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

Carlos Macedo - Goldman Sachs Tito Labarta - Deutsche Bank Thiago Batista - Itaú Olavo Arthuzo - Santander Jorg Friedemann - Citi

Good morning, everyone and thank you for waiting. Welcome to Banco do Brasil’s Second 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 Web site at www.bb.com.br/ir, where the presentation is also available. And the replay will be available through the phone number +5511 2188 0400 in English and Portuguese. To access that replay you must ask the operator to listen to BB's conference call. Your identification will be required. 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 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. Thank you, everyone for participating in our conference call. We would like to start the presentation Slide 4, where in the left side we have the strategic guidelines that were established by our CEO since last year. The guidelines are profitability, increasing profitability, efficiency, control of the delinquency and capital. Customer experience and the digital transformation. The highlights for the first half in comparison to the first half of last year, is a growth in fee income by 10%. Net interest income stable, growing 0.3%. Administrative expense is declining, under control 0.9% negative. And cost to income ratio we are reaching 38.9%, the best ever results. On Slide 5, we have net income, adjusted net income reached R$5.2 billion, growth of 67.3% over the first half of last year. I would like to point out as well that the pre-tax provision earnings increased in this quarter in all comparisons against the first half. Second quarter '16, first quarter '17. The first half is 5.8% higher than the first half of '16. And shareholders ROE reached 14.1% and the way the market calculates the ROE, you get to 12.8% in the quarter. Moving to Slide 6, we have the earnings breakdown. I would comment, the first half where we have R$29 billion in NII, provisions reaching R$13 billion this semester, fee income R$12.4 million. Personal expense is 15.6 billion and the adjusted net income coming to R$5.2 billion. Slide 7, market ratios. Starting with earnings per share where we are showing increasing earnings per share from 0.9 to 0.95 in this quarter. The dividend yields according to consensus of the market is going to reach 3.2 in '17 and 3.8 in 2018. Price earnings 12 months also, in terms of the consensus of the market is 8 times for '17 and 6.94 '18. And price book value cost during the consensus 0.97 for '17 and 0.88 for '18. On Slide 8, commercial funding. We are showing in this quarter growth of 0.7%, reaching R$588 billion in June '17. I would like to highlight the increasing time that brought in this period and growth of 5.5% over the previous quarter. And our adjusted net loan portfolio to commercial funding ratio reached 87.5%, showing a huge liquidity in Banco Do Brasil. Slide 9. Loan portfolio in a broad concept. We had an increase of 1.1% in June against March, reaching almost R$700 billion. But in 12 months this is still showing a decrease, 7.6% in this quarter. Also I would like to point out the change in the mix of the portfolio where we are seeing growth in terms of agribusiness and individuals against decrease in companies. In Slide 10, we are bringing to you the disbursements that we have been making over every quarter since first quarter '16. It's the average and we are considering base 100 in first quarter '16. So in Brazil almost 100% growth -- sorry, 60% growth in the second quarter against the second quarter of last year. The 100% growth comes in the individuals. Agri business more linked to seasonality so that is compared to second quarter '17 to second quarter '16, a growth of 9% in disbursements. In companies we have almost 50% growth year-over-year as well. So disbursements in a growth base is growing and showing a better behavior looking forward. Slide 11, individuals portfolio. We see a concentration of lower risk lines of credit. Mortgages increased 3.9% overall, only for individuals is 8.4%. And now our market share is 7.8%. In payroll we had a growth of 2% until of March, and our market share of 21.6%. The other two lines we have decreases. Salary loans decreased 3.1% and auto loans decreased by 25.9%. Slide 12. Loans to companies in a broad concept. We have a decrease of 1.3 in the quarter, averaging R$277 billion, mainly coming from small and very small, and small companies, minus 6.5%. while we have small growth in the middle market, corporate and government of 0.2%. Slide 13, agribusiness. We are showing a growth of 4.5% in the quarter, reaching R$180 billion. This growth is coming 7.5% in the agro-industrial portfolio and 3.9% in the rural loans portfolio. Also we announced the new harvest plan for '17 and '18. R$103 billion is what we have in our budget, being R$91.5 billion for rural producers and cooperatives. Delinquency ratios in the quarter in Slide 14, reached 3.7 adjusted by specific case. On Slide 15 we have the breakdown by segments where we have NPL over 90 days for companies reaching 6.2, adjusted by the specific case. 3.3 for individuals and 1.4 for agribusiness. On Slide 16, we have the balance and the cover ratio. Balance of provisions and over ratio. So the coverage rates 159.5%, almost 160%, adjusted by the specific case that’s also impacting the NPL. And the total balance of provisions reached R$37.9 billion at the end of June '17. Slide 17, coverage ratio by segments. We have 177% for individuals, 167% for agribusiness and 149% for companies also adjusted by that specific case that I mentioned already. On Slide 18, average risk and loan portfolio by risk level. At the end of June the average risk was 5.9% and the loan portfolio's concentration levels, double AA to C, at 91.1% of the total portfolio. Slide 19, provision expenses flow and loan portfolio. We have it being stable in relation to the first quarter at 1.04, and the total provisions made, gross provisions made in quarter, reached R$6,658 million. NPL formations, Slide 20. We indicate at 107 in the quarter and if you look at the nominal value of the NPL formation, we have 6.8% at the end of the second quarter, the best rating since the fourth quarter '15, showing a