Banco do Estado do Rio Grande do Sul S A : Conference Call Transcription 1Q24

Banrisul's 1Q24 Results Presentation

Conference Call - May 15, 2024

Nathan Meneguzzi:

Hello, Ladies and gentlemen, we hope all of you are safe and well. Welcome to Banrisul's video conference to discuss the results for the 1Q24.

This video conference is being broadcast and recorded directly from our data center in the South area of the City of Porto Alegre, given the unprecedented flooding in the city center, where our head office is located, a flood which also affected several cities.

Thank you for your presence despite a difficult time the state is going through due to the severity of this climatic event.

Let me share some comments. It's being recorded and replay can be accessed in our IR website.

Today's event will be divided into 2 parts. In the first, our Chairman Fernando Lemos will give a presentation with the main highlights and figures and performance for the quarter. Then, we will have a Q&A session during which analysts and investors will be able to interact with us here.

This broadcast will be simultaneously translated into English. If this is your preference, please click on the button you find on the bottom of your screen. If you wish to ask your question via audio, please press the reaction button and then 'raise your hand'. If your question is answered, you can leave the queue by clicking on the 'hand down' button.

This presentation is available for download in our IR website.

And now I give the floor to our Chairman and CEO, Mr. Fernando Lemos who will begin the presentation. Please, Mr. Lemos, you may proceed.

Fernando Lemos:

Thank you, Nathan. Good afternoon, everyone. Before anything else, I would like to tell you that we are all safe; not so well, given the situation we are facing here at Rio Grande do Sul. It was an enormous tragedy of unparalleled events, losses of lives, losses of property. We have compromised infrastructure, including the airport of Porto Alegre. So we are in a situation of contingency here in our data center, which has supported the work of Banrisul.

On the positive side, we can tell you that this Bank, Banrisul is fully operational, 100% operational. All customer relationship channels are available, our data are protected. Obviously, some bank branches have been affected due to the flooding, and some other branches have been affected due to the lack of communication due to the infrastructure problems relating to optical fibers. But clients have been provided services through our apps, through our other accesses, through computer.

Our network is 100% operational, serving our clients, which gives us a lot of satisfaction and show the capacity and the ability of Banrisul and the strength of the ability to protect data, which has been tested in the optimal test, and this brings us satisfaction.

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Let me also thank you for the solidarity that Brazil and the world has shown towards the state of Rio Grande do Sul and the understanding you have shown to us. We have worked really hard, the world and Brazil have helped us so much with all types of services, messages, donations, making part of the reconstruction of Rio Grande do Sul.

As you know, we are a people that has grit, and we will rebuild this state as soon as possible. The waters are lowering, are being reduced, and then in the next few weeks, we will be able to work to start the reconstruction. So thank you, on behalf of all the people of Rio Grande do Sul.

Again, Banrisul is 100% operational, and we are working to implement several measures in our Bank, for our clients. For some, we have postponed credits and other measures, support measures, and we have checked that for this reconstruction, above all, small and medium- sized companies will need working capital.

And we have prepared the line, which is already available in our branches, in our app services. So small, medium-sized companies can start programming themselves for reconstruction soon. So we have R$7 billion in credit and relief for this year for small and medium-sized companies.

Especially regarding working capital, we are a commercial bank, as you know. We do not have special lines from government or budget, we work according to our funding. And we will continue to do so, but we have effectively worked really hard so that we can start to work as before.

So regarding results, you have seen our performance already. That's it, you have had access to this, as Nathan said. These are the results, net income of R$187 million, a little lower than the 1Q23, but with the net interest income that is expressive, showing that we are on the right track.

We had somewhat increased default, which is explained by the change the state has made regarding payroll credits, payroll portfolio, which had one model of operation, which was a source of concern to us because it was leading to debt of the civil servant employees.

So the department, the State Department has reformulated payroll loans being very conservative at this moment, and I think they were right to do so. So only 35% of the net income of the civil servant can be allocated to these loans. And the most 84-month before, it was more than that, sometimes 150-month, which is not compatible with the nature of this service.

