Banco Bradesco - Q4 2023
February 7, 2024
Transcript
Speaker 7
Mais de 70 milhões de brasileiros escolhem diariamente contar com o Bradesco. E nós escolhemos ser o parceiro financeiro. Escolhemos ser a solidez e a evolução nesse mundo que não cansa de se transformar. Movendo a inovação com a segurança de quem avança para ser a contribuição exata que os nossos clientes precisam. Nos centros financeiros, no campo, nas águas da Amazônia, nas cores da nossa cultura, em cada canto e movimento deste país, estamos presentes com ética, respeito e diversidade, prontos para criar oportunidades para a realização das pessoas, impulsionando o desenvolvimento sustentável de empresas e sociedade, seja através do crédito, da assessoria, do atendimento, da segurança, da sustentabilidade, da educação ou da transformação digital. Estamos presentes no que faz a diferença para as pessoas, com a credibilidade de quem abre portas para a evolução há mais de 80 anos. Somos Bradesco.
Marcelo Noronha (CEO)
Bom dia, pessoal! Eu sou o Marcelo Noronha.
Eu sou Marcelo Noronha. I'm here live, speaking from Cidade de Deus. It's 10:32 A.M., to present the numbers for the full year of 2023 and of Q4 2023. After that, we will have a second topic, our guidance for 2024. You probably read at our book and our guidance for 2024. To us, 2023 was a challenging year. It's not the result we would have loved to deliver to you. The guidance of 2024 falls short a bit, but to us, 2024 will be a year of transition, of transformation at Bradesco. Lastly, the third topic is our strategic plan. Of course, here I'm bringing the executive summary of the plan that we put together in the last 60 days. I will present that to all of you, and then we'll be able to debate that during the Q&A.
I will be available to all investors for us to talk later. We already have some meetings scheduled for buy-side and sell-side investors, so we can speak about our plans for the next five years in more detail, from 2024 to 2028. So now I have the challenge of presenting, in the same time that we present our income statement of Q4 2023, to speak about full year results, the guidance, and the strategic plan in an executive summary, as I mentioned. So I'll try to do this as quickly as possible so we can have our Q&A. Let's start with our numbers, our results. As you can see, we have an additional number in lighter color. This was the end of the quarter with BRL 4.3 billion. Here, we had an ALL reinforcement for two cases in the wholesale bank.
We were a little more conservative in these two cases. We readjust the ratings a little, and that's why our recurring net income was BRL 2.9 billion. In addition, we had two major non-recurring events, as you can see here in this last topic, here on, on the right of the screen. The provision for the restructuring that we had, and the contingent liabilities. I think we should comment on some positive aspects of our income statement. Wholesale ALL was reinforced in the two cases that I mentioned, and this is relevant. We have a comfortable coverage level for the wholesale bank this year. We had a reduction of ALL in mass retail, just like we're going to show you a reduction in all delinquency ratios. We control the higher delinquency that we had for SMEs and mass retail. Credit spread is accelerating.
I will show you that this happened for individuals and SMEs. We had market NII recovering, total NPL dropping 50 basis points. And here, there's another positive point which differentiates Bradesco in our positioning. We are a group that has a bank business and also the largest insurance group in Latin America. Our insurance groups went to a, a higher level with an ROAE close to 25% in 2023. Our operating expenses were within the guidance, and I'll detail more on our expenses. So moving forward, like I said, we had an inflection of the curve for both individuals and SMEs. Individuals growing 1.3%, despite a reduction we had in our appetite for risk in 2022, 2023, and also a change of level for SMEs, posting a 1.5% growth quarter-on-quarter.
And we had the write-off of a well-known case, which happened in the end of 2022, in Q4 of 2022. We should call your attention to our average daily production. In the second half, it grew because we changed our credit models and credit policy for individuals, which became more restrictive than in the past. Yes, it's true, but we've had new controlled vintages. The same goes for SMEs. We tested models in April. We implemented the new models as of September, and we started to grow again in the segment of small and mid-sized companies, again, with more controlled credit policies. So we won't have any issues in the new vintages, which are performing really well. As I mentioned, delinquency ratio. We can see all curves of NPL dropping, some for the second consecutive quarter, so we have this portfolio under control.
Our coverage ratio grew 265% and NPL creation decreasing. I mentioned these two cases we had in the wholesale bank, with total provisions of BRL 10.5 billion in Q4 2023. Moving forward, this is our net interest income, NII. We reduced our risk appetite, as I mentioned, in the end of 2022 and throughout 2023. And of course, we stopped having new productions for a while. We resumed that more towards the end of the year and continued to grow. We will definitely grow, but step by step, with good vintages, both in mass retail and in SMEs. In terms of personal credit, working capital, and other lines that we've been growing. And our market NII is a highlight, posting growth in Q4, BRL 0.7 billion, seeing good expectations for 2024.
Fee and commission income, we note that this is a line item that is under pressure. I think the whole market is talking about that, particularly in card income. We posted 3.4% growth, quarter-on-quarter. However, we knew that annual payments for card over time were compromised, because we had a structural change here in the market and with free cards. So that impacted card income, but our loan operations grew quite well, as you can see in Q4, because of this resumption that I mentioned. We grew in consortium management and in checking account. We have challenges because of payment accounts, but we continued to work on that to offer better packages. We have a good expectation for capital markets for 2025. As for our operating expenses, I think I should make three comments here.
Number one, in 2022, looking at the line item, other operating expenses, we posted a reduction in 2022. So that's a baseline for comparison in 2023. So it's a lower baseline. Therefore, we have a greater variation, and we balanced this line item of other operating expenses in 2024, bringing them back to the levels of 2019, 2020. So there's some fluctuation in the ratios. Our personnel expenses, looking at the last indicator, we see a 6.4% increase, despite the collective bargaining agreement, which meant a 7% salary increase, and administrative expenses, we grew 2.5% below inflation. We had a reduction in customer service points, as you can see on this slide. You can see this on the screen and in our earnings release.
I spoke about the insurance group, and I think that this is a big highlight in our results. We had exceptional results along 2023, growing about 21%, 21.1%, 2023 over 2022. Net income growing significantly, almost 25% ROAE, with revenues greater than BRL 100 billion. The insurance group went to a whole new level. Now, regarding our IOC, we declared BRL 11.3, as you can see in the graph, and our Basel Tier 1 grew eighty-one basis points compared to Q4 2022, reaching 13.2%, as you can see. Now, done with that, let's move to the guidance. The comment here is that we have an expected growth for our loan portfolio of 7%-11%. In the middle point, we're talking about 9%, slightly above what the market should expect.
Yes, the expectation is around 8%. Why is it this?
Cassiano Scarpelli (EVP and CFO)
... The NII does not follow the loan book, because of the average portfolio effect will grow month by month, step by step. And naturally, we will have a total NII, depending on the mix, we should also improve our mix, but above the average portfolio. And we are going to see improvements in 2025. Fee income, 2%-6%, suffering some pressure, as I mentioned. Operating expenses, that's not the best ratio. We have an effect of other revenues and expenses, but I think that we are doing quite well regarding personnel and administrative expenses. We'll speak about our goal in terms of operating efficiency target, so the expected growth is 5%-9%. Regarding the insurance group, we're expecting growth from 4%-8%. The natural question from you is: why only 4%-8%?
But there are three phenomena to mention here. First, the reduction of interest rates that should reach 9.5% in 2024, December 2024. Then we have the variation of the IGP-M. And we can see also the variation of the insurance group. And the growth of 4%-8% in 2024 means that if we go back to 2022, what do we see in the insurance group? A leap, significant growth between 25% and 30% in two years for an insurance group this large, the largest in Latin America. And lastly, our expanded ALL, BRL 35 billion-BRL 39 billion. This is reducing. But why not reducing more? Again, because of that increasing loan book and the mix we want to have, which requires more provisions for expected loss.
