Bernardo Rothe - Head of Investor Relations

Tito Labarta - Deutsche Bank Victor Galliano - Barclays Marcelo Telles - Credit Suisse Boris Molina - Santander Anibal Valdes - Barclays Nada Oulidi - Loomis Thiago Batista - Itau BBA

Good morning, everyone and thank you for waiting. Welcome to Banco do Brasil third quarter of 2015 earnings conference call. This event is being recorded and all participants will be in a listen-only mode during the company presentation. After this, there will be a question-and-answer session. At that time, further instructions will be given. [Operator Instructions]. This event is also being broadcasted live via webcast and through Banco do Brasil website at www.bb.com.vr/ir, where the presentation is also available. Participants may view the slides in any order they wish. Before proceeding, let me mention that this presentation may include references and statements, planned synergies, estimates, projections and forward-looking strategy concerning Banco do Brasil, its associated and affiliated companies and subsidiaries. These expectations are highly dependent on market conditions and on the performance of domestic and international markets, the Brazilian economy and banking system. Banco do Brasil is not responsible for updating any estimate in this presentation. With us today, we have Mr. Jose Mauricio Pereira Coelho, CFO and Mr. Bernardo Rothe, Head of Investor Relations. Mr. Bernardo Rothe, you may now begin.

Good morning, everyone. Thank you for participating in our conference call. I would like to start in slide three, where we have highlights for the nine-months ending September 2015, where we have our net interest income growth of 13.6%. Our fee income increased by 9.5%. We show our administrative expenses under control with growth of 6.9%. No improvement in our cost to income ration that reaches 40.9%. Moving to slide four, we have our income statement. Our main lines, where we show the growth third quarter 2015 against third 2014, a growth of 14% net interest income and 5% against second quarter 2015. The fee income, we have a growth of 10.1% and 6.9% against third quarter 2014 and second quarter 2015, respectively. And in the line of administrative expenses, we had a growth of 6.3% against third quarter 2014 and 1.3% against second quarter 2015. And the adjusted net income nine months we show a growth of 7.5% reaching BRL 8,947 million. Moving to slide five. We have some market ratios. Our earnings per share reached BRL 10.8. Our dividend yields reached 13.98%. Price/earnings 12 months is at 2.86. And our price/book value at 0.51. Slide six, we start to go into funding, where we have the adjusted net loan portfolio of commercial funding to show the ramp up of balance sheet in terms of liquidity, it is now 91.8%, an improvement from the previous 92.5%. Then we would like to emphasize the growth that we have in the agribusiness letters of credit and mortgage bonds of 36.2% on September 2014, reaching BRL 154 billion. And also in safe deposits that although there was not significant but compared to what's going on in the market, they are very good results. Slide seven, we start covering net interest income and net interest margin. The margin grew to 4.3% overall. And the spread by portfolio we have, for individuals 14.9%, for companies reaching 7.1% and the total spread reached 5.7%. In the bottom, we have the break down by lines in the growth of net interest income. As you can see, loan operations income increased by 16% comparing to nine months 2015 to nine months 2014. And treasury income grew by 39.5%. I would like to emphasize treasury income is the effect of the hedging that we have to protect our fixed income against the changing rate in the market and also the investments of our liquidity in market instruments. In page eight, we start talking about our loan portfolio in a broad concept. We had a growth of 9.1% in 12 months. Slide nine, we have the organic individuals loan portfolio, where we show that we keep concentrating our business in line with less risk. These lines are the payroll loans, salary loans, mortgage and auto loans. Page 10, we have more information about individuals loan portfolio, starting with direct consumer credit and auto loans with increase of 6.5% in 12 months reaching BRL 96.9 billion. As you can see, 86.7% of that portfolio was concentrated with civil servants and retirees and pensioners, a fragment that [indiscernible] the market conditions. When talking about payroll, you will can see that the increase in 12 months was 9% and we reached BRL 61.8billion. It represents 24.2% market share and the concentration here civil servants of INSS retirees and pensioners is 96.4%. Salary loans, in the bottom left also grew 8.4% reaching BRL 19.4 billion and the mortgage portfolio grew by 34% in 12 months and the individuals portfolio grew by 36.8%. On slide 11, loans to companies in a broad concept. We can see that we grew basically through investments at 7% in 12 months. Trade finance with a growth of 15.9% and mortgage with a growth of 26.2%. Slide 12, we see loans to companies. We have some entities about in corporate portfolio. You can see that very small and small companies portfolio has a decrease of 6.2% in 12 months, going from BRL 101 billion to BRL 95 billion. And the portfolio comprised of middle market corporate and government increased by 11%. The overall results for the portfolio is growth of 5.9%. In the very small and small companies, we have an increase in the penetration of the FGO and Fampe, a kind of insurance that we use in Brazil to protect these particular group of clients, the loans to this particular group of clients with strong write-offs. And very small and small companies as well, time of relationship, we have here in the bottom left, 95.9% of this portfolio is with clients that have more than two years of relationship at Banco do Brazil. Time of relationship is a very important component in our decision making process when it's a credit. And this concentration indicates that we have a very long time experience with these type of clients. In the right side, we also bring to you information about the concentration, time of existence of the company. 