Banco Bradesco - Q2 2023

Transcript

Carlos Firetti (Investor Relations Officer and Business Control Director)

Hello, good morning, everyone. Welcome to our second quarter 2023 earnings video conference. Thank you very much for your participation. In the opening part of the event, our President, Octavio, will present the bank's results. We will have the question-and-answer session. The presentation and other materials are available for download on our Investor Relations website. If you want to ask a question, you can send your question via email or through a WhatsApp message using the address and telephone number on the screen. The presentation will be in Portuguese, with simultaneous interpreting into English. Audio language can be selected directly from the window you're watching. You can also choose audio always in Portuguese, even when questions are asked in English. I now turn the floor to Octavio, who will begin our presentation of results. We'll meet again later in the Q&A session. See you soon.

Octávio de Lazari Júnior (CEO)

Thank you, Firetti. Good day, everyone. Thank you for joining us on our earnings video conference call. We'll start our presentation with highlights for the period. Net income for the second quarter of 2023 was BRL 4.5 billion, a rise of 5.6% versus the previous quarter and within our expectations. As we've stated over the past few quarters, the recovery process will be gradual. Our Basel expansion posted a 34 bps boost into Tier 1 capital, even with the full constitution of IoC. Market NII improved even further and will continue to progress over the next half year and in 2024. Client NII, however, is impacted by the momentary lower origination and lower risk mix. The bank's performance is pressured by Credit Provisions Expenses.

On the other hand, we've been able to control NPLs, with an improvement in the 15-90-day index as a result of adjustments in credit policies that we have made over the last few quarters. New vintages demonstrate an improvement in quality, and this has allowed an initial resumption of origination, primarily in personal loans for middle-income individuals, and a good pipeline in the wholesale bank for the second half. This resumption will continue over the coming quarters, expanding to other credit lines, as well as to retail. The Insurance Group, again, saw a growth in the results and income. We see a strong momentum for the insurance business, contributing positively to the group's performance this year with a countercyclical effect.

We continue with our strategic and efficiency initiatives, the key ones being the reduction of the cost to serve in retail, strengthening our high income operation, and the bank's digital transformation. Our primary focus is on serving our 72 million clients even better, placing them at the center of everything we do. Our work, centered on providing excellent service to our clients, is geared towards contributing to their achievements. We have evolved and customized the journeys, processes, and products according to demand, the need, and desires of our clients. We felt the recognition of our over 38 million account holders through significant progress seen in the NPS for individual retail and Prime in a variety of products. We will continue to strive for constant improvement in an effort to delight our clients. Speaking of our digital agenda, Bradesco has always been noteworthy for its pioneering spirit in innovation.

Our ecosystem of innovation links agile methodologies, tools, and collaboration with suppliers and startups. I would also like to point out the partnerships with significant and renowned institutions throughout Brazil and abroad, with which we have participated in a number of different projects, in addition to the search for highly qualified professionals, particularly data scientists and in technology, to join our staff. We are continually promoting the digital mindset and innovation culture across the bank. This facilitates new business, scalability, and personalization of services for clients. The accelerated use of the cloud, coupled with emerging agile methodologies in villas, has enabled a continuous reduction in the timescales for new implementations. BIA, the artificial intelligence application we pioneered, has had more than 2 billion client interactions since its introduction.

In addition, we are exploring and using new technologies such as Generative AI and quantum computing, Open Finance, Digital Real, at various stages of our clients' journey. The client profile has rapidly evolved as they have become increasingly more digital each day. Nowadays, 73% of our clients have a digital behavior, and 98% of all transactions are performed through self-service channels. The volume of financial transactions on mobile devices has continued this trend and has grown by 33% year-to-date compared to 2022. As part of the efforts to optimize the cost to serve, Bradesco Expresso plays a very important role. There are more than 41,000 service points throughout the country, offering convenience to our clients through a variable cost network. In addition, we promoted the integration of Next with Bradesco.

In this new context, Next clients will have complete access to Bradesco's complete portfolio of products and services. Digio continues as a separate digital bank focused on cards, payment accounts, and partnerships. Still, in the digital evolutions, we launched e-agro, an innovative digital platform for specialized services intended for rural producers that combines financial and non-financial products and services in an effort to address all our clients' needs. This robust ecosystem features partners that carry the best offers to the market, covering the entire agro chain, from finance to costs to the sale of grains. Anchored in artificial intelligence, the platform is capable of making proactive recommendations for offers and services, and also helps rural farmers purchase financed products and get credit all 100% online.

We have witnessed a growth of 115% in this segment over the last four years, and we are the largest private bank operating in agribusiness, boasting unique and specialized services with 14 agribusiness platforms that have dedicated teams, including agronomists. We have continued to improve our Wealth services, a line of business that has been one of our top strategic priorities. Our combined investment platforms, which also include our local banks in the United States and Europe, have now received yet another addition, Tivio Capital, this investment manager established in partnership with BV. It has BRL42 billion under management, and will continue to act independently and specialized in managing high value-added structured funds in an open architecture format. In order to expand our international offer, we launched My Account in July.

This is an international digital account for all the publics, and includes a personalized debit card, which can be used to make withdrawals and purchases in over 200 countries with automatic currency conversion. It is a practical and tailored solution which joins the Bradesco Bank offer. Lastly, before presenting our financial performance, we would like to underline our position in sustainability, which permeates our strategy and our businesses. We have now reached 78% of our goal to allocate BRL250 billion to sustainable businesses by 2025. We also remain committed to creating operations and products with a positive social and environmental impact, boosting growth, for example, of 72% in financing for the purchase of solar panels and 168% in financing of hybrid and electric vehicles over the last two years.

Over the course of the last six months, we received a number of different recognitions, such as the inclusion of the funds managed by Bradesco Asset as one of the most profitable in the Valor Econômico Fund Guide, in partnership with Getúlio Vargas Foundation. Within our innovation ecosystem, major awards for payment initiator and inovabra. Now, let's take a look at the figures for the second quarter. Net income for the quarter was BRL 4.5 billion, improving 5.6%. Income from insurance boosted the most relevant positive contribution for the quarter as a result of a solid operating performance and improvements in claims ratio. Market NII has been following the path of recovery that we had predicted, making a positive contribution. Client NII had a negative impact, as did credit provision. We'll show additional details on the upcoming slides.

Now, we're going to address our credit portfolio. It grew 1.6% year-over-year and fell 1.2% quarter-over-quarter. This performance reflects the ongoing restricted demand in light of interest rate levels and the adjustments we made to our credit policy in some portfolios, mainly in higher risk segments, like lower income individuals and micro and smaller companies. In individuals, we would like to point out the growth in real estate financing, mortgage, and cards concentrated in high income. For corporate, we highlight farm loans. We have begun to gradually increase origination in some segments this quarter, and we intend to continue to do so over the second half of the year, assuming that the vintages maintain the positive performance we have witnessed lately.

