Banco Santander (Brasil) - Q4 2022

Transcript

Gustavo Alejo Viviani (Head of Investor Relations)

Hello, everyone, good morning. I am Gustavo, Head of Investor Relations of Santander Brasil. I would like to welcome and thank you for joining us for our full year 2022 earnings conference call. As you know, this event is being streamed live from our studio at our corporate headquarters in São Paulo, and we will be divided into three segments. In the first one, our CEO, Mário Leão, will discuss the strategic pillars that will drive our growth as well the main highlights from 2022. In the second part, Ángel Santodomingo, our CFO, will present our quarterly and full year results. Finally, in the last segment, we will host a Q&A session where analysts will have the opportunity to interact directly with us. As a reminder, I would like to give a few instructions of our today's meeting.

These events feature simultaneous translation. Simply select your preferred language, and if you would like to ask a question during the Q&A session, just click the hand icon in the bottom of your screen. With that, I would like to turn it over to Mario, who will begin the presentation addressing our current context. Please, Mario.

Mário Leão ) (CEO)

Good morning, everyone. Thank you very much for joining us for 4th quarter and full year 2022 earnings call. It's a pleasure to be here again with everyone in a live and video format. I'll start today's presentation by discussing our performance in the past year, giving us the context and the wrap-up of 2022, and outlining my perspective, which is our senior management perspective on our potential going forward. First of all, I wanted to emphasize what we've been discussing for a few quarters already, which is our ability to effectively anticipate economic cycles. We've demonstrated this skill in the past, and we believe that our aptitude to anticipate market trends has played an important role in bringing us where we are today.

While our results are under pressure in the individual segment and consumer finance, in part due to the expected deterioration in older vintages and client selectiveness, we view this as a natural part of the same growth cycle that led us to deliver a streak of record-breaking results over the past seven years. In addition to that, we had a subsequent event from a large company in our wholesale division that impacted our results in this quarter. Our current results may not be within our desired outcome so far, we are aware of and prepared to address the underlying causes. We have several growth opportunities ahead, which we described in our last earnings call, and we'll be covering those in our session today. We're entering 2022 with a healthier balance sheet and better position to explore our growth initiatives going forward.

With Selic rate declining, hopefully, and consumer spending expected to recover sometime in the second half of 2023, we project a resumption in growth in our consumer finance business, which is the largest in the country. Until then, we will keep selecting clients and Selic rate will keep pressuring our results, particularly in markets. This growth will be achieved by continuing to prioritize business diversification, customer loyalty, we're gonna talk more about that, and cross-selling. We will accomplish all of this while keeping our focus on efficiency and maintaining our emphasis on reducing our cost to serve obsessively. On the next page, slide five, we're highlighting our ability to anticipate trends. We have proactively navigated through the credit cycle, resulting in improved loan vintages.

Our provisions and asset quality are comparable with the current scenario, and we are in a good position to resume credit expansion as soon as we understand that market conditions are ideal. We're obviously granting credit, but we are ready in our individuals platform and consumer finance to do that more rapidly as we see conditions improve. As you can see from our figures, our cost of risk has been consistently more predictable than our peers throughout the cycles. This is an indication to the effectiveness of our risk models for sure. We've also witnessed a better trend in our non-performing loan ratios compared to the industry. Even though riskier lines of credit have experienced a rise in NPLs across the banking sector, our numbers have remained comparably lower.

Overdraft NPL, for example, rose by 189 basis points in the industry as a whole, whereas we saw a decrease of 37 basis points. The same is true for credit card NPL, which increased by 276 basis points in the overall industry and less than half, 127 basis points for us. This is the result of our more selective lending approach and enhancement of our risk models. Looking at more recent loan vintages, we observe a healthier portfolio and a greater proportion of loans with lower risk levels. In fact, these newer vintages already account for almost half of our overall loan book, with 84% being double A to B rated loans. On slide six, we remind you of the pillars that will propel our growth in the quarters ahead.