So this change has helped us because this portfolio will take a different direction from now on. So there was a certain level of readjustment, which will detain the portfolio for a while. It will not show a great advance for the portfolio and the default will still show a period of readjustment. We also had companies default, which was expected. But considering everything, we are satisfied with our Bank figures.

Next, please. Our numbers, you had access to it. Our net profit has been reduced a little as you know. But our financial margin, our net interest income is consistent, pretty consistent making us feel confident to go ahead. So the profitability of this Bank needs to consider that the 1Q, traditionally in Rio Grande do Sul, it's always weaker. It has always been and always will be. This is the truth here in Rio Grande do Sul and in the market, because the vacations, they are taken in January or February, summer vacations. And so this quarter is a little weaker. It's not like in other places in which vacation times are less concentrated. And we have less business days.

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But if you look at the history, it has always been like that. So it shows we have been advancing our financial margins. Our net income is pretty sustainable.

Next, please. So there is an expressive growth, R$1.536 billion in the 1Q24 regarding net interest income, with a growth of 22%. So this is extremely positive for the next few months regarding our Bank, and we hope this will continue.

The balance of our portfolio, it's stabilized for the loan portfolio. I talked about the positive changes in the payroll portfolio made by the state, and regarding the commercial portfolio, we believe it can start growing. We do not know yet how much Rio Grande do Sul, or how long the state will need to reconstruct. Facing this tragedy, we know there are a lot of problems, but also opportunities regarding the reconstruction of this state. A lot of investment regarding infrastructure.

So we will be looking at the real estate industry, as well as the industry of furniture, construction materials, appliances for homes, because they will be in demand. We need to realize that, and we do not know yet when the timing for these investments will be done. It depends on how things go, but we realize there will be a 2H that will be much more leveraged in Rio Grande do Sul regarding these industries. Some of them are pretty crucial for Rio Grande do Sul.

For example, the industry of furniture. That is a tradition here especially in the mountains area, in the Serra region. The main furniture companies are located in the Serra region. And also, we have some very important steel-making companies that will be in demand. We hope, then, that we will have a second semester, which will be different from what we had imagined before this climatic event.

Our portfolio, as you know, basically, we have individual portfolio, and 90% of this portfolio has to do with civil servants. There will be no losses of income, no losses of jobs in this area. So this portfolio is protected. There will be no difficulty regarding this portfolio.

Then for rural loans, which is also expressive in our portfolio, we have already checked and CONAB and other sources have confirmed that there will be some losses, but especially in soy and rice, 80% have already been harvested, less in corn, but most of it had been already harvested. So there will not be major losses regarding the previous harvest of the crop.

So with this crop that has a lot of productivity, we were expected to have the biggest crop of all times, but it will not be possible due to the floodings and the rains. So producers could not get into the crops and take the rest of their crops. But the Central Bank and the Ministry of Agriculture have been dealing with these issues. So we will not have a lot of default in these rural loans, which is also an activity that, on the contrary of supermarket stores and other plants, they are more affected. And this does not happen for the rural producers, because they are demanding credit. They are demanding loans to restructure themselves.

So companies, sometimes they will vanish, but not rural producers, not municipalities, they will continue. And traditionally, Rio Grande do Sul is used to dealing with droughts or floods, so our producers know, they have a know-how on how to deal with these problems and our central government has already established guidelines regarding that.

And we do not have a lot of exposure regarding companies. We believe we will not have a lot of problems in this area. Yes, we will have some issues, obviously, but there will not be major blows to our portfolios.

Right now, considering the situation, we feel safe. As soon as the reconstruction starts, we can start rebuilding the state and will continue working the way we were, conservatively

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increasing our provisions a little bit, because this Board of Directors is more conservative. So we are concerned with the Bank portfolio, but our funding is very positive.

Later, our financial VP can talk about that. But let me tell you, our funding is pretty good. This also has to do with this moment in which people are a little afraid so they run to public banks. In the case of Rio Grande do Sul, people see the safety of Banrisul. So our portfolio already shows this in the increase of funding, which is extremely positive in this sense.

Our asset quality, as you can see, there was a slight growth, which was expected due to what I have explained before regarding the payroll changes and changes in our commercial portfolio, which has also grown. But things are as expected. We have a satisfactory provision that can cover any subsequent event. So we are still very satisfied regarding these figures.