decrease every quarter since then. And the adjusted NPL formation by the part of the renegotiated loan portfolio that was renegotiated over overdue was over 90 days past due. That indicator reached 1.3. On Slide 21, NPL formation by segments. We are showing 1.76 in NPL formation in the quarter. Loan in the first quarter for individuals, 0.87%, in agribusiness also lower than the first quarter. And of companies, where we have most of the problems in terms of delinquency in the high level provisions, is the one that is also showing improvement quarter-over-quarter since the second quarter '16. Being at low levels since the quarter '15 at 4.1%. Slide 22. We bring to you the renegotiated overdue loan portfolio where we have a level of new contracts at R$3.6 billion. The lowest level in the second quarter and the first quarter from the previous quarters since 2015 as well. So reducing the level of new contracts. And also I would like to point out that the amortization of principal plus interest less with capitalized interest in the period reached R$1.2 billion, the highest level ever in this portfolio. In the right side we have the breakdown of what was renegotiated in the period. You can see that over 90 days past due in this quarter was higher than what has been presented before at 44.35%. That was impacted by, basically by two transactions that represent 20% of these second quarter contracts. On the border of this Slide, the NPL formation. It reached 6.27, the lowest level that we show in the series in this Slide. And also in terms of nominal value, 1.7, the lowest level in the series here. Page 23, net interest income. Net interest income reached R$29 billion, a growth of 0.6% over the first half of '16, and net interest income without the recovery of write-offs reached R$26.7 billion, a growth of 0.3% against the first half of last year. Page 24, we have the spreads by portfolio. Individuals 16.12, stable in relation to the first quarter, and the companies we have a reduction in this quarter, pretty much affected by the mix where the large companies participating more in the than total portfolio of companies and very small, small companies are reducing their participation in the portfolio, that’s the main reason for this decrease. In page 25, we have the net interest margin for the period reaching 4.75% and on the border of this Slide we show some of the impact in this NIM, where the mix composition where we have an increasing liquid assets in the quarter and the decrease in credit related assets that have higher spreads, that has impact in the NIM overall, that impact represents 0.13. Without the mix effects, the NIM would be 4.88 and also the reduction in interest for the revolving credit card revenues. It's impact in revenues that represents 0.08, so the NIM without that impact, all this impact, would be close to 5% in this quarter. Fee income in page 26. We are showing a growth against the first half of '16 of 10%. In terms of nominal value the most important one is checking account fees, growth of 11.5%. Than asset management fees, where we have a growth of 26.5%. Also important to mention the loan fees, where we increased 19.7% even though the portfolio in 12 months against the first half of '16 as well was not growing. And in terms of percentage, the big highlight that we have is consortiums with a growth in fees of 41%. Slide 27. Administrative expenses and cost income ratio. The cost income ratio went from 39.9 in the second quarter '16 to 38.9 in the second quarter '17. Administrative expenses had a small increase in this quarter against the first quarter, 1.2, given seasonality that we have in personnel expense in the first quarter. Overall, in the first half of this year against first half last year, that’s a decrease of 0.9%. I would like to point out that the institutional reorganization that we started to have in Banco Brasil last year, has an impact on cost of R$145 million in the semester. That was considered recurring so it was not adjusted. So if we consider that expense as non-recurring, the decrease in expenses would be 1.8% against the 0.9% that we printed. On Slide 28. BIS ratio. Our total ratio is 18.01, so very high ratio for total capital. And common equity tier 1 ratio of 9.2, stable in relation to March '17 and well on track to reach our goal of 9.5% full loaded common equity tier 1 by January 2019. Slide 29, full application of Basel III rules give us the total ratio going from 18.01 to 17.94, and the CET 1 going down from 9.18 to 9.11. So as you can see, pretty much on track to deliver the 9.5 goal. Page 30, the guidance for 2017. Adjusted net income came at 5.2, as I mentioned already, and we didn’t revise these guidance in this quarter. Net interest income net of recovery of write-offs, inside the guidance of 0.3 but given that we revised against for credit growth, we decided to change the guidance for the full year to minus 4% to 0%. The organic domestic loan portfolio has a performance of minus 6.6%, not meeting the guidance and we end up having to adjusted the guidance to minus 4% to minus 1%. Individuals, 1% performance, below the guidance and we also took the opportunity to adjust this guidance to 2% to 5%. Companies at minus 14.5%, way below the guidance and we decided to do with just a minus 11% to minus 8%. Rural loan in the 3.7% below the guidance but given that the dynamics on these type of portfolio we expect to reach the guidance until the end of the year, so we didn’t change the guidance. We also didn’t change the guidance for provision expense net of recovery write-offs, we believe of minus R$11 billion expenses in this quarter. Fee income over the guidance at 10%. We didn’t change the guidance but we expect that to be inside the guidance until the end of the year. Administrative expenses at minus 0.9% below the guidance and we decided to change to decrease this guidance of -- decrease in expenses of 2.5% to a small increase of 0.5%. And in the end, last Slide just take the date for the meeting, the Apimec Meeting that we are going to have in Rio De Janeiro at September 1. So I would like to invite everyone to participate as well. So now we can move to the Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Mr. Carlos Macedo from Goldman Sachs.