If the portfolio were more stable, we would have an expanded ALL provision a lot lower. So now, ladies and gentlemen, I'm going to move to our strategic plan, mentioning our expectations. Our expectation is that 2024 will be a year of transition and transformation. I would like to make a comment, such a strategic plan, such as the one we have adopted, would naturally take about 6 months for us to execute. But we established a very difficult challenge of doing it in 60 days. We're going to do it with a renowned consulting firm, which we can see, I can tell their name, and we're being supported by other consulting firms so that we can have safety and monitoring, so that we can execute perfectly.
What we've done was to follow academia by the book, with a market diagnosis for Bradesco, then developing a plan, and now moving on towards the execution. Here, of course, to have the entire market diagnosis as we developed, there wasn't only the involvement of Brazil's consulting team, but from different countries in the world who came to support us in this diagnosis of the market with benchmarking, technology, credit, and so on. In addition to. Well, after the diagnosis, we developed this plan that's actually a set of initiatives. We had ongoing initiatives in the bank, and what we did was to revalidate those initiatives, measuring everything we had determined to make sure the initiative was valid, sound, and whether or not we should continue with them.
We maintained some, others we identified that we had to change the way of getting it done and the perspectives that we have. There are others that were not part of our plan, and we included them in the set of initiatives to develop our plan. We move into the execution phase. If you know the consulting, the company's work and the stage of execution, what we do is take the initiative, break it down at greater detail levels to confirm the economic intervals that we determine, the timeline for the development, what type of investments we need to make. In some cases, we are already making progress. We're already entering the execution and detailing phase. Others are just starting this stage to run this process to further detail and execute the plan. But what happened when we developed the plan?
We started with a new structure based on that strategic line, and now we have a north and a framework for us to pursue over the next five years. Of course, that when you develop a strategic plan, your plan is not static, that you stick to it and do only that. No, the initiatives are reviewed. We may include new initiatives over time and also adjust whatever is, may not be working out as expected. So we entered into this execution process, which is the toughest, but it's decisive for us to be able to deliver what we expect to deliver in our structure and I'll detail this execution process.
... Allow me to say that the plan is dense, it's ambitious, and of course, we can't in one screenshot to talk about the entire Brazilian market. I have here overall lines to discuss with you, because this is the basis for what we're doing. You're going to see our starting point. First, the Brazilian market, I don't have to tell you, it's one of the most resilient, profitable markets in the world, with good returns. The second point, the market represented, according to our measures, BRL 1.3 trillion in post-risk revenues in 2023, with approximately 30%-40% of this revenue coming from mass retail, where we have extensive penetration. But of course, the main challenge of mass retail is the cost to serve, and here, there is still some medium income share.
SMEs represented nearly 15% of Brazilian market total revenues, and our expectation for this segment is that it should double in value in five years. Bradesco maintaining its leadership position with 1.7 million clients, and the largest loan portfolio with approximately BRL 100 billion in revenue. If we get this, according to the Central Bank classification, and Bradesco has one of the largest portfolio of affluent clients, prime clients, and close to private clients. We have 1.7 million more clients. Of course, here there's an opportunity for us to expand our share of wallet. Why am I bringing this customer base to you? I think it was never disclosed to the market, but it's simple. We've received many questions of: How are we going to compete in high income if you're not in high income?
Carlos Firetti (Investor Relations Officer)
How are you going to penetrate and bring these clients in? We're not gonna bring the clients in, they're already here. What we have to do is to improve our value proposition and our share of wallet. Credit is the anchor for principality as well. So of course, I'm going to give you some very important figures during this presentation. What we've seen in this diagnosis, of course, the fintechs are beginning to grow, but they don't represent for even 3%. The main players are the incumbent banks, both in individuals and corporate loans, and we have the opportunity to improve our credit structure. That's what we've been doing, as well as improve our modeling, using more transactional data that we have. We have plenty of data in Bradesco, as well as generative AI.
The organizational structure, I'm going to talk a little bit more about this, because this is very important to us. Here, we've already changed Bradesco's organizational structure, and our diagnosis was complex, with excessive layers, unbalanced span. We need to admit it, right? What we had to improve. That increases decision-making time, and of course, also makes clients' orientation difficult. We've already changed, and I will talk about this organizational structure in a minute. Investments in technology. Here, with this diagnosis, we saw that we clearly invest the same amount the other incumbent banks invest in technology. However, we've been working on an IT transformation, migrating to the cloud, but we could, and actually we can accelerate this migration to the cloud before that deadline that we had expected. We can also gain in our time to market.
That's what we saw, and I really looked at this diagnosis with our IT team and the consulting company, because I had doubts about this increase in productivity that could be a driver for time to market. What we have to do is to effectively transform outsourced personnel into bank employees, so that we can gain productivity. That's what we're going to do, hiring 3 or 4 thousand employees in the technology department. But replacing with third parties, it's not a matter of cost, it's the way of doing it. Finally, we have a series of strengths with more than 77 million customers, and we're top three or leader in all customer segments, as we're going to see. This snapshot tells you a little bit about our ambitions, without getting into too many details.
You can read it later, but we are either leaders or top three in all major client segments. So our ambition is to get from that market share that you see of 14% for loans, I'm talking about the expanded portfolio here in Brazil, to a share between 15% and 19% within 5 years, by 2028. Increase our SME client base, going from 1.7 million to this figure here on the screen, reducing our operating efficiency ratio around 8% and up to 5 years. That's the goal that we have set for this plan.
Just to mention briefly this box here at the bottom, maybe one of the main objectives of this plan, it is actually the main objective of this plan, is to increase profitability, returns, deliver more ROE, but not in the next quarter, not only in 2028, but throughout this period, during these five years, quarter after quarter, step by step. That's our objective here. To summarize, where are we starting from? That was the beginning of a very important debate for us. We're not building a new bank. There's no silver bullet here. We are reorganizing our bank to make it more competitive. But look, the starting point for Bradesco is high. Whatever way you look at it, we had NPL problems. We did. Are we going to pay for this? We are. We're paying, that's fine.
We're going to pay, we're going to turn it around, and we're going to increase profitability over time. So we are leaders in SME, as I said, top two corporate and middle, top two private banking in Brazil, top two in the affluent market, as I mentioned. We're one of the leaders in retail, with more than 60 million clients, almost 30 million account holders in this mass retail base. We have the largest bank correspondent in Brazil, Bradesco Expresso. We had important deliveries in the end of the year, combining eight platforms, more than 38 thousand points, and that's the key for our turnaround in the service model, the reduction of the cost to serve, and the penetration of this retail segment. We have completeness of offers connected to payments.
What I mean here is Cielo, Elopar, in partnership with Banco do Brasil, with more than 1.2 trillion of total TPV in the year. I'm just reminding you, these companies here that have no leverage. Removing Cielo, Elopar, without Elopar that has another partner, has effectively BRL 10 billion in cash. And we're calling this offer of Cielo, that responds a little bit to our strategic plan, and we're doing it here because we are highly able to invest with all of that cash available in these segments, that remains profitable with companies that bring upwards of 40% ROE every year. There's no need to say this, that we're leaders in the insurance group. It's the largest insurance group in Latin America, with more than BRL 100 billion in revenue in 2023.
It's a very important starting point for Bradesco, and one of the qualitative points that I consider important here. It's the first bank to use AI in the client's day-to-day life with our BIA. We're top of mind for 18% of Brazilians. Humanized customer service that extremely valued by our clients. This point here of our culture, that I think is a value, that high sense of belonging that our employees have, and that sound brand that Bradesco has. Then I move to this mandala image with 10 initiatives, five business initiatives and five enabling factors. Mentioning very quickly, we want to revolutionize our model to serve for retail. We'll create a new affluent segment. Prime, as of it was the top of the Prime segment. We're going to talk more about those details.
We're not gonna say exactly how this segment is, but this is an ongoing initiative. We're going to adjust our customer service model to the SMEs with a new network of platforms. We're already doing this, delivering 122 platforms to clients between BRL 3 million and BRL 50 million a year of revenue, and improve our value proposition with remote digital service for those up to BRL 3 million that are part of our network, as well as micro companies as well. Payment model for us here, it is to redefine our action, and one of the items that goes through that, public offering that we mentioned about Cielo. We are a lot more competitive with F- SMEs and larger companies, together with our acquirers and other businesses. The credit cycle.
