Banco Santander (Brasil) - Q2 2024

Transcript

Camila Toledo S.A.) (Head of Investor Relations)

Good morning, everyone, and thank you for joining us today during our Conference Call for the Results of 2024, the Q1. We are here at our headquarters in São Paulo, and we'll be dividing this event into three parts. First, our CEO, Mario Leão, will talk about the main highlights of the period and the strategies by which we will continue to drive our growth in the coming quarters. Next, our CFO, Gustavo Alejo, will provide a detailed analysis of our performance. Finally, there will be a Q&A session. I will now give you some instructions. We have three audio options on the screen: all the content in Portuguese, all the content in English, or the original audio. To pick an option, just click on the button at the bottom center of your screen.

To ask questions, just click on the hand icon at the bottom of your screen. Today's presentation is available for download on our IR website. Now I hand over to Mario to start the presentation.

Mario Roberto Opice Leão (CEO)

Good morning, everyone. Well, it's 10:00 A.M. sharp, and we are live. This is the Q2 results conference call. I would like to start by showing you the main highlights. I'll start with the column in the middle with the numbers. I think you've already seen it. As you know, once again, we had a very clean quarter, as I like to call it, with some one-off events which are posted in our results. We grew 10% quarter-on-quarter over BRL 3.3 billion. Once again, we reached a BRL 3 billion level this quarter. This shows that we are showing consistent growth of our portfolio growth and results delivery.

In the next quarter, good operating results. We had an increase in profitability. Our profitability year-over-year is 15.5%, and this is an evolution when compared to 14.1% of last quarter, where we already showed an ROE above our cost of capital. In terms of results, growth, and profitability, it's a good performance. This is testimony that we are really going, moving forward in the right direction. On the left-hand side, we have a year-over-year view and how our results performed. Our NII increased by two digits. We will give you more details. During the Q&A, we can give you more information about client NII and market NII. We also had consistent progress in fees, and this shows that we are going to the direction of portfolio diversification. Since 2022, we've been saying that we need to diversify.

We needed to diversify the macro numbers of the bank. We have a credit position which is different, more balanced in terms of different income brackets and more funding and fees. The idea is to grow fees above our margin growth. In terms of funding, we are also growing two digits. This is another marathon. It's not a sprint because this is an effort that spans for many decades. I will give you some additional information further on. Our LLP is decreasing year-on-year, even though the portfolio is growing 8%. This is a clear sign that our portfolio is becoming even healthier and that therefore dilutes the portfolio from old vintages, portfolios that we had to work on during 2023 and 2024. And now we're seeing the benefits. On the right-hand side, we have the strategy progress.

We are certainly talking about our obsessive search for primacy. We use this topic, you know, this theme, primacy, because that means that we want to be the main bank and we want to be closer to our clients. We have to be present throughout the customer journey. It's a multi-channel conversation. So this is the summary of our strategy. In terms of Free, we had an important launch. We did that just before the last result. Free is a very relevant offering, and that puts us back into the game in terms of mass income. We will highlight the consumer finance, which is growing and with lots of transformations. We will give a double click in our business of SMEs. It's growing. We are, you know, revisiting our service model. And as I said in the last quarterly presentation, I mentioned that. And finally, I think you've seen it.

A few weeks ago, at the end of June, we concluded the VR and VA benefits, and we are making a merger with Pluxee, Sodexo. So we increased the valuation of our business, BRL 1,930. The recognition of the results, I mean, we could flow over to the results, but to be cautioned, we prefer to reinforce our P&L. We do have an extraordinary item in the Q3, but we will just preserve it in our results just to reinforce the balance sheet because this is a good sign of good management. Moving on to the next slide, we talk about customer centricity because after all, this reinstates the essence of our strategy. The first major topic that I would like to highlight is that we start talking about principality rather than loyalty. You might recall that we start reinforcing the topic of principality.

We are no longer talking about loyal customers. Of course, loyal clients is something very important, but what we are measuring now is principality. Principality is defined in three major blocks: transactionality, the everyday transactions from our clients, you know, credit card, current account, integrated payments, and then we have the credit side. I mean, everyday credit that converges with transactionality or more structured credit related to mortgage loans and other things. The third pillar is investment. We are referring to three main principality blocks, and that defines whether we are the principal bank or whether we are the second bank or the first one. We have a lot of things to do yet. Not only do we show that conceptually, but also in numbers. We improved our principality goal by 6%, and year-on-year, we are making a two-digit progress.

We will start talking more often about principality. And now this is our commitment, and we will speak about it continuously. We also talk a lot about NPS. We've been showing that, you know, quarter-on-quarter, I mean, we have to show our NPS numbers either going up or down. So our NPS continues to grow. NPS as a whole, transactional, we grow NPS, you know, individuals and companies. We have posted high levels, but that's not enough. We want to increase NPS even more, converging towards individuals as well. But these are historical levels and quite positive. They are also reflecting every channel when we look at a digital channel, remote channel, and obviously they are constantly integrated with the chat experience.

So when we look at the physical stores, this is even more surprising because we posted an important evolution in the physical channels, which coincides with the new service model that we also launched a few months ago in our effort to redesign our retail platform. The stores no longer own the clients, but they become a major element of our multi-channel offering as an element of convenience. So now the stores serve all clients of the bank in a very open way. All of the models are earmarked to that end. So the store is more dedicated to traffic. So NPS grows substantially. Moreover, profitability per vintage also grows. We've been showing these numbers in the past quarters. The 2021 vintage compared to 2022 and 2023 had a substantial evolution, which shows that we are going in the right direction.

We want to grow more, but we are on the right track already. Here we talk about Free with strategic numbers. So we capture the strategy that was literally launched one day before the release. I even showed you the video. We are referring to a strategy that involves a complete redesign of the way we deal with massive mass income. We talk about a new digital experience, redesign, simpler, and much more supported by a human and digital experience through the app. We also talk about a continuous conversation. And I usually say here that we don't want our clients to repeat the story over and over. So the client had a conversation with us, and the conversation has to flow. I don't want our clients to tell the story more than once. And we do that through data capture and our CRM experience.

We don't want the clients to tell the story over and over again because we have to be able to know the story even before they tell us. And again, we want to be the most present bank in customers' lives. And not only, you know, through our own will, but we want them to feel that for themselves. And NPS evolution is just showing that. What has happened to Free in the past three months? We are very pleased with the evolution. The first KPIs are quite positive. We are reactivating more account holders. Part of the strategy that I talked to you before during the release and in other presentations, I mean, from our total base of over 60 million clients, half of it, almost the entire bank, we have inactive customers.

So we have a great opportunity to reactivate clients that were not active a few months or a year ago. We are also capable of converting, you know, single product clients like auto loans or mortgage loans or savings accounts. So we have the opportunity now to bring these clients to bring them a more encompassing offering. And we are doing that with a very selective group. So Free not only means that we are changing our cost of risk, not only means that we are lowering the bar in that credit, in the open credit. We are bringing new clients with quality, you know, proportionally even better than before. And we are activating the clients that we want to have as well. Now here we are zooming in into the Select product. I've been talking about Select for the past year.