We're covering more details our continuity in controlling credit costs, the franchise growth we're gonna have in several different business lines, our DNA in efficiency and productivity, we're gonna cover with some data. Obviously the expansion in several of our businesses which we've been fostering since last year. Some of them already provided strong results last year. They will keep growing at a rapid pace. Moving on to the next page, slide seven, we provide some more data regarding our new vintages and our credit portfolio as a whole. Our credit quality in new vintages, as you can see in the upper left side, the new vintages are performing on an NPL basis much better than the old vintages.

This is a data we showed already in the last quarter, which means that the more selectivity we've had in the new portfolios is paying off. The right-hand side, we see the same on the basis of the over 30 N3. Different ways of looking at and underscoring the way we are approaching credit, which is a big machine, it's a big results machine for us, and we've been more selective and it's paying off. Our loss absorption of new vintages comparing the level of financial margin we have with the cost of credit. On a basis of 100 by the end of 2021, has decreased in personal loans in the first quarter of last year and has since improved back to very decent levels. The same has been seen in auto loans and credit cards.

The main message is, yes, we've been more selective. Yes, that has caused us to increase less our financial margin than we would like, and with that, the related commissions, like insurances. However, the cost associated with those new vintages will be much lower, and that's already been shown by the numbers here. Moving on to slide A, we move to the perspective on clients. Here we present a few metrics confirming that we're on the right track, consistently enhancing the customer experience and increasing transactionality. We have great opportunities inside our client base. In 2023, we will focus even more on becoming the main financial service providers to our clients. Our most loyal customers base continues to grow, expanding by 5% in 2022. We hope much more this year.

Additionally, revenues from loyal customers rose by 41% in 12 months, meaning that we'll continue to focus on turning more of our total clients, which has achieved 60 million, by the way, into active customers and more of our active customers into loyal ones. We've also recently innovated by eliminating the minimum income required for clients to join our high income, our select segment. Our target is to achieve 1 million customers in this category by 2023, as these are our most profitable and loyal clients by a wide margin. Moreover, as you can see on this slide, there are remarkable opportunities within our ecosystem and customer base. In 2022 alone, our consumer finance business was responsible for adding almost 400,000 new clients to the overall Santander. While our microfinance business, called Prospera, added more than 300,000.

A crucial factor in attaining our objectives is customer satisfaction, and among the metrics we track, obviously the NPS, Net Promoter Score, is the most important one. Our overall NPS among individuals hit 54 points in the fourth quarter, an increase of 4 basis points, with the onboarding reaching 71 and products deemed important to client linkage, like mortgage, credit cards, also increasing during the period. These results are not yet where we would like them to be, as we will see in the following slide, we're taking a lot of actions by making investments and further integrating our distribution platform. In slide nine, we highlight our commitment to providing our clients with convenience 24 hours a day, 7 days a week through the availability and integration of our channels, which is really paying off, as shown in this page.

Santander Brasil customers currently have the flexibility to choose the way they want to be served, whether it would be through automated or human service, all being supported by our analytics-driven approach of customer experience 24/7. In line with our strategy to grow our agribusiness portfolio, we are expanding our footprint in Brazil's countryside with 51 new stores opened 2022 alone. We're observing a significant influx of clients in our stores on a daily basis, with over 13 million clients visiting our stores monthly, half of those non-clients. We're also noticing great opportunities for partnerships with other players in retail, and by this, increase our presence in Brazilian cities.

Currently, we are at 44% of the municipalities, a result of a 3.3-fold increase in the number of points of sales during the quarter, and we have set a target to reach 40,000 points by the end of the year. Our digi-digital channel has become the primary route for transactions, as well as an important sales distribution channel. In 2022, the number of contracts increased by 17%, with 97% of transactions taking place digitally. Finally, our remote channel has also been consolidating as an increasingly crucial touch point for human interaction outside of regular banking hours, with 50% of services being delivered during this period. Furthermore, we have reached 95% of first-call resolutions, representing a 14 percentage point increase over the past two years.

On slide 10, let me highlight of how we are focusing on maximizing efficiency while generating strong productivity gains. Although the number of transactions increased 2-fold in 4 years, we have managed to do it in an efficient way, by reducing transaction unit cost in 40% in the same period. Our cost to serve fully digital clients decreased 31% in the last 12 months, reaching 80 reais. We're also making strategic investments in technology, with 90% of our businesses now running on cloud and 84% of new implementations being done in real time. This is a result of the consolidation of our technology ecosystem and company under F1RST, our technology company. Finally, to close this topic, I'm pleased to announce that we recently launched SX Tools, a manufacturing company that will be focused on the delivery of products and services with excellence.