What we did was create a credit business unit that responds directly to me, and parts that were fragmented in the bank, analysis, decision, portfolio management, collection, credit recovery, and now a portfolio management unit. Everything combined, and we're going to increase all of that using generative AI and a lot more data for us to increase the efficiency of our model. Operating efficiency to ensure competitiveness and returns. This has created our organization. We have a series of initiatives that will be developed for us to evolve in operation, operating efficiency, including a good review of our footprint that is ongoing. Culture, model, organizational structure, I will talk to you about in a minute. It's very important that we're already working on this. We've done this already.
For technology, the idea is to accelerate technology, and intragroup synergies and innovation, we have a lot of detailed initiatives, but I won't get into the details in this presentation. How do we guarantee a safe, efficient execution of our strategic plan? Separating teams into Run the Bank and Change the Bank. Change the Bank, we're creating the CTO figure, that's Chief Transformation Officer, which is the vice president, is from the company because he knows exactly which keys open the doors. Every initiative has a senior team led by a director, a superintendent from the bank, with a dedicated team-
Marcelo Noronha (CEO)
... the transformation office to provide support to the CTO, and for us to be able to deliver this execution at a fast pace every week. We're going to keep track in a new MIS that we're implementing in our organization, that will be able to follow each of the initiatives online in real time. We're going to execute all of the different points at once. That's why execution is crucial at our business. This here is our new structure. There's six business units, four support units, plus a chief of staff. We created wealth. We had the spin-off from retail, creating the business unit for digital businesses that's going to focus on mass retail customers. I can't detail everything right now. We can talk about it later. The credit BU responding directly to me or reporting directly to me, treasury. CTO is our CFO with separate structures.
He will dedicate most of the time, or most of his time, to be CTO, CRO related to risk, HR, and the chief of staff, which naturally has new strategic initiatives and the whole inorganic growth under him. It is important to observe the bottom part, what we have already done during this period with that diagnosis about the structure that I mentioned. We increased the average spend by 15%. In that group, that reports to the CEO, with a number of around six, but we changed the span of control. Throughout the organization, we reduced significantly the layers of the leadership. N1, 2, and 3. N1 is the vice president. Only 40% of this number of executives were between N1 and N3.
Now, 100% of them are in these levels, N1 to N3, which means we significantly reduced our leadership group of vice presidents all the way to executive superintendents, eliminating some, some positions. I don't need to mention them individually here, but it is a fact that we had some colleagues leaving since last year. More recently, we also had some colleagues who helped us in the past, leaving the company. The fact is, we have been changing. For example, the officer that in the past would take over as an executive officer, a colleague from corporate, who's a head of a corporate unit, was promoted to executive officer. He would, he would be replaced as head of corporate. Of course, that other job position was filled by somebody, and he would go to the fourth floor.
So, this is now the executive officer will be in the front line. It is the case of one colleague that we recognized, and this position will be filled by the skills, ability to execute of this person, to prepare for my future succession and the succession of the vice presidents. So he will continue to run that business unit. We didn't replenish those empty seats. We did have some promotions of vice presidents and executive officers, but with no replacements, so that at the end of the day, reduces our management cost, and it leads to a simplification of our structure. As an example to the organization, we created this executive committee and these two blue boxes, digital business. We're not bringing you details now. We're in the process of hiring one vice president in the market.
For the first time, we'll bring in a C-level, C-suite officer from the market. Here, we have the C-level of human resources, with a human resources structure to help us in the transformation process and in the process of partly changing our culture to a culture of transformation. This is a practical example of what we've done, and very soon, we'll be announcing the names of these two C-suite colleagues and other colleagues who will complete our executive management. I'm moving towards the end. I bring you some initiatives here with some of our ambitions. In the case of retail, this is our ambition: to grow the customer base, to maintain customer centricity, but the fact is we have high penetration with 60% principality in this, retail customer base. Second, we have ambitions.
We have our strengths on the screen, but in this case, we are delivering this new segment of the new affluent segment. I have a colleague leading this with her own team and with the support of the consulting firm. She mapped 105 opportunities in this affluent segment, and we will be improving our value proposition in high-net-worth clients. In SMEs, as I mentioned, implementation of new branches and a change in our way to manage and in our value proposition. I'd like to remind you, we hold 20% market share. We did have high delinquency, that is true, but we have changed the models, so we will compete to remain in the leading position in this market with our ambitions on the screen. I spoke about credit. Our ambition is to grow our market share from 15%-19% in a five-year timeframe.
We know what this means, and we will know what this means in our final conclusions. I'm not gonna be mentioning each one of them. I'll just say that our conclusions are, this represents a significant, a vast, profitable financial market. We are already in the execution phase of a solid five-year strategic plan. The group has strengths that will be leveraged. The starting point of Bradesco is quite high. Fourth, we're making great strides towards delivering our ambition initiatives, realigning our organizational structure, particularly in the last 30 days. We will have a new human resources plan. We are working on it. We will sit and debate in the month of February to approve by March, this new work structure, connecting all of the levels of evaluation, compensation, and performance for the executive groups. We have these goals here on this topic.
I talked about the efficiency ratio, and we will fight for the leadership in the most profitable pockets. There's no reason why we shouldn't be fighting for these retail. And for retail clients, it's not binary, they're not physical or digital, they're both. And we are mapping all that, and we will compete by reducing the cost to serve, improving our value proposition with solid credit modeling, and take advantage of our competitive edge and our level of penetration in retail. And here, some data for you. And what does credit growth mean? Credit is the big anchor of results and revenue in the Brazilian market. It is still dominated by the incumbent banks, with some share of the fintechs, as I mentioned.
But if the market grows, as our team has forecasted, together with the consulting firms, 8% bigger until 2028, this means that in 2028, we are going to have an additional expanded loan book of BRL 3.3 trillion. So from 2019 to date, 2023, the loan book grew BRL 2.1 trillion, again, expanded loan book. So if we grow our share, there's potential, substantial growth here, and we have the potential to grow even further and get back a significant portion of these BRL 3.3 trillion. The big ambition, our biggest goal, is to increase our profitability and return over the next years, transforming the organization and executing the plan with discipline. We will be periodically showing you everything we are doing and everything we intend to deliver. Thank you for your attention. We'll start the Q&A.
I am here with my colleagues. I said I'm speaking to you live. We continue to be live. I have my colleague, Cassiano, CFO, and now our CDO, our IRO, Carlos Firetti, sitting on my left. And André Carvalho, who is going to be the new IR officer. André Carvalho has been working with us for seven years now. André has a good background. Until recently, he was the Chief of Equity Strategy in the global markets of BBI. He works really well with the buy side, so he'll be starting in a new role. Firetti will have a transition period with André, and then our colleague, Firetti, will take over a new role at the bank together with us, and with us. So Firetti, I think I've spoken too much. That's why we have four people here, so that we can all speak a little. Thank you, Marcelo.
Before anything, I would like to welcome André Carvalho. As Marcelo said, we're going to have a transition, so I'll be interacting with you for a while still. Welcome, André Carvalho, and good luck. Thank you. Thank you for the opportunity. It will be a pleasure to work with you closer to Marcelo, Cassiano, the whole management. I'd like to thank Firetti for the support during the transition period. It will be a pleasure to take on this new role. Thank you. All right, now we will begin the Q&A session for analysts and investors. We have Ivan Gontijo, CEO of the Insurance Group, also joining us online. He will be participating in the Q&A. Questions can be asked in Portuguese or English. We will answer the questions always in Portuguese to facilitate the process.