When we launched Select, Select is our high-income segment. It celebrated its 10th anniversary last year. Two years ago, when I started talking about Select with you, we had 600,000 clients, you know, rounding up. At the end of last year, we hit the target of 1 million. That was a public commitment that I made with you. I was saying, okay, now we are counting backward towards, you know, our target of 2 million. So nine months later, I would say I'm pleased to say that we already have 1.5 million clients. We are not only focusing on the number of clients, but we are growing with an NPS that hits the mark of 70. This is the highest in our history. This is through public survey NPS between the first and second banks in terms of high income in Brazil.

This makes us very pleased. We do that by growing our credit portfolio, loan portfolio. We also do that through investments. So principality is increasing among high income clients. And since we are never totally satisfied, a few weeks later, we launched a new positioning that we call our positioning, repositioning of the brand. And this is also migrating to high income clients with começa com vocês, starting with you. So we want to be very close and be close, meaning human. Of course, the digital also has a very good relationship with our client, but we want our clients to be supported by people available 24/7. These are experts in investments in our AAA and so on and so forth.

So we are revisiting this offering to highlight what we do best in terms of our offering of credit cards, you know, credit current accounts, personalized offering in our dedicated stores, which are spread all over Brazil, also in terms of our remote and digital offering. And here, as I've been doing since September of 2022, here we choose some of our strategic businesses and we will detail their performance. So starting on the left-hand side with our credit card business, if you recall, for almost two years, our operation was decreasing and this was not pleased to see, but it was something that we did consciously. This was part of the change in our portfolio. We need that not only we had to step on the brakes, but we had to earmark a portfolio because we were growing significantly in 2021.

So 2022, 2023, there was a drop in the customer base that was necessary, but in the last quarter, we started to grow again. We double our speed of growth this current quarter. So we are very pleased with the evolution of our credit card business. We are growing in terms of client quality. We are growing in terms of credit turnover. And you see the growth in credit turnover in our fees line. You will see through Gustavo's presentation that we are very well positioned, particularly in credit cards. And we are selling a level of credit cards that is 2/3 of what we sold in the peak of our speed of sales back in 2021. But certainly now we are selling, you know, having better knowledge of our clients. We have a good management of who comes in and who will merit an increase in their limits.

There was a great evolution in terms of data management and risk management as well. Therefore, we are very pleased with the current level of things. Certainly, I would say that it's been a year since we started growing the credit card business. This is relevant for this year and moreover for the coming years and quarters. At the same time, NPS has been very good. We choose to grow this business again, but grow with quality and customers being very, very happy. On the right-hand side, we talk about payroll loans. This is a business that I've been referring to for quite some time. Payroll loans, we are growing in every single portfolio, individuals, government, and INSS, you know, with all of the given challenges with rate limitations.

This is one of the most competitive and dynamic products we have, maybe the most in our entire portfolio. But once again, we are growing with satisfied clients and we are growing, providing a better, you know, credit quality. So payroll loan remains a very key part of our offering. This is the type of credit where we want to grow with our clients. And with that, we would generate not only profitability, but we will be able to deliver better quality of credit. Now here, in this slide, we highlight our consumer finance business. I was telling our employees that the consumer finance is even, you know, older than Banco do Brasil because the consumer finance transaction is over 60 years old. So it's been around in Brazil even longer than the bank itself. But even then, it is one of the arms that brings more transformation.

We are making great strides here. In between 2015, 2016, we took a major step. But now in 2024, we are giving another big leap because not only we want to be ahead of the game, certainly this is, we are not sitting comfortably on the couch, but we are working to evolve. We are the consumer finance company that is leader in the country. Our market quota is 21% and more, you know, even more than the quota. We are originating almost 90% of all of the entire auto loans or used vehicles in Brazil. Well, we choose to do part of it, but we are able, we are capable of looking at the market, and that's why we have a lot of data. Technologically speaking, we also evolved in terms of hiring experience.

In terms of hiring an auto loan, we only need the CPF and the number plate of the vehicle, just 4 clicks. So the experience to the dealership is amazing. So on average, the dealers would want to work with Santander because our experience is quite technological. We use facial biometrics and all of the experience that we need because the world is becoming even more complex when it comes to security. We also have super personalized offerings. All we need is the CPF and the number plate of the vehicle. So we anticipate ourselves in terms of risk and the price of the operation. And we use a lot of events analytics. Again, we have embark technology favoring customer experience. And this allows us to deliver quickly and correctly, both in terms of pricing, volume, and appetite.

We have partnerships with six out of 10 largest OEMs, partnerships that involve, you know, our stake. We have a stake in some companies, and we also have operating partnerships. In practical terms, they work the same way. We are leveraging sales together, the sales of new and sometimes used vehicles together with the OEMs. We have a historical partnership with Webmotors. As you might recall, last year, we sold our stake to Carsales. In practical terms, nothing changed in terms of the operation. We remain totally integrated. Webmotors is one of the largest auto portals in the world. Our partnership remains very solid and strong. In addition, we have a green consumer finance operation, and we are constantly embracing initiatives related to electric vehicles, flex vehicles, partnership with BYD and other players.

Therefore, we are growing with quality, bringing ESG to our agenda on the side of the consumer finance platform. Speaking about agribusiness, our end of quarter, if we look, you know, on a monthly basis and quarter-on-quarter, we had a record origination quarter. Our portfolio grows almost 20% in two years. And our origination also grows. If we look at the volumes, this burst is over 60%. We do that with a very high NPS score. And the quality of credit is even outstanding, outperforming the industry. Our NPL is coming down 0.0 percentage points. So NPS and credit quality and volume growing significantly. Here we zoom out in our SMEs. Last quarter, I referred to the launching of a new service model for SMEs. In practical terms, to recap, so what do we do? We remove from the stores the specialist for SMEs.

So the manager is no longer sitting in the store, just serving a flow that not necessarily came from SMEs. But we reconnect these experts and we put them down the road so they can cover a closer micro region. In the past, we would cover hundreds of kilometers, sometimes 50 or 60 kilometers of area that was almost impossible to cover. But now the range covered is much closer. So the experts are out of the stores. They spend their days carrying their iPads and visiting clients all day long. Therefore, we increase the number of calls. So in a few months, we just increase the number of visits. NPS increases because proximity multiplies NPS. And with that, we also have a better risk management because these clients on average are a bit more nervous. So being close to them is crucial. We can cover more clients.

We are much closer. We increase the number of specialists by 25%. We do believe in this model. We are investing in people. So this is a topic that involves people. So we are increasing that headcount by 25%. We will have more experts all over the country, increasing our performance. And on the right-hand side, we have other figures. Again, based on technology, we do not have a slide on technology alone because technology is part of everything we do. Technology is part of, you know, Select transformation. Technology is also part of Free. It's part of our investment platform. And certainly, it's part of our the transformation of our offering and the delivery of our experience for SMEs and corporate as a whole. Here we talk about automation, digitalization. We talk about guarantees.

You know, we say that almost, you know, we have almost 100% of digitalized customers, 94%. We talk about lead time. Lead time is decreasing substantially in some of the products that we highlight here. The NPS continues to grow. I do not like 41 NPS, but it's much better than the 20-some that we had in the past. That means that we are moving in the right direction with, you know, more profitable vintages and more engaged and loyal customers. Here we talk about investments. Investments, that's one of the main pillars of our strategy. I've been talking about that since the first time we met. I said that we had to diversify towards an investment platform. I mean, the bank never focused on investment as being the main pillar, but we want to change the funding mix of the bank.

