Banco Santander (Brasil) - Earnings Call - Q2 2025

Transcript

Speaker 0

Good morning everyone and thank you for joining us on the results for the second quarter of 2025. We are live from our headquarters in São Paulo. As always, we will split this event into three parts. First, our CEO Mario Roberto Opice Leão will talk about the main highlights of the quarter and the directions for our growth in the coming periods. Next, Gustavo Alejo Viviani will provide a very detailed analysis of our performance. Finally, we will have a Q and A. I will now proceed with some instructions. We have three audio options on the screen. All content in Portuguese, all content in English, or the original audio. To select your option, simply click on the button at the bottom center of your screen. To ask the question, click on the hand icon also at the bottom of your screen.

The presentation we are about to give is now available for download on our IR. Now I'll hand it over to Mario to begin the presentation. Good morning, Mario. Good morning and welcome. It's 10:02 A.M. This is the presentation for the second quarter of 2025. I will start with the main highlights for the quarter and then I will go over a few slides that depict the strategic numbers and then we will have enough time for Q and A. As you saw before, our net income for the quarter was BRL 3.7 billion, slightly below the previous quarter. In terms of ROAE, it is 16.4%, slightly below the first quarter, but nevertheless with a positive evolution of almost 10% in the net income and 1% year on year.

Now, looking at the main lines that we will elaborate further during the Q and A hour, NII was down by 3.3%, mainly due to at NII and an expected effect of the carryover cost because Selic is higher and performance was slightly less positive in our trade line. Year on year was still positive. We will see client NII with a positive evolution that shows that, you know, both assets and liabilities are still evolving in the right direction, even though we are not growing the portfolio. We started the quarter with a small positive evolution. More important than the added number, I mean, we had a relevant evolution in the quarter and some one-off evolutions despite a flat scenario.

We show here that several of our businesses are moving in the direction we want, meaning that, you know, the franchise is evolving in several fee lines and we are also growing in fees despite a lower growth in the portfolio. That's what we're trying to do. We're trying to extract further productivity from our assets. Cost of credit, you know, there was an increase in the quarter because this refers to some very specific portfolios. In the entire flow we are seeing in the most recent vintages, things are evolving the way we expected. We had to reinforce some of our portfolios. That is why our cost of risk increased. In terms of expenses, we had a strong delivery and positive delivery, not only year on year, almost 400 percentage points above inflation, but there was a quarter where there was a drop of 2.5%.

That is why our efficiency ratio is the best of the last three years. In terms of leverages, we are still very much focused on the same thesis, meaning building a more solid and resilient operation. We are still seeking for, you know, excelling management, our golden rules, and we are focusing in the areas where we want to operate. We are very disciplined in terms of executing our strategy. The result is not linear, but it is really earmarked to some particular regions. We will continue to evolve in the coming periods, constantly seeking for our objective, which is to reach profitability of 20-21% in the years to come. This can only happen with a lot of embedded technology, with a continuous improvement of the journey and, you know, customer service.

Now, speaking very quickly about the customer journey, because I could spend an hour talking about this, we are still growing our total customer base. We have almost 72 million customers. We are also growing the base of active customers by almost 34 million. In terms of principality, I mean customers that choose us for their main relationship with the bank, you know, is also growing. Our NPS is increasing, has been increasing for both, you know, SMEs and individuals. Now we are continuing on this growth journey. We are hitting record numbers in July. I will talk more about this very soon. Now speaking about how we engage customers in the margin even more, we already talked about our One App, which is a big leap of an app that is being deployed for a while.

We want now to give you a more concrete number of how many clients are using the One App. I would like to highlight a very specific point of One App. Not only this has to do with the centricity of the clients and the relationship with the bank, because this is quite important, but the fact is that this One App was built with a very high conversational capacity. That is why we are market leaders. In the past two years or two and a half years, we were able to build a very new CRM platform that we call a customer interaction platform. This allows conversations within the app. They are contextualized according to the moment that the client is experiencing. Very personalized. Here I have just some data for you, we have 245 possibilities of conversation. Our response to the stimuli is much higher.

Conversion is higher by 2.33 times. With this pilot that we are now rolling out to the entire customer base, we are getting, you know, a lot more conversations with our clients. This is already embedded in our current version. We are transforming ourselves into a major wallet. We say that we want to be a bank of all accounts. In this quarter we are bringing the function of bringing your money or consolidating flows from other organizations and all of this through open finance.

Speaker 1

We will allow the bank to have.

Speaker 0

The money and then we will operate all the transactions through Santander. You don't need to have an independent wallet, but you can operate through the Santander Wallet. With that you consolidate all your banking operations. We also introduce new payment experiences and this is performing quite well. Our NPS is 86. This is one of the highest NPS with peaks alone. This is increasing by 17 points year on year. We have a very specific wallet, meaning that we are evolving in our payment journey. Payment is certainly the most frequent contact moment of our customer. We are very much focused in this area. We are advancing with very good results. Speaking about four of our main businesses, I will highlight some very briefly and later on we can give you more details. Our consumer finance still makes us proud.

We have the largest consumer finance in the market, but it's also the most digital, the most modern. We have 50% of electric vehicles funded through our consumer finance operations. The journey is quite simplified and this is a great lever of fees. Our consumer finance being this robust helps us with, you know, with our insurance segment, we made important advances with insurance and this contributes to increased fees. The fact that our consumer finance is growing more after a first quarter that was a bit more timid, this really shows that we will grow in a robust manner and will be able to contribute with better margins. In terms of cards, we are still very successful in our strategy to grow. More than half of our portfolio is earmarked to high income. Of course, we also have lower income customers.

In the card segment, we grew 13% in average spending. In the quarter we have fewer products, meaning that the journey is more simplified and more efficient. The journey of cards, you will see when we talk about fees, that this has to do with principality results and recurrency. In terms of SMEs, there was, I mean, we promoted a revolution a few years back. We removed the experts from the stores and now we talk about a bank that stepped out of the bank, meaning that in fact we removed the traditional concept of a manager that sat behind a desk just waiting for the enterprise clients to visit the store. Now we increase the specialists by almost 30%. They go around the region with an iPad and a map of calls. Now they can perform four more calls than in the past.