A couple of questions here. First question, looking at your margins little bit of pressure in the quarter. From your credit spreads it appears a lot of it came from the corporate side. Maybe somewhat mix with less SMEs. Can you talk a little bit about what you are seeing there in terms of pressure and what that means going forward? From your other portfolios it does look like there is a lot of resilience in the average rates, particularly on the consumer side, but in the corporate there was some pressure. Trying to get an understanding. Second question, asset quality. A bit of divergence between what you are reporting and what your peers in Itaú, Bradesco and Santander reported. Asset quality for them or the NPL ratio appears to be getting lower for you. It increased in the quarter. Can you give us an idea of when you expect that to turn? Is that a third quarter thing, a fourth quarter thing, based on what you see in the vintages that you already have in the portfolio? Thanks.

Thanks, Macedo for your question. Starting with margins, the main impact on our spread by segment in this quarter came from the companies portfolio and pretty much the mix changing where we saw in the quarter, a reduction of 6%. The very small, small companies portfolio. While we saw a growth in the large companies portfolio by 0.2. So that makes the main reason for the decrease. We also have impact in this portfolio from SELIC rates of course because large companies in Brazil, spreads are priced as a percentage of CDI. That pretty much tracks SELIC rates. So also that pressure that comes in this portfolio. Over time, our intention is to grow through very small, small companies and we expect disbursements to increase in the next quarters in these segments. We should see the big effect beginning to turn in our favor. So maybe not this year but next year we should see that trend reverse, reversal of that trend and also the impact of SELIC rate in this portfolio and pressure is going to reduce because we expect SELIC rates to reach 7.5% before the end of the year and staying at 7.5% during 2018. So a lower impact coming from SELIC in these particular segments and a changing mix through 2018 that is going to improve the spread overall. That’s what we expect in terms of spreads looking forward. For asset quality, we have different portfolios. So the banks are not the same. It's different in terms of composition, it' different in terms of regional distribution and so on. So it's sometimes hard to compare the behavior of the banks because they are not so similar as some people think. Our expectation is that we should see stability in the delinquency ratio the second half. And given that we have a lower NPL formation, we expect that NPL formation to continue to decrease over the next quarters. But we have base effects that can bring some stability to the ratio and stability means not the same figure all quarter but some volatility there but more in the stability line than anything. And then delinquency ratio starts to decrease next year, together with the group of the portfolio.

Our next question comes from Mr. Tito Labarta from Deutsche Bank.