As for guidance, considering the dynamics up to now, we opted to revise the growth indication, which now ranges from 1%-5%. As we mentioned before, the new vintages have demonstrated an improved performance. The level of delay over 30 days, four months after granting credits, the so-called mob4, is now almost 50% better than it was in December 2021. This has helped to contain NPLs and has allowed us to expand origination in some products and segments. Credits originated from 2022 onwards, when we started adjusting our credit policies, now represent 53% of the portfolio and are, for the most part, a profile of lower risk. For example, secured loans represent 68% of new vintages for individuals. We saw BRL 10.3 billion in credit provision expenses over the quarter, representing a cost of risk of 4.8%.

In this first six months, the actual is 52%, 52% of what I had indicated in the center of the guidance, which ranges from BRL 36.5 billion- BRL 39.5 billion. We believe that the guidance remains valid, although the annualized value points to the upper portion at this time. Still, on credit provision, the balance reached BRL 60.2 billion, representing 9.6% of the credit portfolio. Over the quarter, we once again posted a lower level of credit provision expenses under IFRS 9, which reflects expected losses. NPL creation over the quarter came to 11.6 billion BRL, excluding the specific client effect. The still high level reflects the performance of older vintages. When we analyze cover over the second quarter of 2023, and that's why we break it down by months, we see some stability in these indicators.

We emphasize the coverage, excluding 100% provision credits, which is now 244%. Exceptionally, this quarter, we present the monthly delinquent delinquency, as this provides a clearer view of this indication's stabilizing trend. The short-term NPL showed some improvement in all segments, and in the graph for the over 90-day ratio, it is now possible to see the inflection of the curves, even with the unfavorable denominator effect caused by the shrinking of the credit portfolio. I would also like to highlight the disclosure of our NPL ratios without the impact of that specific client. Now, on net interest income, the total NII was BRL 16.6 billion in this quarter. Market NII posted a new evolution compared to the previous quarter, and this line will continue to gradually improve with the recovery of the bank's ALM.

Client NII dropped 1.7% on an annual basis, reflecting the reduced volume and the 20 bps fall in the spread, which stood at 9.7%, due to the lower risk origination mix.

We have revised our projections for total NII, considering the trend we see for the rest of the year. The new guidance range includes growth between 2% and 6%. The fees line is a challenge for the entire market, and it's no different for us. Cards income continue to perform well, driven by higher spending by our middle and high-income clients, groups in which we have recently increased penetration. For asset management, we are also adjusting our products and client offers, and are already seeing signs of improvement. The other lines continue to be pressured by regulatory issues and the market's momentum. In this quarter, we had significant revenues in capital market operations, and we expect that these revenues may be even more relevant in the second half of the year.

We closed the first six months below the guidance floor, but we expect an improvement over the second half of the year. So we have kept the expectation for this line, with an indication more towards the floor of this projection. Costs grew 11% year-to-date. Personnel expenses rose by 7.6%, driven by the last year collective agreement. Administrative expenses expanded 4%. The biggest impact on costs, as I've-- we have been mentioning, comes from the other expenses and revenues line, due to the lowest comparison base in 2022. We continue with tight control on expenses, adjusting our operation structures and the cost to serve, to allow better results without impacting customer service.

If, on the one hand, we've adjusted our guidance for credit growth, and consequently for NII, on the other hand, we are improving the guidance for operating expenses and insurance income, as we'll discuss later. The guidance for expenses, which was from 9%-13%, now ranges from 7%-11%, reflecting our efficiency and control actions. In the Insurance Group, our performance continues to evolve. Net income for the quarter was BRL 2.4 billion, an increase of around 30% in quarterly and annual comparisons. The premiums growth and the improvement in claims ratio allow for a strong evolution on the operational side. The performance of financial results was also positive. Income from operations is up 21.7% year-to-date, and given the scenario, we've revised the expectation for the year, which now ranges from 21%-25%.

Finally, we'll talk about capital and IoC. Tier 1 capital ratio grew 34 bps to 12.9%, primarily benefited by the cumulative profit for the period. The provisions amounts for interest on equity accumulated in the first half of the year, posted a potential payout of 69% for the period. Our liquidity position also remains quite comfortable, with LCR at 178%. I'm going to finish up the presentation, before moving on to the Q&A session, I'd like to point out that the revisions we've made to our projections reflect the operating dynamics we've seen up to this point. We know that we have important challenges in translating our commitment into better results, therefore, you can be sure that we are committed to delivering a better performance every quarter. Now, I'll join Cassiano and Firetti for the Q&A session.

Thank you.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Well, we will now begin the Q&A session, and we have Octavio and Cassiano, our CFO. We also have the president of the Insurance Group, Ivan Gontijo, connected through by my voice. You can ask questions in Portuguese or English, and the answers will always be in Portuguese. You have an option for simultaneous interpreting of questions in English into Portuguese. The recording will be available on our Investor Relations website. Octavio, shall we begin?

Octávio de Lazari Júnior (CEO)

Yes. Let's keep the show going.

Carlos Firetti (Investor Relations Officer and Business Control Director)

The first question from Yuri Fernandes with JPMorgan.

Yuri Fernandes (Executive Director)

Thank you, Firetti, Cassiano, and Ivan. In the first place, I'd like to understand the trajectory of credit provisions for 2024. I think it's clear, Octavio mentioned in the presentation, that it would be close to the top of the guidance, and there is a positive message in NPL. I'd like to check if this is your opinion indeed, but my question is for 2024, there is an expected loss. As you grow origination, my doubt is whether if the growth of new originations will not increase ALL or credit provision. If we have a peak of NPL, I'd like to understand the bank's vision or opinion for the next year in terms of the credit provision curve. The second question regarding interest rates sensitivity. In the past, you would show sensitivity.

Every 100 basis points of Selic, it would be BRL 1.4 billion. I didn't see this this time. Do you still measure the sensitivity of a reduction in the Selic interest rates,

Octávio de Lazari Júnior (CEO)

Yuri? Good morning. Thank you for the questions. Yuri, as regards to provisions, it is a fact, the loan book growth was smaller because of a need to adjust for delinquency. The delinquency curves that you observed, well, we broke it down month by month, so as to have transparency of the NPL curve. There's a reduction in 15-90 days delinquency. Over 90-day NPL, it seems we reached a peak, because in recent months it's been stable. It's not increasing. Still, in July, we started having new loan originations, of course, very cautiously, particularly for middle to high-income clients, that give us a good, good spread, a good margin.

We resumed these operations. We have an important pipeline in the wholesale bank, a very interesting pipeline for the second half of the year. I believe that the country's economic conditions are signaling a good resumption in the second half and in 2024. Interest rates was reduced by 0.5% by the Brazilian Central Bank. It seems to all of us that the drop in interest rates is a given, perhaps more than we in the market initially expected. We were expecting 0.25. It seems that it's going to 0.50 points. Some people are talking about an even greater reduction.

