitions to be made but we expect the product to be launched in the first half of this year. And I'm certain that we are going to be able to capture very a interesting opportunity coming from our customers. Now I'm going to turn to Inácio that will give you a bit more color on our numbers.

Okay then, so moving on to Slide #5. Here, we have engagement. So we have the activation of our clients of 61% of 31.5 million clients. We evolved naturally along the year in engagement as a whole. And I think the main highlight is the transaction volume that grew 36% in 12 months. And this shows how we want to grow in customer relationship and engagement in enhancing the number of transactions, having a stronger banking and a better experience as Cadu mentioned, with all our evolution with the app. So the transactions are closed at -- close to BRL 35 billion the last quarter. Well, origination, more specifically, which is really the driver of the bank on Slide 6, that was clearly impacted by the shutdown that we had for the INSS but all the others continue strong, especially vehicles. We closed the year with record originations in the last quarter in vehicles, BRL 5 billion that were originated. We are still leaders with motorcycles with 33%, also a very important share with light vehicles at about 9%. Payroll is a bit more difficult now because of the ceiling and the 2-year interest rates that we observed in the fourth quarter. And in the beginning of '25 in January, we are more or less at the same pace in terms of standing, but along the year, this will probably pick up as Cadu mentioned. We are originating from our own channels, but also signing other partnerships with BRL 2.2 billion in the fourth quarter. And BRL 600 million of the workers' severance guarantee fund with BRL 300 million of personal loans. And in addition of the BRL 300 million in personal loans, there is another part that we have been enhancing and exploring are installments with interest rates that we do not see in this indicator. But in our portfolio, we can see how this has been evolving with the expansion of clean credit. So it's slow move, but we think it's very important, especially with regards to profitability. And talking about the credit portfolio now on Slide 7, we see an important growth of 26% in the year. And again, as Cadu mentioned, part because of a stronger origination, lower credit assignment compared to '23 vehicles with BRL 30 billion, growth of 36% in the year. Payroll plus the workers severance guarantee fund with BRL 19 billion, a slightly lower growth, 11% in 12 months. But when we see credit cards and personal loans together, they were about 5%. And now they are 6% of the portfolio and they grew very strong, especially in the last quarter. So if we compare to all our products, they were the ones that grew the most. Of course, is still a small volume, but a little by little, we get more room for this kind of product. And altogether, the BRL 52.7 billion that we have in our balance sheet. On Slide 8, this is even clearer. So you see the subtle change that's starting to happen. In vehicles and in personal loans. So you see 15-90, went up by 20 bps and over 90, about 10 bps. So we do have the appetite to continue originating credit. In the end of the year, we increased the margins, so we are talking about a more challenging scenario in '25. So we increased margins to cope with the potential delinquency rate increase, and we are very confident with the evolution of our results. So over 90 close, that's 7% and 15% to 90% in 8.6%. On Slide 9, we talk a lot about credit. So we do see the bank as a complete platform of credit to our customers. This is essential not only as a tool of engagement, but also of monetization. Half of our customers have some kind of exposure this quarter specifically. In previous quarters, we saw constant growth of the amount of customers with credit in this quarter. We do see a small retraction, but it's very, very small. And the main reason is the amortization that we had the last payment of the Auxílio Brasil product. This was a product that we launched at the end of '22, with the maturity of 2 years, it finished in '24. It was a very good operation, both for our clients and for the bank. And we also did see a lower contribution given the lower amount of new payroll loans. But for the future, again, we want to pick up growth and continue growing the number of customers with credit, not only in terms of amount but also share of wallet. That is how much credit we have with our customers. And the idea is to have an increasing share. Talking a bit of services on Slide 10, we did have an important increase in the quarter. Naturally, in the year, origination of vehicles does contribute a lot for that in the last quarter. We did have -- the third quarter, we had an adjustment in the insurance commissions and that obviously had an impact in full in the fourth quarter. That was expected, and we know there is also a seasonal effect in terms of marketplace. So stronger vehicle origination, growth in services, and marketplace again with the seasonality. And for the future, we already expect continued growth except for the seasonality, of course. Talking about cards on Slide 11, we did increase the number of plastics getting to 193,000. We want to continue growing our client base, always with the approach of bid and credit. So we start with lower volumes as the clients behaves well, we give them more. And the idea is always to have a combo with the clean credit. So not only we have the transactional cards, but also have this complement of revenues with interest in its several forms. So engagement, we also see with an increased TPV already showing a more important advance. And these are the lines that we believe we are going to see an evolution for '25. Insurance on Slide 12, we've reached BRL 270 million in premium, 4.2 million clients with current policies, active policies. This is a very important product for cross-selling. And it does complement our grid of products. And also, we want to continue expanding that for '25. Financial highlights, net margin, specifically on Slide 14. We continued with a NIM that's very important. Without the assigned, the credit assignments that is ex-credit assignments is stayed at 17.5% and that is then after credit costs going to 10.7%. So this is a movement that we have been doing along the quarters consecutively for the bank. And the results of the quarter, more specifically for Slide 15. We had a lower assignment of credit. We had a result close to zero here. So what you see a phenomenal growth here and increases of the portfolio that is growing with higher margins. In this quarter, we also joined the Zero Litigation program a very good economic opportunity where you kill any potential tax discussions for the future. And with that, we had the opportunity of activating and using tax credits from tax losses. Without this effect, we had BRL 340 million for the bank, a very important evolution compared to the third quarter, that was BRL 267 million. And then we closed the results with BRL 211 million. So in the combo, you see margin growing up strongly, net provision expenses are very stable at about 5.1% expenses as a whole. Also very well controlled and the result of BRL 211 million with the return on equity of 10.3% -- 11.3%, I'm sorry. So annual results, we see the net interest margin, again, exception for the period growth and credit assignment grew by 17.1% more than the portfolio. But because we had less credit assignment, it grew 18% from BRL 7.6 billion to BRL 9 billion. The change of mix did pull out the cost of credit, but you see that the margin is better, as we mentioned before, expenses as a whole. We see especially expenses with origination that is related to what is originated go up, but other expenses, admin and personnel grew by 2% a year less than the inflation rate. And we do expect even a contraction for '25 on this line. And then profitability in the year as a whole, at the end of the day, net income adjusted by spread went to BRL 855 million compared to BRL 775 million compared to a return on equity of 11.7%. So robust results preparing the year for an even better 2025. And to close on Slide 17, we have equity and capital 8.4, 14.25 Basel ratio that is managerial. Remember, this is pro forma for regulatory purposes, what is really counted is the capital of the whole holding of BTG Pactual. In the last quarter, we talked about that 3 months ago. We talked about the impact for 4669, that was about BRL 1 billion, and it was close to that BRL 900 million. And we do bring a simulation considering the phase-in of this regulation that was allowed our managerial capital would change very little. So we would consider the same data of last year but one day ahead, we would have a drop in equity to 7.4, 7.5, but capital changes very little because of the phasing. And we are quite comfortable and with the capacity to grow in our balance sheet and deliver a year of '25 very strong. With that, we close our presentation, and we are going to open for your questions.