Couple of questions also. I guess following up on the asset quality. In terms of the provisions, they seem to be in line with the guidance for this year. But as you mentioned, you think delinquency ratio could decrease next year. Can you maybe give some color on how much think provisions can come down, I know it's a bit early but I guess maybe just looking at the cost of risk, it's still around 4%, historically you were much closer to 3%. So as things improve and asset quality improves, can you get back to that 3% cost of risk level? How long would it take to get there? Just wanted to get a bit of sense of, kind of provisions as you kind of get through the cycle and things improve. And then my second question in terms of expenses, you seem to be doing a good job there, delivering a bit better than what you originally anticipated. Is there more room for cost cutting? You mentioned the first half of the year there was some restructuring charges, so as some of those charges go away, you think expense growth can remain kind of flattish, or at least below inflation. Maybe, again, a bit longer-term, how you see expense growth beyond this year. Thank you.

Thank you, Tito, for your questions. Well, asset quality, as NPL formation, expect NPL formation to decrease gradually, provisions are going to decrease gradually as well. So we expect sometime in the future maybe not by the end of '18, maybe it's more for the end of 2019, should go back to the level of cost of risk that historically we have it for. So once we gradually get in there throughout time, more the end of '19 than '18, but moving down. We can go back to the levels of 2% from 3%. So that’s something that we are going to work pretty hard to achieve over time. But it's not going to be at that fast, that’s the point. But the provision should improve gradually throughout the year and continue improving through 2018. In relation to expenses, we are seeing -- the strategy of the bank is keep costs under control moving forward. Right. So we have a lot of initiatives that were put together to allow us increase efficiency in the bank. So the goal is to grow costs below inflation. Even at a very low inflation level, like what we have for this year. So I am not saying that’s what we are going to deliver but a bit of the new guidance is a negative reading for the year, so way below the inflation even though the inflation is pretty low. Next year, inflation should be a little bit higher, so it's going to be hard to deliver below the inflation, that type of growth. But that’s our goal, to keep the cost below inflation throughout the years.

Our next question comes from Mr. Thiago Batista from Itaú.

I had actually two questions related to the these [indiscernible] on the loan origination. If you see the level of disbursement, especially in the household segment, went up a lot in the second Q. It was almost the double of the level of the average in '16. I mentioned that '16 was probably one of the lowest level ever. But my question is, is this improvement in the loan origination is a really a trend or if there is any kind of, let's say one off events that impact this much better loan origination in second Q. And also if you have any idea how was the trend of originations in July or in the beginning of the 3Q. Have you any idea if this positive trend continues?

Thank you, Thiago, for your question. Well, as you can see, this is a trend, it' really a trend. We are growing consistently since the third quarter. Unfortunately, it's lower than what we expected, right. So although the second quarter is very good, right, the first quarter will [roll] [ph] again what we expected. So we are still seeing room for more growth coming in next quarters, that’s why we have a guidance that has growth higher than what we grew in the end of the second quarter for individuals. So we are seeing room to do that and we have seen more demand coming from clients and there are several indictors showing that that can continue and we expect that second half is going to be a better half than the first quarter for individuals.

[Operator Instructions] Our next question comes from Mr. Olavo Arthuzo from Santander.

I wanted to understand a bit more about the digital branches and your operating expenses for the next year. As the benefits of this banking technology are well-know but we do not exactly know where in this cycle of this new trend we are. So to get a better understanding, my first question is about the penetration of digital customers. It is remarkable how the year of 2016 was a strong in terms of digital customer growth but from now on, do you still see a strong pace of penetration or is the bank reaching the stability. And my second question on this topic is whether you could share with us if there is any specific project related to this banking digitalization that you are investing. That can have an impact on the P&L. So in other words, could we assume the improving cost control for the next years could come from these initiatives. Thank you.

