Alberto Monteiro de Queiroz Netto - Chief Financial Officer Bernardo Rothe - Head, Investor Relations

Nicolas Riva - Citibank

Good morning, everyone and thank you for waiting. Welcome to Banco do Brasil’s First Quarter 2017 Earnings Conference Call. This event is being recorded. [Operator Instructions] This conference call is also being broadcasted live via webcast and through Banco do Brasil website at www.bb.com.br/ir, where the presentation is also available. Participants may view these 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 strategies 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. Alberto Monteiro de Queiroz Netto, CFO and Mr. Bernardo Rothe, Head of Investor Relations. Mr. Bernardo, you may now begin.

Good morning, everyone. Thank you for participating in our conference call. I would like to start in Slide 4, where we have the highlights and comparison between the first quarter ‘17 and first quarter ‘16. Fee income grew by 12.3%. Net interest income grew by 0.8%, this net interest income without the recovery of bad loans. Administrative expenses declined 0.4% in the comparison in the period, meaning that we are keeping our expenses totally under control. Cost income ratio reached 39.3% at the end of this quarter. In Page 5, we are showing the net income. We grew 95.6% in comparisons to the first quarter ‘16, reaching BRL2.5 billion in the adjusted net income. The accounting net income grew BRL3.6 billion to BRL2.4 billion. Profitability ratios, the market ROE, the way that market calculates ROE reaches 12.4% at the end of this quarter. Moving to Page 6. We have the earnings breakdown. NII of 14.5%, provisions – gross provisions of BRL6.7 billion, fee income at BRL6.1 billion, total administrative expenses at BRL7.8 billion. Other items, like tax incidence, 3.6, reaching BRL2.5 in the adjusted net income, one-off items reached BRL0.1 billion and net income at BRL2.4 billion. Slide 7, we have some market ratios. Earnings per share, adjusted earnings per share was BRL2.57 ‘16 dividend yield BRL2.67, price earnings 12 months BRL11.6, and price book value at BRL1.05. Funding, we have decreased the total funding to BRL584 billion, a decrease of 8.5% in relation to March ‘16. The funding expenses as a percentage of SELIC reached 6.4% and the adjusted net loan portfolio to commercial funding is BRL87.2, improving through the peers meaning that we are increasing our liquidity. In Page 9, we have loan portfolio, the broad concepts, a decrease of 11.4%. And as you can see, we have a change in the mix in our total portfolio, where companies reduced participation from almost 45% to almost 41%, while individuals grew to 26.9% and agribusiness to 26.1%. In Slide 10, we have the individual portfolio highlighting the lower risk lines of credits. So mortgage increased by 6.6%, being 10.9 in mortgages individuals, a market share of 7.9%, and net interest ratio was 2.09. Payroll loans was stable reaching BRL62.4 billion, market share of 21.5%, some reduction to the market share that we have in the past and in the interest ratio at 1.45. Salary loans increasing 2.9% in the period to reach 19.7 and net interest ratio of 3.05, auto loans at 1.2 in delinquency given the big drop in terms of balance almost 27%, reaching 5.8%. Slide 11, we have the loans to companies in a broad concept, a reduction of 19.4% to BRL280 billion, most of it coming from very small companies, portfolio companies that have with annual revenues up to BRL25 million, decreased 28.5% and the rest of the company’s portfolio decreased by 16.5%. Moving to Slide 12, agribusiness. We had a growth of 0.3%, mostly because of a sharp decreasing agri industrial, pretty much in line with the performance of the company’s portfolio while the auto loans grew 5.7%. This 5.7% considers also auto product deals that are kind of way of financing other deals in Brazil that had a decrease. Without that, it would be over 6% of the growth in total loans. And for working capital, we are still using a lot of mitigations, so 63.6% of our portfolio in working capital insured. Moving to Page 13, we have delinquency ratio. At the end of this quarter, we reached 3.47%. If we exclude specific case that we have in this quarter, a case that involves the company in Chapter 11 hedge funds as we call it in Brazil. Also, if we consider stability in the portfolio, that ratio would be 3.39, an increase of only 10 bps to the fourth quarter last year. Moving to Page 14, delinquency ratio by segments. As you can see, companies was in fact that particular case that was out there the ratio would be 5.7, below the ratio in December ‘16. Also, if you take out the impact of the decrease in the portfolio, that ratio was down to 5.47, below what we have in the fourth quarter. Individuals reached 3.09 and agribusiness, 1.28. Moving to Slide 15. Coverage ratio result is specific case that I mentioned accommodation pretty much stable at 164%. The total provision was BRL36.414 billion, being BRL1.7 billion, almost BRL 1.7 million increase in supplementary provision, an increase of BRL150 million in this quarter. Slide 16, we have the coverage ratio by segment. Foreign operation subsidiaries were 153%, individuals at 183%, agribusiness at 181% and companies without the impact of the specific case, 153%, a little bit more than what we have in the fourth quarter. Average risk and loan portfolio by risk level, our average risk reached 5.70% and 90.4% over the transactions that we have at concentrates in levels AA to C. In Slide 18, the provision flow to the loan portfolio by segment. In the quarter, the total was 1.05, a little bit below what we had in the fourth quarter, but higher than what we have in the third quarter. The total provision – the gross provision was BRL6.715 billion, being 600 in agribusiness, BRL4.317 billion companies and BRL1.6 billion in individuals. Moving to Page 19, NPL information. It reached 1.08 without the impact of the particular case that we mentioned, a little bit higher than the fourth quarter and the coverage of the new NPL was 94.93. If we included past due loans renegotiated in the quarter that were past over 90 days, that’s the NPL formation would grow to 1.19, a little bit more than what we have in the fourth quarter. NPL ratio would be 86.43%. In Slide 20, we have the breakdown of the NPL formation by segment, where individuals is at 1%, agribusiness grew to 0.57%, pretty much in line with what’s happened in the first quarter last year at 0.56%. Again, these few indicators were impacted by some climates effects in certain projections in agribusiness, things that are seasonal and should be addressed during the year. In companies, if you look at the NPL formation without the specific case, you will see a reduction from 1.73 to 1.5. In Page 21, we have the renegotiated overdue loan portfolio. The main highlight here is the growth of almost 100% in the amortization net of interest. meaning principal plus interest less capitalized interest in the period, so almost 100% growth when compares to the first quarter. And the total amounts received in cash was close to BRL1.4 billion in this quarter. NPLs stood at 27% and the coverage ratio of the portfolio grew to 166%, also worth mentioning that the balance of this portfolio decreased a little bit. We can say stable in this quarter. One other thing that’s important to highlight that we have renegotiating loans past due, most of this came from most past due from zero to 14 days at 47% and over 90 days was only 14.8%. Also with written-off of transactions that we recorded in the period installments represents 9.5% of what we contracted in this quarter. Net interest income in Page 22, moving gears to income of the bank, it reached BRL13.5 billion, a growth of 0.8% when compared to the first quarter of ‘16. In Page 23, we showed spreads by segments and the NIM. One thing that I would like to make clear, spreads in fixed interest rates type of loans are fixed at the time of the disbursement, so there is no impact in that spreads for any change in SELIC rates. So the SELIC rates decrease is not impacting these spreads unless they are floating. So individuals, what you see here in terms of reduction is pretty much in line with the reduction in interest rates for credit cards or any impact from SELIC, but in companies has a big portion of what we do is with big companies, that’s the floating rates linked with CDI that follow SELIC rates. That trend was impacted by the reduction in interest rates. NIM end of the quarter at 4.82%. That decreased from 5.06%, as mostly due to seasonal effects and temporary effects coming from different calendar days and business days. In Page 24, we have the fee income, a growth of 12.3% when compared to the first quarter ‘16, reaching BRL6.100 billion, coming pretty much from account fees, a growth of 11.3%. Asset management fees, a growth of 29%, but also for several quarters, we had showing a growth in terms of loan fees 14.5% and credit cards grew also at a good pace at 13.3%. Slide 25, we shift to administrative expenses and cost to income ratio. The ratio went down from 40.9% to 39.3%. Total expenses when compared to the first quarter last year decreased by 0.4%. In the – your right side, we are showing the total employees, branches and points of service the comparison – the annual comparison, a decrease of almost 10,000 employees in 1 year with decreased branches and increased points of servicing line that we announced of our reorganization. Also just an information, the cost of the institutional reorganization brought an impact of BRL67 million in administrative expenses in this quarter. Excluding these expenses, the decrease in against the first quarter ‘16 would be 1.4 and not 0.4%. In Page 26, we will move to capital ratios. Total capital ratios, 18.15, a decrease from the last quarter. Pretty much impacted by another phasing of Basel III rose another 20% deductions in capital. So that explains the decrease and there is common equity Tier 1 reached 9.2. In Page 27, we have the full of application Basel III rules, so the total ratio would grow from 18.15 to 18.16 considering the use of next spread, same behavior in Tier 1 going from 12.41 to 12.42 and also in common equity Tier 1, going from 9.2 to 9.21. Moving to Page 28, we have guidance 2017 – our guidance for 2017. We have in the adjusted net income, our performance was BRL2.5 billion, NII, 0.8 inside the guidance. And then as we start what’s the amazing in terms of guidance is the credit growth with the growth of our loan portfolio. So the total portfolio decreased by 9.2. Individuals came in at 1.6%, below the guidance, companies had a decrease of 19.6%, also below the guidance and rural loans at 5.7%, very close to the bottom of the guidance. The allowance for loan loss expenses net of recovery of write-offs came at minus BRL5.8 billion, expense of BRL5.8 billion and fee income 12.3%, over the guidance and administrative expenses at minus 0.4%, below the guidance. And now we can go to the Q&A and start the Q&A. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mr. Nicolas Riva from Citibank.