99% of our portfolio is with clients that exist for more than two years. Slide 13, we bring to you the agribusiness portfolio. The overall portfolio has a growth of 8.5% in 12 months, mostly coming from individuals that grew 9%. We also used a lot of mitigators in the working capital for import purchase. In this quarter, we have ratio of coverage of 76.1% if insured through climates risk, price risk and so on. On page 14, we start talking about asset quality. As you can see, the total level of provision at Banco do Brasil reached BRL 34 billion at the end of September 2015, being comprised of BRL 3.8 billion in additional provisions, BRL 13.6 billion of provisions to cover transactions that are current and BRL 16.5 billion provision to cover past due transactions. In the bottom, we break down the provisions made by Banco do Brasil only. This does not consider the provisions made by Banco Votorantim and the additional provisions. As you can see, most of the provisions that we made are for the company's portfolio reaching BRL 3.8 billion. In slide 15, we have the delinquency ratios. And you can see that our delinquency ratios increased from 2.04% to 2.2% at the end of September 2015. Looking at the delinquency ratios by segment, we have the stability in the agribusiness portfolio, stability in the individuals portfolio and we have seen some pressure in delinquency in the companies portfolio. Page 16, we have the NPL formation and the average risk. NPL formation grew 15 basis points to 0.86 at the end of September 2015 and our average risk reached 4.15. The change in the risk, if you compare with the banking industry, was lower than what we saw in the market. So although we have a growth here, we have grown the average risk in a different way from the market as a whole. In page 17, we start talking about the fee income. Comparing the growth of fee income, third quarter 2015 to third quarter 2014, we have a total growth of 10.1%. For account fees, the growth was 15.1%. For asset management fees, 12.4%. And billings, we have 6.6%. In the next slide, we have a breakdown for some of the fees looking nine months 2014 against nine months 2015. Account fees grew in this view, 10.9%, reaching BRL 3,768 million. Asset management fees, the growth was 16%, reached BRL 3,506 million. For fiduciary services, the growth was 11.4%. And in consortium was 29.6%. Moving to slide 19. We have some information here about BB Seguridade, our insurance arm and the pension funds. As you can see, the adjusted net income for nine months ending September 2015 reached BRL 2,931 million, a growth of 26.5%. And then we see our leadership position in life insurance, rural insurance and pension plans. Page 20, we have information about our clients and service network channels. We have 62.4 million clients, 11.6 million clients who have saving accounts, 2.3 million clients that are very small and small companies, 2.2 million pensioners and retirees. We also highlight the performance and increase of the percentage of transactions of overall transactions made with both, by our clients with [indiscernible] that are going through internet and mobile. We reached at the end of the third quarter 2015, 59.3% of the total transactions being done through these channels. The bank was considered the most innovative bank in customer relationship according to DOM Strategy Partners Ranking. And we have now 6.4 million clients using our mobile application. And the number of transactions, we ended up with 1,033 million transactions through mobile, an increase of 201% over the third quarter of 2014. Page 21, administrative expenses and cost to income ratio. As you can see, we have been reducing the cost to income ratio over time and from 44.5% at the end of third quarter 2014 to 41.6% at the end of the third quarter 2015. Looking at nine months, the comparison grows strong, 43.6% to 40.9%. And looking at the other expenses, the nominal amounts, in nine months 2014, we had a total of BRL 10 billion, nine months this year is BRL 10.2 billion. So a very small increase in nominal amounts. Page 22, we bring to you the BIS ratio, that ended the third quarter 2015 at 16.20%, being Tier 1 11.61% and core capital 8.07%. One page 23, we bring you the full application of Basel III rules. If you consider the deductions schedule anticipation, the BIS ratio moves from 16.2% to 15.31%. The Tier 1 would move from 11.61% to 10.59%. Just to give you more information, in this quarter we are bringing other impacts that we may have in these ratios just to enable all of you to compare with our peers in the market. So we saw here also the use of tax credits and impact of that use in the ratio. So if you look at BIS ratio, if you consider the use of tax credits, we reached 16.26%, back to the same level that we have now before the deductions schedule anticipation. Tier 1, we have the same results. We are going back to 11.6. And finally moving to slide 24, we have the guidance for Banco do Brasil where we compare to our performance. The adjusted return on equity, we perform 13.7% in nine months against the guidance of 14% to 17%. Given the challenging scenario that we are living in right now, the bank decided to change the guidance to 13% to 16% return on equity. We didn't reach the guidance of companies where our growth was 5.9% against the guidance of 7% to 11%. Given the backdrop of the economy, we decided to change the guidance to 5% to 9%. We didn't reach the agribusiness guidance as well, but we still believe that this guidance is valid and during the fourth quarter we are going to reach the guidance established at the beginning of the year, a growth of 10% to 14%. We have also changed the guidance for fee income. We had a previous guidance of 3% to 6% growth. We are right now growing at 9.5%. Given what we expect for the fourth quarter this year, we believe that a more appropriate guidance would be a growth of 7% to 10%. With that, we end our presentation and now we can open for question-and-answers. Thank you.