You can choose to hear the translation or to, to hear the original audio. So we'll start the Q&A session now with Tiago Batista, with UBS. Hello, good morning. Can you hear me? Yes. André, good luck in your new roles. I have two questions. First, in your strategic plan, you indicated 8 percentage points. That would be an ROAE of about 400 basis points. If this is only the ROAE will not go to be the cost of capital, it will be close to the cost of capital. People use between 14 and 15. So you just want to go back to the cost of capital, or could we expect an ROAE above the cost of capital? That's number one. Second question, regarding low-income segment. We in the market have the perception that the segment is having negative returns.
How are you addressing this point in your strategic plan? Tiago, thank you for the question. It is a pleasure to be speaking with you. Well, for starters, our ambition is not to deliver just the cost of capital. This is an indication of ER. So we have a number of indicators, ambitious indicators, some things we haven't spoken about here, we are not going to be talking about to the market, but we want to deliver. Our main goal is to deliver superior profitability and return, and we want to grow step by step, quarter after quarter. But in a time year, in a five-year time frame, we want to be in a different playing level. I don't want to promise. I prefer to surprise you rather than promise and not deliver. One expectation we have is that naturally, a long-
Cassiano Scarpelli (EVP and CFO)
... the quarters of 2026, perhaps in one of these quarters, we will be surpassing the cost of capital. We have a high ambition regarding operating efficiency, and we will make this happen. We, we have room, room to evolve, particularly re-evaluating our footprint. To me, operating efficiency is cross-cutting. It is in our strategic plan, and perhaps this is the biggest lever for operating efficiency gain. As for retail, what we have seen with the consulting firm, and I'm not gonna get into too many details, is that we have clusters. In some clusters, we are profitable, and we have a significant share of wallet. I spoke about our seasonality. The secret here lies in the cost to serve. That's why we want to review our footprint. We tend to reduce it, but it's not binary. 100% physical, 100% digital. No.
Of course, we'll migrate to digital. I have to know in which channel to operate. Please remember, in Bradesco Expresso, we have one department which is B to B to C, and I said we implemented a new system with tablets to our merchants. They serve clients by doing business, providing customer credit, selling cards, opening checking accounts, and having transactions as well. So they, they have the ability to serve clients. So we do enjoy some advantages that I don't see in other competitors. They have other, other advantages that we might not have. I respect competition a lot. I think we have very competent people in Brazil, both in the incumbent banks and in the newcomers, the insurgents. But we have the largest correspondent banking system in Brazil, with more than 38,000 points of service, and we can compete very well in the low-income segment.
In addition to the cost to serve, we have the credit risk. We are monitoring this closely with good credit modeling to capture what is necessary and to be profitable in most of these clusters. There might be a cluster here and there that we don't want to work with. Okay, Tiago, that's the rationale, but we can compete. This is what we proved in our own internal diagnosis. It's really important that we mention this, and over time, we will be delivering these results.
Thank you, Tiago. Now, next question, Daniel Vaz from Safra. Thank you, Firetti. Good morning. I wish Noronha success as the new CEO of the bank, coming in with a good challenge of putting the strategic plan into place. Good luck, Firetti and André, in your new departments. I'd like to explore the culture and method- and targets for the high levels, C-suite for the bank. I know there's greater standard of control, more agile, more efficient, and we see experiences outside of Brazil or throughout Brazil, that this target for C-level is essential. So if you can talk about the changes that you're working on or outlining for this. Thank you.
Thank you, Daniel. During the presentation, I said that we've been working on a new plan for human resources that will be discussed in February and delivered in March. That takes into account this new structure, precisely. I talked to all of the bank's leadership team, showing the new plan. Those who worked directly with us at every step of the way had already seen it, that we are going to deliver a new performance assessment methodology. Depending on the level, the weights are different, and we are going to recognize and compensate that team that's in the Run the Bank and the team that's on the Change the Bank as well. We're taking excellent people to Change the Bank because that's crucial to us. We are going to deliver a new payment scheme for the executives of the bank.
We have that already in many departments, and we're going to replicate it to the entire organization with a greater flexibility. For some positions that somehow were kind of stiff, socialized when we were to hire or pay the variable income, and we're changing all of that. This is all well-based. We are going to make progress, and you will be able to see that over time. But our expectation is to approve this quarter so that we can implement it after that with our team. Thank you.
Carlos Firetti (Investor Relations Officer)
Moving on to the next question, Renato Milani, Autonomous Research. Good morning. Thank you for this opportunity. My first question is about the credit quality. NPL is dropping, but that's based a lot on write-off. So starting 2024, how do you see the credit quality of the new vintages, and how is that translating into origination, especially for low income? And second, it's more strategic. What are you thinking about in terms of the team you want to attract for this stage, this phase for the company? I know it's the perspective, what you think will help you succeed.
Cassiano Scarpelli (EVP and CFO)
Thank you, Renato. Great question. First, we are monitoring very closely all of the new vintages. We're working with much better ratings.... both for individual loans and for SMEs as well. All of the VPs are involved. We didn't focus only on the credit people and the segment people, but everybody is involved, and we are monitoring this very closely. We're seeing good vintages. We still need to improve some lines to improve our mix and help us in this growth of NII, client NII. It's step by step, but it is going to happen, you can be certain. In this last quarter, I saw the inflection point of this curve, both for individuals and micro, small, and mid-sized companies, and we're working, and during the year, we'll maintain traction to grow during 2024 with controlled vintages.
So I think that here, we also have an important quick win in this new credit structure, that we can capture value, before other initiatives that we're implementing as well. Now, the team that we want to attract, and we have a headhunter doing the selection for us and discussing, debating. We had an assessment process in our teams since starting in December, so we've been working, creating development plans for our leadership colleagues who will remain with us, either on Change or on Run. So Renato, we, we will attract people with different skills from what we already have, people with flexibility, with an easy relationship, and person that can deliver digital skills with our colleagues at Next, Bradesco, and Digio as well, and who can also bring more knowledge.
In Human Resources, we also want to change our paradigms to be more aligned with the market, having growing ambitions for our organizational development. I can also tell you another concern that we had, since you talked about the team, and I think it's very important. We are giving recognition without increasing the operating cost. As I said, we're actually reducing this cost, and this is also an example for the organization. We were only able to set aside a team for Change and a team for Run because we reduced the layers and changed the span. Otherwise, how were we going to do that with departures and taking people for Change the Bank? It was difficult to run this business with the directors leading.
So of all subordinates, five of them are old enough to replace me, to be in the succession plan, as well as the vice presidents. And those who have been recognized, new executive officers who will continue to run their departments, not being replaced, there's also five of them with the age and background to replace any of the vice presidents who are here, as well as myself, take on my seat in the due time for the association. Thank you. Renato?
Carlos Firetti (Investor Relations Officer)
Thank you, Renato. Next question, Bernardo from XP, XP.
Marcelo Noronha (CEO)
Good morning. Thank you for the opportunity to ask questions. Marcelo Noronha, I wish you a lot of success in your new role. Building on the prior question on incentives, can I just ask a question, but in a broader way, regarding the transformation process of Bradesco? Although you've been in this role for a little time, Noronha, you've had different positions at the bank, and in the presentation, it's clear that you have a wide diagnosis of the necessary changes to be made. But I'd like to focus on one specifically. Bradesco has a very traditional culture that has been very well worked on over the years in terms of robustness and trust, but the new environment is quite competitive, and the moment that the bank is dealing with brings about a different sense of urgency.
You need to have different agility to react and to change a few things. How has this initiative been received in the bank regarding the adjustments that need to be made? What paradigms do you still have to break? Because that will give me an idea of the priorities of your agenda of transformation.
Cassiano Scarpelli (EVP and CFO)
Thank you for the question. This is a big question, but I can tell you is, number one, I think that we have to learn from the past. We did have some convictions, and when we sit and we deeply debate each topic, it's almost like you open up your kimono, and you see what you need to do. So without beating around the bush, I'll give you an answer. The board of directors gave me autonomy and has been supporting me in 100% of the changes, or else I wouldn't have changed the org structure. I wouldn't be telling you that I'm in the process of hiring a C-level for HR and a C-level for digital, and in other levels of the org structure as well. We're in the process of hiring a lot of people. So I have the support-
Marcelo Noronha (CEO)
... of the board of directors, 100% support. And this has been really nice, the kind of debate we are having. The board of directors is aware, and we put everything on the table. We were very pragmatic. It's no use being a philosopher. There's a sense of urgency. We have to change. We have to do it. And that's kind of my style and the style of some colleagues here of the executive management. We go straight to the point, Bernardo. Little philosophy, a lot of pragmatism. I think we were able to break down the main paradigms. The other paradigm is the compensation that we are delivering now. There was no time. It's been just 60 days since I took over, and in order to do all that, we just didn't work during Christmas night, Christmas Eve, and New Year's Eve.