On slides 11 and 12, we provide a view of the key highlights from our business ecosystem during the period, in addition to providing a glimpse into where we believe our growth will come from in the future. In the investments business, I would like to point out two major fronts, the evolution of our AAA model for advisory services, where we're already expanding into 600 advisors by year-end, and we will reach 1,300 by second quarter this year. Our outstanding performance in the digital open platform space through Toro. We have ambitious growth plans for the investment segment as a whole. Credit cards, which act as a vital lever to build customer loyalty, featured among the best performance in terms of fees in 2022. We have attained an all-time high in turnover, culminating record-setting year for this product.

Part of this success can be attributed to our commitment to strengthening our ecosystem and the focus in our client ecosystem. In the insurance business, premiums have risen by 28% over the past two years, and we've set a target of BRL 15 billion by the end of 2023. In addition, we have achieved a 64% penetration rate in credit life insurance, which is an industry benchmark. In payroll loans, we have further enhanced the customer experience by expanding the digitalization of contracts, leading us to originate loans at an unprecedented rate, outperforming the industry. Consórcio, another of our top performers, showed a 42% growth in total origination in 2022. This is explained by the progress made in the customer experience and after-sale service.

On slide 12, this year, this year's achievement would not have been possible without our ability to offer the right solutions to our clients, which we expect to enhance even more this year and ahead. Our company segment or empresas had an exceptional year, as highlighted on slide 12. Revenues increased by 32% on a year-by-year basis. In SMEs, we achieved a record number of new clients, reaching 43,000 per month. Moreover, our focus on transactionality result in an increase of 20% in insurance fees. In wholesale, we have managed to uphold our position as the leading FX bank in Brazil. We're also proud to have been recognized as the best cash management bank in Brazil, and also, by the way, Latin America.

We have great opportunities inside the segment, and we have set an ambitious target to increase in 13% our company's portfolio in 2023. In agribusiness, we increased our share to 6%, having grown our portfolio to almost BRL 38 billion, and have set a target of achieving BRL 50 billion by the end of this year. We currently have 300 employees dedicated exclusively to this segment. Lastly, in the auto segment, we are the market leader as a result of our comprehensive offering through consumer finance, webmotors, and strategic alliances with major automakers. Today, we hold a 22% market share in vehicle financing for individuals and a target to increase our credit portfolio by 18% this year.

Finally, with that, I would like to turn it over to Angel Santodomingo on my side, our CFO, for our highlights of the fourth quarter in 2022. I'll be back for the Q&A. Thank you.

Ángel Santodomingo (CFO)

Thank you, Mário. Good morning, everybody. Good afternoon for those that are overseas. Pleasure being here again with you. We go into the numbers, into the results specifically, starting in slide 14, where we detail these numbers and our P&L. Main message about our numbers is that they reflect the moment of the cycle, where still revenues are impacted by prior decisions and provisions still have not started to improve. Our net profit, as you may see, amounted to almost BRL 13 billion, BRL 12.9 billion last year. As we have stated throughout the year, our 2022 performance continues to be impacted by the more selective lending approach we have adopted in recent quarters, by our negative sensitivity to interest rates, and also pressured by provisions coming from earlier vintages, as Mário has stated.

Alongside with these three impacts, we have partially provisioned a subsequent event that occurred recently. With that in mind, let me go over a few of our key figures for the period. On the revenue front, total NII decreased by 6.8% in 12 months, with client NII exhibiting a strong growth but being more than offset by market NII due to the mentioned negative sensitivity to interest rates that you well know. In fees, the expansion of our customer base and greater transactionality led fees to increase by 2.3% over the period, despite some pressure from credit-related commissions. On the expense side, provisions grew in the quarter impacted by this subsequent event. This is consistent with what I have been stating since our 3Q 2021 earnings call. That's about 1 year and something ago.

