Jul 24, 2019
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, Chief Financial Officer; and Mr. Andre Parisi, Head of Investor Relations.
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]. The live webcast of this call is available at Banco Santander's investor relations website at santander.com.br/ir, where the presentation is also available for download.
We would like to inform that questions received via webcast will have answering priority [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 Brasil's 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 Brasil and may cause actual results to substantially differ from those in the forward-looking statements. I will now pass the word to Mr.
Andre Parisi. Please, Mr.
Parisi, you may proceed.
Andre Parisi
Good morning everyone. It's my pleasure to welcome you to Santander Brasil's earnings call conference call.
Once again we delivered another set of solid figures which will be presented with more details by our CFO Mr. Santodomingo.
Before moving on the course highlights, I would like to remind you that Santander Brasil will host its first Investor Day on October 8th, when we celebrate 10 years as a listed company. So it will be a great opportunity to discuss with the top management about our strategy, threats and opportunities.
So please confirm your participation and for more information, please reach our IR team and also our website. Now I turn it over to Mr.
Santodomingo.
Angel Santodomingo
Thank you, Andre. Good morning everyone.
It's a pleasure being again with you this morning on a new set of results. Starting with the agenda on key messages will be the first part followed by a small slide on Santander Group results because they have already been published, macroeconomic scenario and obviously we will focus on the result highlights and final remarks.
So starting in the slide 6, I would say that our return on equity remained above the 21% level reaching another historic maximum on improving the quarter. We keep on generating more value to our shareholders with profitability materially higher than our cost of equity.
In the next slides, you will have a better understanding of how we manage to deliver such performance, been our operational leverage and tightly controlled provision and expenses, two key elements to deliver those results. Last quarter, we presented the best efficiency and recurrence ratios in the financial Brazilian sector.
Key contributors to our profitability. We have farther improved first Q levels in this quarter on both ratios.
We will see if we maintain these best or top place within the sector. According to 2019 Euromoney Awards for Excellence, you have it in this slide on the right side of it.
We were named the best bank in Brazil and in Latin America. We believe that this reflects current positioning of the bank.
Finally, I call your attention to the BRL2 billion distributed in dividends, interest on capital in fact during the first semester of this year which compares with BRL1.2 billion that we distributed last year or BRL1 billion in 2017 for the same period. So doubling versus 2017 and something like 70%, 80% higher compared to last year.
One of the banks and so next slide sorry. One of the bank's main pillars in our customer -- is our customer base which kept expanding at a strong pace.
This sound evolution for an extended period almost 50 months in a row as you can see in the slide comes as a result of our focus on client service. The Net Promoter Score is the metric as you know and I have been sharing with you that we have been using as a tool to materialize continuous improvements in client service.
We have increased it by eight points compared to second Q of 2018 and almost or been flat at 59 points similar to first Q 2019. We believe that levels above 60 are sound and strong for a bank.
In Slide 8, we see the results of the client base continuous growth, a profitable market share gain while we reach a 9.5% market share on launch in deposits, we are now above 11%. Based on these, I would like to underline the performance on the following products.
Cards reflects our offering on products for all nations, from the low income segment with the credit card free to high income clients with for example, the American Airlines Advantage Card. These combined with the best credit card up in the industry, Santander compounds a strong offer that we think will be a stronger in the near future.
SMEs our success in the result of the integration in between financial and non-financial solutions such as the program that helps in their entrepreneur businesses. We have also recently launched the Santander Dual where we combine in the business and corporates accounts into only one service turning the life of mid entrepreneurs much easier.
Vehicles, our digital platform combined with a risk based pricing that we could be sharing with you sharing with you lately remains the backbone of our success. Payroll loans will reach a market share is likely higher than 10% coming from close to 6% adjusted four, five years ago.
Our digital platform has definitely contributed to this achievement along with our strategy of increasing the number of companies and easy policies that we process payrolls for. And last but not least agri business.
Our expansion process continues on track as part of our plan to expand into Brazil's countryside. In line with these, we have already opened 24 agro stores and we have plans to keep on expanding these number.
Slide 9 shows our approach to ESG management fully integrated with our business. We have established several commitments that I wanted to share with you which includes eliminate single use plastic in our offices by 2020 and have our operations running on 100% renewable energy by 2025.
With all these objectives, we have been opening our branches on weekends to promote financial education and guidance. So by first semester of 2019, we have already achieved a few important milestones that you can see on the right side of the slide.
Energy consumption from renewable sources has already reached 21%, government leadership already represents 25% and more than 360,000 clients that are active in our microcredit platform Prospera. Moving to Slide 11, you can see the already announced first semester 2019 Santander Group net profit and results.
