Banco do Estado do Rio Grande do Sul S A : Conference Call Transcription 3Q23

Banrisul's 3Q23 Results Presentation

Conference Call - November 14, 2023

Nathan Meneguzzi:

Good morning, ladies and gentlemen. Welcome to Banrisul video conference to discuss results relative to the 3Q23.

This video conference is being recorded, and the replay may be accessed in the Company's website, in our Investors Relations area.

The presentation will be divided in two parts. Our CEO, Fernando Lemos, will present the main highlights and figures of this quarter. Then we will have a Q&A session, in which analysts and investors will be able to interact with the Bank's Board of Directors.

Let me tell you that this session has simultaneous translation into English. Please feel free to choose English in the interpretation button. If you want to use the audio to make a question, press the 'reaction' button. If your question is answered, you can leave the queue by clicking on 'drop hand'.

This presentation here today will be available for download in this platform chat in Investor Relations website.

Now Mr. Fernando will start the presentation. Please, Mr. President, you can go on.

Fernando Guerreiro de Lemos:

Thank you, Nathan. Welcome to our video conference to discuss results. My name is Fernando Guerreiro de Lemos. On August 1st, I took office as the CEO of Banrisul. This will be my third mandate in our Bank.

From 2003 to 2010, during this period, Banrisul has evolved in many aspects, and the IPO would happen in 2007. Some years went by and I could follow the transformation of Banrisul in one of the main financial institutions in Rio Grande do Sul.

Today, I take the office of this Bank as the CEO to accelerate the digital transformation, improving processes and improving our customers' experience in the several channels of service we make available, for the sustainable growth of this Bank, to have a very good connection, a strong connection in our Bank with a committed team, towards better results with many challenges ahead. We know we will be sailing with safety, identifying and capturing the best opportunities, so our business can prosper.

So I am bringing to this Board of Directors, a group that stands out for high-quality professionals, all with very important careers in our area.

Now let's talk about the highlights of the 3Q in the 9M23. We achieved an adjusted net income of R$567 million, growth of 7% if compared to last year, reflecting the growth in financial margin and services provided by the Bank.

In terms of the same period, we had more provisions to credits and more accruals to credits and more administrative expenses due to, for example, the collective wage. One of the highlights was the rural investment with more than 60% growth in 12 months and 8% in 3

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months. We diversified even more our portfolio in the beginning of the drop cycle of SELIC rate.

In this 9M23, there was a growth of 5.2% with a very good results considering 8% increase in salaries and benefits according to the collective wage. We had the first part of the strategy to increase relationship with our players.

Revenues from taxes and services grew above inflation with a highlight with credit and card services. On portfolio balance, there was an increase in the balance and in credit mix. We highlighted the rural portfolio, which accounts for 60%, resulting from several advances in the relationship with the Agribusiness.

In the individual clients we still have in our credit balance some growth in payroll loans quarter- on-quarter, 1.1% in consumer loans, plus 8.3%. There was a 78.5% increase in the collateralized individuals portfolio as of September 2023.

Now for companies, we have been operating with the building of new credit operations, which has affected our performance in our quarter. Regarding the quality of our portfolio, the total default rate is very low according to expectations in expenses with provisions showed an increase if compared to the previous quarter. With this, credit cost is 2.66%, above our expectation for the end of the year.

In the 3Q, there was R$127 million of net profit, impacted due to more credit accruals and legal provisions, more financial margin and more administrative expenses. There was a drop in the quarter-to-quarter income, but if you consider the 9M period, there was a 7% growth.

We want to increase the profitability of the Bank closer to our previous achievements. And this is our commitment. The financial margin is still growing, with a positive evolution in virtually all types of services, due to the credit mix and the beginning of a drop in interest rates. There was a lower credit recovery, which is stable if you consider the treasury credit margin, the core activities of this Bank.

On our fundraising services, we captured 5.7%, reflecting the growth in bonds and completed services. There were pulverized fundraises. 90% are in individuals or small, medium-sized companies. That is the trust of our clients who decide to put that money in a solid and robust company such as Banrisul.

So our prices are very competitive. The trust that clients have in our Bank is one of the highlights of our service.