More than the number of visits, we want deep and more personalized visits. The customer is more connected to the bank more than ever before. We are growing principality, and with that we are also increasing transactionality and results. I mean, we have not been talking much about the next topic, but I would like to refer to two fee lines which are very relevant. More than BRL 1 billion here or near for us, and we believe that with some effort this number could also double in the next coming years. I am referring to premium bonds and consortiums. Now you see here the base of 100 in terms of revenue, and premium bonds is a business that has been consolidating over time. This is now being engaged in a digital journey with a high consumption of customers. These are the two businesses that we wanted to highlight.

We believe a lot in these businesses. We are diversifying in different lines, and we are counting on several billion BRL coming from credit cards, insurance, and all of that to be more diversified and to have a better outcome. To conclude my introduction, I wanted to emphasize our efficiency agenda. Efficiency is more than our expense account, but efficiency means the way we are transforming the operation in our business. None of that will be possible without technology. I am not just embarking technology in our strategic discourse, but technology has been increasingly important. Technology and business. We do not talk about business and technology. We talk about technology-driven business. Now we are increasingly talking more about business domains. I would like to emphasize three pillars. The first one being our digital transformation. We are enhancing the experience. We created the One App.

Not only is this a new app, but a new journey within the journey of the actual app. These are different components that we are building together with the group. For the first time ever, Santander Brazil will start benefiting from being part of a large group. We are building entire platforms and components of the platforms together with the group. That means that Brazil is no longer doing its own or Portugal doing its own or the U.S. doing its own app, but we are doing everything in a more coordinated fashion under the leadership of Brazil, because, you know, everything that is new in the market starts in Brazil. We have to invest less in relative terms because we are investing as a pool. But you know, we are, we can be more competitive and with that we can invest more in technology than all of the rest.

We see, you see here that we're investing 30% more in technology in, with the base of the past few years. And of course that we are investing maybe more than in other assets of the bank. We are, I mean I mentioned our investment in Cards, but this applies to all of the other products. We have many less products in the platforms. That means less training costs, less, you know, cost to serve, lower cost to serve. We are already reducing by 23% our expenses in infrastructure. And we are already reducing by 11% the cost to serve a mass income. I mean low income customers. I mean the operation can only be profitable if we reduce the cost to serve and if we, you know, select the clients with, with whom we want to operate.

I mean in the short term we are, we were able to reduce that by 11%. The second pillar is the optimization of our stores or branches. We're not talking about closing branches or stores or expenses per se, but we just have to realize that the dynamics of customers today are different. I mean, only in the past two years customers are reducing their visits to the stores by 30% and this is happening across the board. By the same token, they increase digital consumption by 38%. Digital is growing almost 40% and the reduction in stores was down by 36%. If we look back, you know, some years ago, the reduction would be even more severe. That's why we need a different hub, you know, a lower number of stores, but better stores. We are transforming two stores into one or three into two.

The terminology we use is merging of stores rather than shutting down of stores. Now our network of stores is serving our clients better. With that we increase our service by 35%. We are increasing the expenditure and by the same token we are reducing the non commercial job that we do in the stores by 7 percentage points. This is an ongoing effort, but you know, we are removing the non operating jobs at the stores and we are serving customers there. The last pillar is AI. We've been talking about this for quite some time. The market as a whole has been talking about it. Since, and there, I mean the group center there, centered as a group, decided to embrace AI. The same thing goes for Brazil. We created a new function, the CDAIO, the Chief Data AI Officer.

We already appointed this position in Brazil, you know, to help in our AI transformation throughout the organization. This does not only apply to checkboxer technology. This goes, you know, across the board, you know, legal risk, investment advisory and also customer service. This is across the board topic. It's institutional and we certainly embrace that and we will tell you some cases.

Speaker 1

To you throughout the course.

Speaker 0

One case I would like to say that when once we are updating legacy languages like Java and others, in the past we had to write new codes and look at it, you know, side by side and do things one by one, and with Gen AI now we are able to reduce by 98% the time that it takes to do that with more assertiveness and at the same time our accuracy is much higher, 97%. I mean it takes a lot less time to update codes. Our investment advisory part has the pitch maker and by that we reduced by half an hour just to put a customized pitch. We say, I mean it takes about 30-40 seconds to do that.

With the assistance of Gen AI and chat box, with something very classic that everybody talks about, we were able to reduce by almost 40% the updating time. When we talk about mass income, that time is down by almost 60%. Now I'll call Gustavo to talk about the numbers and then I'll come back to talk about our final remarks in July.

Speaker 1

Thank you, Mario. Good morning, everyone. Let's talk about our results starting with the loan book. The loan book reflects our active portfolio management and ongoing efforts to increase the profitability of all of our businesses. I would like to highlight the positive performance of cards, up 13% year on year, of consumer finance, up 16%, and SMEs, up 11%. In individuals retail, the portfolio remains stable, but there are some significant changes in the product mix in addition to the positive evolution in the card portfolio. With good credit quality and with greater transactionality, we grew 81% in personal loans secured by FTTS or investments and approximately 7% in real estate loans year on year. We reduced exposure in public and INSS deductible loans due to the factors already mentioned and discussed.

Similarly, we reduced our exposure in unsecured personal loans by 34% year on year in higher risk profiles. The variation in the large corporate's portfolio, which was negative in the quarter, is basically due to exchange rate variation and reduced demand for forfeit or supplier risk advance payment transactions to suppliers, which was the subject of IOS discussion during the period. With regard to customer acquisition, we continue to follow our plan to increase the relative share of retail and funding through greater client engagement, building loyalty and transactionality. The growth in time deposits from individuals is very positive and growing faster than in other segments, demonstrating the evolution of our principality with our customers. Let's talk about NII. Client NII grew 1.9% in the quarter.

Client NII includes credit NII, which remained stable in the quarter despite lower average credit volume, as you can see here, but benefited from a better mix liability. NII evolved positively with a greater relative share of retail deposits, as I mentioned just now, in addition to the effects of CDI on the base. Also, in the annual comparison, NII growth is higher compared with credit volume, which demonstrates discipline in pricing and optimization of the asset portfolio. As a result of a more favorable mix of assets and liabilities together with CDI increase, spreads increased by almost 200 basis points. Actually, he corrects himself, almost 100 basis points in 12 months. Regarding Market NII, the increase in the average Selic rate in the quarter had an effect on ALM.

