Banco Santander Brasil S A : 4Q23 Videoconference Call Transcript

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

Camila Stolf: Good morning everyone, and thank you for joining us this morning for our 2023 closing results conference call. This event is being broadcast live from our headquarters in São Paulo and, as always, will be divided into three parts.

First, our CEO, Mario Leão, will talk about the main highlights of the period and the strategies by which we will continue to direct our growth in the coming quarters. Next, our CFO, Gustavo Alejo, will provide a detailed analysis of our performance. And finally, we will have our Q&A session, during which you will be able to interact directly with our leadership.

Before we begin, I would like to give you some instructions. We have three audio options on the screen: all the content in Portuguese, all the content in English, or the original audio. The first two options will have simultaneous translation. To choose your option, just click on the button at the bottom center of your screen. To ask questions during the Q&A session, simply click on the hand icon at the bottom of your screen. Questions will be answered in the language in which they are asked. Today's presentation is now available to download from our IR website.

Now, I hand it over to Mario Leão, who will begin the presentation.

Mario Leão: Hello, good morning everyone. We are here live with you. It's 10:03 AM. It's a pleasure to be here once again, closing my second year at the helm of Santander. I will try, as we did in this new format last quarter, to present to you the first few slides in a very direct and dynamic manner. Then, Gustavo will join me to discuss the numbers. We will try to do our part in no more than half an hour, so we can have quality time for a Q&A session of 45-50 minutes, depending on your demand and interest. We are here to obviously answer your questions promptly, and for anything that arises later, our IR team is at your disposal as always.

Here on slide four, I would like to highlight some messages for you. Obviously, profit is right there in the middle. I wanted to focus a bit less on the number, we will cover the number in detail, and focus on the consolidation of our messages for this 2023 that has just ended.

There are a few key messages, four to be precise. The first one is that we have experienced another quarter of overall margin growth. Indeed, we are going to demonstrate a stronger growth in market NII. As the market has been anticipating, we are delivering on that expectation. We have seen growth in the client NII, remembering that client NII is the sum of margins on both the asset and liability sides. With the CDI reduction, naturally, the liability margin faces a challenge in the spread itself. We will seek to offset this with volume. And on the credit margin side, we are going to show several portfolios growing significantly this quarter. We are quite pleased with this.

So, the first message here is: we definitely have a revenue recovery on the NII side. And expanding this to portfolio diversification, which is a topic I've been talking to you about quite a bit, we have a quarter that is seasonally always stronger, but even with the seasonality, we have

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

a very positive quarter in terms of fees. And we will give you more details on how we go about that.

We have experienced stronger balance sheet growth this quarter. We had already demonstrated growth in some of the balance sheet lines in the third quarter. We will present this more clearly now in the fourth quarter, which solidifies our strategy of portfolio diversification. Portfolio diversification involves growing in investments, earning fees, and being less dependent on market credit, but it also involves diversifying within the credit lines and doing more in customer segments where we had been growing less in the previous growth cycle, as well as expanding in products and customer base, as we will show here. With this, the quality of our portfolio leaves us very excited to continue growing.

So, we have been showing this and talking about the turnaround we achieved from the first to the second half of this year, and the fourth quarter consolidates this. We are quite comfortable with the evolution of our cost of credit. We will show here in detail that the cost of credit, the relevant indicators of cost of credit, especially in our retail business, continue to evolve in the way we expected. We had specific one-off cases, a specific one-off case in the wholesale segment, which Gustavo will comment on more. We are not going to go into details name by name, as we never do, but we had a balance sheet reinforcement, a provisioning reinforcement this quarter, which is something specific, one-off, and identifiable and with that, the recurring cost of credit remains very sound with good prospects.

From the perspective of priorities, as we have been discussing, there is a significant consistency in our message. We will continue to focus heavily on customer base monetization. We have a customer base of almost 65 million customers that we need to activate more and make them more loyal; the agenda of 'principality', which is the term we are using here, our strategic motto of being the main bank for our customers, is becoming increasingly rooted in the organization as a whole. So, we will talk a lot about customer base monetization with you, over the next quarters, over the next years. We will discuss the consolidation of strategic businesses. I will give you some data here, as we have been doing since the second half of 2022. And we will talk about how innovation and technology interact with all of this.

