Banco Santander (Brasil) - Earnings Call - Q1 2025

Transcript

Speaker 0

Morning, everyone, and thank you for joining us once again for our video conference on the results for the first quarter of 2025. We are live from our headquarters in São Paulo, and we will split this event into three parts. First, our CEO, Mario Leão, will talk about the main highlights of the quarter and the directions for growth in the coming periods. Next, our CFO, Gustavo Alejo, will provide a detailed analysis of our performance. Finally, we'll have a Q&A session. I'll now proceed with some instructions. We have three audio options on the screen: all the content in Portuguese, all the content in English, or original audio. To select your option, simply click on the button at the bottom center of your screen. To ask a question, click on the hand icon at the bottom of your screen.

The presentation that we are about to give is now available for download on our IR website. With that, I'll now hand over to Mario to begin the presentation.

Speaker 1

Thank you, Camila. Good morning, everyone. It's a great pleasure for me to be here. It's 2:10 P.M. We are streaming live, presenting the results for the first quarter of 2025. It's the beginning of the year, but it's the continuation of a journey. Here, I have the main highlights. I think you probably saw all of that. Starting on the left-hand side, we have consolidated numbers where we deliver, you know, net income of BRL 3.861 billion or BRL 3.9 billion. This is net income almost the same as the fourth quarter of last year, slightly above. An important evolution year on year, and it's important to deliver that because this shows the consolidation of an improvement conducted throughout last year, where we are very much focused on our strategy.

Our profitability is slightly lower, at the same level of the fourth quarter last year, 17.4%, a major evolution of over 300 basis points. Today, we will give you more details about how we arrived at this result. This is quite important. Certainly, there are some relevant accounting evolutions related to 4966. We are the first listed bank to tell you more about how this affects the financial institution. There are several lines that were impacted by that 4966 resolution. We made progress in our NII of 0.4 that involves market NII, and I think you already looked at that. There was a reduction, which was already expected, but the number is still positive. There was also a positive evolution in the client NII made up of assets and liabilities. The impact in the first quarter was quite relevant.

We never mentioned business days' impact, but this quarter, business days had a relevant impact, and this led to a reduction in the NII of a few hundred million. NII, I would say, is flat with some dynamics that I will further explain. There are several positive impacts. On commission, on the fee side, we have a difference between the fourth and the third quarters. There are some dynamics that are positive and some others that throughout the year we will focus on continuous growth. In terms of fees, we still have more things to do. All the strategic agenda is geared towards transactionality to create greater volume and also cheap deposits. In terms of cost of risk, there was a three basis points evolution, but in comparative basis, not the same. We will make comparisons of the different dynamics. The members follow different criteria.

From then on, we will build a new baseline, and I will comment further on about that. Our expense line is very much focused. There was some seasonality between the third and fourth quarters. There is a natural evolution in terms of year-on-year expenses, 4.4. We will continue to have year-on-year expenses lower than inflation. We will seek for, you know, a higher gap against the inflation. This continues to be an agenda focused on discipline. In terms of the strategic drivers, I mean, I will give you more details about that. We are very much focused on building a very sound and resilient operation, increasingly diversified. You have heard me speak about that in previous earnings release calls. You will hear more about the effects of this diversification strategy. We are focusing on very clear strategic agendas.

This time, we will bring you more data, data that we call the golden rules. I will comment on the golden rules further on. We have this obsessive focus on our transformation agenda of customer experience because, after all, this is the bottom line. This is what feeds us. Speaking about clients, here I have some figures, and I am pleased to share that with you. We superseded 50 million clients in our total base. We are also evolving and making progress with the active client base. We have 33 million. I am even more satisfied with our, you know, primacy clients. We call them the agenda of primacy clients because we want clients to feel like they are our main or principal clients. This is certainly the pillar of our, you know, client strategy. In terms of NPS, we have the best numbers in our history.

We made a 10-point increase, especially in companies, in corporate. This shows that we are moving forward in our journey. This is not all. We continue to focus in developing a very robust agenda with clients. I mean, we have here two examples. The first, I'm very pleased to talk about it. We briefly talked about it, but now this is a reality. We are about to launch our One App. This is not an updated version of 13.5.1, but this is a new app, in fact. With this new app, we launched a very unique experience to our clients. This will certainly be an app that converges all of our experience throughout the years. This will also converge into all of our apps.

We want this One App to be the new way of clients to try out Santander every day in a much more personalized way, within a context. This also involves continuous conversation. This One App is rolling out. We start. We will escalate from May to September. Before the fourth quarter, all of our customer base will be covered by the new app. The second focus relates to our evolution in the payment journey. I mean, this consists of a very lengthy list of things, but the payment journey has been a major focus of Santander. Last year, we made progress, and we gained more than 10 or 11 NPS points, and we evolved our PIX journey in a very material way. We have a single place for any kind of PIX key. The PIX journey is simpler and more intuitive.

We have credit PIX, which will come very soon. We have, you know, contactless P, click to pay. We are ready to do automatic PIX, which will be introduced to the entire market very soon, with major things already, you know, decided at Santander. The payment journey is something that we will give you more details throughout the year. This is a great strategic pillar. Together with cards, these are the journeys or the things that clients use the most. We continue being number one in tax, so sustainability remains one of the major pillars of the bank. Speaking about our strategic business, and here I'll mention four. We usually mention some of our business. The consumer finance, you know that it's a very robust segment. It grew less than last year.