In the semester, Santander Brasil represented 29% of the group's earnings showing the relevance of the Brazilian subsidiary results for the group. So let's turn our attention now to the macroeconomic scenario.
On the back of well behaved inflation dynamics in tandem with the maintenance of sound performance of the balance of payments, Brazilian economic fundamentals remain positive, economic activity has registered as lower than anticipated recovery trend but market participants have witnessed some concrete progress as far as the structural reforms agenda is concerned which should lead confidence indicators to improve ahead. Moving to Slide 15, you can see Santander Brasil's net income in the quarter that it reached BRL3.6 billion which is 4% higher than the previous quarter and 20% above second Q 2018 levels.
The result for the first half of the year is 21% above the same period of last year with basically are generating in one semester what we achieved for example in full 2016, just two or three years ago. Customer base growth, volume, cost in provisions control are the main supporters of our evolution.
On Slide 16 represent main lines of our core results. On the revenue front NII grew 5.3% on our quarterly comparison and above 7% versus the first semester of 2018.
Fees expanded high single digit relative to first semester last year and almost 3% compared to last quarter. Looking on the expenses side, an 8.8% quarterly increase on provision in expenses reflecting the already mentioned low levels of first Q 2019 and general expenses with an above inflation increase reflecting new businesses launches.
I will elaborate on the main concepts in the following slides. NII totaled $11.3 billion in the quarter, a 5% increase compared to first Q 2019 and 8% better than second Q 2018, with the following highlights.
Credit NII expanded 5% in the quarter and 7% year-on-year reflecting a solid loan portfolio. Remember that these 7% year-on-year credit NII expansion still reflects or housing sign itself, the regulatory impacts that we announced in second Q, first Q last year.
Okay. So adjusting for that it will be almost 9%.
Funding NII grew 4% Q on Q explained by higher average volumes and the others concept for the quarter is slightly above average. On Slide 18, our loan portfolio presented 9% year-on-year increase reaching almost $320 billion by the end of June.
Individuals segment continued to deliver a good performance increasing 18% in the year and almost 4% in the quarter. Payroll credit cards, personal loans were the main growth drivers.
Consumer finance was once again delivered and a strong performance during the year expanding 17% reflecting our successful model mentioned that I mentioned before. Our SME portfolio accelerated in the quarter expanding by 10% year-on-year and reflecting better NPAs in the segment which has been gaining strength during the last six quarters rather.
Lastly the corporate portfolio which is still lagging due to both the capital markets activity and our profitability oriented starting. Moving to the next slide, we present our funding produce that in the quarter grew more than our asset side, funding from clients increased 4.5% Q on Q and 8% year-on-year highlighting demand and time deposits with a strong growth in comparison to last quarter.
Saving deposits also presented a less intense increase but gaining market share, first about the financial sector system growth while financial bills declined 4% compared to first Q this year. On the commission side, performance is a direct consequence of the customer base transactionality growth.
In first semester with a more competitive environment, we grew 9% year-on-year with positive performance in cost, current account and insurance and remembering that also we have in our regulatory impact coming from third Q 2018 which could lead that 9% to almost around 10%. In the quarter, we had a strong performance in all lines except in cards where we had an above average revenue fee in first Q 2019.
In the next slide, we see Santander’s asset quality. In general terms we do not see any worsen sign for our loan portfolio.
Short arrears in 90 days ratio present an almost flattish performance in the quarter. All in all, we keep quite comfortable levels based in our risk models accuracy granting us confidence to keep on growing our operations.
Covering ratio decreased to 191% but perfectly in line with our risk exposure. In the following slide, you will notice that loan loss provisions net of recoveries increased 8.8% in the quarter.
Here it is important to highlight the fact that the provision delivered for first Q 2019 was lower compared to both quarters before and after fast provoking this increase. On the cost of credit, it reached 3.2 for second Q 2019 perfectly in line with previous quarters.
On this slide 23, we see costs growing 2% in the quarter and 7% in this year. We are growing above inflation provoked by the different new investment in new platforms that we have been announcing to you during the last quarters.
I am speaking of P of Ben Santander to Loop et cetera. And you may see these reflected in the administrative expenses line.
On the other hand as you can see, personnel costs are absolutely controlled being flat both over the year and the quarter defending that cost control mindset that I have referred to in previous occasions. Moving to next slide indicators they show good evolution and I would say that except for return on assets, the other three ratios efficiency, recurrence and return on equity present best levels ever, so historic levels -- historical levels.
