Aug 2, 2015
Executives
Luiz Felipe Taunay - IR Angel Santodomingo - CFO
Analysts
Philip Finch - UBS
Operator
Good morning, and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil S.A.’
s results. Present here are Mr.
Angel Santodomingo, Executive Vice President and Chief Financial Officer; and Mr. Luiz Felipe Taunay, Head of Investor Relations.
The live webcast of this call is available at Banco Santander’s Investor Relations site, www.santander.com.br/ri, where the presentation is available for download. All the participants will be on listen-only mode during the presentation, after which, we will begin the question-and-answer session and further instructions will be provided.
[Operator Instructions]. Before proceeding, we wish to clarify that forward-looking statements may be made during the conference call relating to the business outlook of Banco Santander, operating and financial projections and targets based on the beliefs and assumptions of the executive board, as well on information currently available.
Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence, depend on circumstances that may or may not occur.
Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander and may cause actual results to substantially differ from those in the forward-looking statements. I will now pass the word to Mr.
Angel Santodomingo, Executive Vice President and CFO. Mr.
Santodomingo, you may proceed.
Angel Santodomingo
Thank you. Thank you, everybody, for being on the webcast and on the call for the second Q results of Santander Brazil.
As you may see in the index, and I will start by the index, we will cover five items, starting as always by the macro scenario review and we have divided results given the extraordinary items that we already commented and communicated to the market last June. We have divided it and the results in between those that include extraordinary events and those that are kind of business as usual in which -- to which I will devote the majority of the presentation.
Finalizing as always with my final remarks. Moving to page 4, we present here the central banks service.
So in respect to dynamics for some of the most important economic variables, let me share some thoughts with you. The Brazilian economy as is well-known is going through an adjustment process.
In this environment, the amount of measures implemented announced by the government is considerable and in the right direction. There has been a pronounced adjustment in prices in the Brazilian economy.
Actually, there have been two important relative price adjustment processes in the economy -- the realignment of regulated prices and market prices and the realignment of non-tradable and tradable prices. Consequently, the Brazilian inflation has reached levels around 9% in the current months, well above the known target of 4.5%.
The fiscal measures implemented and announced indicate a clear change in the course of macroeconomic policies. To that extent, we believe that bulk of the measures will structurally impact the economy in a positive way.
Since the adjustments are sizable, the economy is being impacted. In 2015, this year, current estimations point to our GDP contraction close to 2%, probably setting the ground for a better medium term starting in 2016.
Consensus is positioned with a hike in interest rates up around the current levels. As you know, yesterday night, Copon [ph] announced another 50 basis points and signaled that it could be the last or the end of the hike in cycle.
Starting to ease probably next year once the twelve months expected inflation falls or gets near the target. Last but not least, it is expected that the Real -- the Brazilian Real, should converge to the 3.25 reais per dollar.
A level that over time should reduce a current account deficit to a more sustainable level. Let me move to the next slide in which we summarize total results, including extraordinary items.
Total results amounted to BRL4.832 billion in the second quarter and BRL6.465 million in the first half of 2015 with obviously substantial growth compared to the same period last year near to these extraordinary results that we announced. As announced last June, this result and as I am commenting was positively impacted by the reversal of tax provisions, what we communicated as the COFINS recovery.
Additionally, complementary provisions have been recorded to strengthen our balance sheet. The net after-tax impact of these two events amounts to BRL3.2 billion.
Excluding the extraordinary events, which is in the line of profit that I will focus my presentation. The managerial net profit totaled BRL1.675 million in the quarter, 3% higher than the previous quarter and BRL3.3 billion in the first half of 2015, with an increase of 16% in 12 months.
Next page, on Page 7, we break down these extraordinary results of the period. The reversal of tax provisions amounted, as mentioned, to BRL4.77 billion.
Additionally, we have done complementary provisions to reinforce the balance sheet amounting to as I mentioned BRL1.6 billion that were divided in three main blocks, almost BRL800 million -- BRL799 million for amortization of intangible and other assets, BRL483 million for civil and fiscal contingencies and finally, BRL331 million for credit provisions. As a result and as I already mentioned, the net after-tax impact of these two events amounted to BRL3.2 billion.
Once explained the results including extraordinary items, let me move to the business as usual. Net profit, its main characteristics and the main lines that conform it.
On Page 8, you can see these second-quarter 2015 net profit totaling BRL1.68 billion. As I mentioned, almost a 3% or 2.6% increase in the quarter, which continues the positive trend we have seen in the last quarter.
The same may applied to the year-to-date results in first semester, came out to be BRL3.3 billion with a growth close to 16% compared to the same period of last year. Moving to Page 10, we highlight the main ideas that maybe -- that are summarized coming from both, balance sheet, P&L and quality.