[Operator Instructions]. Our first question comes from Mr. Tito Labarta from Deutsche Bank.

Hi. Good morning: Thanks for the call. I have a couple of questions. First, in terms of the corporate portfolio, we saw some deterioration in the asset quality there a bit more than your peers. So I just want to get a sense of how you see that evolving going forward? Do you think its' going to continue to deteriorate at the levels we saw this quarter? Maybe you can give some more color there? Then my second question is, in terms of your funding cost, they continue to rise pretty strongly, I think around 30% year-to-year. So if you can give some color on how you see the funding cost evolving? Is that maybe due to mainly switching a lot to letters of credits? Also with higher interest rate, do you think that stabilize going forward? Or could that continue to deteriorate if you have some pressure there? Thank you.

Thank you, Tito. Good morning. Going through your fist question, the corporate portfolio is where we are seeing compression. That's correct. And we have an increase 40 bips in the delinquency ratio and mostly in the low income type of companies. So the very small, small, intermediate lower middle market companies. Looking forward, we see increased pressure keeping for the next quarters at the pace we don't see that going under or out of control. We do believe that we are controlling the delinquency in the monitoring of our credit performance is working. So we don't se that going out of control. It is still under our control. In relation to funding cost, the growth that you are mentioning is more linked to the growth of the BB's total deposits and total funding of the bank and the changing interest rate in the market, the market rates. But if you look at the average cost to the net rate that we have in here, you can see that we have a reduction in terms of percentage. IT was before 77.5%, now it's 76.6%. We consider that this cost of funding of the bank is pretty much under control, even reducing in a scenario where demand was not growing, but reducing a little bit. So it's a very good performance, in our point of view. Okay?