The efficiency ratio improved 70 basis points below 39% while the recurrence ratio totaled above 89%, and thus as a result of all that, we presented to you this morning our return on equity that rose 20 bps compared to last quarter reaching the mentioned 21.3%, the highest level ever. Moving to the capital and liquidity front, we continue to deliver solid recent numbers.
Our funding has stood at a comfortable levels with a loan to deposit ratio of 90% and with good liquidity ratios and levels. By the end of June, our BIS ratio is at 16% with our core equity Tier 1 of 14%.
As mentioned before, we distributed BRL1 billion in dividends interest on capital in the second Q totaling BRL2 billion year-to-date which is close to 70% more compared to the BRL1.2 billion that we distributed last year in the same period. So moving to final remarks and to conclude the presentation, I would like to highlight the following.
Revenues increased 8% year-on-year strengthening our position as a growth company. Asset quality remains controlled, productivity sorry consistently enhanced leading to a more efficient company and a 21% year-on-year net profit growth yielding 21.3% return on equity.
Overall, we believe that these dynamics are clear indicator that we are on the right track to keep on delivering solid and sustainable results to our shareholders. I would like to thank you to thank everyone for the attention and we are now open to answer Q&A.
Operator
Thank you. We will now start the Q&A session for investors and analysts.
[Operator Instructions]
Mario Pierry
Okay, first question is from Mario Pierry, Bank of America. Good morning and congratulations on the quarter.
I'd like to hear your views about the sustainability of ROE considering a scenario where interest rates stay low for a longer period of time. And as we are seeing the increase of fee tax which one concerns you the most low rates or competition?
Angel Santodomingo
Thank you, Mario. I agree with you that we may be entering lower for longer periods here in Brazil.
I think I have commented these for several quarters now but it is true that we have more stabilized in Brazil. I feel optimistic in that sense meaning that we controlled inflation now, we have controlled fundamentals.
I mean very good balance of payments or very good external reserves et cetera and fiscal policy being kind of tackled by the government. So we may see that scenario in which we have lowered for longer.
I think in those scenarios to your question of sustainability of return on equities et cetera what you normally have is two things. One is lower cost of equity and that may lead to lower profitability levels that may happen or not depending on the evolution of the strong wave of the economic.
Normally, you tend also to have more competition because volume is available. If you see what has happened here in Brazil and I could also say with these idea with you several times, market share of public and private owned banks have behaved differently.
No I mean in the good very growth in terms of years public banks reached high market share gain you need against private banks which bag before that positive economic cycle where deleted with close to 60% and now that is reverting, I mean now approx markets are 50:50 and I would bet that that kind of behavior will continue seen a majority of the markets are gained by private banks and probably public banks going below 50%. So that gives also available volume at the right prices and at the right profitability to the system.
So you have both a positive economy and volume available from some competitors. So both things should lead to growth on the NII side.
Now to finalize my answer on the competition in tax side. Well what I will say is that we have as you know, we have more than 500 in tax now in Brazil in different areas in terms of in the financial sector, in terms of services.
I have shared with these with you in several occasions, I mean this is competition that wakes you and that keeps you on the awake on the competition side in terms of how we deliver both services and products to the clients. To some point, some of these competitors will have to go in to positive numbers at some point in what Santander Brasil will certainly not do will go into strange or competition affecting prices just for the sake of volume or for the sake of market share.
So I will say that to wrap it up, we are in a good positive scenario that we should kind of take advantage of with spreads probably under pressure. So volume will tend to compensate spreads.
Yuri Fernandes
Next question is from Yuri Fernandes, JPMorgan. Interest rate and NII, can you share your sensitivity to reference rates or perhaps one-year interest rate curve specifically how 100 bps reduction in rates could impact your NII in the short term and in the long-term?
Angel Santodomingo
Yes, Yuri thank you. Yes, I think we have shared with you this number, we have a sensitivity of around 300, 250, 300 depending on the quarter -- million reais to 100 bps move in the Q.
Yuri Fernandes
Next question from [indiscernible] Citi. We see that your book decelerated in the quarter and we acknowledge that it's due to the fact that you implemented an aggressive credit strategy over two years ago.
Why if and when the pension reforms approved during the third Q, do you expect to change your appetite for loan concession in any of your loan book segments?
Angel Santodomingo
Well I think that our book, our loan book performance reflects a little bit what is happening in the country. No I mean you we keep on seeing good growth or positive growth on the individual part of the portfolio.