Last year, we grew over 20%, and this year, the market as a whole is growing less. Therefore, we were more cautious in terms of growth in the first quarter, given, you know, higher demand and increase in interest rates. This remains a very relevant growth avenue. In addition to being, you know, a good consumer finance, we are the most digital consumer finance operation. We have also a share in electric vehicles. Our share is 50%. Out of 100 electric vehicles sold in Brazil, we sell 50% of them for some brands. Our market share is over 70%. In SMEs, we remain, you know, renewing our franchise. We introduced a new service model that was launched last year, a new value proposition with coverage throughout the country. We are also increasing the number of calls, you know, evolving and advancing in NPS. The result certainly comes along.

We had an evolution of almost 20% of net income in two years. Certainly, we want to increase that curve even further. Cards, we had a major leverage that I just mentioned. Our base is mostly focused on high income with improvements in average spending. We still have a lot to do, but our evolution in cards is here to stay. We are very much focused on this product. I mean, parent account, PIX, and a view on payment journey with an eye on further integration among different products and how we integrate our agile model. In March, we are launching Santander Shopping. We will talk more about it throughout the year, but this is a new way for our customers to consume through our app using Esfera, which is our relationship model as a big support. To conclude, I reinstate our retail for individuals.

The market is shrinking in general, and we respect that decision. For us, we decided to simplify the way we position ourselves vis-à-vis our clients with our brands, the value proposition that we want to deliver. We are doing that with individuals with the Santander brand for low and, you know, very low income. The first results were very positive throughout the year. We will be able to share more information with you. Just to conclude, in terms of investments, we now launch our major Gen AI pillar. In practice, all of our AAA advisors and very soon all of our advisors in general, experts, there will have, I mean, AAA already has it, a pitch generated by Gen AI, 100% generated by Gen AI. They can share that with their clients through any channel, I mean, email, WhatsApp, or personal conversations.

Just to conclude my presentation, and this is the first time I share this with you, this is something that for more than a year or a year and a half, it was part of my management and the management of the entire leadership of the bank. I call this our compass, our golden rules. In practical terms, you will see that everything is quite simple, and this is how it should be. Everything is connected with everything we said so far. I will briefly talk about it, but I wanted to share this with the market because in a way, this really solidifies everything we've been talking to you in the past few years. What is the bank that we are building? We are building Santander with three principles. I mean, the first being our balance, you know, loan portfolio.

I do want to continue to grant credit, credit as a means to gain transactionality with clients through fees and deposits. I mean, loans per se, they have to be well priced. Despite this more difficult macro scenario, we want to grow spreads. You will see that we are very much focused on spreads because pricing is key. This balance loan portfolio means a lower concentration in low income, higher concentration in higher income. You know, balancing SMEs and the consumer finance. The second pillar is to reduce the funding cost of the bank. We've been doing that consistently. This is not like pressing a button. This is a strategic agenda that has to be, you know, that has to permeate all the channels.

This has to do with the retail market so that we can use our retail instruments to also do some funding and paid funding like deposit and credit notes, as well as funding coming from our transactions with clients, things that you do not sell, but you gain the right of having, you know, a deposit in the account. We are focusing on that. The third pillar is diversification of revenues, revenues from fees. We have in that fees pillar, we saw how we evolved last year. We want to advance again this year in a very substantial way. We will do that. The diversification of revenue lines is very important, and fees play a very important role. The fourth is efficiency in cost. We are doing our homework quite well, and our homework is being well executed. We want to go further.

We want to be more efficient. We want to reach a level of efficiency never seen before. We will, and that will lead us to higher profitability. Profitability also consists of a composition of all the lines and how we organize our capital allocation. We are being very disciplined in that. Profitability is a major pillar. This is the result of all that. We will continue with that pursuit of that mission because we wanted to get at at least 20% profitability. This will be the minimum. We have a long-term view. We do not want to go on a sprint, but we will look at all the macro scenario, you know, interest rate curves, volatility, and results based on those golden rules. We are managing the bank.

Everything we've been telling you in all, you know, conferences and events connects with all of that. I thought that this will be a nice thing to share with you. With that, I turn the floor to Gustavo, who will give us more details on the numbers. Obrigado, Mário. Bom dia a todos. Thank you, Mário. Good morning, everyone. I'll start with the performance of our loan portfolio. The evolution in the full year, as well as in the quarter, shows the continued discipline of growing with quality and consistent profitability. Cards, which play a fundamental role to have loyal clients and transactionality, continue to stand out. We had annual growth of 18%. We are making better use of our own middle and high-income bases, as we said in the prior call. Consumer finance maintained the good dynamics of previous quarters.

Originations continue to be targeted at clients with the best ratings, who account for 80% of our portfolio balance. We continue with a lot of price discipline. With regard to SMEs, growth was concentrated in government loan facilities, which increased 1.8% in the quarter. In corporate, part of the portfolio's evolution is in the private securities and guarantees portfolio, which grew by 2.1%. In this segment, excluding the exchange rate variation, the loan book would have expanded by 0.6% compared to minus 2.2%. Payroll loans fell by 3.4% quarter on quarter, reflecting our focus on profitability. It is a focus that we have declared over and over. This focus on profitability has led to lower origination of INSS deductible loans. On the right side of the slide, we present the results of our funding.

We made important progress in demand deposits, which is a reflection of the primacy of all of our clients, both retail and wholesale. In addition, we continued to optimize our funding instruments, adjusting our costs, improving our costs. In the specific case of this quarter, we continued to increase the issuance of financial bills, given the good market prices and the still significant demand for these securities. This result is a reflection of our discipline in managing funding prices, which contributed to improving average costs in relation to previous funding, combined with the objective, the declared objective of changing the composition between individuals and companies. On the next slide, we see revenues, which grew by 7% over Q1 2024. In the quarter, client NII grew slightly. The lower number of consecutive business days quarter on quarter affects the NII comparison.