Also, you can see that our delinquency ratios remain controlled during the period. Despite the challenges posed by inflation and salary agreements throughout 2022, general expenses advanced by 7%, which is just slightly above Brazil's period's inflation rate. Efficiency continued to remain a priority for us, as corroborated by our 37% ratio for the year, 41% in the quarter, leading us to achieve our return on equity for the year of 16.3%. In next slide, in slide 15, is where we detail how our net interest income has evolved. Customer NII grew by a strong 22.4% compared to the same period in 2021. This is a direct reflection of our continued focus on customer acquisition and loyalty.

When comparing 2022 fourth quarter to the previous quarter, product NII declined by almost 3%, 2.6%, due to the precautionary risk mitigation measures that we have implemented and we have already commented several times. In year-on-year terms, we continue to benefit from positive volume dynamics and improved funding performance. The spreads are aligned to 1 year ago. The quarterly decrease is primarily attributed again to changes in the mix of our loan portfolio and in the selectiveness of our production. As I have noted in prior quarters, market NII reflects our negative sensitivity to upward shifts in the yield curve. As I have been repeating for some time now, this trend is expected to persist in 2023, although improving throughout the different quarters, we will continue to be partially offset by our treasury results.

Next slide, moving to slide 16. Our loan origination and mix have been affected by this more selective lending strategy, reflecting our cycle anticipation measures. In spite of this, we still managed to go through our loan book while keeping risk levels under control. Our portfolio expanded by almost 6%, reaching for almost BRL 490 billion. On large companies, we have had a slightly negative performance due to lower activities in receivables and Forex impact. Excluding Forex, this portfolio would have reduced only 0.5% in fourth quarter. The individuals segment saw the strongest growth during the quarter, as secure credit lines, such as mortgage and payroll loans, drove the expansion of this loan book. On top of that, seasonality contributed to the robust performance of credit cards.

Here, let me open a parenthesis to highlight that 65 of our individual loan book is collateralized. The SME segment also performed well in the period, partially due to the PRONAMPE and FEI. These are programs that are set up by the federal government and that we offer to our clients. On the liability side, our funding had a solid performance during the quarter, enabling us to maintain a strong liquidity position. Finally, our Core Equity Tier 1 capital ratio reached almost 11%, 10.8% at the end of the period, indicating that this core capital remains at a healthy level. It is worth noting that Resolution 229 from the Central Bank, which was originally scheduled to be implemented in January, has been postponed until July this year by the Central Bank.

The changes outlined in this resolution will have a favorable impact on our capital of around 70 basis points. Slide 17. Looking at fees on this slide, you can see that we had a strong quarter with growth of above 7%, driven by seasonality, that's true, influencing credit cards and the renewal of a specific client's insurance policy, but also driven by transactionality. The new consortium rule enacted by the central bank, the Central Bank of Brazil, had an impact on our fees, which were adjusted accordingly as if you obviously remember in the 3rd quarter. Underlying growth of this product is strong and will continue like that as we announced in previous slides. The year-on-year performance can be attributed in part to our loan origination strategy, as previously discussed.

In terms of expenses, the reported figures keep evidencing that our commitment to cost control as our expenses grew slightly above the inflation rate for the period. It is important to remember that the full effect of the salary agreements was felt during this quarter, which added some pressure to our expenses. In slide 18, you can observe how our asset quality has evolved. A lot has been already said, as expected, our NPL ratios, both for the 15 to 90 days and over the 90 days on the left part of the slide, remain clearly under control throughout 2022. The performance of our newer loan vintages has shown a constructive trend. As these vintages gain greater relevance in our loan book, we anticipate a healthier asset quality evolution. Finally, cost of risk reached 4.4 in 12 months.

This is consistent with our past remarks regarding the impact of older loan vintages and the subsequent event that we have already mentioned. Furthermore, our provisioning pace has not only covered prior vintages, but also contributed to increasing our coverage ratio, which hit 230% at the end of the quarter. Higher than both the third quarter and pre-pandemic levels. Obviously, this number includes the subsequent event impact. Lastly, credit recovery once again performed well on an annual basis and will continue to be one of our key focus areas as it has been in the past. Having said all that, let me now hand it to you, Mário, for your closing remarks.