Our administrative expenses and service fees are within the expected with some growth because of collective labor agreements and wage agreements and the voluntary dismissal program, which is being completed now.

There was some renewal of staff, which is now closed. Our staff is renewed by now. So we feel comfortable regarding the provision of services and the maintenance of our administrative expenses. Our service fees have grown because of this performance in acquiring and bank services, expressive areas, and let's hope for the best in the next few weeks and months.

We have been increasing the consumption through the anticipation of purchase because people were afraid that they would not be able to buy water, fuel and other items. So people started collecting items because of these events, which will also reflect in our results.

Regarding our funding, I will ask my colleagues to talk about our Bank's operation. But again, it's 100% with what we expected. Gonzaga, please.

Luiz Gonzaga Veras Mota:

Our funding portfolio, just to give you an idea, in this first 10 business days of this month, there was an increase of R$4 billion, both cash deposit, time deposit to demand deposits, and time deposits for the private sector is also growing in the beginning of the month of May. And also, there was a growth in April.

I am talking about the floods in the state, but anyhow, there was a performance of 12.1% regarding the 1Q23. And up until now, we have the fifth largest clients of the Bank accounting for 15% of our portfolio, which is a diversified funding. This is an extremely diversified funding, and this is the scenario for time deposits.

LCI and LCA bonds with PPRs of the municipalities have shown a good performance. Demand deposit is stagnant due to the small residual amounts in current accounts, a portfolio with R$53 billion in time deposits, R$14 billion, and we have changed the direction of this portfolio, which was previously corrected by Selic, reaching 113 per year, but now we have prefixed this rate.

This changed the funding, it changes cost and, at the same time, we have a prefixed funding, so that this funding is allocated and balance our assets and liabilities, and also helping our loans for the pre-fixed assets, which provides the Bank with a more comfortable situation even if the Selic interest rate grows.

So this is what we have for funding. LCI is a little stagnated and time deposits grows a little as well as savings accounts. I think that's it.

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Next, please. This is our Basel ratio, which is pretty comfortable too. No problems regarding this. We know these historical figures of the Bank are always balanced.

Thank you very much. Now, Nathan, back to you.

Nathan Meneguzzi:

Thank you, President and Mr. Gonzaga. Now let's open the floor for our Q&A session.

Flavio Yoshida, Bank of America:

Hello. It's good to see you all and well. I hope your family and friends are doing well. I am sure the state will get out of the situation even stronger than before. I have a question regarding what you said regarding payroll changes. I would like to understand how these changes impacted the results of the quarter. I understand there was an impact regarding provisions, especially. So I would like to understand if you can give us some more details on this impact.

And talking about the quality of assets, quality of portfolio, the level of the Company's default has increased a lot. What happened here? What can we expect from now on? This led to a significant decrease in coverage. You had a previously comfortable level. Are you going to recover that? So these are my questions. Thank you very much.

Luiz Gonzaga Veras Mota:

I will answer the first, and then Ivanor can answer that. Regarding this portfolio, let me share some things with you. Our INSS payroll loan is very good, 1,2, 1,3, at the most 1,5. So this is very flat.

Our municipal loan, the payroll for municipal civil servants has a very low default rate, also very flat. In the state alone, at some point, there were some issues regarding the state loan. We extended the amount of 4% of the payroll, sometimes a little more, 5% of the payroll in the past, during the pandemic.

So this portfolio was being loaded. And with the emergence of the law regarding over debt, there was a client base who questioned us about this over debt issue. So we had to realign these clients regarding some of the fees and rates, placing them into a level that would be healthy regarding the payroll loan.

This is why we changed it, and we have solved this equation already. And the state took this measure, which we already were asking for. So they set 84 months for a payroll loan. We have differentiated rates for those who prefer 72 months. The interest rate is a little lower. This is very important. And also the payroll loan is of 35%. Before there was no predefined rule. And also, we have the same rates as we use for the INSS. This is 35% of the net income.

For example, it's R$1000. It's 35% over the R$700, which is the net income. So there was a reduction of the credit base, which is available for this loan for this payroll loan. Of course, they will not be growing. It will take some time to generate margin, but on the other hand, this will be a pretty healthy portfolio, which is already adjusted.