On the next slide, actually, over the next three slides, we have chosen three slides to talk about customer centricity. There's a huge message behind this, which is our strategic agenda; it is also our most tactical delivery every quarter, and it is 100% correlated with our customer agenda. On the first slide, we compile a comprehensive collection of data associated with customer centricity. I will highlight some of these for you.

On the left-hand side of the slide, at the bottom, we have a large chart that shows the evolution of our NPS. Just to remind you, back in 2017, so almost seven years ago, Santander was the first of the large banks in Brazil to talk about NPS. We continuously release our measurements and start discussing it with the market. Of course, our competitors began to do so as well, as

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

NPS is not our proprietary metric. But we have been talking about it for at least seven years, and I would say that this year, we have made a very significant evolution. You can see here that we have materially increased our NPS among Individuals. In the Companies segment, even though the number is still far from what we want it to be, it is our highest NPS to date, with a very important evolution. And, looking at each of the channels, we have also evolved our NPS substantially.

So, the message here that I want to convey to the market is: we value NPS as one of the major KPIs. Obviously, it's not the only one. We will continue, obsessively, researching and engaging with our customers through a multi-channel approach, in a fully online manner, and reacting as quickly as possible to their feedback. We have been paying a lot of attention to NPS, and with that, we have significantly evolved our principality agenda.

We are also improving our profitability for the new vintages, so clients from these new vintages have been demonstrating increasingly better performance and profitability. Here, we present a single data point from the year 2023, showing how it evolved from a base of 100. The newer vintages have been performing much better compared to the older ones, meaning we have been successful in selecting the clients we wish to work with, as well as in how we choose to engage with these clients, leading us to achieve progressively higher profitability.

We are advancing this quarter in our loyalty and principality agenda. We have grown 2% in the quarter, 6% over the year. Obviously, we are aiming for much more than this starting from 2024, but this is to give you a sense of our evolution, that we are on the right path. And with the entire organization focused on becoming the main bank for our clients, I am sure that things will start moving faster from now on.

Some of the main levers. Payroll, which we have been talking a lot about for a long time. We are a major bank in payroll operations, something we take great pride in, and we aim to increasingly explore what comes with payroll, including relationships with business customers, and the crossover between business and individual clients, which we do well. The high-income segment, which I will discuss in more detail shortly. Investments, which I will also provide more details about our foray into this highly relevant strategic agenda, as well as the topic of cards and loyalty.

Moving on and taking another deep dive into Select. I've met with numerous analysts over the years, and they always ask me: "what are you doing that is so different?" Everyone is talking about high income, everyone has their own answer, their own brand, ours is Select, as you well know. We truly believe that we are doing something unique, something special. Here, I'll provide some data, and then, obviously, I can go into more detail during the Q&A, and our IR team is ready to delve much deeper into the details.

But in summary, a year and a half ago, in August 2022, we decided to undertake a major repositioning in our high-income segment, which is Select. Since then, we have significantly

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

grown our customer base. Along with the customer base, the loan portfolio has also grown. To give you an idea, 27% of the individual retail portfolio is already represented by Select, which is quite a significant figure, and we are growing at 32% year-on-year. Our customer base is increasing by more than 50% year-on-year. You might remember that we had a public ambition, which I have been discussing with you for a year and a half, to reach one million Select customers by the end of 2023. In fact, we have reached 1.2 million customers, and obviously, we are now actively working towards the next milestone of 2 million. This is the mindset, the big thinking we have here.

Beyond the customer base itself, doing so profitably. So here on the right, I show how revenue per loyal Select customer, with Select customers exhibiting greater loyalty than the average, has also grown over the years. An additional piece of information related to Select initially is: we are launching a new initiative, still running as a pilot in the fourth quarter, but I mention it here because it will be a significant step in our 2024 agenda. We are expanding the concept of AAA, which I will talk about shortly. AAA is our consolidated investment advisory service, already evolving well and indeed causing a stir. Finally, Santander definitively stakes its claim in investments. We are introducing the concept of AAA patrimonial, which in practice is the version for insurance and "consórcios" of our AAA for investments.