Camila Toledo S.A.) (Head of Investor Relations)

I mean, from being more concentrated in wholesale to being more concentrated on the retail side. I will show you more of the data further on. We are very pleased with the results achieved. Starting with that lower part, we had important progress in retail. Retail has never captured as much. Of course, we want to do a lot more funding. We will move towards that direction. A five-time growth in investment in the past year, that is very good. We are more consolidated and that will give us continuous growth. I mean, the base is growing more and more. I hope to be bringing good news, you know, in the future as well. This is executable and we will not be distracted in terms of retail. The zoom of retail is AAA. AAA is our advisory services.

At first, we wanted to reach, you know, 1,200 advisors, but now the target has gone to 2,000. But we know that with 2,000 advisors, we will be able to provide unique service through AAA. It's unique because we offer, you know, a good base. It has a technological base, which is comparable to any other good experience available in the market. And proximity is very unique. And I see, I say that with no arrogance at all. Our AAA service level is outstanding. Our design is very good. And with organic capture or funding of clients, we can even excel. This gives us a greater possibility to serve clients. We can talk more about it. We will bring net inflow and we will keep an eye on our client because all of the targets are very much aligned with client view.

All of the standards related to correct sales and compliance helps us to grow the business significantly. We are very pleased because this quarter, we reached over BRL 6 billion. Of course, the bar is increasing. We reached BRL 6.5 billion. And the number per advisor is 4 million users in the quarter. And this number as well compares quite well with the market numbers. And for all investor clients and individuals, all individuals starting June, they will have a new digital experience. Renewed is almost like a new portal with profitability experience, usability experience, and different menus and usability, everything at a different level. And we were pleased with that evolution. And with that, I will call Gustavo to talk about the results. And then I will come back to talk about the closing remarks for the quarter. Thank you.

Gustavo Alejo Viviani (CFO)

Thank you, Mario. Good morning, everyone. Let's talk about our results.

NII continues to expand year on year, growing 11%. This reflects the evolution of our strategy on both client and market NII. In the long term, client NII benefited from an increased volume, which offset the effect of the Selic interest rate on funding, which on quarter. That variation in the quarter is basically explained by the variation in the Selic rate and the mix, especially the non-revolving card portfolio with 2%. In market NII, on the other hand, ALM operations progressed as planned and continue to show a positive trend for the years we have been mentioning in prior quarters. The reduction in the quarter in market NII reflects a lower result in treasury operations due to the fact of market volatility observed in this quarter. We seek long-term sustainable expansion with active risk management, price discipline, and technical rigor when making resource allocation decisions.

On the next slide, as mentioned, we show that our loan portfolio grew by 8% year-over-year with a positive evolution in all segments. In individuals, the portfolio grew by 1% with a balance between higher and lower risk products, with the highlight going to the cards portfolio, which grew 4% in the quarter, and payroll loans, which grew 2%. Actually, in cards, as Mario mentioned, we are increasing activation and gradually expanding our client base. As for payroll loans, we continue to increase origination more and more through our own channels with a 21% increase in share in two years, which gives us greater profitability. With regard to auto loans, the market continues to be buoyant, and we are keeping up with this trend. We grew 4.5% in the quarter, as seen before, with our well-adjusted portfolios.

In SMEs, we saw a significant increase in the portfolio, a segment that we are prepared to grow at a good pace, as we saw before, based on our team and on technology. The large corporate portfolios benefited from the exchange rate in the quarter, and here we continue to maintain our profitability discipline. Moving on to the next slide, we present our funding performance. Our liabilities plan continues at a good pace, aimed at improving the mix of client segments and funding instruments. We recorded growth of 3% in the quarter and 10% over the previous year. I would like to highlight the 4.5% increase in the quarter in demand deposits, as well as the good growth in term deposits, savings, and letters of credit.

The strategy of increasing retail exposure in our mix continues to make progress, and as a result, we have seen an increase of 2 percentage points in the share of individuals over the last two years. As we have mentioned, this is a structural and gradual change, and we are pleased with the evolution of our strategy. To close the slide, the loan-to-deposits ratio is at an all-time high, reaching 93%. I will now comment on the performance of our fees and commissions. We reached all-time highs this quarter as a result of our revenue diversification strategy. Our quarterly growth was 6%, and our annual growth was almost 18%. I'd like to highlight the 7.2% growth in cards in the quarter and 13% growth in the year, showing this resumption. Insurance, current account, and assets all showed increases of more than 4% in the quarter and significant year-on-year growth.

Another relevant point is that the securities brokerage and placement line item continues to grow, driven by debt issuances, which grew 12% in the quarter. In the line item others, the biggest quarterly increase came from the savings bonds product. Regarding the quality of our assets, we continue to have a controlled ALL, allowance for loan losses, with a slight drop in the quarter, which, together with the increase in the portfolio, resulted in a cost of credit of 3.7%, accumulating a reduction of 80 basis points in 12 months. NPL formation showed a positive performance, reflecting the better quality of our origination, standing at 1.2%. Lastly, due to the better quality of the vintages, the renegotiated portfolio is already more than BRL 5 billion smaller than in Q223. We posted a reduction of 150 basis points in relation to the total portfolio last year.

Now, moving to the next slide. Here, we provide details on the performance of our delinquency indicators. Our loan book remains well balanced, and the portfolios are duly adjusted. The short-term indicator improved in all segments. In the long-term indicator, we saw stability overall. We saw an improvement in individuals and the opposite behavior in companies. The increase in SMEs is concentrated specifically in what we call E1, which includes companies with an annual turnover of up to BRL 3 million. This behavior is partly explained by the renegotiated portfolio, as mentioned in the previous quarter. However, it is important to note here that the short-term indicators have been adjusted, which suggests a more positive trend ahead. On the next slide, we have details on our expenses. We continue to make progress in our quest for efficiency, focusing on cost control. During the quarter, total expenses remained stable.

The increase in administrative expenses is due to a higher volume of data processing by virtue of the growth of our business, and this was offset by a reduction in personnel expenses. In the year-on-year comparison, the growth in expenses was below that of revenues, helping to increase our operating leverage. As a result of our effective management, we saw sequential improvement in our efficiency ratio, which fell by 4 percentage points year-on-year. To conclude the earnings result section, we present our income statement. Year-on-year, we saw a 12% increase in total revenues, driven by NII and by a good performance of fees and commissions. Provisions dropped in the quarterly and annual comparison, and we maintained our strict control over expenses, resulting in a profit of BRL 3.3 billion. This represents an increase of 44% in 12 months.

We ended the quarter with growth in profitability, with ROE of 15.5% and Common Equity Tier 1 of 11.2%. Finally, I would like to highlight that we have focused on a gradual resumption of our results, which have evolved in keeping with our expectations. Our goal is long-term sustainability with solidity and consistency of our results. That concludes my part, and I turn the floor back to Mario for his closing remarks.

Mario Roberto Opice Leão (CEO)

Thank you, Gustavo. Just to close very quickly, so we can start the Q&A, and I'm sure you'll have more questions. I'd like to have five take-home messages connecting with everything I talked about, everything we've been talking about. We don't have a lot of new elements in the strategy, which is good. It shows we are consistent in what we designed.