Yes. Thanks Bernardo for taking my question. I have just one question on Pateronia, I remember that in the past you had mentioned that assets outside of Brazil were considered non-core and you had mentioned that you were analyzing what to do secondary offering of the bank, which you currently control, now Bloomberg published a few weeks ago that there were some banks interested in buying this back they mentioned [indiscernible], my question is have you changed your mind at all about doing a secondary offering, would you consider offers from other banks. And then just one more on this, where will be the impact on your common equity Tier 1 if you were to sell the bank at current market price? Thanks.

Thank you, Nicolas. Patagonia [indiscernible] not so much should effect the communication to the markets in March, where we are saying that we are moving on with the idea of doing a follow-on, right, or as some people like to see, a re-IPO. So – but for our assets outside of Brazil, we are open to see alternatives. But in the case of Patagonia, as we mentioned, what we have or we own is what we have in the communications in the market, that is a follow-on, pretty much a follow-on. And as we still have the case in our hands, we prefer not to mention on something that is not really happening now. If there is anything in the future in relation to the follow-on [indiscernible] we can come and give you more information of potential impact to whatever we do there aiming now [indiscernible], okay?

Okay. Thanks Bernardo.

[Operator Instructions] This concludes today’s question-and-answer session. I would like to invite Mr. Bernardo Rothe to proceed with his closing remarks. Please go ahead, sir.

Just I wanted to thank you, everyone participating in our conference call and remind you that the team of Investor Relations of Banco do Brasil at your disposal if you have any questions in the future. Thank you very much. Have a nice day.

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