This regarding this effect, client NII would have grown by 1.5%. Another effect is related to the adoption of Resolution 4966, which implies some adjustments to loan origination costs and problematic assets in the client NII, which also impacts the quarter on quarter comparison. Overall, we see a good composition of revenue in the quarter. In terms of funding NII, in line with discipline in asset pricing, we are making good progress in relation to our strategic objectives, with an LCR level of 157% and a very positive evolution in loans to deposits ratio. As a result of these effects, the spread in the quarter grew by some basis points, with increases in assets and liabilities spreads based on what we have been seeing: a constant pricing discipline and a balanced portfolio with a focus on optimizing risk-weighted return. That is super important.

Market NII posted a lower performance quarter on quarter, as we have mentioned, given the SELIC rate hikes. The SELIC rate hikes have an impact and have an effect, but this is offset by better results from treasury operations. On the right side of the slide, fees continued to perform well year on year, despite the accounting effects of the new Resolution 4966. The resolution had an impact on the credit operations line here, where fees related to the granting of loans were migrated to the NII. Hence, this specific impact. In the year-on-year comparison, in general, we continued to evolve in the main fees accounts and more rapidly in consortium, for example, which increased to 14% year on year and 4% quarter on quarter, even in a seasonally less favorable period. The other line has been driven mainly by savings bonds revenues.

Now I'm going to speak a little about the quality of our assets. Loan loss provision, which is now calculated using the new expected loss methodology, showed a higher level over previous quarters, given the new criterion, which requires greater provisioning for granting credit. In addition, we saw a lower level of credit recovery due to our stricter approach to renegotiations, which we have been mentioning in past quarters because we want to improve more and more the quality of our operations. With regard to delinquency, the long-term indicator remained practically stable with a slight increase of 10 basis points. Short-term NPL, on the other hand, reflects the seasonality of the period, given that households have lower liquidity. Part of this increase should be addressed during the second quadrant should not migrate into long-term delinquency.

More specifically, in the NPL, 15 to 90 days of individuals, of the 80 basis points variation in the quarter, almost half of that is related to real estate, which seasonally adjusts in the next quarter. That is not a point of concern. The rest is in cards and payroll loans, the latter being partially impacted by the drop in the portfolio. We had a reduction in our payroll loan portfolio. Although we have a more challenging macro scenario ahead, we are confident about the quality of our portfolios. We have focused on sustainable expansion over the long term, carrying out very active risk management, discipline in pricing, and technical rigor in the allocation of resources. Now let's speak a little about expenses. We are making progress in our quest for efficiency with a focus on cost control. In the full year, expenses grew below inflation.

We saw a decrease in personnel expenses due to the one-off increase in variable pay recorded in the previous quarter. As for administrative expenses, this first quarter saw a more normalized level without the effects of the end-of-year seasonality. Once again, the increase in expenses remained below revenue increase in the year-on-year comparison, contributing to the continued evolution of our operating leverage. We saw sequential improvement in our efficiency ratio with a drop of 250 basis points over the year. To end the earnings session, I present a slide summarizing the quarter. We ended Q1 with a net income of BRL 3.9 billion, up 28% year-on-year, and higher profitability with ROAE of 17.4%. We evolved in the composition of our earnings, with revenues exceeding expenses, an increase in transactionality, and more focus on liabilities.

To conclude, I would like to emphasize, as we saw in the golden rules, that our work is focused on the medium and long term, aiming for sustainability and seeking to ensure solid and consistent results. Thank you all, and I now hand over back to Mario for his final statements. I am back. Very briefly, so we can start the Q&A. I am sure that you have excellent questions to challenge us. Let's focus on the Q&A. Five main take-home messages, just to tie together everything we have been saying over the last quarters and years, and what we did in this quarter and will do in the following ones. We have an obsessive focus. I highlight obsessive focus on primacy relationships and customer satisfaction. High by building unified and multi-channel journeys, featuring increasingly hyper-personalized offerings.

We believe in multi-channel and using a network, a brick-and-mortar network that will be downsized more and more. We have to be where we want to be, in the franchise stores, in the work cafes to serve our clients. A complete system with more and more mobile digital experience leading our relationship with the clients. Third message, business evolution, focusing on discipline and capital allocation. We have been doing this, and we've had concrete examples of that. Technology remains our major lever for transformation to transform a customer journey. We embrace technology as a core element in our strategic vision. This year, just like last year, will be a year of execution, a little strategic debate. We know where we want to take this bank. We know what is the 2030 Santander that we want to have, that we want to deliver.

We will use our compass, our golden rules that I shared with you as our north. With that, let's start the Q&A session. Obrigada, Mário, Gustavo. Thank you, Mário, Gustavo. We will now start our Q&A session. To participate, all you need to do is click on the hand icon in the bottom of your screen. We will answer the questions in the language they are asked. We would like to ask each analyst to ask only one question so that everyone will have a chance to participate. Our first question comes from Daniel Vas from Safra Bank. Good morning, Daniel. Bom dia, Camila. Good morning, Camila, Mário, and Gustavo. Congrats on your results, and thank you for taking my questions. I would like to go back to Mário's comments when he talked about the second half of the year and the automatic PIX. You already have some agreements.

I think this is a product that was one-to-end. You had to be enabled by several banks. Today, in the next update of the automatic PIX, there should be only one bank for you to license the company or the utility company to be able to cater to your retail needs. Do you think this is beneficial to the bank at the end of the day, this agreement? I mean, you did not have any revenues coming from that. Do you think this is more positive for the system in general? I would just like to understand what is the net impact of automatic PIX, because this is a major revolution in payment means, especially regarding public utility services. That is a great question. This gives us the opportunity to talk more about this regulatory change.