Here we have, as the main effect, last year's collective wage of 8%. In September, there was an increase of 4.5%, which will go on until next year. There was also a voluntary dismissal program. And with the new staff, this made us achieve a balance.

Regarding services and fees, there was a difference basically due to a reclassification of credit services, which were allocated to our operating services that will now be considered under this target. If you discount inflation, revenue from fees and services showed an increase, both in the 9M period in the quarter. The Basel ratio is stable. This level of growth in capital change makes us believe we can achieve the results we aim at.

Now I give the floor back to Nathan, so we will start our Q&A session. See you later.

Nathan Meneguzzi:

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So welcome Luiz Gonzaga Veras Mota, Finance Director and IR Officer; President Lemos; Risk Officer, Dr. Irany, who remains for another office; and also Werner, who is Accounting Superintendent.

This will also be our annual public meeting, along with Apimec, the Brazilian Association of Analysts and Capital Markets professionals. This is our public event. So, considering this, before we go into our Q&A session, I would like to acknowledge Apimec. They have several professionals and help us to develop open capital companies.

So for this acknowledgment and interaction, I would like to call Apimec's representative, Ms. Mara Limonge.

Mara Limonge:

Good morning, everyone. Thank you for your partnership. Lemos has just mentioned the IPO in 2007. So this partnership we have is celebrating its 16th year. We are here giving Banrisul this attendance stamp, this partnership stamp, since 2007 in this partnership between analysts, capital market professionals and open capital companies. We had this commitment since then. Thank you for this partnership and congratulations on this stamp. This represents how transparent and clear the information it provides to capital market professionals.

Let me just say that it's important to mention that we opened the Ibri Apimec in Brazil Award, which will give awards to the best IR teams and the best analysts of the year. So this is important for investor relations analyst, it's important that you vote for this award that will recognize investors relationships analysts in this market.

So once again, thank you for this platinum stamp, and once again, thank you for this partnership. Welcome this new Board of Directors, Lemos, Irany, Werner and Nathan. Congratulations. I wish you success in this journey ahead. I hope this journey is full of good partnership with the market and a very successful one. Thank you so much.

So the physical stamp is being given to you right now. Now we can see this stamp electronically. And, once again, Nathan back to you with the Q&A session.

Fernando Guerreiro de Lemos:

Thank you, Mara. It's a pleasure to see you once again. We started back then, so I am happy to see you again.

Mara Limonge:

It's my pleasure. Thank you for the partnership, Mr. Lemos.

Nathan Meneguzzi

Open the Q&A session.

Yuri Fernandes, JPMorgan:

Good morning. Welcome to the new Board of Directors. I wish all the best in luck. Considering the strategic standpoint, can you talk about your ambitious bank? I believe it's a weak quarter, 5 of ROAE. So what are your expectations for this year? 9 to 11, 9 to 13 ROAE for this year?

And in the future, what do you expect? You have talked about digitalization, but besides that, how can we see the situation, the status of Banrisul in the medium term and long term? Maybe

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try to get to 14%, 15%? Later, I would like to make more questions about the quarter, but this is my question to understand the new goals of this new Board of Directors, please.

Fernando Guerreiro de Lemos:

Yuri, good to see you. We took office yesterday. I have been working here for the past 60 days in this new position, but we started working today. So we are checking the budget of the Bank for next year. Once we get this consolidated, we will give you more information.

Yuri Fernandes:

Thank you. That's perfect. We will be waiting. And all the best to you. I know that all of you know a lot about the Bank, so I am confident.

Regarding the quarter, can you talk a bit about the PDD (Cost of risk)? it's a little bit higher. We know there were more rain by the end of the quarter. Will that be a factor? Will that have an impact? Can we expect this line of provisions to keep on being high? I would like to understand more about the cost of risk for the Bank.

Luiz Gonzaga Veras Mota:

Good morning, Yuri. The provision, the PDD, as we call, is a little above because of this default cycle, but the rain and climate events in Rio Grande do Sul have not affected the PDD, or the allowance for doubtful debts.

We have some portfolios still above what we expected, but we have a strong task force with all the branches and all the teams in the Bank, in our network, to bring this allowance for doubtful debts, this PDD to a lower status. So we have been working to stabilize this, and even lower this.