From now on, as I mentioned, I will just discuss these managerial results excluding the extraordinary events in the period. As we will see, the quarter shows positive revenue dynamics in various metrics, which result from the implementation of these strategies that we have been sharing with you for some time in quarters already.
I will highlight four main points. First, the expanded loan portfolio decreased by 1% in the quarter, negatively impacted by the Real appreciation.
Let me remember for you that the Real appreciation was around 3% in the quarter. Excluding this impact, the quarterly evolution would be or have been minus 0.6%.
And finally, from clients [ph] climbed or moved up by 6%. Second, the bank remains with a comfortable position in terms of capital and liquidity reflected in the strength of its balance sheet, at the same time that we continue to increase our profitability.
In this sense, the BIS ratio stood at 18.1% with a Tier 1 ratio of 16.6%, obviously positively impacted by the extraordinary events of the period. And even without them also moving up strongly.
The loan to deposit ratio reached 92% as a reflection of what I commented in terms of the asset and liability moved -- in how the assets and liabilities moved in the quarter. Third, net profit totaled BRL1.67 billion in the second quarter with a quarterly growth already mentioned of 3%.
This is basically explained by a better evolution of the revenues in the quarter, which presented a robust growth after various quarters under pressure. And finally, we see a slight deterioration of quality probably reflecting the current environment.
Delinquency over 90 days increased 19, almost 20 basis points in the quarter, while at the same time the coverage ratio reached 185%. Also, positively impacted by these extraordinary events of the period.
This coverage level is the highest for a long time in Santander, Brazil. Next page, in next page, in Page 11.
We show the main lines of our results. With regards to revenues, there was an acceleration of the net interest income that increased 5% over the first quarter and 7% in 12 months.
This is the highest quarterly increase since 2012. Commissions also improved, growing 3% in the quarter and 8% in 12 months.
The second important point is allowance for loan losses that totaled BRL4.4 billion in the first half with an increase of 11% over the first quarter and a reduction of 7% in the year reflecting our low risk credit growth in this year. The yearly improvement was also reflected in our cost of credit, which fell by 69 basis points in 12 months.
I will elaborate about these two points later on the presentation. General expenses grew 5% both in 3 and 12 months.
In this last case, well below the annual inflation. The quarterly evolution was negatively impacted by perimeter and the traditional seasonality of this quarter.
As a result of all of what I am saying, the net profit climbed by 3% in three months and 16% in the year. Let's go line by line so that I can share with you our main thoughts.
In the next page, we have the evolution of the net interest income. Net interest income totaled 7.5 billion in the first half of 2015, growing 5% over the previous quarter.
The credit-related net interest income has continued its improvement, as I mentioned, increasing 5% in the quarter, which is the first relevant growth since 2012. Market activities also maintained a good level of performance in similar positive numbers compared with previous quarters.
In the yearly comparison, net interest income increased 7%. The decrease in credit-related NII was more than offset by the increase in deposit-related NII and by the increase of the line others due to what I mentioned, gains in market activities.
Again, the decrease in credit-related NII is fully explained by the change in mix in the overall banking book spread that we have already also mentioned in previous quarters. The change of mix both from a product or segment perspective can be made tangible with the following examples.
The balances of riskier products individuals, I mentioned what we call here [individuals], credit cards over drops in personal credit, decreased 1.7 billion year-on-year or 4% while for example mortgages increased 35%, 6.3 billion. On the second level or example, for example, large corporates loan portfolio growth clearly outperformed this growth.
So these are the main reasons in effect why we see this performance in the spreads. Moving to Page 13, to the next page where we have the loan portfolio.
As you can see, the loan portfolio -- the expanded loan portfolio totaled BRL321 billion. Devaluation of the Real, the exchange rate, had an impact on the portfolio annual growth, which is significant.
Excluding the impact of these ForEx valuations, the yearly and quarterly evolution of the expanded loan portfolio amounted to a growth of 11% and a decrease of 0.6% respectfully. As you can see, well below -- especially on the annual side, well below the numbers that are really in the total variation numbers.
The large corporate segment continues to be one of the main yearly growth engines, growing 16%. Again, if we include the ForEx variation is 29%, so almost a double in the period after filtering out this exchange rate devaluation.
In the quarter, the loan portfolio decreased by 4%. 2.8% again if we exclude the Real appreciation.
These types of portfolios, as you probably know have volatility in between the quarters given the large amounts we are speaking about. The individual segment presented a growth of 8% year-on-year and 2% quarter-on-quarter.
Both metrics have been impacted by the incorporation of [indiscernible], remember our payroll joint venture portfolio. The like-for-like growth was 4.7% and 1.5%, respectively.