The whole outlook seems to be more positive for the second half of 2023, and also for 2024, with all the reforms that are in the pipeline, everything that is being talked about in Brasília, with a good outlook for the country, GDP growth, et cetera. Now, of course, as we have new operations, we will need to provision for this. That's all correct, but lower provisions than the ones we have now, linked to delinquency, particularly in the end of this cycle, Yuri. Because, as you know, from D to E, G to F, et cetera, the, these skips are much greater, the percentages are a lot higher. We see reduction in credit provision. That will happen. That is happening, given the final cycle of this delinquency that we had. This will allow us to have new credit provisions for the new operations.

If we look at the credit provision in the quarter, it was BRL 12 billion, right, Firetti? BRL 12 billion. We're talking about BRL4 billion a month of credit provisions. We're going to adjust the provisions, given delays, particularly the longer delays, where the percentages are higher, and therefore, we can and should have new operations with a much lower credit provision, because we have better rating and better scores for these clients, so the percentage and the level of provision will be a lot smaller. As regards to your other question, about NII sensitivity. If I'm not mistaken, BRL 900 million for every 100 points. The sensitivity is BRL 900 million.

Yuri Fernandes (Executive Director)

Super clear. Thank you very much, and good luck with the results.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Yuri. Next question, from Bernardo Gutmann with XP.

Bernardo Guttmann (Sector Head TMT, Banks & Non-Bank Financials)

Good morning. Thank you for taking my two questions.

Number one, about portfolio growth. The starting point in the first quarter was low, close to the low part of the guidance, you would need to accelerate a lot to get close to the top of 5%. I'd like to understand, how do you intend to accelerate this? Do you have a lower appetite in more risky lines? What about corporate? Does it remain challenging? Where will the growth come from, specifically, in what line items? My second question has to do with the tax reform and the risks of the change, the proposals that are being discussed. What is your base, your base scenario, particularly regarding IoC? I'd like to have your opinion on this theme and how you evaluate the risks.

Octávio de Lazari Júnior (CEO)

Thank you, Bernardo, for the questions. It's a pleasure to have you with us.

Indeed, growth seems to be challenging, and we wanted to be transparent and fair with you, so it didn't make sense to us to maintain a guidance of 6.5%-9.5%, with a 1.2% growth in our portfolio in the first six months, given the whole outlook, the whole context that we talked about. Nevertheless, we have observed, and we have been seeing in the new productions that we've been doing, particularly, we've had portfolios with the best credit margins. We have 33 million account holders, as we mentioned. In addition to all of the people who, one way or another, have a contact with the bank, more than 70 million people. There is room for us to grow the book, particularly in those operations that are more profitable, with a higher spread, and thus.

We can accept a little more challenge in delinquency. In terms of individuals, growth will come from these portfolios. From consumer credit, payroll-deductible loans, real estate financing, as much as possible. That's for individuals. For legal entities, migrants, small companies are those that are suffering the most, that's where we have the biggest delinquency challenges we showed in the charts. Still, we have good clients there that we can operate with good secured loans, with bringing forward the receivables, there's room to grow these portfolios as well. In the wholesale bank, because of our strategic planning, we have a pipeline of the operations for the second half of the year, we have a very robust pipeline for second half pipeline, or second half of the year for large corporates and legal entities.

We see more momentum in the operations. This was in July, it's recent, but in July, we saw more momentum in fixed income and variable income deals. We had some follow-ons that were very successful, 2x, 3x, 4x the book, and with a price discount that was very small. There's great expectations. Many IPOs, they were in the draw. They are now coming back. We know, and you're right, the outlook is challenging, that's why we revised the guidance from 1-5. If we talk about the mid-guidance, we are talking about 3. We'll work to get at least the mid-range of the guidance, but always with an expectation that we might have a higher demand for loan operations.

Perhaps we can pursue more loans, so that we can get to the top range, the top of the range of the guidance. Regarding IoC, Bernardo, we practically have nothing. We haven't got the tax written yet. We know about the challenges. We have spoken about this with the government. We have spoken to them about the impacts they will have on us, on the banks, but also on the market as a whole. There will be a lot of discussion. There will be a lot of meetings, committees will be formed, so that we can address this in an adequate way to maintain the levels of profitability and results for our shareholders. It is a challenge, because to date, we haven't got anything formalized. Nothing was formalized regarding IoC, nothing was formally submitted regarding IoC.

Bernardo, you've probably observed this, the contact with the government, the interactions with the government, are very positive, both with Roberto Campos in the Central Bank and Minister of Finance, Haddad. We are trying to find a solution that is adequate for revolving credit, interest rates. Even Minister Haddad, yesterday, said that a working group was formed with the participation of the Central Bank, the Ministry of Finance, Febraban, the Federation of Banks, to find an adequate solution, that in 90 days, the solution. There will not be a single solution, because there's no easy solution for complex problems, but that within 90 days, they will present a solution that will at least address the situation of credit card interest rates, particularly, this portfolio, this credit card portfolio. Everybody complains and talks about interest rates of 400%.

This facilitated interaction with Brasília is important, so that we can have a high-level discussion, high-level interaction with them. This is what we've been observing. I think that this will bring about a good discussion. The points will be put on the table so that we can find the best solution in the tax reform, trying to maintain profitability and company's ability to grow.

Bernardo Guttmann (Sector Head TMT, Banks & Non-Bank Financials)

Very clear. Thank you very much, Lazari, and good luck with the results.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Bernardo. Our next question, Tito Labarta, Goldman Sachs. Go ahead with your question.

Tito Labarta (VP)

Hi, good morning. Thank you for the call and taking my question. A couple questions, I guess. Maybe one, starting on profitability. You know, in the past you've mentioned, you know, getting back to around an 18% ROE, maybe sometime end of next year. Just help us think about the, that potential evolution. You know, what would need to happen to, to get back to that 18% ROE? You know, thinking about some of the headwinds, that you're facing, at the bank... You know, you've talked a little bit about loan growth and credit quality, but just, you know, do you think you'll be able to grow your loan book sufficiently enough, asset quality improve enough, particularly in, in, in a scenario of lower rates, where you can get back to that 18% ROE?

Is it still feasible to think, you know, end of next year, or is it more of a longer-term target? That would be my first question. My second question, thinking about the competitive dynamics, you know, the lower income segment, because of credit quality issues and everything else, has suffered a bit more, and now you're going more into higher income segments. If you can help talk a little bit about how you see the, the different competitive dynamics and, and your advantages in, in between both lower income, and as you shift a little bit more into higher income, and some challenges that you could face there. Thank you.

Octávio de Lazari Júnior (CEO)

Thank you, Tito. Good morning. Thank you for your question. Tito,

Tito, you're quite right, and I fully understand your question, of course. We're not delivering the results we wished to deliver, and as you would expect, but we have a very well-defined path for us to gradually resume seeking those results. I think a series of factors contribute to this belief, to this work that we do, to go back to having the results we had in the past. I think the market ALM issue is absolutely solved in the third quarter, already with positive results, low, but already positive, and not negative as we had in 2022. For 2024, the scenario is quite positive in terms of market ALM.