This is a relevant change that will be in effect in a few months. Certainly, we cannot wait until the beginning, the formal beginning of this regulatory measure to be prepared, because we started, you know, in the midst of last year. Not only do we have to be technologically ready, but we have to do it in a way through the app that we could also seek for a commercial agenda with the major banks. Together with the conclusion of our development, we will be able to sell that to the major anchor banks even before it becomes operational. Today, we can already operate automatic PIX, you know, based on the agreements that we have with the anchor companies and our clients, because in a one-to-one basis, we can already pilot that. We can already operate.

The broader journey that we'll start as of the third quarter, I mean, we already have agreements that we cannot mention publicly, but we have some large clients that many of us use every day, and they will be important pillars of our franchise from now on. This is a revolution, Daniel, because in practical terms, it changes the order by which payments or recurring payments are carried out. Today, I mean, you have to register, I mean, as an individual, you have to register all of these utility companies, you know, with the different banks. The clients of these banks, they are the ones who decide what will happen. We will be a relationship one-to-one, as you mentioned, B2B, and then B2C according to the relationship of banks and their clients. This is a journey or a more captive process, I would say.

What Automatic PIX allows us to do, and this will be good, because if we have the large agreements, I mean, it may not be as good for those who cannot engage in these agreements, but this allows us to have a one-on-one relationship with B2B. From B2B, I will be able to get the demands from clients that are already in the bank, but not only that, but with all of the other banks in the system in different formats, digital banks, banks and their physical branches, and other financial institution formats. There will be a bilateral relationship with a large, you know, corporate in the agreement, and we will be able to also make collections from a large base of clients.

This will also bring, you know, a robust flow of, you know, clients, and we will be able to, let's say, dialogue with a larger client base, because I will be dialoguing with recurring clients stemming from this agreement with a corporate or another organization. I think we have a lot to gain with them. The market will be reorganized. It is difficult to refer to that pie chart, but I think that that pie will grow, because once you coordinate payments, there will be more agreements. At the end, there will be more agreements. Since we are a large incumbent bank, we will play a very important role. Through the agreements that we are finalizing, we are very optimistic going forward. Thank you very much. Our next question is from Yuri Fernandes from JP Morgan. Hello, Yuri, welcome. Thank you, Camila. Good morning, Mario, Gustavo.

Congratulations is in order. You know, you had a very good operating leverage. I think the only point that drew our attention was short-term NPL, 15 to 90-day NPL, especially looking at individuals. I think it was worse than seasonality. It was a quarter with a lot of accounting changes. My question is, what happened? I mean, Santander was a bank that, you know, took the lead vis-à-vis the other peers. What was the reason for that? What was the dynamics of the asset quality for the bank? Okay, I will turn the floor to Gustavo, and then I will just add to his answer. Yuri, nice talking to you. As I briefly mentioned during the presentation, 15 to 90-day delinquency, especially individuals, which is the topic of your question, that was up by 80 basis points.

Half of that increase comes from real estate loans or mortgage loans. Mortgage loans have that effect in 15 to 90-day delinquency. Usually, in the following month, things get adjusted. This is natural, and it happens at every beginning of the quarter. In this quarter, delinquency was slightly higher, but it is adjusting itself. Another effect that we've been mentioning for a few quarters is our renegotiation policies. In some quarters, we're more restricted in terms of renegotiations. I even said that we are not going to change our renegotiation policy because it is more restricted, you know, for one quarter. We will continue pursuing that renegotiation. Some of these rollovers will be adjusted, and these will have an impact on the results. We are very much concerned on having a very clean portfolio. Excluding mortgage loans, we have cards. Cards is not a concern.

Some things on the payroll deductible loan part, but the majority of that comes from the way we are dealing with renegotiations. There is nothing that can draw our attention or that we believe will escalate to, you know, over 90. We are adjusting the portfolios when we see that the performance is not going the way we want. We are also allowing some portfolios to flow naturally because this is just a natural move. This quarter, we are not concerned about that. I think that's it. Just to reinstate that, our topic of renegotiations is quite important, and we've been talking about that with you and everybody else. Since 2023, we've been, you know, we are more, we are tightening the belt. I mean, there is no renegotiation, I mean, with individuals, but also with corporate without a down payment.

First, because we have to test the payment capacity of that client. Also, we want to create further engagement. If there was a payment, I mean, I have nothing against the other banks, but we have to ensure our payments. We are more restrictive, but we are not loosening that policy. I mean, the macro scenario is worse, but we are not going, you know, we are not going to change anything. De-risking is still part of our practice. The legacy de-risking continues, and we will see that reflected throughout the year. The reduction in the portfolio, all of the agreements, and the de-risking in the portfolio will remain. The other part, I mean, Gustavo just explained, this is a common seasonality.

This year's seasonality was a bit higher, but in the past four weeks, we know that that's very much concentrated in one portfolio where losses are very small. I mean, that is the mortgage portfolio. In summary, we are not concerned. That's very clear. Thank you very much. Agora a gente vai ter a participação do Gustavo Schroden do Citibank. We have a question from Schroden with Citibank. Good morning, Cami. Mario, Gustavo, thank you for taking my questions. I would like to have a follow-up question to Yuri's before mine. Was there any change in the right of policy based on Resolution 4966? So we can understand the NPL dynamics. Another question is about client NII. From what we could see, there were a lot of moving parts. In our analysis, the number was good, but. O que vocês escreveram já foi comentado.