Other than that, everyone, including the consulting firms, have been working long hours on Sundays. I've been working on Sundays with my colleagues to deliver this urgently, with this level of depth, because if you look at the whole thing we're doing, it's not little. We're already executing, because that's crucial. It's no use having a beautiful book and promising things and not doing them. We are doing it already.
Carlos Firetti (Investor Relations Officer)
Thank you very much, Bernardo. Our next question comes from Mario Pierri with Bank of America. Mario?
Marcelo Noronha (CEO)
Good morning. I have a question about cost and efficiency. Noronha, you talked about improving the efficiency ratio. But when I look here, your provision is BRL 570 million this quarter to restructure branches. So I'd like to understand what that means in the short term. What are you thinking to get to this efficiency ratio target? How do you think about your headcount, number of branches? Because, you see, when we look at the bank today, the bank has about 86,000 employees with about 2,700 branches, 32 employees per branch. It seems to be very high, a high number. How are you thinking about this metric? That's my question. Thank you. Mario, thank you for the question. Let me answer it.
I'll ask you to recalculate your metrics, because you can see 2,700 branches, but in practice, we have 7,000 points of sale. 7,000. Even with the reduction, 7,000. We have traditional branches, we have points of service, which is like mini branches, and, so it's, we have even smaller than mini branches. So we have a set of branches with different characteristics. So you would have to divide the number of employees by 7,000 and not by 2,700. So, having said that, we are reviewing our footprint, and we will deliver some things. We've had an expectation, and now with the new plan, we changed our expectation. We are being more ambitious, more strict. And I want to mention two things: The idea is not to reduce the force, the sales force, but rather to gain efficiency.
The second thing I told you, we are going to be hiring 3,000-4,000 people in technology, so we are exchanging expense lines. Personnel lines will grow, but we would reduce our operating expenses with the hiring of third parties. So perhaps that's the main point in terms of efficiency gain, but this is a cross-cutting initiative in the organization. We are discussing some areas. We are discussing the existence of the points of sale, the scale. We will automate the processes and execute this much faster. It's all mapped out. The whole operating efficiency project is divided into several initiatives, not just one. The one I mentioned here is the largest, but periodically, we will be updating you, showing our evolution and our performance quarter after quarter. Quarter by quarter.
So more towards the end of the year, beginning of next year, we will be seeing some important changes in the organization. Cassiano, would you want to add? Well, in addition to everything you mentioned, Marcelo, we should not forget the restructuring of the affluent segment. A lot of the sales force will be allocated to improve our account loading and the way we will manage such important clients for the bank. In terms of branch efficiency, it's a lot more comprehensive. It has to do with operating synergies among the different departments of the bank. So under this big framework, there will be a reallocation of people, and that is fundamental for us to have the change initiatives and the run initiatives working continuously and going in the same direction. Let me add to what Cassiano said, Mario.
What Cassiano is saying is that I can have a branch with one manager serving mass retail, and this would not make sense, as the manager could be managing SMEs. So we will be reallocating the sales force. It's all mapped out, and we are now refining it so that we can start executing.
Carlos Firetti (Investor Relations Officer)
... Okay. Thank you, Mario. Thank you, Mario. Next question, Tito Labarta, Goldman Sachs. Tito, go ahead.
Tito Labarta (VP and Senior Equity Analyst)
Hi, good morning, everybody. Thank you for the call and taking my question. A couple questions on the strategic plan from just looking at slide 13, some of the comments you made, right, that the market represented BRL 1.3 trillion in post-risk revenues, you know, 30%-40% in retail, and that the biggest challenge is the cost to serve, and you mentioned for the entire market. I mean, just, you know, could argue that that's really the biggest challenge for the incumbent banks, right? For the Fintechs, you know, have a much lower cost to serve, right, don't have the branch network, don't have the employee base that you have. Excuse me, employee base that you have. So what can you do to get your cost to serve down?
Does it mean that you will need to invest quite a bit in the business first? Right, if we look at your expense guidance above inflation, I mean, do you think that continues for some time before you're able to bring down the cost to serve? And then somewhat related, on that same slide, a couple bullet points later, you mentioned that credit is the primary anchor and challenge for Fintechs, which represent less than 3%, of the markets. But you could argue they're also gaining share, you know, at least one or two are gaining share very rapidly.
So just to understand your ambition to get to that 15%-19%, given that you could argue that the market has gotten more competitive the last few years, what can you do to really capture that market share, given that other competitors are also growing very fast?
Carlos Firetti (Investor Relations Officer)
Okay. So Tito, thank you for your question. We're going to answer in Portuguese this time. Firetti determined it, okay? Next time, we won't. But what we have here to compete in this market, as you ask, the revenue I mentioned, you mentioned it again, and then you said... About this part of retail, 30%-40% of total revenue, how can we compete with the cost of fintechs? It's a fact that our main challenge is the cost to serve. Of course, that the right credit model for that, but cost to serve is key. And as I said, we assessed, have evaluated clusters, and we found out that in some clusters we are able to compete, and we have a significant share of wallet, but we are going to have to reduce the cost to serve.
We identified exactly where we have to get to, and now we're detailing this. But let me tell you some other things that are worth mentioning. First, Bradesco has high penetration in this segment. Not all incumbents have that. Bradesco's principal activity, as I said, is again around 60%. Not all incumbents have that. Bradesco has, in its DNA, the relationship with this type of customer. We need to change the Cost to Serve. We have Bradesco Expresso as a very important competitive lever, not only as a channel, but I also told you, we can serve those customers with a variable cost instead of having fixed costs in some points of sale throughout Brazil. So we have different competitive levers that can allow us to compete in this market.
But look, Tito, note that we have a market of 30%-40% of the total revenue of banking business in Brazil. And it's a market that can be divided with three or four banks or fintechs, and everybody can hold 20% of share and be big. That's another important thing here, to have scale. We have scale to serve this market and to be able to compete in this market. That's how I see it. There is room for those who will serve in a certain way, and there is space for those who will serve in a more connected way. That's what I think for Bradesco over time, and we're going to show you that. And then I think you asked about the credit, how we're going to grow.
Tito Labarta (VP and Senior Equity Analyst)
Yes.
Carlos Firetti (Investor Relations Officer)
Yes. We are going to grow effectively with good models. We have the capacity to do that with good credit models, a good, good follow-up portfolio management. And we are going to have portfolio management looking at the entire expanded portfolio, from the retail bank to the wholesale bank, how we're going to operate, capital allocation, that's all obvious, but we have distribution capacity. So I believe that today, competition is a lot more among the incumbent banks rather than Fintechs. They still have a small share. Of course, they have opportunity, and they will grow a little bit more, but we have the levers, and we have the capacity to distribute and grow, depending on our models. That's what I showed. In the last quarter, we had that inflection point for the curve, both for individuals and SMEs. Thank you. Thank you, Tito.
Our next question, Jorge Kuri, Morgan Stanley.
Jorge Kuri (Senior Equity Analyst)
Jorge, hi. Yeah. Hi, good morning, everyone. Thanks for taking the time to do this, and congrats, Marcelo, on the new role-
Carlos Firetti (Investor Relations Officer)
Thank you.
Jorge Kuri (Senior Equity Analyst)
Best of luck. I, I wanted to ask about the return on equity that's embedded in your plan and your ambition. Your return on equity based on the 2024 guidance is gonna end up roughly at 10%-11%. That's half of what the guidance for Itaú, which is your biggest peer, is. I wonder, how long do you think it's gonna take you to close the gap vis-à-vis your best-in-class peers five years out? If you execute your transformation program, where should the ROE be? That was my first question, and first question. I'll ask my second one later. Thanks.