SMEs have been gaining momentum as we speak during the last four, five quarters or six quarters while corporate and large corporates still are either flattish or negative due to several facts I will say. Due to first that you have the capital markets alternative, second spreads are under pressure and we will not enter into operations that we think at least on our numbers do not have a certain level of profitability and probably a steel investment plans coming from manufacturing companies are not there waiting for the economy to pick up and also using the spare capacity that you have available on the economy today both through unemployment and through industrial capacity not being used.
So that is how we see the performance of our portfolio. If you see we have seen an a strong change of mix during the last two years in our balance sheet, what used to be retail close to 60 today is above 70 of the total loan book reflecting what I just said.
Going forward I already elaborated in my first answer but what I would say is that the normal trends would be to see those two parts of the book to stabilize in similar trends of growth and not have such a difference in between retail and wholesale. That's really the trend looking forward.
Unidentified Conference Call Participant
Next question from [indiscernible] Credit Suisse. Thanks for, sorry.
Congratulations on the results. I want to have a little more color on the spreads.
We saw the credit spreads continue to edge higher in the quarter but most likely has a mix effect, do you see any pressure on product by product basis, any segment that competition has been more aggressive driving spreads down?
Angel Santodomingo
Yes. What I would say I briefly mentioned this in my previous answer.
As spreads are under pressure and are under more pressure as you move from retail to corporate and large corporate, okay. So I will say that there is more pressure on corporates and logical corporates.
On the retail side, I would say little bit less depends a lot on the products, depends a lot of the moment, depends a lot of the certain campaign from our competitors or from ourselves at Santander, you have all the acquiring world that I think is well known by everybody that has been under pressure for some time but I will say that this press in that cycle that I was mentioning and describing before will tend to be under pressure. So what I would wait or I'm sorry what I would expect is NIM probably on the asset side with some pressure given that volume will grow when spreads will tend to be flattish or with some pressure while NIM on the liability side and fees will tend to offset the profitability formula on that side.
But I will say that in general terms, what you see as a flat spread or even improving in our case for the whole bank in the quarter, you are totally right is because of the mix effect I mentioned before.
Unidentified Conference Call Participant
Next question is from [indiscernible]. Question on asset quality.
Can you provide more details on the increase in yearly NPLs? Do you see any risk of systemic deterioration or is this a normal behavior of the portfolio?
Angel Santodomingo
I mentioned it on my speech, I don't see any -- we don’t see any worrying trends. We speak of settlement by settlement in terms of credit quality behavior.
As you know the early arrears is a ratio that tends to be volatile. If you seen the quarter, I think it raised if I remember well 10 basis points reaching the same level that we had one year ago or the same level that we had by year-end 2018.
It's been ranging in between 4, 4.2 continuously. You have some seasonality, sometimes in the end of the year or first Q But I wouldn't say that there is -- there is that trend in early indicators will not show that.
Again two comments, two important comments here. First one is the change of mix I mentioned to you.
Okay, so we remember that considering that retail has been growing in the 20s and corporate companies in general terms have been growing closer to zero or low single digit. That change of mix during the last two years has could have and has its impact on the provision level.
That's one point. The second point which is a little bit more structural one is that in the Brazilian world that we just mentioned before, our cost of risk in a positive economy, in a positive cycle with all the caveats that I mentioned before should not be a point where we should have a negative evolution.
And so I would say flattish or even positive. But again with the caveat and the hypotheses that we have positive country looking forward.
Unidentified Conference Call Participant
Okay, next question from [indiscernible] Goldman Sachs. You mentioned release one-off effect in cards, in acquiring fees in the first Q.
What was that related to? Do you expect this fees to continue declining?
Angel Santodomingo
Tito, yes. No, I want to say, I don't know if I use the words one-off but I would say that what we -- you have these typical FX depending on your volume and depending on your commercial activity on some quarters that even I mean if you exclude it, we will be on the positive -- on positive growth.
So it's not an extraordinary, not these type of things, it’s purely commercial driven that we had on the first Q that have given some volumes and some activity, you do have that kind of volatility in between quarters. Excluding that as I mentioned, we are on the positive territory, so I wouldn't at all think that credit cards or card business will have to will present negative evolutions in the future, it’s just a ponytail issue that I wanted to underline on my speech.
So that you all knew about it.
Unidentified Conference Call Participant
Regarding net, next question is from Yuri Fernandes, JPMorgan. Competition is getting tougher in payments industry which is one of Santander Brasil in parent key areas, that volumes decelerated from 30% in 2018 to 16% first Q and only 6% now, is this below industry growth for the period implying the market share lost for the first time in years.
How to address it, would get more aggressive in pricing or is it about better service?
Angel Santodomingo
Thank you, Yuri. It is about better service.