You mentioned that there were high interest rates that improved your remuneration on funding. Mario just mentioned de-risking, which theoretically should play against the spread in the NIM. Could you comment on the dynamic of interest rates and funding cost, cost of funding? Is there a repricing going on? Can you have a gain with the interest rates and cost of funding, or perhaps would this improvement be due to a remuneration of funding? Okay, I'll start, and then Gustavo will speak about the right of. Aqui é super importante o ponto do NII clientes. A gente pode cobrir depois aqui, claro, o NII mercado. We can cover this part later. Tem de fato esses dois grandes componentes. Eu vou dissecar. Client, well, client NII has two big components. Starting with the funding liabilities.

There was a liabilities expansion and a growing franchise of funding like ours, which is super important. It's a good thing we started focusing on funding in 2021, 2022. It's commissions and the strategic funding strategy benefits when we have a CDI at 14% odd. There are two types of liabilities: CDBs and letters that we sell to customers in here. This is under Gustavo's management as CFO. We have applied a lot of discipline of repricing down. How do we do that? Not just being less. We do this by shifting the funding mix. Moving more towards retail. We can continue to get money from the big funds. There will be some price discipline there. Over the last 12-18 months, we have been doing this with a lot of consistency. I call it the marginal funding of the bank balance sheet growth.

It's coming more from retail than wholesale. We dilute wholesale. Also, at the beginning of the year, we take advantage when the credit spreads were very, very low, and we start issuing again the letters, finances, financial bills. It's not that we did that because we didn't have alternatives, but it was a tactical move of funding financial bills at very low prices compared to CDI without the need of reserve requirement. That gives us a very powerful LCR. We have been funding in retail more than wholesale and also the issuance of financial bills, which was a tactical but relevant move. The paid part of deposits, the part that I trade, was reduced to bring us a better margin with higher volume, and we get more money. Second block is what I gain without selling. I don't sell time deposits or demand deposits.

This is again derived from the relationship with clients. The fact that the organization is focused on transactionality as a core element. Like I said, credit is a way to get fees, but also cheap deposits. Cheap deposits account has improved a lot. We saw a substantial evolution quarter on quarter, year on year, what we call a max account, our remunerated account. We can see a good evolution both in the time frames with low price and demand deposits. We have an agenda of funding, which is not just for this quarter. It is a multi-annual agenda, and this line item should continue to grow. What's happening on the side of the assets, which is the more interesting part? We continue with the de-risking with a credit NII that we will continue to work to expand.

Gustavo, the first assumption is we have been super disciplined in pricing. When we look at product, product by product, of course, we have to follow what's happening in the market, but we have been managing to pass through for the prefixed portfolio, consumer finance, mortgage, etc. We have been able to pass through this increase over time of the cost of funding. Of course, in the last quarter, there was the opposite effect because there was a slowdown of the midterm curve. We had a good discipline between how we fund money and how we pass it through. By the way, we have been hedging loan origination. In terms of market NII, we are more and more balanced, and we'll have less volatility. We have spread discipline.

Given that we are de-risking, sometimes we have an exchange in the product mix or portfolio, which are less top line, but also less provision for loan losses. We are pursuing this evolution. We do not doubt that we have to switch from more risky, volatile portfolios for less volatile portfolios, even if the top line is lower. The ALL will take longer to be felt. Again, it is the golden rules. Until now, we have been able to balance all that. In a nutshell, we have an expansion of funding that should continue its strategic NII that did not come as a sprint. CDI will continue to help us for a while. Hopefully, the interest rates will drop sooner than later, but while it is high, it benefits us. Also, price discipline.

Since we don't have an agenda to grow the balance sheet in an expansionist way, we're being more disciplined. We can choose where to grow. We can better choose the pricing. This applies to wholesale. In wholesale, we're not growing that much. There was also a reduction with exchange rate variation, but we have been disciplined in managing our disbursements in wholesale because I'm choosing the loans where I can have the best result. We can play a better game for wholesale. Gustavo, would you like to talk about the write-offs? That's what you said, Gustavo, about the assets. We're being very disciplined. We are not focused on growing some portfolios if we don't find an optimal point of price versus expected return. Some portfolios can grow more or less, but it's basically based on discipline.

We did not change the policies. We did not change the concepts. We did not change anything. We are just executing what was predefined by us. When we do that, some portfolios will flow, some will be rolled over. We will have a double L affected by that. Our goal is to have a cleaner and cleaner portfolio, a portfolio that needs to be built in a solid way with a better performance. This is what we are doing. There were no major changes. There was this change of Resolution 4966, but since we were already operating by IFRS 9, there was no major change, neither in the way we operate or the way in which we book things. That is a good thing to point out. As we said two or three quarters ago, our day-to-day decisions since 2018 have been based on IFRS 9.

Obviously, there are some minor changes, some not so minor, but it doesn't really change the way we grant loans, the way we manage credit, and how we book losses. The short answer is there were no changes. Our management felt little or nothing or no effects related to Resolution 4966 because we were already in IFRS. A gente já tinha com exceção do imobiliário, que é 450. Yes, I just want to complement that we had, we were abiding by other resolutions. Thank you. A próxima pergunta vem do Pedro. Our next question from Pedro Le Duque from Itaú BBA. Olá a todos, obrigado pela pergunta. Hello everyone, thank you for taking my question. My question is related to the 4966 resolution. I know that there are several parts to it, but I would just like to get a better understanding of it.