Mário Leão ) (CEO)

Thank you, Angelo. Wrapping up everything we said. Main messages regarding our 2022. Our approach to client selectivity, which was designed already late 2021 and executed throughout 2022, aligned to our sensitivity to interest rates, impacted total revenues as we noticed before. Also, other loan vintages deteriorated as expected, and now we find ourselves in one of the challenging periods of longer credit cycles. We'd like to say that the credit cycle individuals lasted for 6, 7 years. We had record-breaking years in client base, top line, bottom line. Now 2022, and for some part 2023, we will be running under the tougher part of the credit cycle, where we expand less our portfolio on a more selective basis. That will result in a better asset quality overall, and we will see that throughout the next few quarters for sure.

Talking about our 2023 context, we start credit 2023 under the same, I would say, restrictions or selectivity in our credit portfolio. We didn't alter our view and appetite simply due to the calendar. We will have more and more strategy focus on client selectivity, client loyalty. Obviously, we wanna keep growing our client base. 60 million is already a very large number. We're very proud of that. More importantly than growing to 61 and 62, which we'll deliver anyway, is bringing those customers to become active and those active to become loyal. That is one of the key reasons why we're very confident on our 2023 and ahead. We will keep our culture of efficiency, productivity and obsession, like I say, on reducing our cost to serve.

That's the only way we're gonna have a mass market client base in a profitable way. We keep our culture, our DNA, in looking at every opportunity we have in being more efficient, which means spending, but spending in a better way more and more. In terms of levers of growth, we have several different ways that keep us in senior management and across the firm as a whole, keep us excited about the future. We keep being a growth story for several different angles. We have even more an enhanced balance sheet than we did in the last quarter. Our portfolio, like Angelo said, is already half represented by new vintages, and they've been performing better and better, as we expected. We continue our rapid growth in several of our portfolios, such as companies across the board, PMEs, mid corporates, large corporates, corporate and investment banking.

We keep expanding those portfolios. There are several layers in investments and commissions which will have more and more representation in our overall portfolio. Together with that, we obviously prefer better results. We obviously prefer a 2022 of more growth, but those results are all expected, designed in some sense. While we had a tougher macro context, we were spending a lot of time and energy in building hedges to the portfolio, building more seeds that will grow and will generate more profits, which already did 2022, and will provide more growth and more good stories to share with the market throughout 2023 and beyond. When markets are better in terms of macro context, we will have the largest consumer finance company to grow even further and a very, very strong and streamlined individual's credit platform as well.

We are optimistic about our growth prospects. We keep working very hard to contain the macro context we're operating on. Obviously, we are more and more confident that our decisions taken a year and change ago have been the right ones, and we're working towards expanding growth and resuming growth throughout the next quarters this year and ahead. With that, I'll pause for questions. Thank you very much again.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Mário. Thank you, Ángel. We'll now start our Q&A session. Our analysts will have the chance to ask question during the Q&A, which will last for about 30 minutes. Again, if you'd like to ask a question, just click the hand icon in the bottom of your screen. Our first question comes from Jorge Kuri from Morgan Stanley. Hi, Jorge.

Jorge Kuri (Analyst)

Hi, everyone. Good morning. Thanks for taking the time to answer questions. I wanted to ask you if the numbers that were published on the press about your exposure to Americanas of BRL 3.7 billion are correct. Is that the exposure that you guys have? What type of guarantees do you have on the back of those loans? What percentage of that exposure has been provisioned already? What is your expectation for how that's going to turn out in the first quarter results as a fully NPL, or will it take 90 days to become NPL? How much of the BRL 1 billion in additional provisions quarter-on-quarter that we saw this quarter was for Americanas?

What % of the Americanas exposure is provisioned, and how do you expect to cover the rest of the provisions over the next couple of quarters? That's evidently very important for us and the rest of the markets to understand, you know, what is your net income power for the next couple of quarters, if you still need to create another BRL 3 billion or so in provisions. Thank you.