Mortgages in agro continue to be our main drivers. Consumer finance portfolio decreased 2% in the quarter and 4% in 12 months.
We are absolutely comfortable with the profitability and performance of these segments, especially taking into account how the overall car market dynamics are taking place here in Brazil in this year. Finally, the SME portfolio decreased by 1% in the quarter and presented a slight increase in 12 months, partly reflecting also the mentioned macroeconomic environment.
In any case, we continue to invest in our franchise in these segments. On the next page, Page 14, we can see the evolution on the funding side.
That is a clear reflection of our focus on clients and on the linkage with them. Funding from clients totaled 276 billion, climbing almost 45 billion in 12 months and 15 billion in the quarter.
The general behavior of the financial system with more [ph] evolution in demand and savings deposits was reflected also in our performance in each quarter. But even with this, on balance funding grew 4.5% in the quarter.
Finally, total client funds include assets under management, came to almost 500 billion -- 494 billion, growing 23% in 12 months, 93 billion or 5% in quarter, 25 billion. Then I’ll remember to you that assets under management totaled 178 billion, increasing 16% in 12 months and 7% in the quarter.
Going back to P&L in the next page, we have the fees and commission income. The total amount we are speaking of, almost 5.8 billion, which has an 8% variation on the year, but probably what is more important, a 3% increase in three months.
This positive quarter evolution compared with previous ones that we have been presented to you, to the market, in previous quarters is again a reflection of our effort on client linkage in our commercial initiatives. In the quarter, the highlight were current account and lending operation, which grew 8% and in 12 months, the growth was boosted from insurance and lending operations.
Moving to Page 16, we give a breakdown of general expenses. If we exclude depreciation and amortization, it decreased by 5% in the quarter and 3% in 12 months.
Well below as mentioned approximately 9% annual inflation in which we live today in Brazil. It is worth mentioning and remembering that the incorporation of GetNet, our acquiring company, impacts the deal evolution and bonds sufficient incorporation, which took place in the first Q, in February, impacts both periods of comparison.
Traditional seasonality that I mentioned the introductory worked in the second quarter in personal expenses also impacted the Q-on-Q comparison. We continue to have the same target, we do not vary this target in terms of expenses growth.
And we continue to say that it will grow well below inflation in 2015. As you can see, including depreciation and amortization, total expenses moved up by 5%, both in 3 and 12 months, this last case well below inflation.
Moving to quality on Page 17, we can see the delinquency ratios. The NPL ratio over 90 days fell by almost 90 basis points -- 88 basis points in 12 months with an improvement in both individual, 124 basis points and the corporate, 40 basis point segments.
In the quarter, delinquencies increased by 19 basis points impacted mainly by the large corporate segment. The leading indicator, the 15 to 90 days NPL ratio increased 16 basis points in the quarter maintaining a fall of 51 basis points in 12 months, again, with the main impact coming from the corporate segment.
The individual segment is around the same level as the previous quarter in both indicators, in the over 90 and the 15 to 90 days NPL ratio despite the general economic pressures that we are all aware of. Finally in this slide, the coverage ratio grows to 185%, which is a highly comfortable level and also a historical level for us.
In that ratio, the extraordinary items have an impact, which, if we exclude them, it would be 178%, which is also a comfortable level and quite similar to the previous quarter. In terms of allowance for loan losses on the next page, as you may see, they came out 4.4 billion in the first half presenting a decrease of 7% year-on-year.
In the quarter, they are lower, the provisions for the loan losses increased 11%. The cost of credit of the first half of 2015 is 50 basis points lower than the cost of credit of the whole year 2014, which was around 3.5%.
We maintain our expectation with this regards, with the cost of credit in 2015 in similar levels compared to 2014. And this applies in general terms for the quality discussion in Brazil.
Moving to performance ratios on the next page, I would underline the efficiency ratio at 50% in the second quarter with an increase of 32 basis points in the quarter and the recurrence ratio that has reached almost 68%, producing a 123 basis points in the quarter. The first item I would underline is a return on equity that stood at 12.8%, the same level as the previous quarter and obviously if we include extraordinary items, it goes up to 18.2%.
In terms of liquidity and capital ratios in the next slide, the reflection of the stable funding sources and an adequate funding structure leads to a loan-to-deposit ratio of 92%. On the other hand, on the solvency side, the BIS ratio stood at 18% -- 19.1%, mostly composed of Tier 1, at very comfortable levels.
On the quarter, the ratio improved 210 basis points, out of which 130 are due to the extra ordinaries we already mentioned. So the organic generations are on 80 basis points.
The main factors that explain the evolution in the 12 months are the growth of the credit portfolio, the impact of the Basel 3 phase-in and an increase of operational risk due to the implementation of the provincial conglomerate balance sheet in January 2015 that we've commented in the previous quarter. Finally, in the last slide, let me go through my final remarks.