Okay. Great. So just have two follow-ups, if I can. So then, in total asset quality when you include the consumer, any concerns on the consumer portfolio going forward? And then just on the funding, so do you think funding cost can kind of stabilize or fully stabilizes, will it stay stable for next year?

Okay. Because in the consumer finance in the individuals portfolio, we are showing a stable delinquency ratio. We don't expect a change on that, so it's stability with small fluctuations moving forward. The way we have built our portfolio, protects us against most of the impact from the economic situation in Brazil. So our own initiatives to reduce our exposure to higher lines of credit is helping the control of the delinquency ratio overall. So we don't except variations, so it's stability with small fluctuations moving forward. In relation to the cost of funding, we don't see big changes in that. It is pretty low already. So looking forward, we are still seeing some stability in terms of percentage of savings. Okay?

All right. Very helpful. Thank you very much.

Our next question comes from Mr. Victor Galliano from Barclays.

Yes. I just wanted to ask about the provisioning we saw in the quarter and obviously the difference we could see there in terms of what was put through the managerial accounts and we saw in the corporate loan accounts. Can we assume going forward then in terms of your guidance and in particular with regards to allowance for loan losses that this will exclude any one-off provisions that you factor in there? And can you just give us an explanation of how you would define one-off provision in a situation where the economy is deteriorating and we are going to see negative GDP growth next year or probably more than 2%, where the economy is deteriorating and really it looks like you are going to need to be doing additional provisioning going forward? Thank you.

Thank you, Victor. First of all, all provisions that are done are in accordance with our policy and with regulation of the Central Bank of Brazil are considered recurring provisions. So if any provision, in fact, that we can link the provision being made to any particular case are considered recurring. When we do, in our case, what we do is an additional provision that's not linked to a particular transaction or a particular client or a particular sector. So with that, we are not recurring provision, the position that we are building to protect us and protect our capital for the challenges that we have ahead of us. If we eventually, just moving back a little bit, we have additional provisions for quite some time and if you look at what Banco do Brasil did, we never changed the additional provision. We didn't use so far that additional provision. And so we for the future, if there is a need to do that, we are going to do, but that has to be defined technically completely under the policy that we have in place. So additional provisions are going to become regular provisions, if we allocate that additional provision to one particular case moving forward. Basically that's how we treat that. And everything is in accordance with the laws and regulations of Banco do Brasil.

Okay. Thank you. So looking at the run rate of the nine months, though, in terms of the allowance for loan losses to average loans, when you factor that in, it's above 3.5%. So the performance so far in terms of provisions, if you are saying that all provision should be considered recurring, then we are running above that 3.5% guidance. That's -- thank you.

Our next question comes from Mr. Marcelo Telles from Credit Suisse

Hi. Hello everyone. Thanks for the time. My question is with regards to capital of the bank. How are you thinking about your capital position today and like three years down the road, given that your common equity Tier 1 declined from the second to the third quarter? I think it's a little bit above 8%. And would you reconsider your payout policy? Maybe lower to 35% from the 40%, because in this environment, I believe it might be a little bit more difficult to build up capital over time and you have the phase in period of the Basel III regulation? And in that same matter, would you consider the possibility to sell or reduce a little bit your stake in Cielo or sell a little bit more of the BB Seguridade in that environment? Thank you.

Thank you, Marcelo. And let me start with the end, Banco do Brasil is not going to sell anything from the BB Seguridade or Cielo. Zero. Nothing. Going back to the first question. The payout, there is no discussion about that in Brazil. So we are not changing anything. And going back to the first part of the question, we are very strict in terms of capital management. We have our capital plans in place. We consider other projects and that we have the situation in the market, the scenario that we have in the market is big part of our projections. So given all that, we have our internal targets that is more than the regulatory targets for Tier 1. And our projection would say that we are going to be in our own target in the three years period. In fact, we have to be 18 months in advance over our own target. And we so far are in the right direction. So we don't see any concern in terms of how we are managing our capital base.

And just a follow-up on that. What would then be your target common equity Tier 1? Some of your peers, I think they pretty much mentioned 12%, 12.5% as the minimum core capital Tier 1. So in your case, what do you think is the appropriate level?