On the other hand, in the months of January and February, and also December in Rio Grande do Sul, it's natural to realize to see an increase in default rates, especially concerning small and medium-sized companies. This is a normal and expected situation in this period. So we need to understand the default rate. We really work hard, but we always expect a small level of default rate. So this is a sort of residual default rate. So these 2 portfolio, the small, medium- sized companies portfolio and the state civil servants payroll loan are very well adjusted. So

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the 1Q of the last year, 285 PDP. In this year, it's over R$400 million, but our portfolio is pretty conservative and healthy.

We are very conservative regarding the voluntary dismissal program, our PDV to maintain a healthy portfolio ahead, considering the levels of default maintaining PDD reserves and the portfolio regarding state payroll loan from now on. There will be a default of less than 1%, a level that we had in the past.

Ivanor Antonio Duranti:

Good afternoon, everyone. Let me just complement and tell you that this change since April that the state has implemented, it changed the system for the payroll loan, automatizing it through our web service, and this gives us safety, the security that the payroll loans are secured till the end of the agreement.

The decrease in the margin, which was 45%, went down to 35% now, which allows civil servants to have more available resources. And on the other hand, it has an impact on the reduction of defaulting other lines of credit in the Bank.

The state payroll loan is very similar now to the INSS system, which provides us with a lot of safety in terms of lowering our indicators, the levels of default, especially in terms of provision.

So I can tell you that we are pretty confident. We know that we are not going to grow for some time because of the expected time of this portfolio and the margin of the loan. But this safety will allow us to improve in terms of net interest income to rethink for those who have some available margin, especially reducing PDD of the loan as a whole.

Luiz Gonzaga Veras Mota:

Just to complement, R$19.3 billion, R$6 billion are from the state, R$5.9 billion. For the public sector, I mean. Executive, legislative and judiciary. So R$6 billion out of R$19 billion.

Flavio Yoshida, Bank of America:

Just let me say that, given that this payroll will has a lower growth, how can you reconcile with the guidance that you gave us in the beginning of the year? Are you going to compensate this in another way? How do you see the guidance considering this change, which was not programmed when you published the guidance.

Fernando Lemos:

Yes, it was already estimated in our accounts. We already knew that was going to happen. We knew that the state would publish a law, an order to change this. So our guidance has already considered that. We are accelerating INSS loans for the prospection because it's very safe. We also have some space to grow in the municipal loans and our numbers and figures are focused on the growth of companies, corporate clients.

As we understand, it can be increased regarding the proportionality of credit and to be part of our portfolio as a whole.

Yuri Fernandes, JPMorgan:

I would like to say that I hope that you are well and become stronger after this event. The Bank has been doing a lot of work, R$7 billion in working capital, several lines in 2 months for credit cards. You are thinking about the exemption of fees. You have payroll for 4 months, you are

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not charging some fees. So you have several measures which are needed in this time of need. But do you have any study so far to understand how this will affect your short-term results, your guidance? Because you continue paying employees, you continue paying the expenses. So help me understand these measures, how they will impact the Bank.

Luiz Gonzaga Veras Mota:

I will start answering this. In terms of the fee, it can be postponed. We will have to replace our base. There were many clients whose stores have been affected, infrastructure that was affected, especially in the devastated areas. So the impact will be R$2.5 million regarding the fees.

In our credit loans portfolio, as I said before, the state payroll loan was postponed for 4 months, which will be taken to the end of the agreement for 40 months, will add 4 months. And later, they will have 48 months to pay the agreement.

The same applies to credit cards, 3 months for credit card and the refinance of the debt. The same applies to credit cards, same procedure, 3 months, or installments of 12 installments. Rural loans, 3 months too.

We also have some credit lines for individuals, we are trying to give our clients more time and to capitalize on interest rate. And our portfolios in this period, if we have an individual who has debt with the Bank, this will be paid later on, and the portfolio will have to wait until the clients start paying.

In terms of the rural loan, this will be until August, we will postpone probably till August 15. This is according to the rules of the Central Bank, and from now on, we will follow the Central Bank rules. In terms of rural loans, it's safe in terms of postponement. Losses will not be major in this field, they we will lose money, but not so much. They already have 80% of their crops. Most of the rice is already done in terms of crop, and soy too. The portfolio is R$2.6 billion.