As for credit, as you saw me answering earlier, we already have better control of delinquency that happened due to a series of factors, economic factors and situational issues, and the type of clients that we have, the profile of clients that are Bradesco clients. That, combined to a much better expectation that we see for the second half of the year and for 2024 as well. Regarding what the Brazilian economy can be, we opened 2023 with economists talking about a GDP growth of 0.8, Now we're talking about 2, maybe 2.2% of GDP increase for 2023. This will certainly carry a tail into 2024. 2024 already indicates to have a better scenario. Interest rates, it's low.

Yes, of course, it's from 375 to 325 is small, but it's the beginning of a reduction, and the reduction of interest rates seems to be already a given. The drop on Selic rate is already agreed in a percentage that is higher than we expected, from 25 basis points to 50 basis points, even higher maybe. That also gives us very good expectations for the future, for what's going to unfold. The expectations we have for the year 2024 seems much better. I think all of these variables combined give us the expectation that we will have a better second half of 2023, and a year 2024, also better, with lower delinquency, better growth of loan portfolios at a... with quality, with IPOs and follow-ons already coming in and being able to increase revenues. The Insurance Group has been going through a good phase.

In the second quarter, it made BRL 25 billion. In the half year, it's already been BRL 50 billion. We're working hard to close the year with a higher income, above BRL 100 billion. Of course, it had benefited from the indices, IGP-M and IPCA, but what we see is the operating growth of Bradesco Seguros in all segments, in their private pension plans, that already has a positive uptake. The auto sector and property and casualty also improving in reduction of claims. Even health, with all the challenges, despite the challenges of service costs, we're able to bring new customers, new companies to our portfolio. The Insurance company also has very good expectations.

We see a brand with relevant growth in their portfolio, with relevant growth in the funds under management. They are ranked as one of the best asset managers from the end of last year, the beginning of this year. Looking at the whole macroeconomic scenario and the work we've been developing here at the bank, we do see the possibility of us going back to the results we had in the past. It will be gradual, yes, but we're working to make it happen, and it certainly will. I think that's a little bit of what we expect for the second half of 2023 and for the year 2024.

As for the competitive scenario, especially on lower income, Tito, you know, inflation is a huge plague for the Brazilian population. It's the majority of our clients, the people who are 70% of Bradesco's clients. At this point, these people are more affected in their purchase, purchasing capacity and the payment capacity, and that translates into delinquency, as we see here clearly. As the country starts to get a better condition for GDP growth, we're seeing unemployment at lower levels. I believe that our competitive advantage and our comparative basis to continue to growth in this segment as well, despite all the competition, especially from digital banks that are competing with us. Some of them did well. They're doing good work. That's also important for the competitive scenario in Brazil.

I think we're well-positioned to also grow in that market with product placement, credit placement at the right rate and the right size of credit. It is a competitive scenario. It's big, quite large, but that we understand we're well-positioned to compete. As for higher income, we, at our last earnings conference call, I talked to you, and we said that our high-income vertical, as we also showed in today's presentation, we have total focus and a priority in the high-income vertical when we put everything under Guilherme, taking care of high income, and we've combined private, top-tier, prime, as well as our Agora brokerage. Digital high income, that's also evolving quite well.

Our bank in the United States, in Europe, we added capital, $230 billion of capital in the United States, to be able to grow on loan operations there as well. There's a lot of room for that. Now, we recently launched My Account last month, actually. My Account also gives us expectations, because everything is aligned under the same vertical, not to mention a brand, Bradesco Asset, that's also part of this process. I think that this vertical, with this quality, with this capacity that these businesses have to evolve during 2023 and 2024, they'll be consolidating and bring better profitability. Now, more recently, this week, yesterday or the day before, we were the winners, and we'll, we'll be the partners for Amazon here in Brazil to issue their credit for card.

This will be officially launched on the eighth, but they released the information yesterday. Bradesco will be the issuer of Amazon cards here, and they're a quality brand that is respected around the world. I believe we have very good expectations when we look at what was done in terms of the market ALM, the better control of delinquency, and the expectations for growth that we have for 2023 and 2024.

Juan Recalde (Equity Research Analyst)

Octavio, if I can add, in lower income, it's important to mention, as you said in the presentation as well, Next, the work that we did with Next, bring this to the bank. It's a synergy. We have two strong brands, Next and Bradesco, for this digital native client who's starting their banking journey, and that also contributes to access and competitiveness in the lower-income market.

Cassiano Scarpelli (CFO)

The strategy is, along with all the others that Octavio mentioned in our high-income vertical and our repositioning, that's focused on this customer-centric and principality.

Octávio de Lazari Júnior (CEO)

That's very important. In Bradesco alone, we opened 15,000 accounts on mobile every, every day. Every day, we're talking here about 300,000 accounts, and Next is no different. On Next, we open 4,000 accounts per day. 4 or 5 million clients that we have that are active on Next, that was incorporated into Bradesco, and it does not have any more all the costs it did, and it now becomes an expression for our heavy digital user clients to have a digital bank to call theirs, even if they don't have if, if they don't like Bradesco particularly, they have a digital bank available with all products and services that Bradesco can offer.

With that face, with that feel, the journey, that is of, of Next. In addition to the digital bank, that is a completely separate bank with very important partnerships. They work with partnerships in credit cards, payment accounts, and they have a partnership with Uber. There's more than 1 million clients that are Uber partners, Uber drivers, who already have digital accounts. This scenario shows you a little bit of our activities on low income as well.

Tito Labarta (VP)

Okay, thank you.

Octávio de Lazari Júnior (CEO)

Thank you, Tito.

Cassiano Scarpelli (CFO)

Thank you.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Tito.

Our next question, Daniel Vaz, Credit Suisse. Daniel, you may go ahead, please.

Daniel, Daniel, Daniel?

Daniel, can you hear us?

Daniel Vaz (Equity Research Associate)

Sorry, my microphone was muted. Thank you, Firetti. Good morning, Octavio, everyone. Thank you for this opportunity. I'd like to talk a little bit about asset quality. We saw here in the presentation that the new vintages already take 53% of the loan portfolio, individual concessions are already 58%. We can say that there's a level of a portfolio with a new risk profile, but NPL creation is stable at higher levels. Loss, when we look at what was expected on IFRS for the portfolio, increased. I'd like to understand from you how to read these indicators correctly vis-a-vis an expectation of portfolio increase. Is it possible to increase the portfolio without these indicators rising, or at least remaining stable? What would be the new mixed or new risk profile?

If you must make any additional correction on origination so that these indicators drop, considering the portfolio increase you're aiming for next year. I'd like to explore this with you, and if you can help us read this correctly.