As already indicated in previous disclosures, the Selic rate at 15% raised in the last month of the quarter and its potential to remain at this level throughout the year influences the results of this line item. However, it should be noted that the planning for the year in this line item remains the same. As Mario mentioned, our market making operation showed good results in the quarter coming from a record result in the previous quarter despite slower credit growth and the partial migration of fees from credit operations to NII. According to 4,966, fees have proven resilient, growing 1.3% in the quarter. Cards have benefited from higher transaction volumes and consortiums from improved performance, both due to the macroeconomic scenario and our focus on our sales force. Now moving to provisions, provisions in the second quarter increased by 7% quarter on quarter.

This variation is basically explained by two effects. The first relates to the increase in provisions for court reorganizations, mainly in the large corporate and agribusiness portfolios, which totaled approximately BRL 500 million in the quarter. This is related to court reorganizations and the other parties' clients for whom we adjusted provisions according to credit recovery. The second effect stems from the prepayment ETA laws of operations with low probability of recovery. The volume of assets written off was BRL 2.5 billion, resulting in a reduction in the provision cost of around BRL 200 million. On the other hand, we sold some other portfolios at a loss in the quarter, which practically offset this amount of BRL 200 million in full. The total amount sold from this portfolio at a loss during the period was BRL 3.8 billion.

We have seen improved performance of integers in the Individuals and Consumer Finance portfolios, which under the logic of risk return have been performing well with fewer late payments and less need for renegotiations in the quarter. The percentage of NPL 15-90 days fell to 4% from 4.1% in the previous quarter, reversing the upward trend in this indicator observed in the first three months of the year. As I mentioned in the last earnings call and as expected, the rollover of the real estate portfolio to NPL over 90 did not materialize, reducing this portfolio. The first range of late payment. In general, most match retail products for individuals recorded a decline in rollover percentage rates in the quarter, although the smaller portfolio in the period did impact the denominator in the corporate segment.

With an increase in NPL 15 to 90 days concentrated on SMEs mainly due to the macroeconomic scenario. Here we are operating with more collateralized products that serve customers well. In this current context, we also saw an improvement in the percentage of the portfolio in the over 90 NPL which fell from 3.3% to 3.1% impacted by early recognition at losses of the operations. As I just mentioned, as for expenses, we will present data on the evolution of our expenses. We are advancing in our pursuit of efficiency, focusing on cost control and better resource allocation. We've been talking about this during the year it's expense growth was well below inflation and declined in the quarter. That is important. We observed a decrease in personnel expenses in the quarter due to a one time increase of benefits in Q1.

We saw similar behavior in administrative expenses which also contributed to an improvement in the efficiency index or ratio of 40 basis points in the quarter and 250 basis points in 12 months. Lastly, I would like to share our income statement. We ended the second quarter with a net income of $3.7 billion, up 10% year on year and 80 basis points. Growth in ROE with CET1 at 11.6%, revenues grew more than expenses which in turn grew well below inflation. Our credit portfolio shows a better combination of risk return supported by funding with a better mix of instruments, customers and prices. This performance, given the current macro scenario shows that the discipline with which we have been managing our balance sheet over the last few years leaves us better prepared for short term volatility, confirming our pursuit of profitability that is increasingly sustainable.

I will stop here and turn the floor back to Mario for his final statement. Thank you, Gustavo. To end very briefly, I want to end with some strategic topics so we can start the Q and A session. You probably have a lot of questions. Four main messages primary relationship and satisfaction of our clients. We are customer obsessed, obsessed about the journey of bringing a better journey, bringing customers closer to us to interact with us in a personalized and digital way and more and more engaged. For that we have unified in multichannel journeys, more and more powerful ones featuring a lot of embedded technology providing the best payment experience. One App. The second half will be more and more our reality. Technology is our major for transformation and efficiency. We'll hear more cases and data showing our evolution.

As I have said for some quarters and years now, we'll continue to pursue a powerful efficiency agenda when we preserve our franchise, reinforce our franchise in all of the fronts where we need to grow, for example technology. We seek an efficiency agenda. With revenues growing correctly and expenses under control and to end, business continues to evolve. We continue to grow in the businesses we chose to grow and knowing how to fund the growth, reducing some other businesses due to profitability and capital discipline, we have to stop investing. We have an agenda of diversifying the portfolio with a better quality of our numbers and we continue to believe in growing profitability and results in the coming quarters. With this I will end and we'll start the Q and A. Camila. Thank you, Mario and Gustavo. We will now start the question and answer session.

To participate you need to click on the hand raise, the raise hand icon at the bottom of the screen. We will answer the questions in the language in which they are asked. We ask that each analyst asks only one question so that everyone can participate. Our first question comes from Tiago Batista with UBS. Good morning, Tiago.

Speaker 3

Camila.

Speaker 1

Good morning, Camila. Mario, Gustavo, I have a question about ROE. In this quarter, for the first time in a long time we saw a slight decrease in. Mario, you have been mentioning that you aim to have a bank return much higher than it is currently. I will link this with a Spain call this morning. Earlier today they said that ROE could be 20%. Almost always there was a comment about the Brazilian interest rates. If at 12% we could improve this return. My question is what are the drivers? You have levers. What are the levers that you have? If the Selic rate continues at current levels higher than expected by everyone, can we have this return on equity reaching 20% or not? Does the decline of the Selic rate to a low double level would be essential for the ROE to evolve to 20%?

It does not need to be 20%, but something higher than the current level. Thank you, Thiago. This is an excellent question. Actually, let me just put things into context. The group has talked about seeking 20% ROE as a profitability target for the coming years for the group as a whole. There are some businesses of the group that generate an ROE above 20%, some below 20%, which is the case of Brazil. Some that are aiming to convert to 20%, as is the case of Brazil. It is true that the group is looking at the interest rates of Brazil up close. Of course, the group is one of the biggest FDIs in Brazil. They have several hundreds of billions euros, almost EUR 15 billion of capital in Brazil. It is only natural that the group will look at the macroeconomic issues in Brazil.

The group has little or no concern about our ability to execute. Of course, the macro scenario raises questions and challenges and group investors challenge. These investors buying shares of the group, they look at the portfolios, they look at the points of concern. The high interest rates of Brazil is one point of concern. A 15% Selic is the highest in recent years. If it were just a snapshot and then dropping, it would be different. We know it will continue at double digit, at least for a few years down the road. When it starts dropping will be probably in the turn of the year, and still it will end next year at probably around 13%. The concern about interest rates is correct for Santander Brazil investors and for group Santander investors.