In 2022-2023, we focused on designing the bank we want to have in the next five years and beyond. This is summarized in these five pillars. We want to be the most present bank in our customers' lives. This is the main motto. It cascades down on all the rest. We want to have primacy, using intensely our technology. You'll hear more and more we're talking about technology as the main enabler, so we can have principality. We want to have the right customer experience and the interconnection among the channels. Free offering is the answer. It's a powerful tool for mass income offerings. It will bring more activation, more conversion, more margin, the right margin in the right assets, and not the short-term margin.

Everyone will be counting less on, will count more on collateralized products and on cards in the offering, given that cards represent a lot in principality and usability in clients' day-to-day relationship with the bank. We'll consistently advance our strategic business, and we'll continue consistently to work for non-linear growth because our market is not linear, but consistent, solid growth with quality. This translates into a mid-to-long-term view of profitability, one or two steps at a time in the right direction, so that we can grow with speed where we believe we can grow with speed to deliver solid results, as Gustavo mentioned. With this, I invite you for the Q&A session.

Operator (participant)

Thank you, Mario. Thank you, Gustavo. We will now start the Q&A session. From now on, all analysts will have the opportunity to ask questions and clarify any pending point.

If you want to ask a question, just click on the hand icon that appears in the lower part of your screen. Your questions will be answered in the language they are spoken. We urge every analyst to only ask one question to give everyone the opportunity to participate. We already have a series of questions. The first question comes from Brian Flores from Citibank.

Camila Toledo S.A.) (Head of Investor Relations)

Good morning, Brian.

Brian Flores (VP in Equity Research in Financial Analysis and Investment Strategies)

Good morning, Camila and team. Thank you for this opportunity and congrats on your results. My question is on SME. You talked about changes to your model, and it is very clear to me what you've been doing. I would just try to understand a bit better why did we see delinquency increasing in the quarter. And so, if you could elaborate a bit more on that issue, that would be useful. And also, if you talk about the performance of the sector, the dynamics, that would be very good.

Camila Toledo S.A.) (Head of Investor Relations)

Thank you. Brian, well, I will start, and then I'll turn it to Gustavo. First, I will refer to the strategy and how this connects to the risk management that we've been doing for over a year. And finally, I'll refer to the numbers themselves. We've been talking about our strategy, and that means that we want to double our business of SMEs in the next few years. I cannot give you the exact date, but certainly it cannot be in 10 years. But in a few years, we want to double the business because we believe there is room for that. And we would do that not linearly because this is not a mathematical equation, but we want to double the size of the business.

Just as a reminder, in December of 2023, we had already doubled the numbers vis-à-vis 2021. So we doubled that number once, and we want to double it again. But certainly, we will do that the correct way. This applies to every segment of SMEs, but certainly, there are different clusters. There are small, small companies, a small, mid-size, and we call them in the bank companies one, two, three. In the very small company segment, you know, company one, we needed to renew our service. And I already, you know, talked about that during my presentation, and I'm pleased to know that you recognize that. We believe that we have something, you know, much better now, and certainly, very soon, we will have a business of small, small companies that will grow in a very sound and consistent way. But how does that connect to risk management?

The fact that I have, you know, some thousands of experts spread all over Brazil and knocking at the doors of our clients, so to speak, that means that our marginal risk management is much better. And this also allows us to manage our inventories much better. How do we, how are we managing small companies and individuals in the last 12 to 13 months? Since the Q2 of last year, we changed our renegotiation policies, and we've been referring to that. We are not so open anymore to renegotiate that with no cash components. We are being more restrictive in the way that we allow the renegotiation to roll out. A portfolio of BRL 5 billion reflects a more sensitive agreement policy, which is very good for the health of the portfolio, and it's also good because our de-risking is more accelerated in terms of the portfolio.

Some rates are affected because we're not rolling over anymore. But, you know, I can turn that question over to Gustavo, but this stems from a more asset, so to speak, management of our legacy portfolio. I mean, this legacy portfolio is more predominant among individuals, but more so with very small companies. That's why raising the bar in this portfolio allows us to touch in some ratios or indexes. But this has to do with a new generation of very small companies and more to do with that inventory.

Gustavo Alejo Viviani (CFO)

Hi, Brian. And then you can all, you will also notice that NPL 15-90 of this segment is under control, is performing well. So in terms of legacy portfolios, and as Mario was saying, with our new renegotiation strategy, I mean, things are very clear. And NPL 15-90 and the new vintages' performance is very good.

So it's a one-off thing, and it stems from what Mario said before. NPL 15,290 is performing well. In summary, it has more to do with the portfolio de-risking rather than marginal origination. So I would say marginal origination tends to be of better quality, not only because of the policies, but with everything else we did, especially after 2022. The new model will help us because the new model will increase proximity, something we didn't have, you know, as much with our clients. I mean, look at the number of calls that we have now. I assure you, we want to increase that number of visits, not only increase the number of visits, but visits with quality. I want my experts almost like camping in the house of the client. This will not only increase volume, but results. I hope I answered your question.

Brian Flores (VP in Equity Research in Financial Analysis and Investment Strategies)

Yes, you did. Thank you.

Operator (participant)

Okay, our next analyst is Daniel Vaz from Safra Bank.

Camila Toledo S.A.) (Head of Investor Relations)

Good morning, Daniel.

Daniel Vaz (LatAm Financials Lead Analyst)

Good morning, Camila. Good morning, Mario, Gustavo, and congrats on your results. I would like to take a second look at the spreads. I would split my question into two. Your portfolio mix and now I see you are accelerating mass income, and also high income has become your priority. What would be the behavior of your spread? First, looking at client mix, and secondly, looking at the rates from your peers. I mean, tight rates in terms of, you know, payroll loan. What will be the progress of your spreads going forward? Thank you.

Camila Toledo S.A.) (Head of Investor Relations)

Well, thank you. Well, certainly, when we look at the spread, we look at the gross profitability of the portfolio. But we are taking a deeper look to the profitability of the portfolio I'm generating.

I'm not saying that we are not interested on the spread. Spread is important, but I do not want to demonize the portfolio, the credit portfolio. I mean, the spread comes from several dozens of percentage points. It could be 40%-42%, Daniel, but I do not want to rely on that spread because the net spread of provisions is not a good spread. So, of course, there will be a certain amount of personal loans that is very much connected to the payment journey. So, personal loan that is disconnected from principality, from the credit card journey, from the journey of transactionality of Pix, because it's becoming just one single thing. We call it, you know, a payment journey or consumption or consumed journey. So, in terms of portfolio midterm view, it would have less risk in terms of mix.

So, credit card would be the major clean element of my portfolio because it's crucial to have a credit card as a clean element. It doesn't mean that I'm going to open to everybody at a volume of, you know, BRL 100,000 per client. I will accept having lower limits when compared to my historical levels, and I can only do that if my unit cost falls quickly because this is an important evolution, and we will talk more about that further on. But the credit card has to be the clean element of the offering because this translates the client's connection with the bank on a day-to-day basis. But this has to be based on collateralized instruments. And we want to have all of the other things coming from that. I mean, home equity, they will call UseCasa.