Thank you, Olavo, for your question. We still have a lot of work to do in terms of digital strategy. We have right now in the digital module, 1.8 million clients at end of June. The target for '17 is 3.3 million clients in the digital module. So it's almost double. So we have still a lot of work to do. Most of this shift now is going to come from the clients that we call exclusive, in English, right. That’s the clients that have their incomes higher than 4,000 per month and lower than 10,000 per months. Most of the clients that we have in this digital segment, the ones that make more than 10,000. By the way, for the people that heard me say 8,000 before, we just changed the segmentation, the level of income you need to be in the segment is still from 8,000 to 10,000. So from now on it's over 10,000. So most of them are already there. We are still growing in this segment. The number of clients basically just moving then from other segments that were not allocated correctly, as we increase our capacity to serve them through the digital strategy. But most of that we have already done. So there is still room to keep improving. Then in terms of the users of digital, the mobile application, right. We have today, at the end of June, 12 million clients using the mobile. The target is to reach 15 million clients by the end of '17. So we should see more clients moving to use the mobile banking as the main way of doing business with us. So we have seen that improvement over the time. Of course, when we do this type of movement, when we have more clients using the mobile banking, Internet banking and so on the cost savings are possible for us. Of course it's less expensive to do business from this automated ways than by a person in the branch. And the relationship manager in digital module, they can serve more than one clients at the same time. So we can increase the portfolio of clients that that relationship manager can serve. So we increase efficiency and we increase margins made and so on. So several benefits coming from this strategy. And the digital transformation is reality for everyone. Almost every industry in the market. So we have to be aware of that and we are trying to be ahead of the pack and be the most innovative bank in terms of deployment of technology and serving clients.

Our next question comes from Mr. Jorg Friedemann from Citibank.

I have two questions. So in a part of this conference call, you mentioned that you are working to achieve the best you can in each of the line items of your guidance, particularly on fee income growth. You were above the guidance and the reminder that part of the strategy of the bank is to continue improving product penetration of our own client basis. So taking that into consideration, could you please comment on how comfortable you are to be in the higher end of the guidance for fee income this year. And my second question. In this quarter, we saw a relevant drop of coverage in the agribusiness portfolio. I know that you do not have targets of coverage in the [indiscernible] provision, your requirements of the books on a case by case. But what happened over the first quarters you feel comfortable in allocating less provisions to the agribusiness book. Is this only due to the new provisioning methodology adopted by the bank earlier this year because any [debt formation] [ph] for the agribusiness book has improved but it's not into the lowest levels ever seen. However, your coverage for this book since have been to historical lows. Thank you.

Okay. Thank you, Jorg, for your questions. First, in terms of fee income. What we have for the full year, we had the first quarter in last year was a weak quarter. Right. So when we compare a better quarter that we have in for this year, we are over the guidance. The second quarter last year was a strong quarter. So when we compare quarter against quarter, in fact we came at 7.3% growth, inside the guidance and the mid of the guidance. But taken to the aggregate, we have 10% in the semester. What we expect for the next quarter, again we have a comparison thing here because third quarter last year was not a good one. So we should see a very good performance for the bank in the third quarter. By the way we don’t have potential strikes this year because the agreements with the unions were for two years, so everything is set already. So we are going to have lower impact from strikes and fees, although nowadays it's not that big, that impact. But much better when you don’t have the [entry] [ph] by that. So we should see a third quarter better than third quarter last year. So another strong quarter, growing over the second quarter against a weak third quarter last year. But the first quarter was strong again, right, last year. And we are going to compare potentially coming inside the guidance again, the first quarter against the first quarter. So overall, we should see that moving through the guidance as we pull together the performance quarter against quarter throughout the year, we should move to the guidance. I would say we can be a little bit higher than the mid of the guidance than to move to the top of the guidance, but inside the guidance in terms of fees. Moving to the coverage, as I mentioned, I believe in the Portuguese conference call, we do provisions by clients. And we do provisions ahead of delinquency. So we start to increase provisions before the delinquency reach us. We have decreasing covers in agro at the end of the fourth quarter. And the first quarter more relates to the changes that we did where we have excess provisions in agro business going to some of our exposure that we have in the individual Slide. So we are just there between agro and individuals with the same clients. So it's pretty much that. And then with the first quarter we have some growth in the delinquency ratio, went up a little bit -- the delinquency ratio went down because of that. But the level of the provisions that we have for this segment are more than adequate. And if you look at the provisions made by quarter, we had a growth in the level of provisions. So the first quarter we spend R$6 million in agro and increase to R$750 million. So we are doing the provision that we need to do and the coverage is adequate in accordance with what we need in this segment. Again, it's a bottom up approach, so all the clients have this right level of provision otherwise they pose problems for the bank.

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.

I just want to thank you everyone for participating in our conference call and our team is as disposal for any questions and other doubts you may have about the performance of Banco do Brasil. Please let us know, we are here to serve you. Thank you very much again and see you in the next conference call. Bye, bye.

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 Web site. Thank you very much for your participation and have a nice day. You may now disconnect.