Octávio de Lazari Júnior (CEO)

Hello, Daniel. Good morning. Thank you for your question. It's a pleasure to have you here with us. Indeed, you're right, but that's what I said. At this end... the end of this cycle, when you carry over more provision, that skipping of letters, when it goes from 10 to 30, to 50, to 70, to 100, the provision volume end up higher here. Although the credit provision volume for new operations is not as high, because they are operations that come at a better rating or score.

That balances our capacity to continue to grow, increasing our credit and accelerating as we expect and want to accelerate, without having an increase on credit provision expenses. We're running at 3.5-4 per month, but a majority of these are the operations of the older vintages that are closing their formation cycle in BR GAAP. Now, unexpected losses, that's the concept that we use, and that's why in every presentation we show this to you, and this will be in force now in 2025 in January 2025. We're always looking at that and showing it to you through the expected loss concept, because that's how we're able to better see it.

A better origination of a better portfolio with clients with better ratings and scores, as you already mentioned, already gives us a good dimension of the work that we're seeking to do to increase our credit portfolio. On the other hand, it also benefits those operations who have bigger spreads. That means they can take a little bit more of delinquency, but on the other hand, bring credit, higher credit revenues. I think this balance that we're trying to achieve and implement over the second half of the year and 2024, will allow us to get the portfolio to... the credit portfolio to grow, because there will be a demand for credit.

This seems pretty certain with a reduction of interest rates and increase on the GDP and employment going down, will allow us to grow our loan portfolio without increasing or maybe even reducing the credit provision expenses that we see for the year 2023, because it is still carrying over expenses with delinquency, provisions of ALL.

Carlos Firetti (Investor Relations Officer and Business Control Director)

It's also worth mentioning that NPL formation has already given clear indications of stability in the last quarter. We believe it will begin to drop. The NPL flow to formation also goes through this negotiation process and renegotiation with the client that also delays the natural flow from those older vintages, that have already given some indication of deterioration. I believe this cycle is flowing. We believe that soon we'll be able to get better news and information as well.

Daniel Vaz (Equity Research Associate)

Thank you.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you Daniel.

Next question from Rafael Frade with Citigroup. Frade, go ahead.

Rafael Frade (Equity Research Director)

... I have two questions. One, building on the comment made by Firetti regarding renegotiation. I don't know, maybe I overlooked this in the previous quarter, but I believe that you negotiated very little in portfolios that were less than 90 days past due. In this quarter, you mentioned almost 50% of the renegotiation came in the portfolio of less than 90 day past due. I'd like to know, when did this change happen? Please elaborate on the rationale for this change. How do you see this renegotiation that is somewhat earlier? The second question regarding the insurance operation, you posted a relevant improvement in the operation this quarter and in the guidance for the year. I also noticed a reversal of provisions, specifically in the line item, other provisions in life and pensions.

I'd like to know, does this help explain the improvement? I'd like to understand this reduction in provisions and if this helps explain the improvement in the yearly guidance, and perhaps, how this will be in 2024, because you're not gonna have this kind of reversal.

Octávio de Lazari Júnior (CEO)

Thank you, Rafael. Good morning. Thank you for joining us. Well, Rafael, regarding the NPL that Firetti mentioned, we have always worked with the negotiation with clients. Comparatively, can I recover? How much can I recover in that past due portfolio? Is it best to sell this portfolio because I can get a better price for it? You will remember that given the interest rates and the interest rates hike, sale of portfolios became more and more difficult because the prices were no longer attractive.

This indeed happened, and we did not sell a lot of portfolios because it didn't make business sense to us. If we would get a better price, if we renegotiated. In credit recovery, you know, you can bring more money in and have better result. Indeed, we focus more on renegotiations, collecting from clients, particularly in, in loans that are not very, very much past due. When it's long past due, we can renegotiate easier, and more easily. The fact that we are now selling the portfolios because the prices were not attractive, and all along, we, we said that we would make a comparison between the advantages of selling the portfolio and what I can collect from business internally. This is a business that has to be profitable or else it does not make sense.

We are focused more on recovering the loans from our clients, and this is what led to this effect that you yourself mentioned. In addition to improving the modeling, predictive modeling, to understand and identify the patients that have more ability to pay, and so we can recover, their, their, their loan. This is about NPL. Regarding the Insurance company, Ivan Gontijo, the CEO of the Insurance Group, is here. Ivan, would you like to comment on Rafael's question?

Ivan Gontijo (CEO of Insurance Group)

Of course, Octavio, thank you. Rafael, thank you for the question. Based on your question, you mentioned the improvement of our guidance and the robust balance sheet of the Insurance Group. Before addressing directly your question, I would like to highlight, and based on what you said, our sustainable growth.

Better, better revenue that is noteworthy, given the joint integrated work of co-management among the companies and the several departments of the Insurance Group. We are market leaders in insurance, pension plans, and capitalization bonds. The better result of our operations, very robust sales, BRL51 billion in the first half. A better claims ratio, better mix of products with new products, more tailored to the regions, a better process aiming to serve our clients better, and particularly an improvement of our fundamentals. Focusing on the people also of the Insurance Group. So to your question, and the technical provision line item that you mentioned, well, these are formed in addition to the specific contract reserves to face the future commitments of the Insurance Group. Always considering the economic assumptions and the actuarial assumptions, reflecting the best estimate for the portfolios.

To give you an idea, the behavior of IGP-M influences this line item that you mentioned, this line item of provisions. In fact, we always form our provisions based on the best market practices, and particularly considering IFRS 17 and the standards in effect. Bradesco Seguros or the Insurance Group, was established about 40 years ago, and we are always focused on the sustainability of the business and aiming to better serve our clients and the perennial behavior of the insurance operation.

...and we call special attention-

I'd like to draw your attention to the fact that in the end of July, the Insurance Group posted, BRL 340 billion, and I stress billion, BRLs of provisions. This gives us a lot of comfort, and it gives us peace of mind to continue in this path that the Bradesco organization decided to start about 40 years, about 40 years ago, and that will continue.

Rafael Frade (Equity Research Director)

Thank you, Ivan.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Frade. Next question, by Mario Pierry with Bank of America. Mario, please go ahead.

Mario Pierry (Managing Director)

Good morning, folks. Thank you for the opportunity. I have two questions. Number one, looking at the new guidance of expenses, it is implicit that expenses will remain flat in the second half compared to the first half. Any new measures taken by the bank to contain expenses? Where do you see this improvement in the guidance? Second question, I'd like you to elaborate, because you mentioned that you're going to be issuing credit cards for Amazon, and I'd like to understand the economics of this project, if the credit risk is on you, and if you could elaborate on that, it would be very appreciated. Thank you.

Octávio de Lazari Júnior (CEO)

Good morning, Mario, and thank you for the first question.

The second question, I won't be able to elaborate a lot, but I'll tell you whatever I can. Regarding the guidance of expenses, I would like Cassiano to speak a little bit about this, and then I'll add if necessary.