Most of the soy areas, they are planted in high areas, so they are not affected. Maybe some grains will be affected. Maybe the soy will not have the same quality, the grain may be affected. So we can lose 5% or 10% out of this 80%, which were already harvested.

But we will have many lines like Pronaf, Pronampe, we have many credit lines for these producers, provided that small producers have insurance, and they will have the safety net, in general.

Yuri Fernandes, JPMorgan:

Just to let us know, in terms of fees, R$1.5 million to R$2 million, and the other fees for credit emission.

Luiz Gonzaga Veras Mota:

Regarding our fees, the other fees, they are residual. Fees that we can charge, we have already informed. If a client opens a current account and has 6 months to start paying the fee, we will provide him with a little more time. So most of the fees are for new clients. They have some time of grace period to start paying their banking fees. So this is kind of residual.

Yuri Fernandes, JPMorgan:

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Regarding NII, you are not going to collect interest, but maybe you will collect interest by the end of the agreement regarding the income of the Bank. Are you are going to reconcile the income and will continue provisioning this?

Luiz Gonzaga Veras Mota:

Dr. Werner can talk about that. This is on the debt balance. This client will not take a loan in this period because there's no margin. So in cash flow, there will not be no effect. The Bank has R$30 billion in cash. So this operation will make no difference regarding the Bank's cash flow. So we have a safe portfolio.

Now, let's talk about the risk of the Bank.

Irany Sant'Anna:

Good afternoon, everyone. There is one issue that is very important to highlight. We are not actively collecting now because our concern is to understand the readjustment of our clients in terms of the fees they have to pay.

So this time we are giving them, we will provide them with the right time so they can have some relief, so we reduce collecting these fees for the moment, for the time being, but it should not have an impact on our revenues, because our concession of timelines and schedules allows us to do that, and we will provide them with this relief time for the time being.

Yuri Fernandes, JPMorgan:

Thank you very much. Second question, on capital. The Bank is very well capitalized. And recently, by the end of April, I believe, you changed, you approved the policy for this year in 40%, if I am not mistaken. Any changes?

Luiz Gonzaga Veras Mota:

No changes in sight.

Yuri Fernandes, JPMorgan:

What happened in financial adjustments? You had slighter changes. What helped to improve the capital?

Irany Sant'Anna:

This has to do with capital requirements. We had some improvement, or a reduction of capital requirement regarding some important issues. I do not have the details here with me, but I can forward them to you later.

Yuri Fernandes, JPMorgan:

No problem. I can talk to Nathan later. Thank you so much. And again, I wish all the best to Rio Grande do Sul and you all. .

Luiz Gonzaga Veras Mota:

We will check the prudential adjustments every semester.

Ricardo Buchpiguel, BTG Pactual:

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Good afternoon. I hope you and your families are well and safe. I have two questions here, on two topics. First, we have seen that this week, the Central Bank relaxed the provision fees and compulsory needs for banks that are exposed, such as Banrisul. Do you plan to adhere to these changes? And do you have any estimates to improve NII regarding these adjustments?

And the second topic, in the presentation, you said that 75% of the individuals are collateralized. I understand that most of them are in payroll loans, which will not be affected by the floodings due to guarantees. But regarding the rest of the portfolio, which is the percentage that was collateralized, if it makes sense to count on that for companies portfolio. I believe there are some guarantees that may be damaged. In the case of rural loans, they have some insurances that may not be covered by this type of climatic events, such as floods. So let me help understand more about the collateralization of the loan.

Luiz Gonzaga Veras Mota:

Regarding compulsory, this comes from the savings. Right now, we have collected from the Central Bank around R$2.1 billion, with a profitability of the savings resources. And this resource will be released to the cash flow for the period of 1 year. And after this 20% of the compulsory rate of the savings, we will go from 5% to 5% from next year onward. This will go into the Bank's cash flow, based on Selic interest rate. If we maintain this level of Selic interest rate, we will have 4% of difference. This will be R$80 million of growth revenue.