[Operator Instructions] The first questions were sent in writing by Pedro Leduc from Itau BBA. The first question says, origination of payroll loans, there was a low in the fourth quarter. Now that the curve is better and the ceiling is higher. How do you see any possible recovery? The second question, vehicles had very healthy numbers for '24. What is the outlook for '25?

Thanks for your questions, Leduc. I'm going to start with payroll loans. It's true when you compare to December the interest for 2 years, which is the interest rate that we price had an important drop, and we did have an increase of the cap of the payroll loans. So -- and we expect to have two more for the future. And that obviously improves our margins and also our potential to pick up growth in this product. And here, we have a very clear definition in the bank. We are going to originate. One, whatever is good for the client, two, if it is profitable for the bank. So in December, we had a point in time that was not profitable. Now profitability is low, but we do expect for the next 15 to 20 days to resume origination at higher levels. But obviously, that depends on the increase of the ceiling or the cap and also the behavior of the future interest rate for the 2 years. Vehicles. Yes, an excellent year, very high origination and good profitability. For '25, we are watching out for the macro scenario, but we still believe there is room to continue originating at a very good profitability level. So watching out because of the scenario, not only in Brazil but worldwide. But this is a product we are very knowledgeable about, very experienced. We've experienced different times in last years. We knew how to drive those products even in more turbulent waters and the macroeconomic scenario. But we continue optimistic about this business for '25.

Our next question comes from Antonio Ruette.

My question is to try and understand a bit better your civil contingencies. This is something that has gone in the last quarters. It did show again in this quarter. So I wanted to understand it a bit better. I know you have already explained, but if you can go over it again, the reason for them to be higher now and also your prospect for the coming quarters, perhaps even 2026 as a whole. Because as we see it, they, in a way, offset part of the operational improvement. That you are delivering and the improvement of provisions and credit assignment. But bottom line, we see the result being offset by that. So a bit more color would be highly appreciated. Thank you.

Thanks for your question, Antonio. Well contingencies. Not only as a contingency model, but also in all our models, we continue updating things with recent data to know if they are the best way for us to make our provisions. The matter of the fact is that along '24, we decided to reinforce our balance sheet with civil contingencies. This is basically the payroll loan business, payroll and credit cards. We know there is a very predatory litigation in this area. And that had been growing along '24. So not only an increase in lawsuits, but also the amount of the lawsuits. So both increased along time and then that is something that we decided to mirror in our balance sheet in '24. This is part of the business. You have to price contingencies, especially for payroll loans in our origination. What do we expect for the future, for this year, is a number that is reasonably below that of '24, and this reduction is going to show along the next quarters a little by little. So it is an important business. It's a large business. We are very much focused on that. This is not something that happens only to Banco Pan, all retail banks in Brazil do suffer from the amount of litigation that is really hazardous, especially in payroll loans. Again, they went up in '24. We are always revisiting our models. More and more, we are using artificial intelligence to try and predict these kind of things and better defend our actions. But the matter of the fact is that it was high in '24 given all that I have said. And for '25, we do expect a reduction on this line, which is a very important line in terms of cost for the bank.