This is not good for anyone, for the loan book, for the growth of the country and for the financial health of the sector. I think it is an important point to be monitored and have to deal with that. Now, how does that reconcile with our ambition that I stressed in the opening of this earnings call? We remain obsessed to pursue 20%. Of course, a higher Selic rate makes this challenge mathematically a little bit farther out. The higher the Selic, the more expensive is the carryover of our bonds portfolio. Historically, we had an additional challenge with the high Selic.

Speaker 0

How.

Speaker 1

Which was how we fund our retail and consumer finance portfolios. Historically, we would do it with no hedge. We have been saying this for almost a year. We have been saying that in the NII we had, if not a full hedge, but a substantial hedge of the new loan origination. We are working more and more neutral in the marginal origination. We still have that stock, that inventory that was not hedged, plus the bonds portfolio. All of that suffers when the interest rate increases. If we believe we will get to an ROE of 20% in the coming years, it will happen. Do we need the Selic rate for that to happen, we do not rely on the Selic. There are many other levers to improve our results. You mentioned efficiency. Absolutely. The efficiency agenda is important.

I have a slide about this and I talk about this with the buy side, with you analysts. This is a big lever, cannot be the only one. It has to be well conducted because this is not an agenda of just cutting down costs. We have to do it thinking about evolving the primacy relationship and good service to our clients. The efficiency agenda is a big.

Lever in and of itself.

It will get us from high 16% to the 20%, which is basically growing 15%-20% the current profitability. Efficiency, absolutely. I spoke about expenses. On the side of revenues, we can evolve a lot. We do not need to evolve materially the portfolio, although we will work to evolve the portfolio where it makes sense. We can continue to work on the NII. We have a spread discipline, as Gustavo mentioned, which is very good both in credit. We are growing credit NII better than we are growing the portfolio and also in liability NII. We have been benefiting from a high Selic rate and we have been doing good work on the mix. We are bringing the bank's funding to be funded by retail.

The bank is being funded more by retail than wholesale. That is another source of profitability because it is NII without capital in the fees business. I mentioned this, Gustavo mentioned this. Several line items evolving to an annualized base of two digits. We have to improve in capital markets, in insurance, and continue the growth base after cards, consortiums, premium bonds. If we have all the line items growing around 3%, we will have an annualized fees account of two digits. That will bring us more efficiency of results and capital productivity. Yes, we continue to believe we can get there. Of course, the Selic rate helps. If it starts declining next year, we will have better results. This will help us get our profitability closer to those 20% ROE. We do not want to stop at 20%. This is just a threshold we want to hit.

The management is convinced that we will achieve this in the time horizon of the coming years. Thank you very much.

Speaker 0

Thank you. Thiago. Next question comes from Danielle Vance with Safra Bank. Hi, Camila, Mario and Gustavo. Good morning. My question relates to this landscape of cautious ends.

Speaker 1

The increase.

Speaker 0

In the low delinquency. I think what is concerning is SME and I think in the last 12 months we saw some increase in SMEs. When we look at some differences in the market, different activities, and the financial health of SMEs, I think this is becoming more aggravated. How much of that concerns you? I know that the bank is talking about being cautious for quite some time. As part of your concerns, where do you see SME, you know, vis a vis payroll loans and reorganization of companies? Here we still believe in the SME business. In our view this is a great opportunity, but more than a large opportunity. We have about 7-7.5% share and I think we can grow more. This means that we will grow above market in terms of SMEs.

It does not mean that we will do that every quarter because we will continue to be cautious in the way that we allocate capital and we place some of that growth in SMEs. At the end of the day, certainly we want to be a more profitable bank until we get to 20-22%. We continue to believe in that SMEs. Macro really affects not only SMEs but all of the other industries. I mean, immunity discourse is macro n SME. The SMEs are certainly affected by an interest rate that begins at 15%. Certainly that leads to higher spread costs in addition to government lines. The risk is higher now when compared to Selic at 9. Even then we continue to believe in SMEs. We believe that this is one of the areas where we should expect to grow more.

That means that we will continue to be cautious like we are in all the other portfolios. Certainly we want to seek for growth in SMEs, you know, by renting credit or even through government lines. We want also to get additional guarantees. All of the rest of the things that we can do with SMEs, not only loans alone. Our most profitable portfolio, and I said that last quarter, is the portfolio of SMEs with profitability way above that 20% that we have in other portfolios. We have to know how to learn how to grow with the right transactionality with floating business fees. Business and the principality of that SME customer is very important. Sometimes they do not ask for loan. I mean, this SME is self funded by a great margin. We have a lot more deposits in SMEs rather than the loans.

That means that we continue to evolve and this is a self funding business and it is much more profitable. The direction will not change. Certainly we will be more cautious in the margin as we are with other portfolios. There is still a lot more to do with SMEs in addition to loans. We know how to do that quite well. You should continue to wait that this is a portfolio that will continue to grow vis a vis other portfolios. Thank you. Thank you very much. Now we have a question from Gustavo Schroeder with Citibank. Good morning, Schroeder. Good morning, Camila. Thank you. Good morning, Mario and Gustavo, thank you for taking my question. My question is about asset quality. This is a topic that is worth elaborating further.

There was a worsening with SMEs, but if you look at NPL in general, it was an NPL that posted a slight improvement. When we look at exposure, looking.

Speaker 1

At it.

Speaker 0

4966, stages 266, there was a 100 basis points increase. It went from 8.1% to 9.1% in a combination between stage two and three. Stage two requires larger provisions. I would just like to understand whether that increase from stage two and three is also related to SME or if there is another segment that also hurt stages two and three or rural. Still speaking about asset quality, if you could talk about the write off policy of the bank. The path is slightly different from what we have seen in the industry. I know that the 4966 will give you more flexibility in the write off path. I see something. They are going in the opposite direction. Gustavo, I think you could start. Hi, Schroeder. In general, we saw the impacts in different stages. As I said, I mean the reorganization impact, stage three.

That is the major move in the quarter. Just like we have agribusiness companies that are going through the reorganization process. Therefore, we have to add additional provisions because we believe that expected losses could be higher. As I was saying, the retail portfolios and the consumer finance for individuals is performing well. There are less entries and the losses are lower in the initial stages. We are closely monitoring coverage per stage. I think our coverage per stage is very good. This also matters. The second part of the question was write offs. Oh, the write offs, write offs. The dynamics is the same. We work with expected losses. In portfolios where we believe that there will be low recovery as part of our policy, since we have that possibility today, we will anticipate our moves.