We are already leaders in home equity in Brazil, about 25%. And I don't think that's enough. I think that the portfolio is not so relevant, but I think we can do a lot more in terms of structured financing. But the pivoting point would be the credit card. So, we will migrate to less risk. And if the price to get there is the nominal spread, I'm not going to struggle because the net margin will have much better quality, and this will certainly be translated into the bank's profitability. Our design is, you know, profitability, etc. So, I will grow with profitability. So, therefore, I will look for an equation that involves a net spread. On the liability side, I mean, the NII comes on the right and the left side of the balance sheet. So, we are getting a cheaper funding for the bank.

Maybe in one quarter, I may give a leap, but in some years, we will see some gradual improvement. I mean, individuals versus corporate. So, retail funding for the entire industry is cheaper when compared to wholesale funding, many percentage points. So, CDI is cheaper. And as we gradually improve quarter-on-quarter, we will see an increasing margin on the funding side. Even, I mean, CDB that has a lower spread, but we will have cheaper funding of the money that remains in the account. So, the mix is much better. One point that I would like to stress is that we make a decision aiming at the performance of the portfolio. It's not spread alone, but how the performance, you know, evolves in terms of profitability.

So, the decisions we'll make for client and the combined product looks at the evolution we envision for the portfolio aiming at profitability.

Daniel Vaz (LatAm Financials Lead Analyst)

If I can do a follow-up question, you said that the pivoting element is still the credit card. We see a digital competitor of yours doing PIX Finance as an embedded product in the credit card. How do you see that product and whether this is also part of that mass income product of yours?

Camila Toledo S.A.) (Head of Investor Relations)

Okay, great question. Well, thank you for raising that issue. Whenever I say that our view is based on the journey rather than the product alone, I'm not praising A or B, but that view that the client no longer wants to have a product relationship with the bank, this is something that is here to stay. I mean, there is no going back.

A client, they want to have a journey relationship and the main journey that individuals want to have. I mean, corporate would be the same, but the main journey that clients want to have with us is transactionality. With transactionality, there is no distinction between overdraft account or credit card account. We have to offer an integrated limit. No matter how they consume things, consumption defined as, you know, supermarket purchases, you know, payment slips and PIX transactions, at the end, everything boils down to transactionality and everything has to be integrated. We have a very clear design of payment journeys, and we are working towards having the best journey in the market in just a few months, and we will deliver that. Certainly, the short-term view is to have a unique journey.

So together with the PIX journey, which is a very simple and very seamless journey in the market, the entire payment journey will be integrated with the credit, with the card.

Operator (participant)

Thank you again. We will now switch to English with Jorge Kuri at Morgan Stanley.

Camila Toledo S.A.) (Head of Investor Relations)

Hello, Jorge. Good morning.

Jorge Kuri (Equity Research Analyst in Technology and Financial Services)

Hi everyone. Good morning. Thanks for taking the time to answer questions and thanks for the presentation. I wanted to ask about market NII. You did BRL 258 million this quarter, which was down sequentially. To what extent this number going forward is a result of market volatility and to what extent is the result of the absolute level of rates? There's evidently been a big shift in the way the market thinks about Selic rates going forward.

If indeed the consensus is right and SELIC stays at 1050 throughout this year and next year, how much of a recovery can we see that number from the BRL 258 million that you did in quarter? Thank you.

Mario Roberto Opice Leão (CEO)

Thanks, Jorge. Pleasure to speak to you. So although we don't provide formal guidances in terms of how we think about the numbers, this number has two components, like Gustavo mentioned, and you know well. The first number is our ALCO portfolio, our ALM. And in that portfolio, we have been repricing our funding of retail, the retail business for a few years already. That's the piece of the portfolio which, with the higher rates very rapidly in Brazil between late 2022 and 2023, that piece of the portfolio suffered. You know well, we explained it every quarter.

That repricing of the retail funding of the portfolio, the marginal, the front book, as we call it, that repricing has been undertaken basically, and we are going to keep progressing on the results. So we don't have any cost to be paid on that repricing. The repricing is fully implemented. It took us 18 months, give or take, which is normally the speed. So that's the piece which Gustavo mentioned that we should keep progressing through the next few quarters and obviously as we enter into 2025. Yes, the dynamics change with the Selic rate now at 10.50%, probably throughout late this year and, you know, most next year, who knows. But that impacts mostly the funding of our backbook, which is how we basically invest our capital. So the funding of our capital is going to be made at a higher rate than we felt before.

So that margin is lower than what we expected. But the overall, the juncture of how we price our front book, how we fund our backbook, we view positively in the next few quarters. So I would say it's not a guidance, but the outlook should be constructive as how we see that piece, which is a big piece, progressing over the next few quarters. The second element is market making, as we call it, which is the way we handle and square the risks arising from our markets or sales and trading business. And that's where we captured the volatility we saw in the Q2. It was, I would say, a tremendous volatility globally, but in Brazil particularly, with nominal rates going more than 100 basis points up, nominal rates going maybe 50 basis points up, FX, etc. And that obviously caught us partially.

We still made money in that business, but less so than in the Q1 where we had actually a stellar production. It's harder to predict a business which is on the squaring of businesses from clients, and that depends more on market volatility and how we capture that. We view that business positively. It has been a strong component of our P&L delivery, Jorge, but it's hard to predict the direction. It's obviously not linear, but we feel positive as to the way we run our VARs, the way we have our franchise established. We are the number one franchise for FX in Brazil, number one in rates. So we do have a lot of flows to capture, and that should allow us to trade that, to square those positions well. So we view that positively, but again, it's a business which is harder to predict.

The ALCO business is easier, quote unquote, to predict, and we view that constructively, like I said. I would say overall, we feel good about our markets and NII through the next few quarters. But again, there's an element which is market dependent, which we and no one else can precisely predict, but we feel positively about the overall line.

Jorge Kuri (Equity Research Analyst in Technology and Financial Services)

Thank you, Mario. That was great. Thanks a lot.

Operator (participant)

Vamos voltar agora para o português com o Mário Pierry, do Bank of America.

Speaker 12

Back to Portuguese with Mario Pierry from Bank of America. Hello, Mario.

Good morning. Congratulations on the result. Many positive trends here. Operational trends. But I'd like to focus more on fees and commissions. The fees and commissions in the last four years not growing, and in this quarter we saw a significant increase, particularly in current accounts, checking accounts.

I would like to understand how you see the dynamic of this line item going forward, particularly whether growth will come from volume or price. How do you see competition holding back prices? Is there any room to increase prices, or have we achieved a price level that has decreased enough and there's no more room to decrease?

Mario Roberto Opice Leão (CEO)

Thank you, Mario. I'll start, and Gustavo will complement. Of course, we are happy with the performance of our fees and commissions. It is true we had modest growth in fees and commissions for quite a while. Again, we built a successful business in a 2015-2021 cycle based on credit growth. Of course, we grew other line items too, but the loan book grew, and it's clear to us that we have to support our loan book with a more smart and more diversified credit.

And I don't want to suggest that we are going to grow 6%, quote unquote, in every quarter. Of course, we are progressing, and we want to continue to grow on average in all quarters. But the fact that we grew more significantly in this quarter is the result of a number of things, a number of seeds we've been planting for a while. There was no great one-off element. Perhaps the capital markets was the only one, and we have a franchise to capture that. It was a good progress, as Gustavo mentioned. As for the transactional part, which to me is the most recurring element, the most replicable element when we look at the lifetime value of the account, you mentioned cards. I know you asked about checking accounts, but cards to me are a very important element because they have a progressive gain in client base.