Cassiano Scarpelli (CFO)

Thank you, Mario, for the question. Good morning. The guidance of expenses, let's remember what we have been systematically reporting to the market. It means a strong cost control of the organization, and this continues. Expense lines, both administrative expenses and personnel expenses, that's all under control. Because of the work that we've been doing. This has to do with our cost to serve, so that we can have a good control of expenses. Even considering our collective labor agreement in September, still, we have expenses under control.

Operating expenses are the ones that are making some difference, but in the second half, they are coming down to the normal range. We are convinced that when we change the guidance, we are, we are right in the middle of the, of the guidance. To know... We, we'll know that our expenses are always under control. We don't see a lot of variation. We understand that we are on the right path of maintaining expenses flat or stable in the second half of the year.

Octávio de Lazari Júnior (CEO)

Yes, Mario, let me add to what Cassiano said. Of course, we are continuously making adjustments in our network of branches. You will see that, well, it's not that we closed down branches, but we changed the branches.

Either we merged some that were very physically close, or we turned a conventional branch that has a lot more costs, guards, security guards, revolving doors, et cetera. We turned them into a branch that has a lot less fixed costs and fixed expenses. Well, since last year, this work has been starting. In 2021, 2022, we started doing that. In 2023, in the second half, there's about 100 or 150 branches that will be transformed. We'll continue on that path. There is also the progress of Bradesco Expresso with 41,000 points. We can ensure our presence in the cities, but it's all based on variable cost, so we don't have that problem of cost increase. If we have a cost increase, it's because we have a much higher additional revenue flowing in.

This gives us a lot of comfort, a lot of peace of mind, to adapt the expense guidance and to say that our expenses should be in the middle, the mid-range of the guidance. As for the Amazon card, Mario, you will forgive me, but we cannot say anything. What I can tell you is that the credit risk is ours, but with total autonomy of Bradesco. Now, the other aspects of the business, you will forgive me, but this will be launched on August 8th, 2023 with the presence of the Amazon board and our Bradesco people as well. The launch will be on August 8th, 2023 and during that event, more details will be disclosed. I shouldn't be talking more about that. On the August 8th, 2023, we'll be able to speak more about this.

They will present all the economics, and if you want a meeting, Rocha, the VP of Cards, can meet with you, can give you all of the information, as long or, or as soon as we have disclosed the business with Amazon, which is our partner in this, this business. They're a wonderful partner. This is a wonderful partnership. We're very happy to have them as partners in Brazil for the issuance of cards. Other than that, I cannot disclose any more. Thank you very much.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Mario, for your questions. Next, from Juan Recalde from Scotiabank. Go ahead.

Juan? Juan? Pass that to Thiago, depois a gente volta no Juan. Bom, nós vamos pra próxima pergunta.

Okay, we'll go to the next question, and then if Juan reconnects, we'll go back to him. Next question, Thiago Batista, UBS. Thiago, please go ahead.

Thiago Batista (Research Analyst)

Hello, guys. I have two questions. The first, about Desenrola. There's been one month of the program. I'd like to understand a little bit of the impacts that this second phase of Desenrola will have on Bradesco, if it's going to lead to a drop of NPL, or if you can give us a view of the impact you expect to see, both in the bank and overall. My second question, also in terms of regulation, in July, we had that change in the risk factor. The bank has already impact improved since the fourth quarter of last year. How do you see the impact of this capital regulation change?

How much can it add, 50 basis points, 100? The magnitude, if you can give us after this new regulation.

Octávio de Lazari Júnior (CEO)

Thiago, hello, it's a pleasure to have you here. About Desenrola, the operations are of low amounts. We're talking about the second phase, Thiago, where the person still has to negotiate directly with their creditor, either the bank or the store, whatever it is. What we've seen is that there has been an increase in renegotiation operations of that, which we already had, around 8%-9%, the daily volume of renegotiations. That's the first 12, 13 days that it since it started. In this st phase, there was an exclusion of 620,000 default accounts of up to BRL 100.

Now, for the client to normally pay for their operations so that they go, don't go back into the status. The amounts are low, so it's not going to really affect NPL that much, because these are operations that have already been written off. It doesn't really change anything so much at this first moment and in this scenario. What we can see, Thiago, the people that we were trying to reach in order to collect, it was impossible, and we couldn't. With Desenrola, at least they went there and clicked on the website. They showed up to try to see the conditions they have, and then we were able to renegotiate or get something back. It's small. It doesn't really change NPL that much. For capital base, Basel, as you said, we have been improving.

This quarter is a little bit better. Now we have this new legislation that started in July from the central bank. The impact will be from 0.20 bps-30 bps, so 20 bps-30 bps. It was implemented now on July 1st. The initial impact is that it will be from 20 bps-30 bps.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Thiago. Let's go back to Juan Ricalde from Scotiabank.

Go ahead.

Juan Recalde (Equity Research Analyst)

Hi, can you hear me now?

Carlos Firetti (Investor Relations Officer and Business Control Director)

Yeah.

Octávio de Lazari Júnior (CEO)

Yeah.

Juan Recalde (Equity Research Analyst)

Perfect. Okay, apologies for that, and thank you for the opportunity to ask questions. My question is related to the fees and commissions. I see that you reiterated the guidance of a growth of 2%-6%, in the first half, the change was year-over-year, the change was -0.5%. I was wondering if you can talk about what will drive the stronger fee income in the second half, where it's going to be card income, asset management, checking accounts, or any color on that would be helpful.

Octávio de Lazari Júnior (CEO)

Okay, Juan, thank you for your question. Good morning. Juan, a gente está um pouco abaixo-

Juan, we're below the guidance in terms of fees, and this is a business that really struggles with regulation, governmental decisions, the central bank's decisions. There's some asymmetry in that sense, and sometimes a lot of dissemination on social media for fees to be canceled because there's the essential package by the central bank. There's always a lot of offenders for us to grow. In order to grow in fees, there's no other way other than growing in volume, increasing client base, strongly increase the bank's client base, and that's what we've been doing. I talked to, I mentioned briefly about the grow in accounts open on mobile, even the accounts on Next, there's 4,000 accounts per day.

In all these cases, seeking to generate benefit to the client so that they see that the fee is not just an expense that they have, but that the fee will bring them additional benefits. They pay the fee, for example, to have a subscription of a streaming channel or maybe Disney Channel, or Disney Plus, rather, and some partnerships that we've-

making to make this fee more attractive for the client, so that they can perceive not only the work behind and the quality of the services provided by the bank, but also additional benefits to our clients so that we can retain them. That's a good point. Bradesco Asset has been doing a good job increasing their portfolio and the assets managed there with new funds, with performance rates. The administration fees, due to the reduction of interest rates in the past, administration fees went down, but once interest rates went up, administration fees did not increase, and they won't increase. You need to work with other funds that include a performance fee, because that's how you can get additional revenue, Bradesco Asset has been developing good work in that sense with credit funds that stand out in the market.