I think you mentioned a few aspects of that resolution during your presentation. You talked about NII, and I just want to put everything in the same basket. Maybe next quarter, once we run a quarter-on-quarter comparison, the picture will be clearer. If maybe NII will be lower for stage three, accrual 60/90, you know, ALL may be different, the debt service may be different. Do you have any estimate of what the impact would be in your P&L or BRL 300 million negative? Still referring to that resolution 4966, we noticed that provisions for ALL, you know, transition was a bit different. I mean, it was difficult to estimate, I know. We know that it was BRL 5.6 billion, and in the past was BRL 4.4 billion. What led to that increase in that transition of ALL?

It has to do with expected losses, or it was related to a new understanding of the resolution. It is great talking to you, Pedro. I will start with the second part of your question, and then Gustavo will add to my answer. In fact, I mean, there was this evolution, and it is very good that you mentioned that because we want to cover that with everybody watching. Evolution, that also relates to the initial provision for 4966. I mean, it has nothing to do with the scenario saying that, okay, since it is worse, let's take advantage of that. We did not use that. We did not roll out or anything. More than that, it was a deeper understanding of how that inventory, let's say, could be affected given the new accounting standard. We continue performing all the analysis.

You were very kind to say that there were too many things that had to be assessed. We continue to analyze things after the fourth quarter presentation. Right after the first month or month and a half, we just arrived at the conclusion that we already did some fine-tuning, and everything was fine-tuned with the central bank and with our internal and external auditing experts. There was not anything associated to protecting our results or the macro scenario. We just used the same criteria we used before, which is some additional things in terms of the perimeter and the portfolio. I think with that, I answered the second part of your question. The first question about the 4966 resolution, I mean, it is exactly as you said. Certainly, the starting point was, you know, that first quarter.

The way this will evolve pretty much depends on where we produce, how we produce, and what is the combination of all that. I mean, the fact that the portfolio accrual, I mean, the renegotiated portfolio accrual has an impact, but as we reduce the renegotiated portfolio, the impact will be also diminished quarter on quarter. The other thing is that it will depend on what products we produce and what kind of relationship we have, and this may have a negative impact on the margin. There are several issues depending on how we produce and how we will advance our portfolio throughout the quarters. I mean, there are several moves in this quarter in addition to all of the things that we talked about. We have also a different number of business days, and then we will progress going forward.

It's difficult to say because we haven't yet defined everything that we will produce and how we will be producing things in the coming quarters, but we work knowing what the impacts will be in the several lines of the bank. It very much depends on how the bank will perform. If we'll continue producing less payroll deductible loans as we did in this current quarter, it is one thing, but if the production increases, it's a different thing. We grew 0.6% of our auto portfolio, and if that number decreases or increases the following quarter, I mean, all of these are variables that certainly, once, I mean, we and also you will help us understand how this will impact our client NII going forward.

Pedro, also knowing that the work you do and the buy-side work as well is already challenged, but it is even more challenged with this new 4966 resolution. I mean, there is a timeline of how much we can cover, but we are here at your disposal to, you know, clarify questions and to help you find out what will happen. We will try to be as transparent as possible. Whatever we can do to help you in the next few months, please count on us. There are more things coming, you know, with this 4966. We try to build things with you going forward. Thank you for your question. Eu vou chamar agora o Marcelo Mizarri, do Banco Bradesco. Marcelo Mizarri with Bradesco BBI. Mizarri? Hello, good morning. It's a pleasure to be here for the first time.

Regarding the earnings, we have one question regarding market NII. Market NII was a positive surprise in our expectation and the market expectation considering the natural dynamics and how sensitive it is to interest rates. Mário, Mário mentioned the start of hedge that started along last year and how this should reduce the volatility of this line item. I would like to understand what in market NII was associated with trading with ALM and how should we think this line item looking forward? Welcome, Marcelo. It is great to have you here. I will start, and Gustavo will be able to elaborate more because he runs that. This line item has two big components. The first is what we call market making, the result of our non-client treasury operations. Essentially, the part of treasury that zeros client positions. It is a core role.

We have one of the biggest treasuries in Brazil, if not the biggest one. There is a lot to manage. Market making also takes on some positions. We do not have a great proprietary book. We do not run our treasury like a big fund. Nothing against it, but our treasury is geared to clients and to zero clients positions. Sometimes we take on positions. In a nutshell, Gustavo mentioned this. We had a first quarter, which was very good in market making, which is a merit of our franchise. It is a non-recurring event, quote unquote, because in trading, we cannot expect equivalent performances week after week, but we did have a very good performance, which helped this account.

In the ALM account, which is more linked to management of our loan book, how we fund our loan book, which involves hedge and the management of our securities that we carry, as all big banks do. Here, we will have, by definition, a more challenging year than last year, given the average CDI and SELIC now versus last year, and the average Q1 average CDI was different. There is a quote unquote effect year on year effect that can only be negative. We should see this over this year until the moment that a quote unquote will start reducing. We hope that this will happen along 2025 and along 2026. The market making part did really well, contributed for the positive result we knew, and the whole market expected a negative number. Correctly, you expected a negative number.

On the side of ALM and the management of our books, of course, that portion had a negative result. As expected, it is a performance to be expected throughout the year with a SELIC interest rate that should increase a little more, hopefully just a little more. There will be some quote unquote effect, and then it will get to a peak of negative, and then it will start improving. We expect this peak and this following improvement to start along 2025 so that we can end the year better and have a better outlook for 2026. Hedge, we started hedging in the end of third quarter of last year. We started hedging in September to hedge a good part of our loan origination. Over time, and over time should be measured in a window of about 18 months.