As I mentioned, we grew 6% year-over-year. Still, it's not a huge number, but growing 6% to plus higher spending per client, higher turnover by client, both come very powerful. The third element we didn't speak about, but which is also relevant. We talk about expense management, managing our expenses correctly, but there's an important management to reduce costs of those operating expenses, expenses directly linked to sales that we sometimes recognize as reduction factors for margins and fees and commissions, and we're also managing that. Now, talking about checking accounts, that's an important question you asked. We grew checking accounts in a market where supposedly there should be no fees coming from checking accounts. So how come we are growing in a business that clearly should be zero?

I don't believe that we will continue to grow in the line of fees and commissions for the next 5-10 years. It is very positive what we are doing. It's not by chance. We're doing this for two reasons. We're bringing in new clients. We are bringing new clients in packages where clients accept to pay fees and commissions. And there was also some repricing also for legal elements. So we have new clients on board in individuals and companies. In companies, we can bring these clients in components of combos that have been adjusted by inflation. So we adjust for inflation, plus more clients that accept paying some fees. And of course, that pumps up the fees and commissions. So the growth you saw is positive. We are happy about it, mainly in companies and in individuals.

In my very long-term vision, we should see this line item together with other transactionality lines, the cards, cash, and payments as a whole. And why not acquiring, which is a key product, prepayment? So I spoke a lot about a focus on journey for individuals and companies. It's all about transactionality, cash collection, prepayment, Getnet in our case, all more integrated. And all of this will evolve to a more powerful combo view that we will price more and more focused on a client. And we'll play with the lines in a way, Mario, that will allow us to win as a whole. And of course, volume is important. The checking account is important, but our focus lies in gaining in that line, but in gaining as a whole in fees and commissions or profitability per client. But it is a positive movement in the quarter.

Speaker 12

Very clear.

Operator (participant)

Thank you. Agora com o Matheus Guimarães.

Speaker 12

Now we turn to Matheus Guimarães from XP. Matheus, you may start. You begin.

Good morning, Camila. Good morning, Mario and Gustavo. Thank you for taking my question and congrats on your results.

Matheus Guimarães (Equity Research Analyst in Financial Sector)

A pergunta do Vaz que ele fez no início, queria fazer.

Speaker 12

Referring to Vaz question, I would like to hear more about personal loans. And you also said that the spread or the margin after provisions is not healthy. I mean, it's less healthy than it seems, even though spreads are higher. Does that have to do with the cost to serve? How do you compare that with other fintechs and competitors investing in this line? I think this is more focused on personal loans. Right. When I talked about personal loans, I mean, personal loan involves four major portfolios.

Mario Roberto Opice Leão (CEO)

We have the clean personal loan, and I answer that part when I answer Vaz's question. Our ambition to grow is moderate, given the fact that the vocation of this product, in my view, should be the one that boosts principality and loyalty. The personal loan product that we have not necessarily adds principality or delivers results. Of course, I'm referring to the average. I'm not saying that any personal loan does, you know, makes no sense, but it's a product that usually we have a lower share. And we are not worried about that. So in all my leadership, you know, meetings with my team, it doesn't have to do with how I double my personal loan share.

Talking about, you know, collateralized personal loan or on the investment side, we talked a lot about the payroll loan portfolio, which is huge, but I do not want to have different ratios in these two particular loans. There is a fourth personal loan that I really want to reduce, which is the renegotiation portfolio. That's when we combine all portfolios, especially from credit cards, overdrafting accounts, and more structured funding. Then we bundle everything to renegotiate, you know, some debts that even have a haircut. This personal loan is coming down. Part of the margin, part of that margin equation has to do with the drop of this personal loan reorganization. It means that the members are healthier now.

I cannot speak about how other competitors see that product, but in our view, personal loan is something that is auxiliary to the entire payment journey. The clean personal loan is seen by us with a certain degree of limitation. I mean, clean personal loan is just part of a portfolio. That clean personal loan is part of our portfolio, a balanced portfolio. With that balanced portfolio, it's something that you adjust and limit. Personal loan is just part of that. This is very important. It's not a standalone product, but it's a product that is part of a portfolio and long and medium long-term profitability and sustainable growth.

So we are not so much concerned with the evolution of that clean, but that's part of a risk portfolio and how we weigh that portfolio so that we arrive at the best possible performance and certainly serving the client.

Speaker 12

That's very clear. Thank you very much.

Operator (participant)

Agora nós vamos passar para Thiago Batista.

Speaker 12

We go to Thiago Batista from UBS. Good morning, Thiago.

Thiago Batista (Stock Analyst in Major Latin American Financial Institution)

Bom dia.

Speaker 12

Good morning. Can you hear me?

Yes.

Good morning, Camila, Mario, and Gustavo. My question is about margins. We talked a little bit about margins, but when we look at the third, the second, the Q3, I mean, the Q1, the margins were positive. I mean, the only thing that disappointed me a bit was the growth of NII. In the Spanish call, they indicated that the margin in Brazil would grow, and before it was in the high tens.

I would just like to understand what will be your dynamic going forward. I know that Brazil uses GAAP, there is GAAP and IFRS. We will see, you know, growth of margins in the quarter. So what kind of dynamic in terms of NII should be expected, whether we would see them gaining momentum in the next quarter or not?

Mario Roberto Opice Leão (CEO)

Okay, great question, Thiago. Without giving any guidance, of course. If we look at the funding margin this quarter, as Gustavo said, but I would like to reinstate that point. Of course, we would rather have a client NII that grows more, of course, and/or an NII as a whole that grows. We are working on that, and we will deliver it.

But starting with the funding client NII, the detractor factor of the quarter was basically the proportional fall of average CDI compared to first and Q2. We compensate part of that with volumes. I would say that the mix also had a positive evolution. Therefore, our evolution, and I would like to call it, I mean, the average spread measured as, you know, CDI, our average spread is evolving in the correct direction, and this compensates for the drop in CDI per se. I mean, CDI, if it doesn't change from now to the end of the year, which is the base case of the entire market and ourselves, and we are also included in that, we will not have a detractor factor of CDI.

So we will continue to work hard to grow volume, to grow mix, bringing more clients and more time deposits with, you know, a mix more earmarked towards retail. So we will see a difference in the funding client NII in terms of regular client NII. It has to do with CP reorg goes down, and we do no longer have that NII element. I mean, that I would rather not have. So we will continue to see that positive evolution of the reorganized portfolio, and this is good. We will try to mitigate that by increasing the portfolio that aims at gross spread. But as I said before, we want to do that in a way that, you know, after provisions, we can grow in the correct way. NII, because client NII, we should have a positive evolution in the next quarters.

So this, coupled with client funding, we will grow client NII. It won't be linear because it shouldn't be, but we will grow sequentially with a bias of the mid and long term rather than the next quarter. We want to deliver good quarters, certainly, but we want to deliver a very sound and consistent bank with a very diversified portfolio. And this has to do with a growing client NII.

