After two quarters that shocked investors and repriced its market value, Bradesco today published a first quarter in line with consensus.
Operating expenses and the insurance group performed better than expected – but the bank still suffered from rising defaults.
The bank reported a net profit of BRL 4.28 billion, stable compared to the previous quarter but still 37% below the same quarter of last year.
Return on Equity (ROE) was 10.6%, with Equity closing the quarter at R$155 billion.
“The results are within expectations and what we have been putting for the market: a first and second quarter that are still challenging, but within our forecasts,” CFO Cassiano Scarpelli told the Brazil Journal.
Profit was impacted by a reversal of provisions that contributed around R$650 million to the bottom line. This reversal led to a drop in the so-called coverage ratio, which dropped from 204% to 182%. The tax rate, which stood at 10% in the quarter, also helped.
The so-called market margin – which reflects the bank’s gains from managing its balance sheet and proprietary trading – improved by R$500 million, but remained negative by R$300 million.
The customer margin – which measures the bank’s earnings from credit and funding – improved by 7.3%. The so-called total financial margin closed the quarter down by 2.40%, compared to a guidance for the year of +7% to +11%.
The NPL over 90 days – which measures credits that defaulted in the quarter as a proportion of the total portfolio – grew from 1.2% in December to 1.9% at the end of March – without considering portfolio assignments, which were rare in the quarter after the Selic at 13.75% made assignments unattractive.
Total delinquency over 90 days – which measures all credits in default in relation to the portfolio – increased from 4.3% to 5.1%.
To reduce this default, Bradesco is being more conservative in granting credit. In the first quarter, the bank reduced credit approval for riskier products by 40% (basically clean credit for individuals and SMEs) – this after having already reduced grants of this type of credit by 15% in the previous quarter.
According to Cassiano, this has already generated an improvement in new harvests, especially in individual portfolios, where the bank already sees “a significant improvement” in defaults. (SME photography remains challenging.)
The CFO reaffirmed the bank’s expectation that the NPL stabilizes and enters a downward trend in the second quarter, “may slip to the beginning of the third.”
Naturally, this greater conservatism cannot last forever, since by holding credit the bank is building less margin for the future, which will impact ROE later on.
Cassiano said that this calibration has become an “almost weekly” discussion at the bank.
“We are already in the second month of the second quarter, and we entered it still restrictive. But when we have more clarity about the cycle, and if these positive trends of the new crops are confirmed, we will carry out this reassessment and have another risk appetite.”
To respond to the challenge, Bradesco raised its total provisioning to the highest level in the last ten years, with PDD rising from 8.8% in December to 9.3% at the end of March.
The Basel Tier 1 Ratio increased by 0.2 points to 12.6%, while the Total Basel Ratio increased from 14.8% to 15.1%.
One highlight of the quarter was Bradesco Seguros, which delivered a net profit of R$ 1.8 billion with ROE of 18.2%. Written premiums rose 13% to BRL 25 billion, and the insurance group’s operating margin stood at 11.7% – above the guidance for the year, of 6% to 10%.
Another strong point was the dynamics of operating expenses, which grew 9.3% in the quarter year on year – the floor of the guidance for the year, which ranges from 9% to 13% growth – and declined 5.2% compared to fourth tri. The behavior was particularly healthy given the background: an IPCA of 8% and a readjustment of bank employees that was between 8% and 10%.
Today’s result still does not mark the inflection point that Bradesco needs to reach, but they point to a certain stabilization.
The CFO admits that part of the problem had to do with a communication error, which the bank is trying to correct.
“We had conflicting signals here in relation to default. Customer behavior was intermittent: there were customers who had already paid 24 installments and stopped paying. There was little visibility, but we ended up being more emphatic than we should have been.”
Geraldo Samor and Pedro Arbex