Over time, this should bring us a material de-risking of our volatility, as you mentioned in market NII, because how I funded my pre-income portfolio and my market funding hedged, and this will reduce volatility, reduce the volatility this quarter, and over time it will continue to do so. When interest rates start decreasing, this portion will no longer benefit, but for a good reason, and will benefit in the portfolios because we are hedging pre and post-fixed at much higher levels than before. We will benefit from interest rates and from interest rate curves over time. We have a potential upside to be built over the next quarter given the level of level and duration of the bonds we have been buying. Gustavo? That is exactly that. The script in terms of negative sensitivity remains unchanged.

What happens is the average of the average SELIC in the non-hedged part will change, but it is as designed, as is in the script. In Q1, we had a good market making performance. What drives this number is that there was no material change in terms of negative sensitivity. This is exactly according to the script. There might be some potential upsides now starting in May with the coupon meeting, and we'll see how the monetary policy will be in the coming months. For now, things are exactly according to expected for 2025. There was an event in Q1 that was very good, but this is an event, in our view, extraordinary. It does not change our ALM strategy and execution. They are totally independent. Marcelo, I gave you a very broad answer.

Just want to stress that we are building a portfolio in the last two, three quarters with much higher levels than we had until then. This is important information. Do not expect this to lead us to a materially different Q2, but this will make a relevant change when interest rates start dropping. There will be a positive gap between the level of securities that we have in this new portfolio and the SELIC interest rate, which means a better accrual in the future. And/or when the curves decline, the curves decline before the SELIC will generate some goodwill in the future. The short term is exactly what we expected. I think that a better market NII that we are having relatively brings some positive insights in the future in terms of what the market NII can be in the future. Thank you very much for participating.

Next question by Tiago Batista, UBS. Hello, Tiago. Hi, Camila, Mario, Gustavo. My question is about mass retail. I think that it was in 2022, 2023, Mario gave an interview and mentioned that mass retail was deficient and they needed a lot of cost adjustments. Not in those words, but after a while, you closed many branches, points of service. There was a 7% reduction in the branch. Can you say that you have inverted mass retail, that it has become profitable again? This additional ROAE increase that you aim to have it at 20% in the midterm. ROAE would be 20%. Can you say that mass retail is profitable again and too? Whether this additional return gain would come from an even greater improvement in mass retail. Excellent, Tiago. Let's start with the end.

The improvement we expect to have of at least the 300 basis points plus, and we don't want to stop at 20, but this improvement of 300 basis points in ROAE in the midterm, the midterm is getting closer and closer to us. Undoubtedly, that involves mass retail being more profitable. It doesn't come only from a profitable mass retail. We expect to have continuous improvement in the portfolio of our consumer finance. We have been originating with an ROAE above 20, but we still have the de-risking. There is a part of that in consumer finance. I guess that in another year or so, the whole portfolio will be above 20. In the category of portfolios above 20 for Santander, where we are at 20 or much higher than 20 would be in SMEs, which is a super profitable segment.

Our high income segment operates way above 20, and wholesale operates, like I said, at a lot higher than 20. However, 20 is always the target. Consumer finance is moving in that direction, given a marginal loan origination. Mass retail is still what is pulling down the average to 17%. Mass retail is already, is mass retail profitable as a whole? Not yet, but with the new vintages, we have an ROAE above 20%, prospectively, obviously. Everything related to loan origination has to be checked vintage by vintage. We always compare our assumptions, ex ante, and after it materializes. In mass retail, we see a positive performance aligned with the 20% plus ROAE. The challenge is we still have a portfolio that up until recently was BRL 100 billion, and we will continue to reduce that.

I'm not going to give you a guidance here, but you should expect mass retail along the year to drop somewhat materially until the end of 2025, possibly also in 2026, but with a new portfolio, which is much healthier than the old portfolio with those renegotiation policies that Gustavo mentioned that will remain intact. We'll continue to have an agreement with those that are paying their loans or writing off those that are not. We are at the best level we've achieved in the last three years. It doesn't mean it's good, but we are working on impeccable loan origination, working on the inventory of loans to reduce it so that we can have left the good part, so we can have mass retail that is profitable. This is what we are focusing on and a healthy mass retail. The rest continuing with the expected profitability.

If that happens, mathematically, profitability will be higher than 20% in the midterm and then not too long, too distant medium term. Thank you. Now, next question is from Eduardo Rosman from BTG Pactual. Good morning, Rosman. Good morning, everyone. My question is addressed to Mario. I would like to learn more about that obsessive focus. In your press release, you said that you want your clients to feel like they are primacy clients. Every bank is talking about principality. Can you tell me what is Santander's differential and what KPIs should we monitor to learn who is winning that race? Rosman, this is a million-dollar question. Certainly, we're telling you probably the same thing that most large banks are telling you.

We do acknowledge that the challenge is to convince you, the market, and mainly to convince the clients that we are the right bank for them to operate. First of all, our base, our customer base is quite relevant. We are not starting now. We have 70.7 million in our gross customer base. Many of them are still not active. We have 37 million potential clients to activate. I mean, to reactivate those non-active clients, it has been a very relevant part of our agenda. I will use the same thing I use when I talk to our employees because sometimes in the past, we would ask clients not to reactivate their account with us. I mean, I am ashamed to say that, but in the past, our activation journey was impeccable, just as impeccable as in any other fintech or digital bank.

Please, you know, challenge me if you think that, you know, that's not right. We are now reactivating customers. We are really engaged in this conversation to reactivate those clients. Last year, we activated more clients than what we did in our entire history. Activating is not enough because we're talking about principality. From these active clients, how do I make them feel that they feel like they are a primacy client? I mean, it takes great discipline. I will give you some reasons of, you know, how we are going to get there. First of all, we have to be very simple, more than what we've been so far. If I could go even further, you know, more than the incumbent banks have been. You know, being simple means having less offerings rather than more offerings.