Speaker 12

Thank you. Perfect.

Operator (participant)

A próxima pergunta é.

Speaker 12

Next question from Pedro Leduc from Itaú BBI.

Pedro Leduc (Lead Equity Research Analyst for Brazilian Banks and Financial Services)

Olá, bom dia a todos.

Speaker 12

Hello, good morning. Thank you for the question, Mario. Team, congratulations on the results. Speaking about revenue lines, I'd like to ask about the cost of risk. The ALL level was slightly below despite a higher loan book with a good NPL formation. SMEs, not so much. So the ALL level is stable at BRL 6, almost BRL 6 billion.

Cost of risk is falling. So I would like to ask you about what do you think about the next six months in terms of NPL, ALL level acceleration of the portfolio, SMEs being a point of attention. And as a second part of my question, the JV was considered as a reinforcement for ALL. Is it something that you wanted to do, or was it just a good place to allocate it? I just want to get a sense of the coverage ahead. I'll start with the second part.

Mario Roberto Opice Leão (CEO)

Thank you for asking that, Pedro. I'll start with the second part, and then I'll turn the floor to Gustavo. So starting, it's a good thing you asked about this, actually. The fact that we have this gain of BRL 1.9 billion in our VA/VR operation, it's circumstantial, of course.

It's part of a vision, Pedro, where we want to extract value that is kind of hidden in the pricing of the stock. Either because it's non-core, or because these are smaller elements in the franchise and in the results. When we had Webmotors operational last year, we wanted to unlock value in Webmotors one way or another that flowed into the results. We were in the most acute phase of purging the portfolio. Now we are in a more mature phase of management, the old portfolio and the risking. And why did we provision for that? Why did we reinforce the balance sheet? Because we could do it. We wouldn't have done it if it weren't for the adventure of that joint venture. So to answer your question, we didn't think that we needed to do. We were not worried about the coverage of the portfolio.

You mentioned the evolution of the indices, and that proves that's proof of that. But we felt that we had a clean result to deliver, a clean result in terms of being recurrent, diversified in the right direction with from quarter year-on-year growth. So we didn't need to flow this to the result. We decided to be prudent and reinforce. We didn't need to do it, but we could afford to do it. So simply put, that's it. I'd like Gustavo to comment on the performance.

Gustavo Alejo Viviani (CFO)

Hi, Pedro. It's exactly what you said. All of our indices are ratios 15 to 90 and 90-day NPL, NPL formation at a good level. The vintages performing well. We are growing the portfolios where we want them to grow.

We didn't change our risk appetite, or we are growing at a good pace in the portfolios that have been growing in recent quarters. So the ALL trend is positive at this point. We have no surprises. What we knew is already in the 90+, 15- to 90-day NPL, as you mentioned, SMEs. That's well balanced, adjusted. Looking forward, we'll continue to grow the portfolio with this kind of credit quality that we have. There was a change that we talked about, and this is already reflecting in our allowance for loan losses. So it's all established that there's no nothing new because that's all established. It's already seamless. ALL is very correct and adjusted in all senses. So we'll grow the portfolio. The performance is doing well. Where there's some noise, we can quickly adjust. We didn't see anything different in the quarter. So that's the trend.

But again, the ALL volume will be the result of the volume of the portfolio that we are growing and how it is made up in terms of every block of business and product. So let me stress that. We see all ratios forming well, and we are comfortable to grow in the SME portfolio that we grew in the quarter because it's all adapted. Or else we wouldn't grow three. So that's the trend in ALL and the cost of risk will evolve positively. And there's something here to highlight.

Mario Roberto Opice Leão (CEO)

Gustavo kind of touched on it. So let me add to that. During the presentation, I kind of mentioned what we're doing with technologists. So please allow me to digress a little to stress the point. Today we have the ability to react, to adjust up depending on the audiences that I want to work with.

Not to say appetite, but marginal increases in terms of loan granting, but also to reduce credit. So we're looking at the border, that limit in loan granting in every product, in every segment. We are looking at that every day, every week. What changed from the last in the last three years? In the end of 2021 to 2022, when we stepped on the brakes, we took months to implement something. Now we take a couple of weeks to implement a change. It might sound a lot, but two weeks is quite agile. As a diligent analyst, you know that our ability to move this big bank, this cruiser in terms of policy decision and marvelous decision during that agile with agility, that evolved a lot in the last few years.

So we can test the border more dynamically because if we make mistakes, and it's part of the business to make mistakes, we can adjust quickly. And when we realize that there's an audience we shouldn't be giving loans to, we can quickly make a change. That costs very little to us. So this evolution has everything to do with technology and how we deal with our policies and credit models. That's an asset that we have now that we didn't have two or three years ago, and that helps us in the policy of recovery and in our ability to do fine-tuning credit management.

Speaker 12

Thank you very much.

Mario Roberto Opice Leão (CEO)

Thank you, Pedro.

Operator (participant)

A gente vai passar agora para o Yuri Fernandes.

Speaker 12

We're going to give the floor now to Yuri Fernandes with J.P. Morgan.

Yuri Fernandes (Equity Research covering LatAm Financials)

Eu queria perguntar, é pouco parecido com a do Leduc.

Speaker 12

Hello, my question is similar to Leduc regarding this credit cycle in Brazil. No momento pouco diferente. I think that in a different moment you stepped on the brakes before. E nesse sistema de level, this NPL discussion, some worsening in SMEs. But I think that Gustavo's message is clear that you and PL as well behaved. But I'd like to understand about this system. How do you see it? Not just in terms of NPL, but in terms of growth as well. There's a lot of discussion. I see Fed rebonds research. They're reviewing growth a little up, but with somewhat higher interest rates. So I'd like to understand how do you see the cycle at the Brazil level and how will Santander surf that cycle? Because, like I said, you were in a slightly different position than the average peers that you stepped on the brakes earlier.

Mario Roberto Opice Leão (CEO)

Okay, thank you for the question. I'll start, and then I'll give the floor to Gustavo. When we speak about strategic business, I always choose a few to comment on in the call. Some are related to credit, but we have other strategic business deriving from credit fees and commissions, liabilities, so on and so forth. So I spoke about where we are evolving, where we are gaining share. But Yuri, it's a good thing to earn share. Of course, we prefer to earn share than lose share. We are gaining share in current and consumer finance and payroll loans. But we don't wake up in the morning thinking, "I have to gain one, two, three points this quarter." That's not it. We want to grow with profitability, with the right mix in a sustainable fashion.

So we don't define in our evaluation model for the management that we should grow 1-2 points more than FEBRABAN. Now FEBRABAN is talking about something close to 10, but I don't want to give any guidance. But we want to grow in line with the market. I don't want to say, "Oh, I'm happy to grow half as much as the market." Of course not. But in line with the market, in the products that we choose to grow, and I call these strategic businesses, we're going to grow more than the market. But not because gaining share will define our success, because in our strategic approach of mix and how we want to grow the bank, we're designing the bank for the next five years. We deliver it every quarter, but I'm designing the bank for 2028. So this bank has to have a different credit mix.