When we think that the portfolios will not have the anticipated or the estimated recovery level, that could happen. I mean, the write offs are healthy. We made some important moves this quarter. It is important that our portfolio will be cleaner, given the fact that we have better new vintages or cohorts. As I evaluate and remove things that may not have the expected recovery level, I think that this dynamic is quite healthy for any risk management or balance sheet management. Just to add, Gustavo, it is precisely what Gustavo said. We have been pursuing a policy of engaging in agreements and we are more sensitive in terms of our agreement policies or negotiation agreements. Everything now includes a cash component. In practical terms, this leads to an acceleration of our position vis a vis.

I mean, agreements that we would do without the cash component, but we are using a cash component. For the past year, all of the agreements include the cash component. That anticipation or the write offs, meaning that every quarter the margin is cleaner and healthier and that the risk, if I could call it that, gives us more room. If the opportunity comes, we would do that more often rather than extending that attempt to get any recovery. You should expect this kind of management going forward. Perfect. Thank you.

Speaker 1

Thank you. Question by Eduardo Rossman. Morning everyone. I have two follow up questions. First, Santander Group, they announced a one off impact of EUR 467 million. I think that this is the main reason explaining IFRS profit and BR GAAP income. So I'd like to get a confirmation from you. How do these two factors talk with each other? My second is regarding asset quality. One of your competitors has said that NPL of the vehicle system has been showing worsening and to them that's an indicator of worsening in the last 10-15 years. Do you see this? Do you see this getting worse? Do you agree that this is an important indicator for us to follow and monitor? Could you elaborate? Thank you, Rossman.

I will quickly answer the first question and then Gustavo will speak about asset quality, this balance sheet reinforcement, the reinforcement provisions the bank had. Just to put things into context first, if you follow the group up close, the group had a super positive quarter with all indicators ticking the box. The group would have had an extraordinary result, a surplus linked to the sale of an asset. This could be a surplus, but the group decided to use this to reinforce provisions in the global balance sheet. Given that first question from Tiago, with the concerns about the select rate, the macroeconomic center in Brazil and given the provisioning level in IFRS 9, I'm not talking about 4,966. Okay? The group said, since I have this ability to strengthen the balance sheet in a conservative preventive way, not that we have anything happening. August 1st is coming.

The group preferred to boost the balance sheet in a preventive conservative way and to increase the provisioning for Brazil under IFRS 9. How does this talk with 4,966? Rossman, it's almost a harmonization if you follow the disclosure of the last quarter. If you look at the LLP that we had in the IFRS 9 there was a billions difference and this creates a convergence of about two thirds of this difference that existed in the IFRS 9 of Santander, Brazil matching 4,966. In practice it has no impact on 4,966. It is almost as with the change of the accounting creativity. It's almost like we already did a good part of the change in the capital. Now with IFRS 9 the group decided to use the proceeds of the sale of that asset to strengthen the balance sheet. It's nothing more than that.

It's a one time thing to harmonize, converge the two GAAP criteria. It does not really touch the 4,966 which should be your natural concern. As regards consumer finance, I think it is important to take a step back. About 18 months ago or more, we have been operating with our best ratings. We did not change anything in our risk appetite and guideline. We are operating with the highest ratings. In our view, this started in the last few quarters and truly we did not identify any deterioration in the ratings of our customers. We have seen performances in other ratings and that is why we did not move forward. If we had seen better performances in ratings 7, 6, and 5, we could think of approaching this, but we did not. That is an important signal. We see that there are a number of performances by rating.

90% of the market goes through our funnel and we choose to fund almost 20%. We did not change anything internally. In the audiences that are of interest to us in the rationale of risk, we have been having good returns. Returns that have been increased, as Mario mentioned before, by the penetration of products and cross selling to our consumer finance customers. We have seen good performance. So much so that we increased the portfolio by 5% and growing one of the largest portfolios. Again, for the groups that we have defined, we have not seen this deterioration that you mentioned in NPL. Excellent. Thank you very much.

Speaker 0

Thank you.

Speaker 1

Next question from Mario Piloji with Bank of America. Good morning everyone. Thank you for the opportunity to ask a question, Mario. I would like to focus on the growth of the individual's portfolio, showed stability with cards growing 13% but payroll deductible loans are decreasing. I would like to hear from you. How do you see opportunity in private payroll deductible loans? In the latest data we've seen, the bank has been very conservative. You haven't been growing in this product. What are you waiting to see? What do you think could accelerate this growth to offset the reduction in INSS, deductible payrolls and payroll loans?

Speaker 0

Thank you, Mario.

Speaker 1

I'll speak about individuals portfolio and then I'll speak about the deductible ones. Okay. In individuals, I've been saying this for quite a while. We are relocating portfolios, reusing higher risk assets to portfolios where we can be more profitable. So in individuals we post a slight decrease net wise and it's okay if this happens as long as we are using the risk weighted assets that we were using with less sustainability in the mass income and we are directing that more to high income. So there's a structural move. In individuals, we are rebalancing our exposure. We had historically high concentration in low income and now we've been moving to mid to high income. We've been doing this for a while and we will continue to do it. Our commercial pressure would be to increase our presence in mid to high income.

It's not that we are going to exclude low income, we need low income, but we need the right low income. So we've been more selective. So this is the first move of a mix change in the individual segment. This is happening and every quarter we are improving a little bit. Hopefully in the second half we will improve even more in that direction. Now speaking about the products, mind you, you are correct in your assessment. In the payroll deductible loans it was revenue growth source revenue and growth stream in 2022, 2023. But since then we have been reducing more INSS, deductible loans and all public ones because the private payroll loans changed. So INSS continues to be the same. When we use INSS, there is very little margin left.

Given the ceiling of rates that continue to exist and not correlated to the cost of funding for the mid to long term, there's no correlation with the Selic rate and Selic is increasing and the ceiling, the cap continues at a level that is not feasible. For the Corban channel, it doesn't really make sense to do INSS payroll loans. In our own channel, those make sense and as much as possible we are doing it. There is an additional element which is recent. Given what happened with the INSS, all of the fraud. The government, I would say, did the right thing. They implemented a methodology to validate customers via face biometrics, which is an anti-fraud measure, but in an audience that is less digitized, less familiarized with digital apps and biometrics. They raised the bar for the right reason and for the whole market.