To summarize, one, I tell you that we need to gain scale. We need to get more clients, more products and services, to be able to add products and services that have a high perception of value for our customers, and that's how we can think about fees. It is a challenging guidance, but we understand that considering this greater volume, the growth on client base and fees that come from other areas in the bank, we understand it is possible for us to seek at least a lower level of the guidance in fee revenue.

Cassiano Scarpelli (CFO)

Another important point that you mentioned earlier, Octavio, in the market, in the capital market operations, we understand there's strong attraction in that in the second half of the year, and that has been contributing to our fee income. July was very good.

We also need to look at high income, cards spent has also been working well. Tivio Capital, that's an association that we formed recently with Banco do Brasil, that adds that other work that you mentioned about BRAM. It's all of these aspects, and we cannot forget an important point, one, which is credit. If the credits are retracted, the fee revenue also retracts. Now as what Octavio said, now we'll be more comfortable to seek at least a lower level of the guidance. Thank you, Juan.

Juan Recalde (Equity Research Analyst)

Thank you for the comments.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Juan. Now, we still have a very long list of questions. As much as possible, please limit yourselves to just one question. Next question from Eduardo Rosman with BTG.

Eduardo Rosman (Senior Analyst)

Hello, good morning. Well, actually, I'd like to ask a follow-up question regarding the Insurance Group. I believe the result was very solid. It surprised positively everyone. We were expecting weaker results, albeit with some improvement. It was not 100% clear to me, because there was a big difference quarter-on-quarter. In that leap, is it the new bottom line for the Insurance Group looking forward, or could we expect more improvement? I, I just would like to have a clearer notion regarding that.

Octávio de Lazari Júnior (CEO)

Ivan, can you answer Eduardo's question, just to confirm your previous answer regarding additional provisions, as you mentioned, and then I will add something.

Ivan Gontijo (CEO of Insurance Group)

Thank you, Octavio, and thank you, Eduardo, for the question. Your question, unlike Rafael's question, is more geared to the future, and I would like to say that we changed our guidance from 21%-25%, but we did it under a lot of thought, and this is based on the fact that in the first half, we achieved the mark of 21.5%. So it couldn't be different for the second half, particularly if we consider the improvement in the commercialization part. We made some changes in the commercial department of the Insurance Group in the beginning of this year, and our earnings clearly show that, BRL 51 billion, as I mentioned.

Actually, in the second half, we expect to reap the effects and the fruits of this commercial operation. We will be working on the bank insurance in a differentiated fashion. And we believe that in the second half, we're going to reap even more fruit. In addition, the increment of the commercial channel, that now we'll work together with the network channel, but separately also, with the strategy that we developed. This will happen in the ecosystem of each company. This was implemented in the first half, and again, we can see the positive effect, and it will continue. This project, which we call Project Bravo, bringing the market channel to the inside of the companies, drive an improvement in performance and will make performance improve even further in the second half of the year.

Businesses will evolve, given the sales to companies. Looking, we, we are thinking, we're considering a higher NII and its continuity in the second half. We will maintain the, the, the loss ratio, the claims ratio at this level or even lower, and all of these are positive effects. Together with the product mix and expansion of the margin, all of that gives us comfort, and now I address your question. This gives us comfort to increase the guidance, and it gives us the hope that we will achieve definitely, that for sure, even better results in the second half. I'm not sure I answered your question.

Octávio de Lazari Júnior (CEO)

Rosman, let me just add to what Ivan said.

The sales, the revenue of the Insurance Group will be greater than BRL 100 billion. This is the result of the work that the Insurance Group has been doing, led by Ivan. We had an important reduction in the claims ratio. You know that every percentage point of reduction in claims ratio is fundamental. There was a positive impact. The IGP-M was negative. The increase in sales. To give you an idea, Ivan did a work for the development of digital journeys. This year we'll have more than 2 million items sent in mobile devices, just of insurances.

Of course, our wish, and we will work to continue to maintain this kind of revenue for the coming years in the Insurance company, because of this growth and because of the independence of each one of the verticals of the Insurance Group, as mentioned by Ivan.

Ivan Gontijo (CEO of Insurance Group)

Thank you, Rosman. If you'll allow me, Octavio and Rosman, the fundamentals of the Insurance Group, if you look at our balance sheet, give us comfort to have a very objective, prospective look of the future, very positive outlook for the future.

Eduardo Rosman (Senior Analyst)

Thank you.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Rosman. Next question from Arnon Shirazi with Santander. Arnon, go ahead. Arnon, are you there? We do not hear you. Okay, let's move to the next. Renato Meloni from Autonomous.

Hello.

Unfortunately, the sound is not audible. We apologize. We apologize, but Renato Meloni's sound is not audible. I'm sorry, Renato, we cannot hear you at all. Your voice was very metallic. Renato, are you there? Okay, let's go to Pedro Leduc, and we'll come back to Renato later, okay? Next question from Pedro Leduc with Itaú.

Pedro Leduc (Equity Research Analyst)

Thank you, Firetti. Good morning, everyone. A quick question regarding the guidance review for NII. 7-11, now 6-10, and since this guidance was disclosed, the CDI curve moved in a favorable position regarding Market NII, and still this total line was reviewed down. I think it has to do with the portfolio. So what do you expect regarding Client NII? Because it seems that considering a drop in CDI, still you revised this down.

It seems that there was a deterioration in client NIMs for the coming quarters. Is this a fair statement, and how will this evolve for 2024?

Cassiano Scarpelli (CFO)

Okay, Pedro, thank you for the question. As we have been saying, the Market NII, yes, it has that constant gradual growth towards the second half, and the main offender for changing the guidance continues to be the loan book. We worked strongly to hold back loans in the first half. We reviewed all of our policies, and now in June, July, and August, this is changing. We understand that we can accelerate, but not as it was before. It would not be feasible. We recognize that the loan book growth less than the previous guidance. The market portfolio is recovering.

The Market NII is helping us in this indicator, it is not enough for us to reach the total of that first guidance. Credit, still at an important level, we are now opening short-term portfolios or loans for individuals, where we believe we have a higher spread, and we can hold a lower credit provision. This is what we are doing. We are doing it, cautiously and gradually. This mix and the market improvement, and when we ended the balance sheet, that interest rate reduction was not guaranteed. This is coming, and an interesting prospective cycle is coming up, particularly for 2024. Undoubtedly, credit and credit granting will guide us in the NII guidance.

Carlos Firetti (Investor Relations Officer and Business Control Director)

The Market NII, as Cassiano mentioned, tends to recover. I think this is a given it will improve in the second half of the year, and hopefully will end at a positive level in the second half, slightly positive, perhaps even in the next quarter. It will continue to gradually improve along 2024, and I think that the resumption of the loan book, as Cassiano mentioned, will be the biggest driver looking forward.

Pedro Leduc (Equity Research Analyst)

Excellent.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you. Now we'll go back to Arnon Shirazi from Santander. Arnon, Arnon, can you hear me? Arnon, still not connected. We'll turn to Renato Milani from Autonomous. Renato, can you hear us?