We announced our risk appetite that was discussed by the Board of Directors. And our risk appetite for beginning of 2016, but we have to reach that 18 months in advance, is 9.5%.

Does that consider, because there was a new regulation that came out on the systemically important additional requirement, so does that consider already the extra 50 or 100 basis points on top of what has been established?

We consider that, but the risk appetite was announced last year. We review it every year. So as soon as we review, we may increase if the Board of Directors think that that's the proper action to do.

Okay. Thank you.

Our next question comes from Mr. Boris Molina from Santander.

Yes. My question goes back again to the capital situation. The bank has been chronically running with relatively weak capital ratios, once we factor in the reductions that fully lower the Basel III and obviously deducting all the deferred tax assets as international regulations require. Now I would like for you to explain a little bit the rationale for buying back this Tier 1 security that was announced yesterday. It doesn't seem to be going towards the objective of actually strengthening capital ratios. In our view, it's very difficult for us to see how capital ratios can improve from the current levels, fully loaded, in our calculations of around 6% or lower to around 12% which is doubling in probably three or four years. So do you believe that you can reach your plans organically through capital accumulation? Because otherwise, you would have to halt credit growth. So what are the parameters that you factor in this capital planning over the years to reach this 9% or eventually low-teens percentage by 2019? And what other alternatives you have to bolster capital ratios? And then the second question I have is regarding the pension fund. In our calculations, you are going to show a significant mark-to-market decline in your pension position that is also going to affect capital ratios in the fourth quarter. Are there any plans to deal with this continuously in terms of market risk in your capital planning?

Thank you, Boris. First, the tender. We cannot talk about the tender. We are advised by our lawyers that we have direct all questions about the tender to the dealers. So if you don't mind, you can contact JPMorgan and Citibank for asking such questions. In relation to the pension plan, the pension plan is going to be the best contractor and it really doesn't matter what happens there. So through following the implementation schedule of Basel III, everything is going to be deducted from capital. So right now our calculation that it's going to be deducted when we reforecast or reposition of capital moving forward. So I cannot say to what we may do. Basically we are managing that very closely and we are pretty comfortable that we are going to reach the 9.5% that I mentioned when I answered the previous question.

So in the previous question, you mentioned that obviously no asset sales and obviously no cut in the dividend payout. So with returns on equity suffering because of asset quality and the potential change in economic policy that we still don't know is going to happen, but there are some rumors that there could be some returning to what's like increasing public sector bank lending to kick start the economy, this looks like an environment where capital ratios are going to remain fairly flat over time. So is the Board committed towards increasing the targets, regardless what government policies might want to think?

I cannot anticipate measures that we need to take because it defeats the purpose. But just to correct you, we didn't say we are not ever going to change payout because we can. But it is not under discussion. And our projections that give us comfort that we are going to reach our target and we are moving in that direction. And if there is anything that shows in our projections that there is a gap, that for any reason we may not reach the target, we have contingent plans pre-approved in place that we can activate right away to take these corrective measures as needed. Okay?

Okay. Wonderful. Thank you.

[Operator Instructions]. Our next question comes from Mr. Anibal Valdes from Barclays.

Hi. Good morning, Bernardo. Just a follow-up on working capital. Can you please provide the number for the Brasil III related adjustments as of third quarter 2015, on CET 1, sorry?

Okay. We don't show the CET 1 position until it's fully implemented. But you have for the Tier 1 and the Basel capital. We don't disclose that.

But Bernardo, you used to provide that number and I am asking because now we are a little bit confused about the additional deductions that were made on third quarter 2015, particularly the higher investment line and the tax credit arising from temporary differences on dependent generating companies. Those deductions are just one-off? Or is something that you will continue to increase, given the phase-in of Basel III? Because we are trying to estimate what will be the fully loaded number. And it seems that the deductions increased materially from 2015 to 2016, which is the deductions that you disclosed as prudential adjustment. So I don't fully understand if that number, that increase, is the 40% of the full amount that has to be deducted? Or I am overestimating that number? That's why I am asking, which is the number of the Basel III related adjustment to CET 1?