Biometrics and assigning INSS payroll loans, it became more complicated. We like the product, but we are very disciplined in terms of profitability. We do not see how the core bonds channel can be profitable. If some players are managing, good for them. It is a business that does not reach the targets that we want. As you know, we are very restrictive in terms of capital discipline. With our own channel, yes, but with the challenge of biometrics.

Speaker 0

There'S some.

Speaker 1

Challenge regarding the cap, but that's manageable. We'll continue to grow where it is possible. In private payroll-deductible loans we have about 30% bankers' share with the new format, we are learning as we go. Very candidly.

Speaker 0

There was a lot of.

Speaker 1

Proportionate noise, something that we never expected would happen in the short term, of course there is volume. There are many incumbent and new players doing this. We respect them. We tend to be more conservative because not all mechanics of collection, responsibilities, etc. Not everything is very clear. Some things are being still designed or finalized. It is only natural that a totally new process will take some time to settle. We are monitoring this up close. We continue to like the product. We believe we understand private payroll-deductible loans. We had a portfolio of BRL 12 billion over the years. We want to continue resume growth for the portfolio. There might be an evolution in Q3, but it will not be a leap. The first payment defaults will tend to stabilize.

We had very high levels and we prefer to be cautious in the beginning and play more strongly in the public payroll loans in the coming months. We will resume growth. This is kind of a new product with a whole new mechanics. The market and the product are learning to operate everything to be very precise. Excellent. Thank you very much.

Speaker 0

Now we go to Yuri Fernandez from JPMorgan. Good morning. Good morning. Camila, Mario and Gustavo. My question is about top line and your NII. Maybe for the next 12 or 24 months. Going forward, I saw a very good spread. Dynamic volumes are weak. But I think you're seeking profitability. We may increase allocated capital. So my concern here, thinking about the next 12, 24 months with spread going towards the fourth quarter, maybe we should try to think about something to do because the portfolio is very weak. What is your strategy? Maybe, you know, you think the volume will still be weak. You think that spreads should improve going forward. Maybe it's a matter of market NII because maybe with lower interest rates, maybe your client NII will improve or maybe will be more challenging because now everything seems good.

But with the portfolio growing 1-2%, it's hard to keep that going on for a long time. I just want to understand your dynamic. I will start and then Gustavo can comment later. I would like to give you a few answers. First, we don't have to grow continuously our portfolio by 1 or 2%. It's not a KPI imposed by Santander Group. The management KPI is what you manage. We want to be very obsessive in terms of the profitability level of their portfolio. And we haven't reached that level yet. So in our excessive search for profitability, we will not, you know, focus on growing the bank very much if it's not profitable. I think we can grow specific portfolios more than what we are growing. The consumer finance is a good example. We saw room to grow.

I mean all of the, you know, origination cohorts that generated a lot of money ROE was above 20%. So our origination was very good. On the consumer finance segment and this applies to, you know, SMEs. We grew less mainly because of the write offs. Growth was below that of, you know, the first quarter. We can still grow, you know, above that 20% that I mentioned for the consumer finance, large corporate in the first quarter, in the last two years we haven't posted growth. It has been flat or sometimes a slight decline. Due to some one off situations, I don't think that the exchange rate will appreciate so much in the next coming quarters. Maybe, you know, there will be some ups and downs and IOF, at least the drawdown risk is something already solved.

Not so much so in terms of SMEs or the corporate segment because there is a cost because that hampers the financial breadth of companies. The drawdown risk comes back this quarter margin. Maybe I don't think it will appreciate a lot more, but we still see a lot of room to grow with profitability. On the wholesale segment we are very disciplined. There are situations where I can sell my assets or opt for some other avenue. I talked about high income, high income. We are still far from where we want to be. We grew a lot in the past two years. We can grow a lot more. You know, we are focusing on, you know, individuals and high income. We know that high income is more sensitive to fees, they are more competitive. Our franchise is very, it's very robust.

We have almost 4 million clients, you know, in our Select Portfolio with, you know, advisory service. Meaning after all of that, the portfolio can grow more than in the past quarters. It is not a KPI per se, but we have a lot of capital to make it grow. Maybe your next question was about capital. I know you focus on the capital side and you're right. We have a capital base to grow. We have capital to distribute. It would not be for lack of capital that we would do it, but more, it's more a matter of discipline. Now going to, going back to NII x volume, that credit discipline that you mentioned. We believe that we have a lot of discipline. With a lower ceiling next year, we believe, I mean P versus Q there will be less P.

It's natural we'll try to offset that with more transactionality and more volume. To give you an idea, Yuri, in the low income segment, we are growing meetings, our transactional deposits and our credit position in low income. When we reshuffle low income going to high income, we are reducing low income. We are growing transactionality by, you know, in mid-teens because with account we are, you know, transactionality is growing. We want to increase margin with better mix, reliability, volume and volume taking care of fees. To close, we want to, we draw more out of the fee line. Some dynamics are very positive, some are not. We want to maintain the positive levels that were. We will take care of the capital markets insurance so that they continue to grow 3%-4% every quarter. The fees line will grow four digits in the foreseeable future.

I mean between margin and commissions, we want to keep, keep our top line account growing mainly in clients because eventually Selic will start falling. This line will give us a contribution year on year. 2026 will be better than 2025. I hope I answered your question. Thank you. It's very clear. Great. Our next question comes from Pedro Leduc with Itaú BBA. Good morning. Good morning. And thank you for taking my question. My first question is very quick, about 15-90 NPL that was up in the quarter. Could you tell us how much of that increase came from protected loans like FGI that do not materialize as a loss? I just wanted to hear your view. The second question is the expense line, the performance was, I mean if you look at all the other lines, they outperformed and looking at the quarter.

Mario, I would like to hear from you what we could expect in terms of underlying what is behind the gains, especially looking towards 2025, whereas fee in the revenue can be tougher. Whether you continue, you will continue to see greater efficiencies. I mean, Gustavo will start with the first part of your question and then I will talk about expenses. As I said, NPL 15-90 in the lines with further collaterals. I mean 15-90 NPL is affected by government lines. There are lines where we have to wait 180 days and then after that there will be another seven days and some other lines 90 days plus 30. Obviously there is an impact coming from these lines. It's not a loss, but there is the rollover of these lines in the period. This is what happened. It is an important part of the rollover.