Very well. So for '25, perhaps it would make sense to assume the close to BRL 1 billion in '24. For '23 it was BRL 300 million. So should we have something like in between?

No, I would say it would be closer -- I'm sorry, going to be closer to '24 than it was in '23. Indeed, from then on, we did have changes not only in the amounts of lawsuits, but also an increased dollar amount. So I think it's going to be closer to '24 than '23 but is still lower than '24, okay?

Our next question comes from Brian Flores.

Hello, everyone. Can you hear me?

Yes.

Okay. Thanks, Cadu, Inácio and the team for taking my question. This has to do a bit with all the components. First, growth. I know you're going to grow above the market. But part of the large banks that reported are starting to be a bit more cautious about growth. So are you going to continue at that pace of growth you had of 20% for '25 just for me to understand the magnitude of growth and also a follow-up with private loans, because Cadu, you did talk about private loans connected back to INSS, but if you could talk a bit about the personal loans, what kind of opportunity you see. And if it has the right economics, as you mentioned, could be a game changer, especially for the component of growth. And then I would like to talk a bit of cost of funding with interest rates going up. Should we consider a tighter scenario for that?

Thanks for your questions, Brian. I'm going to start by talking about we paying attention to the macroeconomic scenario. We expect for '25 vehicles with very good profitability, still lower growth than what we had last year in the vehicle portfolio though. Part of the increase of better results that we expect for '25 has to do more than the piling of better periods, especially with vehicles than compared to 3, 4 years ago, than a substantial growth of vehicles or personal loans or credit cards in '25. And why am I saying that? Because again, given the macroeconomic scenario, the growth of these portfolios is not going to be as big as '24. And obviously, we have to monitor that as time goes by. So better results, but comes more than the piling up of previous periods with higher profitability than a substantial growth in the credit portfolio, especially with credits -- with the risk of credits that is vehicles, cards and personal loans than it was last year. Two, private loans. Well, today, this is a market of approximately BRL 40 billion. We think that we can multiply that by 3 or 4 once the marketplace of origination of personal loans is established, we know the connections of this kind of product and why, because this is going to be based on the payroll loans of INSS, Auxílio Brasil, and the workers severance guarantee fund. And we know how these works. So we don't have anything that is predefined about this product in our budget, and it has not been launched yet. We believe it will be launched, and it will be a great opportunity for us to offer to our clients. Again, remember, the two major products that were launched in the market recently were the Workers Severance Guarantee Fund and the other, the benefit card in the payroll loans. Adding these two examples, we positioned as leaders in the launch of these products. We have a leading role in these launches. And this is what we expect for personal loans to be really taking a leading role for this product because it has to do with our clients. And you're going to have some credit risk because it's not as standard. In fact, it's not standard at all when you compare it to the INSS because an employee that has been working for 1 or 10 years in a company or an employee that is working for a very large or a medium-sized company has limits of risk and prices that are completely different. And we have the knowledge to be assertive, to be right in pricing this product. So we are very encouraged with the possibility. It is a possibility we thought that the product was going to be launched in '24. It was not. But for '25, it is an important opportunity. And the last point was about the cost of funding. I'm going to split cost of funding in two chapters. One, how the cost of funding affects our balance sheet? It does not, because we work 100% on hedge. So the costing of funding going up or down does not affect our results. It should affect our new originations, especially for those products that do have some kind of ceiling or cap. And this is why we are suffering a bit with the payroll loans of INSS because interest rates were up, and we do have a cap that is quite squeezed now. So this is how we see that. And there is another point. A third point that is very important to mention. More and more, we are centralizing our capitation with BTG and then we pay less spread to the market. So in terms of spread over CDI, we are getting more and more competitive because we are centralizing everything with BTG. So I think I have answered your questions.

Our next question comes from Olavo from UBS BB.

I have two. The first, Cadu, I would like to explore the litigation program a bit better. I tried to do the math just to try and understand the level of profitability the bank would be running given that the negotiation has been done, and you're going to follow with compliance and other. So if you see the net impact that the litigation program generated. And if you think of the DTA of BRL 125 million that you unlocked, you're getting to a net profit of BRL 222 million with a rate close to 34%. So a bit more normal. If we fit the tax benefit of -- you would be getting to a very high income for this quarter, do you think these numbers make sense?