Marcelo Noronha (CEO)
Okay. Jorge, obrigado pela sua pergunta.
Carlos Firetti (Investor Relations Officer)
George, thank you for your question.
Marcelo Noronha (CEO)
As I mentioned-
Carlos Firetti (Investor Relations Officer)
As I mentioned, our ambition, our main target, is to grow our profitability over the next five years, quarter by quarter.
Marcelo Noronha (CEO)
Uh, uh,
Carlos Firetti (Investor Relations Officer)
We have an opportunity-
Marcelo Noronha (CEO)
... Pra mostrar o nosso ROE melhor.
Carlos Firetti (Investor Relations Officer)
To show better ROE-
Marcelo Noronha (CEO)
Algum trimestre do ano.
Carlos Firetti (Investor Relations Officer)
Maybe at some quarter during 2026, as I mentioned, I believe, in the first question that was asked. That's when we probably will be able to exceed that cost of capital. The idea is for us to grow during these five years, delivering compatible returns with our shareholders' expectations and compatible with our expectations. That's our ambition. There's no date and time, there's no deadline, specific date for this delivery. Thank you, George, for your question, but this is what we pursue as-
Marcelo Noronha (CEO)
The nosso plano.
Carlos Firetti (Investor Relations Officer)
the main goal of our strategic plan. Thank you.
Jorge Kuri (Senior Equity Analyst)
Thank you, Marcelo. My second question is about the C-level compensation package, and particularly your compensation package. What type of targets is it linked to? Is it return on equity? Is it market share? Is it stock price? Can you walk us through how the success of the bank and your success are tied together?
Marcelo Noronha (CEO)
Ah, well, veja, a gente-
Carlos Firetti (Investor Relations Officer)
Okay, so look, we are reviewing-
Marcelo Noronha (CEO)
Revisando
Carlos Firetti (Investor Relations Officer)
-this plan. We're preparing, as I said, a new human resources plan to be implemented by the end of this quarter. We'll discuss it during the month of February, and the idea is to approve it in March in order to implement it.
Marcelo Noronha (CEO)
Yeah, I see.
Carlos Firetti (Investor Relations Officer)
And then-
Marcelo Noronha (CEO)
Esse C-level
Carlos Firetti (Investor Relations Officer)
The C-level-
Marcelo Noronha (CEO)
também vinculado
Carlos Firetti (Investor Relations Officer)
Will be connected to this total compensation that we're going to determine. Of course, we already have references and benchmarks in the bank. We are still working with the previous policy, but I believe that we are competitive enough to bring C-level individuals to our organization with competitive compensations. And we'll compensate both people who are on the brand of the bank and those on Change the Bank, recognizing their respective roles here.
Jorge Kuri (Senior Equity Analyst)
Thank you.
Carlos Firetti (Investor Relations Officer)
And then, look, you talked about the indicators. George, the indicators will depend on each of the departments, right? Where they are. We have indicators related to the plan, and we're going to have indicators department by department, for digital, for physical, to effectively implement this new human resources plan. Of course, the higher the level of the executive, more linked to the whole they are, the more, the higher the hierarchy, more relationship it has with what they effectively do and deliver. Thank you.
Marcelo Noronha (CEO)
Thank you, George.
Next question from Eduardo Nishio with Genial Investimentos. Nishio? Hello, good morning, everyone. Thank you for the opportunity. I wish you a lot of success in the new strategic plan, Noronha. My question is more related to this cycle and how this should change with the new strategic plan. In this past cycle, in my own assessment, you had three big challenges, if we can call them that. Treasury, market NII, that was way below the peers. ALL, particularly in the low-income segment, which negatively impacted the results of the bank, and your digital strategy, which was then restructured and now is under the bank. So if you could speak about these three points, what will they be like with a new strategy? I know you have very few days, just 60 days since you took over, but do you see any structural change in these three pillars?...
Thank you, Nishio, for the question. I will divide the answer with my colleagues, so I won't be the only one speaking here. I'll ask my colleagues to begin, and I will add to their themes. Cassiano and then Firetti, feel free to contribute. Nishio, thank you. The market NII, as you said, suffered in 2022, 2023. 2023 recovered almost BRL 1.7 billion compared to 2022, and it became positive. In 2024, in our guidance, it's basically the natural levels that we had in prior years. So that's a phase that is behind us. The whole loan book originated in the prefixed area, did well in our trading desk and client desk's working strongly. So for the treasury, we believe that we now are handing the baton from the difficult period to a more normalized period, 2024 onwards.
As for ALL, Marcelo mentioned we had a bill to pay, particularly low-income cards and SMEs. As Marcelo mentioned, in our numbers, we see the important news that all delinquency curves are reducing, which is very good. All our testing in the new cohorts puts us in a very good position regarding additional ALL, allowance for loan losses. So this supposes a reduction in mass retail. This has been happening, and growth, given the growth of the loan book, the nature of the loan portfolio, with different types of clients. With more risky clients, we need more provisioning. So this year, that's when we will be paying the bill, this past bill, and starting in 2025, we will have a more natural cycle in terms of the allowance for loan losses.
As for the ALL, as Marcelo showed, we recognize that we have adjustments to make, not only in ALL, but in the whole credit cycle, which is reflected in our credit business unit. They will look at credit in an integrated way, the loan book, quality of credit, approval. So these structures, in our view, will give a lot more effectiveness to credit management. We will also be making adjustments in terms of credit modeling. I think that modeling has always been a strength in this bank, but, you know, there's always room to evolve and to constant improvement. So we do acknowledge the need for adjustments in this part of the strategic plan. And Nishio, let me add, digital. Strategic paths are not limited to one. You can choose different paths, and through different paths, different organizations, you can achieve common goals, with both initiatives being successful.
We decided in the past to bet on Next, Digio, and then we saw that the values, the prices of the business changed in the market with a different approach. So now we brought this closer to Bradesco, 'cause it's a core business for us. But there are a lot of lessons learned and value here embedded in Digio and Next. Our client base continues to grow. We continue to do things differently, yes, so that Digio is an important laboratory for us, also in our strategy for Bradesco Digital. So everything is closer to us. Whether we're going to integrate the platforms or not, well, we've seen so many interesting things with the new diagnosis, that perhaps we'll integrate Next, keep the brand. But we have Beyond Bank, our marketplace. We brought it from Next. We just delivered it for friends and families here at Bradesco.
So we are testing this in Bradesco with Bradesco base, but also connected to Next. We have another part of Beyond Bank, which is agribusiness, another marketplace. So this theme of Beyond Bank is part of Next. So we do some business for us to move around. So this goes to serve mass retail, low and middle-income clients that can potentialize our business with multi-brand. This is not totally defined yet. We can take one path or a different path. Secondly, regarding market NII, they've talked about this. We have a good expectation of full normalization along 2024. Thirdly, ALL, allowance for loan losses. You're going to have a higher cost in 2024, which I consider to be a transition year, because we have a substantial growth of the loan portfolio. Due to expected loss, this is called ALL.
If we were flat in growth, we would have less ALL, but we are putting efforts to have client NII with adequate losses in the new cohorts or vintages. Next question from Rafael Frade with Citi. Frade, go ahead. Good morning to all. Marcelo, wish a lot of success to all of you in your new roles. I wanted to tap into your diagnosis. We have a lot of discussions in the market in terms of how a low profitability of Bradesco in the last two years was linked to a structural issue, or related to the context. Bradesco has more exposure to smaller companies and lower income segments, but I think there's also a market element. But you're also saying that you have a lot of opportunities to improve your operation. We spoke a lot about lower income segments. I'd like to understand more about SMEs.