In terms of agrobusiness, there is commercial, companies' debts and some other debts. But in general, we have this task force, as I said, to bring this rate to a lower level, more to the left of our goals.

Yuri Fernandes:

That's very clear. Thank you. This quarter, when you look credit cards, but not related to Banrisul, it was R$20 million, but now it's R$50 million. What is that? Is this a recurring event? Sometimes we see some peers benefiting one credit card flag or the other. So what can explain this increase in your fee this quarter?

Nathan Meneguzzi:

I can answer you this question, Yuri. There was a reclassification of accounts for this quarter. So diverse incomes from credit cards was within other operating revenue, but now they are in fees revenues. So the increase in this line is due to this accounts reclassification.

Moving forward, we will probably see that, with this new account, we must have a fees layer higher, considering the face value. Any other operating revenues, there will be a reduction. It's around R$30 million in this account for the quarter.

Yuri Fernandes:

Thank you, Nathan, and all the best to the new Board of Directors.

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Flavio Yoshida, Bank of America:

Good morning everyone. Congratulations on this new position, this new office. All the best. Regarding the growth of the portfolio, it has been decreasing the annual growth quarter-after- quarter. So, in your opinion, which are the signs you are anxious to see to accelerate growth and have a product mix with a higher spread? Because over 90 default rate is stable, coverage is more or less high. So how can you accelerate this appetite for growth?

Luiz Gonzaga Veras Mota:

Flavio, regarding portfolio operation, it's not very accelerated, but because we are refinancing our portfolio, especially when it comes to a service in consigned services. This is a basic idea.

So other portfolios, such as the rural portfolio, will not have as high a growth as they had. They will be in stagnated a little bit. We will have other portfolios with a moderate growth, and we will focus on commercial and companies portfolios, especially focused on medium and small- sized companies, especially regarding portfolios that are stable with a higher margin. This is what we aim to do.

Irany Sant´Anna:

Just to complement what Gonzaga said, you know that we always choose between grow and consolidate. So the Bank had a significant period of growth recently, and now we are consolidating all this growth, focusing on results. So as soon as we consolidate this focus on results, we will be once again discussing growth, especially in small companies and medium- size companies again.

Flavio Yoshida:

Thank you. And how can you see competitions and rate caps dropping in consigned credit (payroll loans)? How do you see this?

Irany Sant´Anna:

Let me insist a bit on what we said. We have focus on the repricing of our portfolio. We have a balance that is pretty proper. We now need to generate margin and consolidate this operations to grow our margin. And we need to change the pricing of our current portfolio to do that.

Flavio Yoshida:

Thank you very much.

Eduardo Nishio, Genial Investimentos:

Good morning. Regarding the Guidance, you maintained the guidance, right? And if we infer on that, even for the lower tier, the 4Q would need to be very strong in terms of ROAE. To get there, the 4Q would need to be very strong. So my question is, how do you feel about the 4Q? How confident are you? And now, regarding the 3Q, have you had any nonrecurrent event you would like to talk about? Because the profitability of the Bank has dropped, the ROAE has dropped. So have you gone through any reclassification that you would like to discuss in relation to the 3Q?

Luiz Gonzaga Veras Mota :

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In terms of recurring events, no, we have had no strongly recurring events.

But regarding the guidance, we have been working. What is detached from the center of the goal is fundraising. We have been working very hard to reposition our clients, especially individuals, wealthy or are bigger clients in this portfolio, because they have a fundraising capacity that is very important to Banrisul, and we have been working very hard to maintain this.

This is an important strategy for us, to keep these clients with us, especially considering the competition. And we have been working with this guidance. We are in 5.3. We want to reach above 6, and this is what we aim to do.

Another point is that, for the 4Q, we may enter the proposition of our goal in terms of profitability too. And regarding the other item that is administrative expenses, now the payroll effect is gone, and this expense was executed in this quarter. So we are aiming to the left side of the goal, below the center of this operation. We want to improve this margin. We are confident that these guidelines will help us deliver results in both margins.

Eduardo Nishio:

Thank you very much.

Marcos (via webcast):

Good morning. Are there any plans to expand real estate financing operations in more cities, especially in cities in the state of São Paulo, outside the state of our Rio Grande do Sul?