So AAA patrimonial, which we are going to expand this year, will in practice enable us to have a significant number of advisors initially linked to the Select stores, selling in a specialized, consultative manner, insurance and "consórcios" to our high-income clients. Again, the pilot we conducted at the end of last year was extremely relevant, and it has excited us to expand. So the goal is set, and we will have an important agenda here. We will talk more with you about it.

Entering the topic of retail once again, but moving to the other extreme, we've just discussed high income. We are taking a significant step, in fact, several significant steps this year, in what we call the mass retail segment. So, mass retail, which constitutes the large base not only of our operations but also of our competitors, whether they are traditional banks or digital banks, we are on an agenda of deeply challenging ourselves to seek much more loyalty, much more principality.

Again, we are evolving in the NPS, which is a way to measure if we are doing this well, but doing more of the same, doing just as we have been doing, with only marginal evolutions, here it's not going to work. In our last few disclosures, particularly in the last one, I told you that this is a segment that is currently generating negative results for Santander. This is not exclusive to Santander; other banks are facing challenges in this segment, but certainly we want to be profitable in each of the segments we cover.

We do not want to have a bank where one segment funds the other, and the opportunity we have to monetize mass retail is enormous. We are seizing it with both hands, and we will work diligently to deliver, in the coming months, significant evolutions in our offerings, brutal

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

simplifications in our offerings, a much more digital and remote agenda. In other words, the mass retail segment that Santander will increasingly have from now on is a duet between an even more impeccable digital experience and a greater capacity to relate to humans through our remote channel, through our remote operation, ever more. Yes to the phone, but a phone that evolves to chat, a chat that evolves to Generative AI.

We are taking these steps quite quickly, and this year will be the year of evolution and consolidation in how we deal with mass retail. The simplification agenda I mentioned is not a minor one. We have already achieved a reduction of 31% in our portfolio products, and just in cards alone, this number exceeds 50%. So, what are we doing in practice? We are streamlining our offerings to make them simpler and much more understandable to the customer, enabling us to better engage with the customer, especially those in mass retail, who need less. They need a good card, a good account, good credit offerings, and an impeccable digital experience. Thus, we are increasingly focusing on the agenda of essentialism, as we say, the less is more approach, striving for an offering that is simple, easy to understand, and impeccable.

Moving on to the investment agenda, which is one of the major strategic blocks I have been discussing with you for two years now, we have made clear progress. We will show the numbers later, illustrating how we grow in terms of volume and results. Retail, which is a major monetization engine for our investment agenda, not just in volume, had its best year in history. Of course, we aim for much more, we want to extract much more, especially from retail banking for individuals, but also from SMEs. But we have a record in funding that is 1.5x more than what we achieved in 2022, and if we look back a bit further, this number used to be negative in previous years.

So, clearly the investment aspect was a topic that wasn't on our strategic agenda before, and now we are adopting it decisively. And obviously, we will aim for multiples of what we achieved in 2023, which shows that we are on the right track.

One of the important arms for this, but not the only one, is AAA, our great, I would call it, investment advisory office, which is obviously in-house. It's a model that we developed, which is unique, and we believe it's a super winning model. It has an NPS of 85, which is the highest NPS in the entire industry, NPS here measured by the market, by third parties. And we had a net inflow per advisor of R$ 2.5 million in the quarter, which is an important evolution compared to what we had in previous quarters and is a data point, I would say, quite competitive if we compare it with similar offices or companies.

So, we want even more, of course, but we are showing that AAA, as a major vector of our investment agenda, is evolving quite well. Toro, which is our digital brokerage with a 100% controlling interest that we acquired over the last year, has also seen strong growth throughout the year in clients, AuC, and results. Therefore, Toro is proving to be a relevant agenda. We will increasingly build a duet between Toro, our Santander brokerage, and our entire investment

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

agenda. We will still do a lot of integration here with independent brands, distinct brands, but we will have a coordinated agenda. And our Private banking unit, as I've had the chance to mention here to the market, we had a record year in Private, in terms of volume, funding, and results.