There are some basis points on top of that 15-90 NPL. That's why I said that 15-90 comes from macro. To be more specific, it is precisely what is happening. These lines are delinquent and we have to follow the normal flow of collections attempts. Once that doesn't mature, I mean, if they do not pay, there is 30 days for people to pay and then you give them an additional seven days. This is exactly what is happening. We are not concerned because there are collaterals, but that 15-90 NPL for SMEs have an impact, like you said. Now speaking about expenses, and I'm glad I have a chance to talk about the outlook. We are shrinking the expenses in a sequence. I mean, I've been talking about that in several occasions with the sell side.

I've been saying that we would try, consistently try to beat inflation throughout the years. We are doing like sub inflation, but maybe the difference is not so high, so much so that we'll move the needle. This quarter we are trying to beat inflation in a more enforceable way. I mean, maybe 1.3. We had a reduction of almost 400 basis points. I mean 400 points in terms of actual gain. This is something relevant, but we will not stop there. What can I tell you about what we anticipate going forward? This agenda will be pursued throughout the year. It is not an agenda that I think will be concluded at the end of 2025 because it involves efficiency transformation, in some cases reinvention. We want to continue with that agenda throughout 2026 and maybe 2027. Why cannot I do everything now?

Because there are things that depend on other investments that we started in the recent past and others that are about to come to have more automated journeys to eliminate redundancies of some legacy systems or core systems like Cards. We are still running two systems today. The new system that we developed together, we could group this, will help us a lot with the operation in terms of increasing efficiency. We still have the funda, which is a legacy system where we ran our mainframe for years. All of that takes time because it is not just a matter of completing the new system. The transformation agenda, processes, automation, transformation, etc. The reduction of redundancy and the prioritization of the management is something that is happening at full force. I think you could demand a positive performance in the coming quarters. This is part of our positive outcome.

I think that we also have to grow the top line. Your previous question is very important. That is why we want to grow the top line, but without just having this huge appetite to grow the top line in detriment of, you know, all. The management now is more asset, I will say, on the expense line so that we have a positive breadth throughout the next two years. With that we will create a more sustainable base for the bank. This is part of how we will achieve profitability of 20% plus with a lean management. We will still take care of the top line, but this will transform into middle line with a better quality of credit. This will reduce the all portfolio. In a snapshot, this is the equation of how we will converge towards that profitability that you would rightly so should demand from us.

Speaker 1

Thank you. We will now switch to English.

Speaker 0

Carlos Gomez from HSBC. Good morning, Carlos.

Hey, good morning and thank you for taking my question. I wanted to ask about a specific reason, which is the rural portfolio. We see that it is declining quite significantly for you, the corporate part, 5%, individuals 17%. That's a lot. In the past you wanted to grow this portfolio. Obviously there are problems. Now we know that in the main player. How do you see it from your perspective? What are the prospects and has it been impaired permanently? If you could just comment, how do you feel today versus three months ago in terms of the macro and the general situation?

Thank you.

Speaker 3

Okay, Carlos, I'll start. Gustavo, please feel free to chime in. We grew a lot our agro portfolio and I've shared this with you through the times between end of 2021 and end of 2023, almost double the portfolio. It became on the credit portfolio, close to 10%, and on the expanded portfolio, close to 7-8%. It became a relevant portfolio. We don't regret having grown our agro franchise the way we did. Obviously, 2024 was not foreseen by us and by the market. The mismatch for some of the commodities, particularly grains, between the price, the pricing realized of the commodities sold versus the supply, the cost of supplies, agrochemical supplies, and the financing costs, that didn't work well for grains, particularly last year. It is better already this year.

It says that the portfolios, you know, the farmers are still tainted with the negative results they had last year. That was unforeseen. How did we deal with that? We dealt very closely with the clients, restructuring whatever we needed to restructure. There were much higher clients, much larger clients fighting Chapter 11 equivalent in Brazil than ever. We had to deal with that as well. Most of the portfolio, Carlos, is secured with either fiduciary lien or mortgage. It takes time for us to take over the farm and potentially sell it and monetize. We are probably in the valley of that cycle whereby the Chapter 11s are still taking place at a slightly slower pace, but still relatively to two years ago, still higher. We're still aggregating Chapter 11 filings and working on the recoveries as fast as we can.

There's a process, there's a, let's say, trial for you to undertake that, it takes at least 12 months in practice. We are already working on the recoveries for the Chapter 11 filed last year and probably next year is going to be an important, important year for recoveries as we undertake the final proceedings related to the newer Chapter 11s and those from 2024. How do we look at the agro going forward? First of all, agro is a lot of different commodities. I mentioned the grains, soybeans and corn particularly. Sugar has performed super well, coffee, super well, cocoa and some other products. We continue to work on those sub products where nothing happened almost.

Growing those portfolios in grains, we're not away from those producers anymore, but we are more cautious in looking at the numbers and looking at those producers that did not, were not affected by the pricing challenges last year. At some point we're going to resume growing. Right now we're more working around the portfolio where we had more challenges at the margin, where we didn't have challenges, we keep growing. The net can be a reduction, yes, but it's not because we want to reduce per se, directionally our exposure to the Agribusiness? No, we're just in the point of time where we are digesting more the portfolio as opposed to looking at growing. At some point we will have digested the portfolio probably next year onwards and we will resume growing more broadly.

Hopefully that answered the question, the question regarding the sentiment on macro at the margin compared to two months ago, marginally worse given rates peaked at 15% but hopefully peaked at. I do believe they are peaked at 15%. It's a very, very high level. The performances overall, we just saw two days ago the central bank data for June and for the quarter, there's a marginal deterioration in delinquencies. We're seeing that, we just saw in our numbers. Some portfolios are suffering more. Corporates in general pay floating rates. The higher Selic for a long period of time, which we will unfortunately have, poses a challenge. On the more global arena, the tariffs scenario is not great obviously. We hope Brazil closes a deal with the U.S. but God knows. That is a potential cloud in the horizon as well. At the margin I would say marginally worse.

We keep progressing, we keep willing to grow the bank, grow the balance sheet, grow the different lines like I said before, and obviously grow profitability. We remain optimistic, medium long term, but obviously with some concerns on the short term which we need to handle, but nothing preventing us from keeping growing the franchise and the results.