We have to know how to put the offering in the right context, either because the client wants that or maybe because in that client journey, it feels good to talk about it at that moment. If we can have CRM and the CRM use that, in fact, allows us to have a continuous conversation. It's not all the time, Mario, talking to Rosman and like, you know, bothering you all the time, but having a continuous conversation when you, the way that you feel like you're connected with me the whole time, that I will be very surgical rather than sending you lots of push messages that I send to everybody. I need you to see that I am directing my message to, you know, BTG's analyst, Eduardo Rosman.

You have to feel that I am talking to you, understanding your context and your moment of life in a way that it brings you some context that has to do with your family, with your professional life, something very unique. That's why I like to use the name of customer with primacy. You know, you have to make clients feel that they have primacy. Of course, there are dozens and millions of clients, but they have to know that they are unique. The second pillar, again, that has to do with hyper-personalization and things that meet a context and in the right dose. This is important. Together with all of that, we must provide an impactful journey. I mean, lots of clicks and a lot of menus. No, sometimes the bank tries to sell everything they have.

The advantage of a bank vis-à-vis a fintech is that we have a full offering. If I want to sell everything at the same time, clients become disengaged. Sometimes it is better not to sell anything or to sell one or two, one-off things. We just respond to their demand and also provoke them with a few things that I have. It is a good advantage when you have a full basket of offerings, but I have to be very surgical in terms of what I offer to my clients. All of that combined with our service model, almost two-thirds of my sales happen through digital channels. We want to reach 60-70%. That has to be consolidated as well, given the fact that everything in the past was sold through the network.

It is also very important to have an adequate service model specific per client, you know, hyper-personalized. Clients from private banking, clients from a grocery store, and clients that, you know, bank with us in New York. The way we serve human beings throughout the country with a humane service, we have to work close to the client. We go to where they are instead of having them come to us. We pay clients a visit. We are doing something apart from what the market is doing, except for, you know, acquiring businesses. We go, we have a call map. Our service model is very personalized. In the case of individuals and also corporate segment, we can talk about investments and the full banking offering, but very simple.

I know that, you know, I went around a lot, but I hope I covered some of the aspects of your question. That was a great answer. Thank you very much, Mario. Thank you, Rosman. To conclude, we have our last question from Antonio Ruet from Bank of America. Good morning, Antonio. Good morning. Camila, Mario and Gustavo, thank you very much for your time. I would like to go back a bit and talk about credit appetite because we see very conservative appetites. You talked a lot about the risking nominal growth. I mean, what changed in the last three months? I know that you do not give any guidance for portfolio growth, but how would you say that your appetite evolved and what changed in terms of your asset quality plan or your funding plan? That is a great question.

I'll start, then Gustavo will add to my answer. Since the earnings call of the third quarter, even though it was a very positive quarter, at the end of October, we decided to be more cautious in terms of portfolio growth. This is something that we mentioned in the fourth quarter. I think that the earnings release, you know, probably was less ambitious, but we remain on that same pace. We don't know more than the market does because our reading of the market is the same as everybody else's. Since the last months of last year, we saw signs that, I mean, of course, we didn't know what would happen in December, but we knew that the macro scenario had some signs given the fact that interest rates were increasing. We saw the immediate consequence of some deterioration in some portfolios.

We see this happening in the numbers of the first quarter as it happened in the third quarter. Does that change our risk appetite? Substantially not. It does not change what we've been doing. We do that regardless of the Selic rate or the fact that it is going up or down or, you know, whatever. Our discipline is very fierce. That is not monthly, but we are looking at it every week. We look at all of the audiences to which we grant loans, you know, audiences that are closer to the appetite limit that we call border. I mean, we look at all the audiences, but for border products, we pay close attention to them. We look at the first signs, concrete signs. We do not wait six or twelve months.

We wait for the first concrete signs of deterioration, and we make adjustments to those border audiences in a very differentiated way. What we evolved is in terms of our capacity to react to the data. We make policy decisions in a few days. In the past, this would take six months. Policies are just fine-tuning in loan granting, loan concession. We make decisions much quicker. We continue to do that. If there is any additional, did we make any additional cut? Yes, in March, we did some marginal cuts in some specific products for low income because these audiences were not performing accordingly. They were not performing ex post in line with what I wanted or what I expected for low income. These are marginal cuts that do not impact the portfolio as a whole.

They have, you know, there is a price in terms of entries because if the spread is higher, you decrease the NII, but this is acceptable because the ALL is lower. I mean, we are just making marginal adjustments, as I said, and this is, you know, business as usual, and we implement these marginal adjustments much quicker. This is part of our operation, our dynamics. I mean, that is it. We did not make any substantial changes. We have the portfolio that we wanted. I mean, we have businesses within businesses. This is very clear, but there are no structural changes. The macro scenario is not going to lead us to change our strategy. What we are doing is that we have the portfolio that we believe to be healthy. Now we are just testing the performance. The performance test is what leads us to make marginal adjustments.

There is nothing relevant. We have a very clear strategy of where we want to go. Certainly, there are portfolios that can grow even further. It's just a matter of demand. If there is demand, we will then grow. I mean, the measurement is very clear, and nothing changed from what we've been talking to you in the last quarters. Great. Thank you. Thank you very much for your time. Thank you. With that, I would like to thank you all for joining us this morning. After this video call, the entire IR team of Santander Brazil will be at your disposal to clarify any further questions. Thank you very much, and see you soon. Have a very good day.