As a conclusion of what I already presented, our second quarter 2015 main messages are the following. First, the performance evolution is directly linked to the transformation that we are trying to do in the bank and that we are executing and that our clients and our organization is experiencing, which has been shared with you in previous quarters.
This agenda is based on three main drivers. The first driver, our investments in our commercial model.
There has been a significant simplification of the processes around the client like opening a current account, digital transactions have become easier and there was a launch of the new mobile app for example, We have implemented our new commercial model and our new customer relationship management focus called Servo [ph] that we have mentioned previously, which has simplified processes, improved service levels and devoted more time of our branch network teams to commercial activities with clients. We have also improved strategic businesses and the partnership with [Indiscernible] as an example that has already been [indiscernible].
In SMEs, we have recently launched Santander [Indiscernible], which is the most advanced semi-platform in Brazil and will make the difference in our results in the following quarters and years. Management, we with an improved -- in terms of management, we have improved our credit quality management and we have maintained our cost discipline within out evolution always running well below inflation.
My second main point in terms of final remarks would underline the acceleration of revenues and the pace of growth continuing to show a positive trend. The third point that I already mentioned is general expenses remaining with annual growth well below inflation.
The fourth point that I would also underline is a slight derivation that we are seeing in asset quality. Also the environment has already commented performance, we remain comfortable thanks to our coverage levels maintaining management priorities to continue delivering results while we keep improving the performance of the upper part of the P&L.
And fifth, finally, there was an improvement of the liquidity and solvency positions of the bank. Thank you.
And now we are ready to answer any questions that you may have.
Operator
[Operator Instructions]
Luiz Felipe Taunay
We have two questions about asset quality, one coming from [Indiscernible] and one coming from Philip Finch from UBS and both of them, they mention that the NPL ratios increased 15 tonight increased 20 basis points, the sixth increased 40 basis points and the 90 increased 20 basis points, and the questions regards if you could comment on the expectations for asset quality going forward, if you expect further deterioration as a consequence of the economic slowdown and the deterioration in early delinquency rates. Okay thank you, [indiscernible] and Philip.
Angel Santodomingo
What I would say around credit quality is that -- sorry they tell me that I was speaking with no volume -- with no impact. I was saying that in terms of credit quality, what are we seeing?
What we are seeing is, this slight deterioration that we mentioned basically on the corporate side dependently [ph] we speak of the NPL ratio or the cost of credit. What I would call this is a normal reflection or a normal impact of the current macroeconomic environment.
And we remember to you that the GDP will probably stand in recession with a minus 2% or around minus 2% for this year, with unemployment rising and this has to have an impact on the quality. Now another discussion is, how this impact maybe and what are our views.
What we see, and I mentioned also in my presentation, is probably that 2015 on average terms will be similar to 2014. This means doing a slight smile [ph] probably concentrating on the corporate side, but both the [indiscernible] leading indicators are the kind of messages, behavior and relationships that we see coming from our clients do not lead us to message in terms of aggressiveness of what may be coming forward in terms of asset quality.
We see this slight acceleration that may continue, but I would underline this slide because we at this point, we do not see war in finance either in the leading indicator side or on the actual NPL formation and ratios.
Luiz Felipe Taunay
We have one more question about cost. What is the outlook of the bank for the cost-based growth in 2015 and 2016?
Angel Santodomingo
Well in the cost evolution, we also mentioned in my presentation, the cost evolution of this quarter was impacted first from some seasonality that we always have on personal expenses in the first Q -- second Q compared to first Q. Secondly, perimeter and thirdly, by some kind of impact that we tend to have like the launching of the Santander Brasil's [indiscernible] that I mentioned, these type of things tend to be a little but volatile within quarters.
The annual evolution of the year continues to be well below inflation and we will continue to maintain that message. How will we see the future?
The future we see converging towards inflation, but, in any cases, we will keep a focused management way in costs and this means that Santander Brazil will keep the discipline on the lower part of the P&L without increasing the impact on the net profit. The message going forward is, discipline will continue in costs.
Operator
The Q&A session is over and I wish to hand over to Mr. Angel Santodomingo for his concluding remarks.
Angel Santodomingo
Thank you all for being there in this Santander second Q 2015 results. I hope that you agree with us that they are a good set of results, both in relative terms and absolute terms.
And we will continue supposedly next quarter to deliver these type of sound results. Let me remember you that we will be in Santander Group Investor Day taking place on the 23rd and 24th of September in London and there, if you attend, we will be more than happy to meet and discuss with you any points that you may have about our bank.
Thank you very much.
Operator
Banco Santander's conference call has come to an end. We thank you for your participation.
Have a nice day. Thank you.