Thank you so much.

Thank you.

Speaker 0

Thank you. We will go now with Jorge Kouri from Morgan Stanley. Good morning. Welcome, Jorge.

Speaker 3

Hi everyone.

Good morning. Thanks for the opportunity to ask questions. I wanted to ask about markets. NII, you had telegraphed that that was going to be a more complicated quarter given the movement in rate. I do think that the magnitude was probably worse than what the market anticipated and that's why your operating income shrank a lot, quarter on quarter. How do we think about the next couple of quarters? If Selic indeed is now going to stay at 15% for the rest of the year, is there room for that market NII number to be a much lower negative figure for the next two quarters?

Just because it's such a big part of your revenues, how do we think about 2026 if we start an easing cycle and the consensus is right and Selic rate ends 2026 at around 11.5%-12%, which is where most estimates are, how big could that market NII be on an absolute basis?

Thanks.

Thanks, Jorge. We'll start with please.

Jorge. Hi. As I mentioned.

What I think.

In terms of total number for the NII, the mark as NII and more specifically the ALM part, the number, the figures that we think are the same.

Regardless of this higher select because we.

Did some measures to get there. I cannot anticipate how much will be the figures in the third quarter and the fourth quarter. Something that I can tell you is the number and the figures that we fought in the last quarter and I, and also in the fourth quarter about what is going to be the shape or the number for 2025 is the same. Nothing changed.

Despite the fact that we have a higher Selic, a higher.

Average Selic year on year than we budgeted. Is everything under control? I'm sorry, but I cannot anticipate the movements on this NII for the next quarters.

I think we can complement, which goes along with the previous expectation. As Gustavo was saying, Jorge, the market should not expect. I mean, it's a price versus volume thing. Again, it's mathematical. Right. So the Selic consolidates at the 15% level average in the third quarter. In the second it was already high, but not full 15%. Right. So there's a consolidation at the higher level in the third quarter. It's unlikely that we reduce materially the negative number we saw in the second quarter. If the average Selic, which is the funding cost of our ALM portfolio, got marginally higher in the third quarter and by the way, in the fourth, which is probably going to be the same level.

I would not expect a material decrease in the negative number in the next two quarters simply because the opportunity cost will remain at that high level, close to what we saw in the second quarter and slightly higher. When you compare third quarter versus second quarter, there's the other element, which is market making the trading position, which also consolidates in market NII, that's very hard to predict. We had a positive second quarter, but we had had a record first quarter which helped us on the first quarter. On a relative basis there was a decrease, although the franchise keeps very solid, very strong.

But that's.

That one is really hard to predict because it depends on the flows, the auctions, the tradings, etc. Client flows particularly. We hope, as we have a very solidified franchise, that we're going to have solid third and fourth quarters, but time will tell. On the bigger number, which is the ALM piece of the portfolio, it is a volume versus price thing. I would not expect a material change there. In 2026 onwards.

Yeah, 26 over obviously depends on the average leak and I hope. And potentially the average leak is lower. We'll potentially see a delta 26 against 25. That is natural. We'll be hedged and the carry and the select. The rate will be on average lower than 25. Potentially you see positive delta in 26 against over 25.

Yeah. We hope we are going to progress in that line in 2026, hopefully again in 2027. Time will tell, but we believe we have peaked the rate scenario at a very, very high level. From here, taking aside the next few quarters where we still accommodate the average Selic, for the next few years we believe that is going to be one of the points where we have at the margin more earnings momentum. Thank you, Mario. Thank you, Mario. Thank you.

Speaker 0

We'll switch back to Portuguese with the last question from Thiago from Goldman Sachs. Good morning. Good morning. Camila, Mario and Gustavo, thank you for taking my question. My question is about fees. I would like to hear from you, what do you expect going forward? There are three lines, especially insurance, capital markets. We see some potential for improvement, if that's what you expect by the end of the half year and if you think it's sustainable to grow cards, you know, by. In two digits from now until the end of the year. Thank you, Thiago. We talked about fees. Some dynamics are already running at the level we would like to see for longer. You also mentioned cards. It's hard for me to precise the magnitude of this growth because the denominator grows as the base increases.

But what I can tell you about cards is that we. We still want to grow in this line because cards together with the limit of the account and payments as a whole, because we see everything as being one single thing. The capacity to invest, to spend and transfer. We see that as something integrated. This is still the pillar of the strategy. We will continue to put capital in this area and our focus will be in improving technology, people, et cetera. This line will continue to grow and together with that comes transactional deposits. I mean, they are not together, but as we said, we are growing retail transactional deposits. Things are moving along very well. We hope that this line will continue to grow two digits year on year. You know, with the bar or the parts that's increasing, this will.

We will look at cost of risk and also profitability, insurance. The quarter was about flat. I mean, certainly resuming growth in this line is crucial. Granting less credit in more expensive products where you have more cross selling and insurance poses a, you know, a bit of a challenge when compared to previous years. I would say that the quality of our insurance origination and productivity in terms of our credit has to be higher. That's what we are looking for. There was one other product that we didn't have. We were launching it now. Now we launch the insurance for the checking account and credit card and that is selling like popcorn. We will launch high income insurance just to add up to our offering. We are just filling into some historical gaps. We are strengthening our sales force in the insurance segments.

We have another external channel with people that work for us, but they are dedicated to the insurance business. We are just making this team more robust. Finally, we are aligning that with incentives. I do believe that starting in the third quarter our insurance segment will resume growth. This is a crucial line. The capital markets certainly depends on our effort, but it depends pretty much on the market. As you know, the first half was a bit, you know, slower than historically. We are not in some operations because of our own discipline. In the third quarter the pipeline will be stronger. In July we already did a few things.

My feeling about the third quarter and going forward, you know, especially debt because equities is still not performing, M and A, you know, we see one thing here or there, but we are excited about capital markets and we believe that will continue to grow. The fees dynamics should have a very good performance in the second half of the year. We are putting a lot of our efforts in this area. With that we will increase productivity, profitability to extract more value out of our capital because we have to continue to grow and we will grow. Thank you, Mario. Thank you, Thiago. I would like to thank you all very much for joining us this morning. After this video conference, myself and the entire IR team for Santander Brazil will be available to clarify any further questions. Thank you very much.

I wish you a very good day and a very good week. Thank you all.