Regarding the second question, PDD, we have been talking to the risk analysts and risk manager, we will analyze the new rules given by the Central Bank and we will calibrate the PDD according to the risk of operation. We will manage according to what we know from the Central Bank.

Regarding the Bank's portfolio, we have 78.8% in individuals and 21.2% in companies. So from R$53 billion of this portfolio, R$42.4 billion is for individuals, and the commercial portfolio is R$25.9 billion, R$19.3 billion is payroll loan and the other individual loans will give you this difference of around R$6 billion. And rural loans have R$10.9 billion, and R$7 billion of costs. Soy is R$2.6 billion, and cattle around that; rice is R$400 million; and soy, the same.

So for the payroll, we have R$19.3 billion. Most of them are state and municipal civil servants and also INSS, which are protected, retirees and civil servants. So this portfolio is protected. And 80% of this individual payroll loan, the biggest mass of clients in terms of individuals for commercial credits is employed. As I said, INSS retirees and civil servants. And also other individuals who are lawyers or dentists. And also, we have the rural loans we all know about.

In terms of corporate, we have the small and medium-sized companies, R$2.6 billion; medium- sized, R$3.2 billion; and big companies, R$4.5 billion. And food and beverage, health and education, with very, very low default rate in health care connected with FUNAFIR, which is a SUS credit, SUS' payroll loan. So this payroll loan, this money is safe. It will be received from the Ministry of Health, from the federal government.

In terms of real estate, we have R$900 million in civil construction, too. In food R$700 million. In real estate, R$5.3 billion in individuals, most of them in public service.

So our credit is very healthy. Maybe we will have some problems with small retailers, but we have remedies for that like the unique account, the single account to provide working capital to these companies. We have some lines like the guaranteed fund with the new rules that are coming. We can deal with that and adjust this with companies that face some problems.

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So the individuals portfolio is very healthy, and for the corporate ones, we will have remedies to deal with that.

Irany Sant'Anna:

I just want to highlight one point. We see no problem regarding expected losses. What we see is the need to provide short-term relief for these people who are in debt because they will need to reconstruct. Individuals will need to buy furniture to rebuild their houses, but we are not giving discount. We are giving a relief time so the people can readjust their lives, get their lives back to normal.

So what we have in payroll loans is guaranteed. Our revenue is guaranteed. Due to the way of how the operation works, we have partnerships with these public entities. And now we need to give this relief to this client and the Central Bank role will help us in establishing this provision without increasing our risk.

Ivanor Antonio Duranti:

I would like to complement that regarding small and medium-sized companies, we have launched a product that has a different characteristic, focused on working capital to help companies to reorganize in terms of their cash flow, trying to look for receivables and also payable accounts. With this, we will increase our level of banking fees, our fees, our relationships with companies.

We will provide them with the opportunities so they can reorganize in this time of hardship by connecting receivables to the operation. So there will be a liquidity assurance and guarantee, providing them with the conditions and the deadlines and the necessary flow to return. Interest will be paid after the grace period, and the main part will be in the flow availability of the Company or by the end of the agreement. We believe that this project will help us both to provide new resources, and also to reorganize the cash flow and operations, which are already with us.

Ricardo Buchpiguel, BTG Pactual:

Just a follow-up, everything is clear, but I understand that there will be a need for relief, but the main risk will be in small and medium-sized companies, around R$7 billion. Could you talk about the R$7 billion, considering the most affected regions or the most affected industries? And which will be the exposure for the Bank, or the areas of risk for the Bank?

Luiz Gonzaga Veras Mota:

Small and medium-sized companies, we have a portfolio for small and medium-sized companies of R$5.5 billion. The basin of the Guaiba River covers the regions of the Serra, the mountain regions, the regions around Porto Alegre, São Leopoldo, Novo Hamburgo, the metropolitan area. They are very strong regions. So we do not know exactly how this will be. We do not have the full picture yet, but we have the products that will help adjust the lives of these clients.

Probably there will be some lines coming from BNDES, lines that are different, investment lines for remodeling, reconstruction. FINEP will play a strong role in this world of purchase of machinery, and also with working capital and refinance public job sites.

But we do not have a clear picture yet. This is a big major blow to the economy. It was a tragedy. But we do have the right tools to collaborate and adjust and help these companies to

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