Marcelo, at the beginning, you said that Bradesco is a leader in the SME segment. It is an important part of your profitability. It's a part that had an important portion of the NPL formation in 2023. So what have you identified in your diagnostics that could be quickly improved, something that could be deficient? Perhaps you could elaborate on the diagnosis for this segment of SMEs. Thank you, Frade. It's good to see you again. All right, SMEs. As I mentioned, we are leaders in the SME segment. We have a significant share, but Frade, we have to admit, I think that we had a credit policy which was perhaps a little more open. Perhaps we misread, perhaps we stopped granting credits a little later than we should have.
We have to admit these things, but Bradesco is part of the Brazilian social pyramid in lower income and SMEs. We're very present in these segments, so when there's a delinquency issue, we tend to suffer more proportionally or in absolute trends than peers. Regardless of having a higher leverage when we should have stopped before, earlier. That's a given. This bill is being paid. But when I look at the segment, it has the right size, it is profitable, and I'll tell you, most clients in SMEs are paying their loans. They are not delinquent. Most of them are okay. They have been paying off their loans, and they have been doing business with us. So we are leaders. We have new credit models. We have new credit policies. These credit policies, are they more restrictive, somewhat more restrictive than in the past? Yes.
We are a little more conservative in that regard. Less conservative in the transformation of the bank, but more conservative in managing credit risks based on the new modeling. But we have a huge opportunity of quickly reversing that, because NPL is dropping, delinquency is dropping, that's under control. We went back to growing, like I said, we had an inflection point in Q4, so the number is under control. Yes. What are we doing in this segment? We are creating 122 platforms in Brazil, as I mentioned during the presentation. We have delivered some in the end of the year. We'll deliver 122 platforms in 2024, as quickly as possible, with a team fully dedicated to this target of clients, tier one, between BRL 3 million and BRL 50 million per year in the main cities.
But you see, we started working with some radius, but we are increasing this segmentation, this targeting for this client base when we have a complete network of platforms. For the target from zero to three million, we improved the whole work on remote service, also for micro entrepreneurs in terms of digital, physical service and remote online service. So we increased the force of sales, or the sales force in the segment of SMEs. And why? Because we see this opportunity. Besides, in order to get more traction and more safety, we brought in some credit analysts to work more physically close to these platforms. We have been doing some good testing with them. This will ensure to us more speed, because part of this credit granting is judgmental. And we have a different management model, different than what we had before.
We implemented in our client management role. We started with that segment of BRL 3 million-BRL 50 million, with a different way of managing the portfolio. Now we are starting to educate and train our managers. We'll have to be monitoring this in a centralized fashion, so that we can do full-time management and monitoring of the portfolio, so we can make decisions regarding risk management, regardless of a centralized portfolio management. These are operational details, so I do risk assessment-
Cassiano Scarpelli (EVP and CFO)
... the contracts, and how do I monitor? Because if you get there first, you enjoy benefits. So we have models and indicators to manage this, just like we do in other segments. So here, we are improving this management model, so we can be a lot more competitive here in terms of delivering goods, customer service and experience, and in terms of managing our credit risk, regardless of other people and other tools managing the portfolio. Added to that, we have the public acquisition offering of Cielo, what we call OPA. We want to bring payments and other synergies with this SME segment, which is highly profitable and should double in size in the next five years, as I mentioned. Thank you.
Carlos Firetti (Investor Relations Officer)
Next question, Arnon Shirazi, Santander. Please, Arnon, go ahead.
Arnon Shirazi (Equity Research Analyst)
Good morning. Noronha, welcome to this position. My question is more related to 2024, to talk about your guidance. You gave an expectation of the increase in the loan portfolio, but I'd like to understand where this growth is coming from, if it's more individuals, more companies, and also about the rate for 2024. I think it changes the perspective that the analysts have for the year.
Carlos Firetti (Investor Relations Officer)
I can answer it. In terms of growth, I believe I can say that we're going to be growing in our main lines very closely. As we've been saying, we're accelerating credit origination in retail. This origination has been significantly growing. It's still not overflowing to lead to portfolio growth. That's the portfolio hasn't responded yet, but the main driver for growth includes growth in all lines, on wholesale, retail, and small and mid-sized companies, where we're also accelerating. This growth will accelerate during the year, as the guidance includes in 7 to 11, we have significant growth. In line or above the market, of course, that the average portfolio grows less, and that's what translates into the margin guidance that's slightly lower. In terms of the rates, you can consider between 16 and 18 as a reference, the tax rate.
Yes, and the idea is to grow the entire portfolio with the expanded portfolio, as Firetti mentioned. Thank you.
Cassiano Scarpelli (EVP and CFO)
Thank you, Arnon.
Carlos Firetti (Investor Relations Officer)
Next question, Yuri Fernandes, JPMorgan. Good morning. Good luck with the management of the company and the plan. My first question is about the bank's capital generation. I believe Bradesco has good capital, 2.7. It's not a matter of funding, but when we think about ROE, as you mentioned, Noronha, maybe in 2026, it will exceed the cost of capital. When we look at the 2024 guidance, it should be a rate of 10%-11%, maybe slightly higher, but with the portfolio accelerating, as Firetti mentioned. And in the past years, we're looking at you maximizing the benefits of IOC, and the bank has been paying relatively good dividends, but that implies a smaller capital growth.
My doubt is how to think about this choice between growth and capital, and how to fund growth, considering it may take until 2026 to improve profitability a little bit. The capital cost may be broad in this plan for you to get to that 15%-19% market share. So if you can talk a little bit more about how to think about the payout and this dilemma between investment and growth and capital, would be my first question. And the second, very quickly, Noronha, about Cielo. If you can give us more details about the strategy behind it, if there's any discussion, and about this public acquisition, if there's any discussion about the Selic rate around the price of this offer. Dividends was very clear.
You have relevant focus on Cielo, but it's not clear whether there's a correction for the Selic rate. Thank you for the question. Cassiano, I believe you could begin, and I'll add and talk about Cielo.
Cassiano Scarpelli (EVP and CFO)
Thank you, Yuri. It's a pleasure to see you here again. On the capital side, we understand here that our projections are all considering sufficient capital to maintain the credit growth, of course, in our strategic plan, and even for the new approach for the central bank's operating risk that we've been discussing in some of the fronts, and we can talk about it in person. The results tend to grow, and it also makes capital more robust. So the strategy, as Marcelo said, our, our transformation pattern is to seek growth of our profitability, growth in our net income, that are also a significant part of our capital composition. We see it as natural to continue to work the basic benefit of IOC for as long as it exists, and this year is no different.
For the moment, from everything we're seeing with our business cases and the planning and the budget process, we understand that at least over the next few years, we will be comfortable in terms of capital to support the transformation process and the bank's growth.
Carlos Firetti (Investor Relations Officer)
Yes, Yuri, that's what Cassiano said. We ran all projections-
Cassiano Scarpelli (EVP and CFO)
... with the expected growth levels, and we have sufficient capital to do it, and we're comfortable with that. In terms of Cielo now, you asked two questions, right? So first, whether there's going to be a correction, that's not the information we have. That's not what we have in mind for the time being. We don't have that perspective about this correction factor. And the second is about Cateno. There's no discussion about separation from Cateno at this time. We are offering those stocks to the market, the public acquisition offering, because there's some important strategic points that I mentioned in our plan. And on Banco do Brasil's side, they also have good penetration on legal entities.
And for both of them, the strategic aspect is essential, because then that gives us greater strategic freedom to review our value proposition here for SMEs and even for larger companies, since Cielo can also penetrate larger companies in their acquiring business. And on Banco do Brasil, we won't get into their strategic decisions, and they, they don't get into ours, but we'll have the liberty to do that. There are already separate commercial teams in the company, but it's a closed capital company that effectively allows us to move faster, make faster decisions, because we need to do that now. And then, a question that may originate from your question, and I'd like to add here, is that: Oh, but so if it's a closed capital firm, are you going to be able to have the governance to do that?
The answer is yes, and it is yes, because we have other partnerships with Banco do Brasil, Alelo, Livelo, and there they are all delisted companies, and we have this view of one and the other, and we have very good management, each one of us driving our channels and making the business develop, and it's not gonna be any different in Cielo's case. Thank you, Yuri, for your question. Thank you, Noronha and Cassiano.