That's the kind of policy in a strategy that we have been using, not only with a net but specifically with all the products and services of the bank. As you know for the long tail, we launched an offer a couple of months ago, a profitable offer and being profitable because we had been working strongly in cost of unit cost of each operation getting it for some years now and being profitable, it’s also the lowest in terms of discount of receivables for our retail clients.
So you can achieve profitable again underlying profitable, profitable offers with being competitive if you do your work at home in terms of unit cost et cetera. In terms of GetNet, you mentioned little bit percentages.
Again with the same environment, speaking of volumes may be tricky sometimes. Okay, and we will not go and I have repeated these for several times both again in GetNet and outside GetNet, we will not go for volume for the sake of volume or for the sake of market share.
If you see number of transactions just in this quarter and you analyzed those number of transactions that we are dealing with, we are in double-digit. I think somewhere in the 12% or 13% growth.
So we keep on with good activity, obviously selecting or avoiding volume that is unprofitable. And to your answer also, the bank will not follow the idea of trying to be bigger or larger for the sake of having a larger market share.
We will grow in markets. We think we will grow but through a profitable scheme.
Andre Parisi
The next question on the asset quality from Gabrion. Could you comment with us why you increase provisions in the quarter, if your NPLs reduced and NPL formation grew below the growth rate of your book and coverage remains high.
Is there something that you are seeing your loan book which could be to where you -- to begin to where you’re sorry? I don't know, if I understood it.
Could you comment with us why you increased provisions in the quarter if your NPLs.
Angel Santodomingo
Well, I mean one thing is the balance sheet the ratio the 90 days over ratio and the other thing is the provisioning with the provisioning, you have both a calendar, a criteria, a ranking of the different companies in parts of the portfolio. So one thing obviously talks with the other but they are not immediate in the same quarter both because of what I said and because of the different policies look at both from the regulatory point of view and from our own criteria which sometimes is more conservative than the regulatory levels.
The coverage remains high as you said, NPL formation is still on the low 1%, 1.1%, 1.2% depending on the quarter. So as I said before, we don't see an issue on the credit quality front as we continuously present to you.
Operator
Our next question comes from Eduardo Altamirano from HSBC. Mr.
Eduardo, you may proceed. Mr.
Eduardo, your line is open.
Angel Santodomingo
Yes.
Carlos Gomez
Hi, it is Carlos Gomez from HSBC. I had a question regarding the tax rate which was 29% this quarter.
Any particular reason why it's bit lower than in other quarters. And do you expect the increasing 5% proposals through the reform to go through?
Thank you.
Angel Santodomingo
Thank you, Carlos. Well, you’re right.
The tax rate was 29%, we normally yes this is a little bit volatile as you can perfectly understand. We expect the tax rate to be in the 30, 30 plus, okay.
But with that kind of I understand that you analyze on the exact number but it does have these kind of small variations throughout quarters. What on the 5% that increase that was included on the pension reform.
Well, we are waiting to see where how these evolves. If it goes through, you will have a positive impact on the short term and negative impact on the medium and long-term not probably in three, four years you tend to have said one with the other.
But I cannot say to you much more, I mean it's under the political process or the government and Congress process then we will see how it goes finally out when it is approved as you know parallel to that, you also have the tax reform. So we have a lot of things on the table to consider.
And the best now is wait and see and see how it evolves.
Carlos Gomez
Okay. And for the quarter, so 29% was also related to your -- given the big payment of interest on capital.
Do you expect to pay less in the second half of the year?
Angel Santodomingo
No, has less interest on capital or less tax rate?
Carlos Gomez
Interest on capital.
Angel Santodomingo
No, I mean you know that there is a revolution with regards to interest on capital. We paid one being the first few interest on capital and we have paid another one being the second Q also interest on capital.
So this is up to the board. But the normal estimation would be that that 1B is repeated and first Q and we will adjust numbers in fourth Q, that will also lead to a little bit less volatility and an easier stance for you because if you remember what happened in previous quarters, in previous years was that we had some volatility on the tax rate on the fourth Q given that lumpsum or increasing value in interest on capital.
So the idea is to stabilize a little bit more in between the range of impact that you normally have on the tax rate but to try to establish a little bit more, the tax rate across quarters. So I would expect a stability in both interest on capital and tax rate.
Is there any other question.
Operator
I’m sorry.
Angel Santodomingo
No, no, go on, go on. I was going to ask you if there is anything else.
Operator
[Operator Instructions]
Angel Santodomingo
Not having any additional questions. I thank you for being there and hearing to us.
And I look forward to following quarters. Thank you.
Operator
Banco Santander Brasil's conference call has come to an end. We thank you for your participation.
Have a nice day.