We still think there is a lot of room to grow; we want to at least double our Private in the coming years, and we believe we have all the conditions to do so.

Quickly touching on our strategic business agenda, we have been reporting to the market for a year and a half now. Back in the third quarter of 2022, I decided to discuss with the market about this specific topic of strategic businesses. We were still in the first year of managing our legacy portfolio, in a way, of older vintages.

So, on one hand, there was a portion of the portfolio that we knew we had to manage, to hold steady, and some portfolios, like cards, we were aware that for a while we would indeed see a decline, despite our obvious distaste for this drop. However, we knew that for a year and a half to two years, we would have to manage and take care of them. But on the other hand, we chose some businesses in the third quarter of 2022 that we were going to focus on growing, and in some cases, grow much more or significantly more than the market. So, this is a quick accountability on some of those businesses.

I'll start with the payroll deductible loans. At the bottom left-hand side of the slide, we are growing again this quarter in a consistent manner. We are experiencing growth across all payroll deductible loan lines. We are expanding in the public segment, with the INSS, and also in the private side, which is a major asset that Santander possesses. We are achieving this with very effective control over the cost of credit. We are gaining market share in payroll deductible loans, and I am extremely pleased to see how we are consistently delivering good results here and will continue to do so.

In the same vein, we have made a very significant delivery in agribusiness. One of the public ambitions I had set for the market was that we wanted to reach R$ 50 billion in our portfolio of agribusiness products. Here, it's not just about the overall customer perspective, here it's about the agro products. Not only did we reach R$ 50 billion, but we also reached almost R$ 54 billion, meaning that we were able to grow by 42% if you look at December 2022 vis-a-vis December 2023, which is quite significant. And when we compare it with December 2021, it's a growth of nearly 100%. So, we doubled our agribusiness product portfolio in two years, which demonstrates the importance we place on this business.

Our consumer finance, as you all know, is the largest vehicle finance business in the country. It ends the year with a 21% share. We want more than that, you know I have the ambition to reach 25%. We are going to get there, I hope still this year, but it ended with an origination record. We finished the fourth quarter with almost R$ 12 billion in origination, which is a historical volume. So, this is a very strong indication. We will soon see some of the impact of

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

this on the bottom line, as Gustavo will show, but this is a very strong indication of how we are thinking big from now on in our consumer finance operation as well.

Regarding cards, which I already mentioned in the last quarter, we have seen another quarter of very positive evolution in cards. If we consider turnover, which is a good indicator, turnover for the quarter year-on-year, in the fourth quarter of 2022, was down compared to the previous year. In the third quarter of 2023, it had grown by 7% and in the fourth quarter of 2023, which we are now discussing with the market, it increased by 11%. This means we are experiencing double-digit growth in turnover, given that the average spending in our customer base has increased and given that we are selling more cards now than we did in the first half of the year. So, the base of 100 that we sold in the fourth quarter of 2021, which was possibly our record for card sales, had dropped to less than half of that not too long ago, and we have now nearly returned to two-thirds of that level, which is a level we consider quite adequate.

Once again, we are not striving for a sprint in card sales, of customer acquisition, as we did in 2021. This is not the model with which we plan to close 2023 and enter 2024. However, we are quite confident in selling cards to the customer base we are currently operating with, at this level we are at now, and the results will show. As for Esfera, as an addition to the loyalty and principality agenda, we will discuss more about Esfera throughout the year, but here, Esfera continues to make very good progress.

In Companies, we are maintaining a continuously positive agenda. You will see the data after the volume analysis, but here, discussing the strategy for both corporate customers and small and medium enterprises, we have seen good portfolio growth. Especially in the expanded portfolio for large companies, we are experiencing double-digit growth year-on-year. We aim to continue with a strong performance here over the years, but there will always be a focus on profitability here.