Carlos Firetti (Investor Relations Officer)
Next question by Pedro Leduc with Itaú BBA.
Marcelo Noronha (CEO)
Thank you, Firetti. Welcome, Noronha, André. I wish you a lot of success in this new chapter of your lives. I have a quick question, just to clarify regarding the outlook for efficiency. We see the SG&A and OPEX of this year running above inflation. I know this is a period of investments and other costs that come with the transformation. I guess we could imagine SG&A growing less than inflation in 2025, 2026, or should we think that the efficiency ratio would improve because of revenues?
Cassiano Scarpelli (EVP and CFO)
Well, investments are kind of multi-annual, in a sense. Obviously, we want to grow our revenues a lot. But the adjustments that we will be making in terms of reducing the cost to serve in our structure, will be implemented partly along 2024, and that should start giving us higher effects in 2025, in terms of reaping the benefit, improving the efficiency and evolving those line items. Now, when we look at our expenses for 2024, administrative and personnel expenses will grow basically in line with inflation in our projections. There's a slightly more pressure on the line item, others, because of provisions for civil claims and other provisions that are part of that line item. But in administrative and personnel line items, we already have a good level of control. For 2025, we'll start capturing the benefits.
Firetti summarized, revenues are important, but of course, the biggest capture will come from reduced expenses.
Marcelo Noronha (CEO)
Thank you very much. If I may ask a question about SMEs. You're discussing the strategy to resume growth in retail, and I know that SMEs are a relevant segment for Bradesco. It's a profitable portfolio. So what is the turnaround strategy, perhaps integrated with the recent announcement of Cielo? If you could elaborate for SMEs, it would be welcome. As I mentioned, Pedro, we've been dividing SMEs into three segments. Tier one, 3-50 million, and we're having new platforms that are being opened in the main cities of Brazil, and we'll expand the radius of those eventually. So we are allocating the sales force with more prepared people. We are training people. We started opening these platforms in the end of last year, and we'll continue these openings along 2024.
We expect to deliver 122 new platforms with a much more focused and established management, like I said, with a new management model, including portfolio management. Not just in a centralized way, but also decentralized and a better customer experience for our clients. We're also changing the value proposition and increasing the sales force in the SMEs 0-3 million, because these are more decentralized in the branches in Brazil, and also for micro entrepreneurs with remote service and digital service. Naturally, we expect to improve the value proposition, and it's linked to this OPA, the Cielo OPA, or OPA is the Public Acquisition Offering, and other strategies we'll bring to the market. If I may add, Noronha, also the use of transactional information, that's the best use we can put our CRM for.
We've been working a lot on this and the product verticals, looking more and more to this niche, the new cash platform that we are introducing. So we add CRM, the transactions, database, our new products and the new account loading, all subdivisions of SMEs. With all that, I believe that we are well positioned to have growth in this new segment. But let me add something. With accelerated credit granting to small companies in Q4, that was the inflection point. What we see is that now that we have this monetary easing in Brazil, that's a tailwind that will benefit small companies and low-income segments. For small companies, as Marcelo mentioned, they account for 15% of the banking value to be captured in the market, as this will double in 5 years, these 15 can become 25.
Here's where we can create value and growth. That's why we will increase from 1.7 million to 2 or 2.5 million clients, showing clearly that we want to gain market share in this segment. Pedro, I can tell you, all incumbent banks are here fighting for this market. This is what we see, and I'll tell you, we'll be in this battle. We'll be competing, because we don't want to give up the leading role that we play in this segment. Thank you for the question. Thank you for the transparency, for all the time you're devoting to us today. Thank you. Success. Now we are moving to the last question from Carlos Gomes with HSBC. Thank you, Carlos. Thank you for waiting.
Carlos Gomez-Lopez (Head of LatAm Financials Research)
Thank you very much. I'll do it in English. And again, good luck in this new stage, and really good to see André back, our old colleague. Good luck to his new role as well, and to Firetti. I had two questions. The first one goes back to capital. Could you give us the potential impact of the proposed tax reform on your capital ratio? In the sense that the DTAs would probably be impaired if it is passed as it is now. What would happen to your capital? Where would that 11.7% Tier I go? And also related to that, what—I mean, you said you have an adequate level of capital, but what is the level that you want to maintain in the coming years?
My second question is more generic. I mean, in your new strategic plan, one of the assumption is that you are going to grow market share. That's unusual for a large bank, like yours. What makes you think that, you know, Bradesco can significantly increase its size in a very competitive market? Thank you.
Marcelo Noronha (CEO)
Thank you for the question. Carlos, so from the standpoint of capital, the impact of tax credits is about 0.8-1 percentage point, starting in 2025, in terms of tax credit operations. This is what we've seen. Now, obviously, we still have a year. The Central Bank of Brazil will be looking at this as a whole, so there might be some changes in terms of the capital, some bias in terms of capital. But if there are no specific assessments for the banks, the impact should be between 0.8-1 percentage point. Let me add to that. There are a number of changes underway. There's Resolution 229, that changes the capital requirement for operational risks. That's the impact of 0.8 percentage points on capital. There's also the IVA reform. It will be implemented very, very gradually.
It will have a little impact on capital. There is a third front here, which is the income tax reform. This has not been submitted yet. It will probably be submitted in March, and then we'll be able to do our assessment. We haven't got the details on the table to evaluate this. This impact is for deferred taxes or for recovery, this 0.8%-1%?
Cassiano Scarpelli (EVP and CFO)
... Oh, percentage point. It's different. As regards to our market share gain, I think that to start, we have to remember that in this past year, because of our reduction in risk appetite to control delinquency, we ended up losing some market share in some markets where we can play an important role. So in resuming credit origination, coupled with our initiatives in our strategic plan, we see room to regain this market share that was lost. That happened because we reduced our risk appetite. Also, the strategic plan brings some initiatives that will increase our competitiveness in the credit market by integrating the credit process or through those initiatives for SMEs, for example, and the whole positioning that we are reviewing in our retail operation. We believe that this resumption and market share increase will come naturally, given our positioning at this moment.
Let me add to what you said, Firetti, regarding the affluent segment, high net worth clients that Marcelo mentioned in the strategic plan. It's very important. We have 1.7 million clients, a very important potential share of wallet. We believe that by doing all this work of transformation, of delivery, of content and relationship building with affluent clients, we have possibility of expanding our share of wallet and naturally get a share, a market share of these high net worth clients. Very well. May I just add?
Marcelo Noronha (CEO)
Carlos, we have-
Cassiano Scarpelli (EVP and CFO)
Carlos.
Marcelo Noronha (CEO)
many strengths in different segments, as the SMEs in retail business with low, low-income clients, we have a strong penetration there. But we have many strengths in wholesale bank in affluent for high-income clients, SMEs. As I, as I mentioned, we are leader in SMEs, we have an important penetration all over the country with different value propositions with three different segments inside of SMEs. So we believe that we have a strong distribution channels to improve our loan portfolio, maybe in 2024. But over the next few years, over the next five years, that is the, the plan. Thank you very much for your question.
Thank you.
Thank you, Marcelo.
Cassiano Scarpelli (EVP and CFO)
So now I would like to thank everyone. We are going to close this video conference call, and I remind you that all of the questions that were not answered during this meeting will be answered by our Investor Relations department. May I just make a final comment here? This is my first conference with all of you, and I would like to say that I thank you all for your attention here today. We already have, as I said in the beginning, we already have some meetings scheduled with international buy-side meetings tomorrow, investors tomorrow, local buy-side colleagues, sell-side colleagues. We are open to talk, to explain with more details all of these plans for the future. Not only myself, but my colleagues here as well, from the Investor Relations department.
To give you more detail, not only this week, but even later, I am open to welcome you here. It will always be my pleasure to talk to all of you. Thank you, Firetti. Thank you. Once again, thank you, everyone, and this concludes our video conference. Thank you very much.