Renato Meloni (Equity Research Analyst)

Good morning. Is it better now?

Carlos Firetti (Investor Relations Officer and Business Control Director)

Yes, much better.

Renato Meloni (Equity Research Analyst)

Excellent. I apologize. I'd like to talk about your view.

When you talk about the recovery for the coming quarters, if you look at Selic rate for next year with the offer of 9%, can we talk at a level of 18%, especially the competitive view that's very different from the past?

Octávio de Lazari Júnior (CEO)

Thank you for your question, Renato. Renato, we understand that this moment of a reduction of ROE that occurred is a situational aspect, not structural. Of course, that the change in the market and changing people's consumption habits, has a structural aspect that the bank needs to adapt to, and that's what we've been doing since the pandemic. I remembered in the last meeting that we had, in the last meeting, that before the pandemic, every day, the bank would make 1 million authentications at the teller, and now it's 90,000.

We went from 1 million every day to under 100,000 to 90,000 authentications at the teller. There's a change in the market in terms of relationship with the customers and people's consuming habits that influence how they consume products and services. That requires you to make structural changes that are essential, as I said, the change in the types of our branches, the reduction in size, the adoption of business units for advisory and service to our clients. No longer a branch for back office service or account payment or bill payment. Many processes that we've been developing in the bank with negative... Or as you saw last week, some negotiations we have with some partners, with quantum computing.

The structural change we had on Next, that is no longer an expense line or rather a strong investment line, but becoming or bringing it into the bank so that it can bring the expense close to zero and make the most of all the synergies between Next and Bradesco, preserving for the client, especially lower income or heavy user clients or younger clients, to have an option of having a digital bank for themselves through Next, which has a different visual look than Bradesco, the way that they want. There are, in fact, structural changes that may be, that must be and are being implemented. A good trigger for that was what ended up happening with the pandemic that changed completely these relationships, as well as the entry of new competent competitors that require us to go through substantial change in relationship.

As I showed you, 98% of relationships with clients with us go through the mobile service. These are structural changes that we have been evolving and developing, creating through new methodologies for the development of systems, through partners, the agile villas squads, and that is structural, and we have been implementing it quite well. Now, in terms of ROE, as you said, well, that was a situation that happened in terms of market ALM and delinquency that affected us. Market ALM, I believe, as Firetti said, is done. It's solved. The third quarter, fourth quarter, it will be positive again, 2024, with much better expectations in terms of results, interest rates going down. We have portfolios formed with better rates, that help improves the condition.

It's hard to pinpoint when, Renato, but we've been working, we are working quarter-over-quarter to deliver an ROE at the levels we delivered in the past. You can be sure of that, and we will continue to pursue the resumption of that ROE that we used to deliver up to two years ago.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Renato. Now we'll turn to Carlos Gomez from HSBC. You may go ahead.

Carlos Gomez (Head of LatAm Financial Institutions)

Hello, thank you very much for taking my question. I wanted to ask about the tax rate. It was particularly low this quarter, 8%. What do you expect for the rest of the year, and what should we expect as a normalized tax rate without any changes to interest on capital, of course?

Carlos Firetti (Investor Relations Officer and Business Control Director)

Carlos, the tax rate is at a very low level due to the fact that the earnings level is lower, so the effect of the IoC leads this rate to be at a lower level. In addition, as you have been seeing, there's also greater participation of the Insurance company in the total of the Bank's results. The Insurance company has a lower rate, so with base, based on all that, we would say that a range, a reasonable range for tax rates would be from 10%-14%.

Carlos Gomez (Head of LatAm Financial Institutions)

Thank you. That's for this year. What, what about, you know, when things rise, and you have recovered? Thank you.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Okay. Looking forward, as the results increase, take on the maintenance of the structure we have today with IoC, the IoC tax shield will cut less from the tax, so the tax rate will normally increase. I'd say that when we go back to the levels of ROE that we had in the past, our rate will also go back to the levels we had in the past.

Carlos Gomez (Head of LatAm Financial Institutions)

Thank you.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Carlos. Bom, agora nós temos a pergunta...

Well then, now we have a question by Nicholas Riva with Bank of America. Nicholas, go ahead.

Nicolas Riva (Director)

Thank you very much for the chance to, to ask questions. I have a question on your, on your Tier 1 capital. I see about BRL 14 billion of Tier 1 capital on the balance sheet. I understand this has all been raised in the domestic market. I wanted to ask, what are the important call dates for this Tier 1 capital, and what's your plan if you plan to refinance this as well in, in the local market? I do not recall any local Tier 1 issuance this year after the, the Americanas event. And then in general, how do you see your, your funding needs, your dollar funding needs?

I think historically you have shown a preference more to issue locally rather than issuing dollars and hedge back to reais. If you can give us kind of your, your updated thoughts in terms of dollar funding needs. Thanks very much.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Okay. Thank you, Nicholas.

Thank you, Nicholas. Well, as regards debt and capital Tier 1 to one capital instruments, we have about 1.5%. Which is our limit. To us, it is the efficient limit. We do not need to have any additional issuances. We had an opportunity to issue the whole AT1 in the local market here at costs and with a structure that we consider to be very adequate in BRL, which to us brings a lot of efficiency in terms of not requiring hedge. We, we do not have any big core event coming up. This limit has been used, and we will maintain these issuances here in the local market. We do not see any room for new issuances, particularly in the international market via AT1.

Now, as for debt instruments or dollar funding needs, I will turn the floor to Cassiano, 'cause he knows a lot about this.

Cassiano Scarpelli (CFO)

Thank you, Nicholas. At the international level, at this point, we don't see the right conditions. Again, it all depends on market conditions. We still have a high CDAs, we. and the interest rates abroad. When we compare local and international issuance, local issuance, considering the high Selic rate, is still better than international conditions, but we look at this every single day. If we see an opportunity that is beneficial to that will benefit us with the international funding, we will consider that. Right now-

Nicolas Riva (Director)

Thanks very much.

Cassiano Scarpelli (CFO)

the local conditions are better.

Carlos Firetti (Investor Relations Officer and Business Control Director)

Thank you, Nicholas.

Thank you, Nicholas. With that, we are ending the Q&A session. Questions that were not answered during this call will be answered by our Investor Relations team. Before I turn the floor to Otavio for his final statements, I'd like to remind you that in our IR website, you will find this presentation, as well as all of the material related to our earnings release.

Octavio, thank you for the presentation.

Octávio de Lazari Júnior (CEO)

Thank you, Firetti. Thank you, Cassiano, and thank all of you in particular, for joining us, for your participation and attention. I hope that we have answered all of your questions. I'd like to thank also Ivan Gontijo, who joined us online. Hopefully, we have answered all of your questions, but if you have any pending questions, if you need more detail on any topic whatsoever, please get in touch with us. Firetti and our whole IR team and those on it will be available to speak with you. Thank you very much for your attention. Enjoy your weekend, and have a great rest of day.