Fernando Lemos:

We concentrate our business in Rio Grande do Sul and we will continue to do that. Especially in the real estate portfolio, this will be our focus, here in the metropolitan area of Porto Alegre, and in other big cities in the state of Rio Grande do Sul. We do not want to have operations outside the state. This is not our intention.

Eric Ito, Bradesco BBI:

Good morning. Welcome, the new Board of Directors. Regarding the NPL, We had this write- off big effect here, and there was a high NPL ratio. Would you like to maintain these two or drop for the next quarter? What about NPL?

Luiz Gonzaga Veras Mota:

You are talking about default, right, Eric? Default is just like I said, there are cycles, cycles in which there's a strong action on credit, and when there's more credit, we might face default in the near future. Now we have been diagnosing the portfolios and the idea, our goal is to work on these debts, on our clients in default.

We have more massified portfolios, and then we will need to work harder to work on those clients on default, and we have other portfolios, which are more standardized and they are easier to deal with. But anyway, we have a strong action focused on reducing default in this last quarter to improve this result.

Irany Sant´Anna:

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Just let me complement. It's very important to highlight that the Bank will focus on collecting, on collection operations. The Bank has intelligence and has the team to apply to this process of collection, and by doing that, we will reduce default and improve our results.

Eric Ito:

Thank you very much. That was great.

Mateus Rafaelli, Itaú BBA:

Thank you. Good morning. I would like to explore the NIM recovery strategy. You have had some recovery, but there is a pressure in the funding. There, is a pressure from the mix, it's migrating to the agro. What about next year? Does it make sense to work an expansion? Or should we wait for it to stabilize, this mix change to stabilize, and this may help in the funding too?

Luiz Gonzaga Veras Mota:

Let's talk about real estate funding. First of all, as we know, the savings' fundraising has a very slow growth. So if the real estate portfolio wants to grow, we need to look for other sources. It has a stability in the portfolio growth, if they are matched with the funding resources.

About capital, they are more on the accounts of automatic CDBs, captured from the mass of clients. So there is no funding space for rural credit deposit.

There are other fundings. We have been working on them, but the creditor portfolio will not continue with this accelerated growth. There will be a qualification in a certain stability. Other portfolios such as exchange, if there is a competitive price, then yes, considering the price, because it's too high for rural now. We need to consider this for this operation because the client has to understand the risks involved.

Regarding commercial area, we have a large funding that is competitive too. It's not cheap, there is no cheap credit, but it's very good for commercial credit portfolio. This goes to the payment deducted loans and for other lines of credits and services to clients. There is a massified portfolio that is very important, with small amounts in this segment, as Irany said, with small and region-sized companies.

This is where we want to grow in credit. For this portfolio, there is a good price of funding that is a good funding and we need to qualify the risk of this operation for borrowers and consider this to keep on building these portfolios. Others will have a moderated growth according to the fund and the category of risk.

Mateus Rafaelli:

Thank you very much.

Sandro (via webcast):

What is the payout expectation for 2024? Is the idea to maintain current levels of 50 payout for 2023?

Nathan Meneguzzi:

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In 2022, we maintained this level, and the main point here, Sandro, is that we do not have access to the complete budget yet, both considering capital and the Company's budget to be set.

But would you like to talk a little more about that, I would say that we need to wait for the budget and evaluate the possibilities for 2024 and the availability of capital for that.

And also, regarding the fiscal aspect, as Gonzaga said, there is a discussion regarding the end of JCP (IOE) availability and how much this can generate. It must be within the analysis to approve the 2024 payout. Normally, it's around February or March. This is more or less when we announced this payout, then it's also approved in our shareholders meeting.

I think, we have had answered all questions. I would like to thank you all for your participation. I would like to thank Mara, from Apimec, and the investors. The Investor Relations team is available to you. Please talk to us in our website.

And, before we close this meeting, I would like to give the floor to our CEO, so he can wrap up our event here.

Fernando Guerreiro de Lemos:

I would just like to thank all the shareholders, the market analysts with us. It's a pleasure to see many of you here again. It's pretty good to be back at this great institution to work hard so we can achieve very good results. We want to achieve these very good results line for line. We will be working very hard, and we hope to achieve fast and robust success.

Thank you all very much.

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