What we have in page 23 of the presentation, deductions schedule anticipation. So, over here, we bring to you what the full deduction of that. And the increase that we have this quarter in RWA were related to the tax credit activation that we did and to the effect that changed in the credit portfolio. Basically that's what happened. Bu these tax credits that, just talking about this particular tax credit that we reported this quarter, we had to use until the end of 2018, because the increase in the total contribution of 5% has an end date of 2018. So as the tax credit is calculated over that particular increase are short-term, we have to use this particular tax credit over that same period. So we are going to use the whole of the tax credit until 2018 or we have to write that down. So we have to use it or write that down. So anyway, we believe that we made the right calculation. So what we activate is what we are going to consume over time in that short period. Everything else, we have our own calculation internally, our projections and we are consuming tax credit over time. At the same time, we are generating the new tax credits over time. So everything goes together in our projections. Okay?

Okay, Bernardo. Thank you.

Our next question comes from Ms. Nada Oulidi from Loomis.

Hi. Good morning. Thank you very much for the presentation. Could you please provide some further color on the type of companies where you have seen an increase in NPLs? Were these mostly small and medium enterprises or large corporate? And were there any particular sectors where you have seen most of the increase? Thank you.

Thank you, Nada. Well, we are seeing pressure in the very small and small companies and the medium companies, these revenues are up BRL 150 million. That's where we see pressure, where we see delinquency increasing. Okay? Not big companies.

Any particular sectors? Were these mostly the companies which were involved in the Lava Jato? Or the deterioration is across the board?

No particular sector. The Lava Jato companies impacted our delinquency ratios and our provisions in the first quarter. Not now. So not linked to Lava Jato at all. It's different sectors. According to our participation in the overall market and the very small and small companies, they are the ones, so it's more on a regional basis than anything else.

Thank you so much.

Our next question comes from Ms. Thiago Batista from Itau BBA.

Hi guys. Thanks for the presentation. I had two questions. The first one on the fees, especially on the banking account fees. This quarter we saw an outstanding performance in terms of banking account fees. It went up 10% Q-over-Q or 50% year-over-year, while the number of the bank accounts, the number of clients have declined a bit. Could you comment on strategy on the fees? And particularly on the bank account fees? The second question is in terms of credit standards, on credit cards. Have you already become more restricted in your limits and also in your credit card originations?

Thank you, Thiago. Well, talking about, we have been re-pricing and we have been working through our branch network in the year with our clients to give them options and we are upgrading the package itself, the packages in the account, so overall increasing, not only increasing the fees we are charging but also upgrading the package fees that our clients are linked to. So we have been having a very good conversion rate in that effort and that's reflecting in the accounting fee, back account fees. The other fees overall, we have been re-pricing everything and we have been working pretty hard to increase the structural results of the bank. And you can see that through increasing in margins, increasing the NII, increasing fees overall, faster than we are increasing our cost. So we are keeping everything in control. The idea is always to improve the operational side of the bank and we are moving to a better result over time. In relation to credit cards, we manage the credit cards business pretty closely. We have a very small delinquency ratio in that portfolio. And we keep following our clients. We advise them to be in the credit card exposed to the higher interest rate in that particular deal. So when we see a client suing too much of that, it tends to bring them out of that particular type of credit to go to a better and more adequate line of credit for that client. And those also show the quality of our client base. The client base is very good. That reflect very small delinquency ratio.

All right. Thank you very much.

This concludes today's question-and-answer session. I would like to invite Mr. Bernardo Rothe to proceed with his closing statements. Please go ahead, sir.

Thank you very much for the participation on our conference call. And I would like to tell everyone that we have a team in San Paulo to answer any questions you may have after this call. So thank you again. And see you in the next conference call.

That does concludes Banco do Brazil conference call for today. As a reminder, the material used in this conference call is available on Banco do Brazil Investor Relations website. Thank you very much for your participation and have a nice day. You may now disconnect.