We could grow much faster in the corporate segment, but with capital markets fortunately strong again, especially from the second and third quarters, we will compete with capital markets and will be more selective in terms of what we want to include in our balance sheet. And we continue to perform well in several rankings. We are number one in trade finance, we are number one in foreign exchange, we were number one in DCM, in international debt capital markets, which we are very pleased about.

On the side of SMEs, on the right-hand side of the slide, our growth agenda remains very clear. You will see the data; we have grown the portfolio by more than 5% quarter-on-quarter, after having grown by more than three in the previous quarter. In other words, that stable portfolio agenda we were still looking at, choosing the right moment to accelerate, we have decided to grow more strongly from the middle of the year onwards, and the numbers clearly show this. Here, we aim to double the SME business within a few years, and we are already taking clear steps in that direction.

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

To conclude my part here, the technology and innovation agenda, obviously, it connects with all of this. We don't have technology on one side and business on the other. I even say internally that we are all business. So, technology is a major business hub, and the operations areas are large business centers. We have some data on this page, I'll just mention a few, but we are already at 95% of our operation in the cloud. We are converging towards 100%, and soon we will be ringing the bell for 100% of our operation in the cloud, which is a super good figure. This generates agility, creates response capacity for the customer, obviously, efficiency, and cost reduction, so we are quite pleased to have such a strong cloud agenda.

We are increasingly investing, of course, like the entire market, in Gen AI. Generative AI can be a great answer, as I mentioned just now, for chat and for the remote channel, but it can also be a great answer for gaining productivity in programming, in coding, in development. We are also very strong and moving quickly on this front here. We have been following the Central Bank of Brazil in innovations; we conducted the first transaction with privacy on the DREX digital real network, so we are, obviously, embracing the Central Bank here in the innovation agenda. We have invested a lot in the APIzation of Santander, in banking as a service. We are partnering with major ERPs and seeking to expand this agenda to have Santander increasingly more present for the customer, not necessarily having to come to the bank, even digitally. We want to be inside, embedded in the customer experience.

We are maturing our agenda of business domains. We have 27 business domains that we've introduced from 2022 to 2023, and now from 2023 to 2024, we're further integrating this with our product agenda, as we call it here. So, the business domains, or these large communities that handle everything from the front to the back end in each of our businesses, are super consolidated, and all the management, all the compensation, the incentives are aligned.

We continue pursuing our efficiency agenda, more than doubling the number of transactions while at the same time cutting the unit cost in half. So, this agenda remains extremely strong for Santander, as it must be.

And with that, I will turn the floor over to Gustavo to talk about the results, and I'll be back shortly for the Q&A. See you in a bit.

Gustavo Alejo: Thank you, Mario. Good morning, everyone. Let's start the results section with the NII. We posted NII growth of almost 5% year-on-year with good progress in client and market NII. We recorded a good performance in terms of volume, as well as in terms of funding, both of which benefited the client NII in 2023. In Q4, we saw the continuation of some positive trends seen in Q3, which led to growth of 4.8% in NII quarter-on-quarter. One of these is the gradual growth in retail credit, which will be detailed in greater depth in a minute. The other trend is the reduction in the Selic interest rate, which benefits our funding costs, as Mario mentioned.

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

Market NII shows a progressive evolution, about which I have been commenting throughout the last few presentations and is in line with expectations. The evolution of spreads over the year reflects our strategy of greater selectivity initiated in 2022 and which is in keeping with the risk profile of new loan originations. Lastly, regarding NII, I would like to highlight the positive year- on-year evolution of net interest income. In this fourth quarter, as you can see here, we posted growth of 12.3%.

Now I'm going to comment on some data on the evolution of our loan book. We increased our expanded portfolio by 9%, as mentioned. We grew in all lines of business, with significant expansion in retail for individuals, vehicles, and SMEs. During the quarter, we achieved a strong performance in cards for individuals. This result was sustained by seasonality and by the gradual improvement of card sales, the resumption and improvement, which has proved to be more qualitative and assertive, with satisfactory quality levels in loan origination.

This performance is accompanied by the continuity of consistent results in payroll deductible loans, mortgages, and farm loans. Indeed, Mario has already mentioned this, but I want to stress it further, it's important to highlight the growth in agribusiness, with an increase of 10% in the quarter and an expansion of 42% over the year.