Different credit mix means having some more clean personal loans. This product will lose relevance over time. It's not the most relevant in margin. It will lose. It doesn't mean I'm doing a bad job. Payroll loans. We've got to collateralize the home equity. Home equity can grow twofold. I have a portfolio of less than BRL 6 billion in Bureau. This portfolio can grow to BRL 10 billion very quickly, or maybe BRL 50 billion plus, which is all we have in mortgages. In this mixed approach, we intend to grow more than the market in some products. On average, we will be reasonably in keeping, perhaps one percentage point more or less. There are the state-owned banks. Speaking about the whole industry, I'm not going to give any names, but some state-owned banks with an appetite, which is marginally higher, which is natural. These are cycles.

I think state-owned banks make or do a super important work. Act in some industries, some sectors, which are huge: searches, housing, agribusiness. These are interesting to us. In housing, we compete less, but in agribusiness, we compete. We want to continue to grow. But in agribusiness this year, we'll grow with less ambition than in prior years. We'll remember that we practically doubled 98% portfolio growth between December 2021 to 2023 with BRL 53 billion at the end of last year. Now we're growing. We're growing all through accrual rather than growing the portfolio because this is a more challenging year for agribusiness. There's nothing wrong in that. It's with the cycles. We are not scared. We're not going to be growing 20%-30% as we did before. It's all good.

In agribusiness, we might lose a little share, but we do to a correct decision about managing the portfolio. So I hope I kind of gave you a macro view. Gustavo, do you want to add?

Gustavo Alejo Viviani (CFO)

No, that's exactly it. Of course, we look at the market, but we have our own portfolio mix. Ideally, it is a dynamic portfolio mix. We measure performance of all of the portfolios, thinking about the product and thinking about the clients. It's all very dynamic. We have a target of profitability. How it's made up might be different. We might grow as much as the market, but with a different composition. So it's all about actively managing the portfolio and measuring performance daily of everything. It's all very dynamic, and we are not focused on growing more or less.

We are focused on doing the right thing with the right makeup that will give us the best result for our macro environment and business environment and always decomposing into individuals and companies. This is our vision. And CDI, if CDI stops dropping, it doesn't help, particularly for companies. CDI at 10.5 is still high. We don't pay that. There's always a CDI plus in terms of market funding. So legal entities don't benefit from interest rates that do not decline. And for individuals, all the individual risk appetite for individuals will not go back to the level of 2020, 2021, because we had an oversupply of credit, because there was this perception that COVID did not have an FX on disposable income. As an industry, we got that wrong and that we had new competitors offering new credit to clients. But all of that evolved.

I spoke about this in Pedro's question, but we evolved as an industry in terms of not allowing oversupply, particularly to low-income clients. I don't think that for individuals there will be an accelerated resumption, as some surveys indicate. I think everyone is going to be more prudent in loan granting. We are being prudent, and still we are growing, but with a smaller audience and with products with a different mix, as we said before.

Speaker 12

Clear, thank you very much. Let's move to our last question from Eduardo Nishio from Genial. Hello, Eduardo. We have no sound.

Operator (participant)

Nishio, a gente não está te ouvindo.

Speaker 12

Nishio, we cannot hear you.

Operator (participant)

Ainda não.

Speaker 12

Not yet.

Operator (participant)

Bom, acho que a gente não conseguiu aqui conectar o Nishio. Depois a gente faz.

Speaker 12

I think we weren't able to connect with Nishio, and certainly we can do a follow-up with him. Let's see.

I think now he's back. I'm sorry.

Eduardo Nishio (Senior Equity Analyst of Major Brazilian Financial Institutions)

Bom dia a todos.

Speaker 12

So, good morning, everyone. Good morning, Mario, Gustavo and Camila. My question relates to this last one. It's more related to your journey to improve, you know, sustainability, diversification, and profitability. I think, Mario, since 2022, you had ROE at the end of 2022 was very, very low, and then you started resuming profitability. There was another quarter with a drop, but in fact, this profitability is improving. And it has been improving more quickly this year in the last quarters. But my question is, where do you find yourselves in this journey? I know that this is an endless journey, but in terms of the objectives that you lined up during your administration, Mario, where do you think you are right now in that journey?

Where do you think you still have some catching up to do? What segments you believe that profitability could be improved in mass income or credit cards? Whether you could also tell us about incumbent banks that are operating at higher ROE. When do you intend to catch up with these banks? Thank you.

Mario Roberto Opice Leão (CEO)

I will answer without giving any guidance, okay? That's a very good question. Whenever we talk about profitability, well, certainly this is a key element of our strategy. I mean, the strategy is not just profitability because profitability is just the result of a strategy. I've been repeating that because we have to have a better balanced credit portfolio, more recurring, more fees, you know, funding, and all of that combined to deliver a good client strategy.

We haven't seen that happening so strongly, at least in the last nine years where I've been with the bank. Eduardo, some quarters ago, when you and your peers would ask me, you would say that we were in the low teens. I mean, we were generating economic loss. I mean, profitability was below cost of capital, and that was not sustainable, but it was part of a cycle. We had to go through that. So, well, we were not proud of it, but we had to go through it because we are now doing the right, you know, homework. We have to, you know, look at the cost of capital. We were doing that even before some of you started asking us about that.

But in the Q1, we were able to show some economic progress, but still, you know, not what we wanted to have: 1.4 percentage points of gain every quarter. It's not linear because that's not part of our business. The bank is all fit with the right leverage. We are just measuring the acceleration pace in every segment. We want growth in both sides. We are not going to let go of profitability in favor of growth because even though we want to deliver good quarters all the time, we are not going to let go of one in favor of the other. We reach that level of mid-teens. We want to consolidate that level. From now on, what will be the next level? Mid to high teens. In the next quarters, we will gear our operation to that end.

I'm not going to say that it will be in the next quarter. It will be quarters and not years because if it takes years for us to reach, you know, high teens, it wouldn't be advisable. So we will aim at mid to high teens in the next few quarters until we reach something rounding up to 20%. This is a very clear objective. I'm not going to tell you whether it's going to happen in X number of years. Obviously, it's not going to come in just a few quarters, but it could happen. And we will work to that end in a timeline of, you know, short to mid-term. But more importantly, Eduardo, is how we are going to get there. If I'm saying, okay, I'm going to do 20, that's cool. But certainly, I think this is what you want to hear, myself included.

But we have to do that with a different portfolio construction when compared to what we did back in 2021 in some quarters. Well, it's not bad that we reached 21+, but that 21+ that cost costed us, you know, low teens of ROE. This is not the where I want to be. So the speed will be different, but it will be very consistent in a mix that I guarantee you will be very different. I mean, of course, challenges will be on the way. Our business is very dynamic and complex with exceptional competitors, both incumbent and digital competitors. And consumers are looking at us, you know, forcing us to innovate all the time. So there are challenges coming from all of different many different directions. You know that this also includes human and intellectual challenges. And that's very nice.

We discuss with the Santander Group all the time because Brazil is almost like an indicating KPI for the world. But we are aiming at a mid- to high-teens, you know, level and then to be in the 20s. And throughout time, we will evolve and we will certainly talk to you about how we're getting there.

Speaker 12

Thank you.

Operator (participant)

Muito bom. Agora sim, eu gostei.

Speaker 12

Very well then. So now I would like to thank all of you for joining us this morning. So after this video conference, myself and the entire IR team of Santander Brasil will be available to answer any pending question. Thank you very much. I wish you a very good day.