In auto loans, we posted growth of 5.5% quarter-on-quarter, marking the best performance of the year. This improvement more than offset the impact of the sale of the PSA portfolio in the previous quarter, and it reflects the strength of our strategic partnerships and the positive market momentum we are witnessing.

In SMEs, we continue to drive the growth of our portfolio after a relatively stable first quarter, with adjustments, which is fully aligned with our previously stated strategy of increasing the share of this business in the total portfolio. The 5.2% increase in the portfolio in the quarter is something to be highlighted here.

On the next slide, I share details about our funding. As we have been discussing and emphasizing throughout the year, we have achieved a solid performance in fundraising, demonstrating our commitment to the expansion strategy and the pursuit of a more balanced mix between wholesale and retail. Our funding, as previously mentioned, grew by 15% over the year and 2.6% in the quarter, highlighted by time deposits and tax-exempt securities. Our loan- to-deposit ratio is at 92%, the best level in our history.

Here, in this next slide, we present the performance of our fees, which each quarter reflects the evolution of our business in a very clear and consistent manner, with positive performance across practically all lines. In this quarter, we recorded a growth of 7%, following a 6.5% growth in the previous quarter. Even with the positive seasonal effects in cards and insurance, the business as a whole showed very positive dynamics, which reinforces our strategy in fees, aiming for increased transactionality with our clients.

Videoconference Transcript

4Q23 Results

Santander

January 31st, 2024

We now advance to talk about the evolution of our asset quality. This quarter, we have the effect related to the increase in provisions for a specific case and the reinforcement of provisions for wholesale cases. If we disregard these effects and the lower volume of loan recoveries after two quarters of record performance, we have a stable gross LLP in relation to the previous quarter, with no signs of deterioration.

We maintained the downward trend in the cost of credit, which closed the year at 4%. We also continued to see a downward trend in the renegotiated portfolio, in relation to the total portfolio reaching 6.3%, as you can see here. This 120 basis points reduction over the year reflects the better quality of recent vintages, especially in retail. On the other hand, NPL formation posted a slight increase due to higher delinquency in the renegotiated loan portfolio. But this is something that was expected as we move forward in the process of purging this portfolio.

On the next slide, we provide a more detailed overview of our delinquency indicators. We recorded a sequential drop in short-term indicators for both individuals and corporate and SMEs. I would like to highlight the 110 basis points reduction in the 15-to-90-day past due loans for individuals. In the long-term indicator, the over-90, there was a slight variation of 8 basis points due to the renegotiated portfolio, as I have already mentioned. Indeed, the 90-day delinquency rate in the SME segment, which is displayed on the left, also reflects this impact. In summary, we continue to have quality indicators under control, with the possibility of some volatility throughout the year, due to the renegotiated portfolio.

Moving on to slide 19, I present here the evolution of our general expenses. They increased by 9% in the quarter and 8% over the full year. The expenses were affected by the collective bargaining agreement, which had an impact on the fourth quarter as a whole. Moreover, for the full year, we also had the 8% carryover related to the 2022 collective bargaining agreement.

Administrative expenses recorded an increase in the quarter, largely driven by seasonality. The main factors behind this growth were strategic investments in marketing campaigns to capitalize on the end-of-year period and data processing due to the increase in volume and more business. The seasonal effect also affected our efficiency ratio, translating into a deterioration of 80 basis points.

Continuing with the transparency already implemented in the previous quarter, we present the evolution of our expenses by segregating product and business expansion expenses and recurring expenses. We can observe here that our annual growth was primarily concentrated on expenses aimed at business growth, which we consider as fundamental in supporting our strategy to deliver the best experience to our clients.

And to conclude the results section, we present our income statement. As a result of the dynamics discussed throughout this presentation, we recorded a net income of R$ 2.2 billion. Compared to the fourth quarter of 2022, total revenues grew by 11%, and profit increased by 30%. Managerial profitability, excluding the specific case, reached 12.3%. Our core capital