Mário Leão ) (CEO)

Hola, Jorge. Nice to host you here. Thank you. Thank you for participating and for raising questions as well. The group Santander as a whole, and it's not different, Santander Brasil as the biggest operation we have in the group. We have not provided comments on specific names. That remains our stance towards the market. We understand the market is curious, anxious, and we understand it is relevant. We appreciate all that. We have had that stance, Jorge, and obviously respectfully to you and to others that have questions, we will not comment on the particular case of the subsequent event. Yes, we have made one step in the direction of provisioning. You're gonna notice in the numbers.

By looking at the levels or the scores that we report to the Central Bank of Brazil, hopefully you'll be able to understand more about how much we made. Like every provision we have in our wholesale and also minorista, in also retail business, we always look at those portfolios as a film, as a movie, and not as a picture. We will keep looking at this particular event, how it evolves. It is obviously in flux, as you're all following through the press. We will keep monitoring this throughout the year, like, I understand, most of the industry will. As we evolve towards one direction or the other, we'll evaluate how much we provisioned versus how much we should keep doing.

There's no preconceived decision as to how we move ahead. Again, that's the most we would like to share given our stance of not commenting specific names, which remains the case. Thank you.

Jorge Kuri (Analyst)

Great. Thank you, Mario.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Mário. Our next question comes from Thiago Batista from UBS. Hi, Thiago. Good morning.

Thiago Batista (Analyst)

Yeah. Good morning. Good morning, everyone. I have two questions. I know that you cannot talk about Americanas specifically, can you give us the size of the supplier finance of Santander, not only for Americanas, with all the industry? What has changed since the case of Americanas? Are you changing the prices? Are you changing the process? Are you trying to check Central Bank, the size of exposure with other players? What has changed? My second question, about the payroll loans. You mentioned in press release that you are expecting an expansion of 26% of the payroll loan book in 2023.

This is much stronger than expansion of last year, and also I would say probably one of the biggest expansion of years. What has changed in this business? The changes were internally in Santander or we're seeing any change in the industry to explain this much stronger expectation of growth for payroll loans. Thank you.

Mário Leão ) (CEO)

Thank you. Thank you, Thiago. I'll kick it off, and then Nando will complement. I wanted to cover firstly the strategy regarding the supplier financing business. We call it Confirming. It's a name we use it here. The risk was sacado, right? This is one of our, I would say key businesses, among wholesale clients, both our corporate banking business and our corporate investment banking business, the ultra-large clients. There are many anchors, like we call them, with whom we operate this product. It's a product that has been evolving throughout the years, has been reviewed thoroughly by not only regulators, auditors and alike. We're very proud of the franchise we've built, to be honest, regarding the product.

We have, like I said, dozens of anchors with whom, A, we keep operating, B, we keep willing to operate and expand, and we keep having a healthy relationship with them as anchors and with their suppliers as those that are anticipating their receivables. We actually just launched last year, we have here in the presentation, a channel which we call SX Integra, which is a digital channel through which suppliers can anticipate their receivables on a self-serving format. Which is already the largest self-serving or digital platform for receivables anticipation in supply chain financing. We not only believe in the business, but we are expanding the ways through which we offer to anchors and suppliers alike, more facility, agility and obviously capacities to serve. In terms of our risk appetite, we remain committed to the product like we were before.

Ángel Santodomingo (CFO)

In terms of exposure, that was your first question. What we do publish and release is our exposure to the retailer sector. I think if I remember well, it's barely around the 3%. So highly diversified portfolio as always, with very low exposures as a percentage of the loan portfolio. This is something that it is included in our governance, in our risk appetite limits and alerts. We have the principle of highly diversifying exposures and risks.

Thiago Batista (Analyst)

Thank you. Thank you, Mário.

Mário Leão ) (CEO)

No, just covering the second part.

Thiago Batista (Analyst)

Please, Mário.

Mário Leão ) (CEO)

The macro perspective I wanted to share regarding the payroll loans is that why we're expanding. Obviously we're expanding because we believe in the risk reward proposition. We like the risk reward proposition of all of our products, but particularly in a moment where we have a tougher micro context, with lower disposable income, et cetera. Payroll deductible loans are obviously healthier than clean consumer loans like everyone else is looking at. Why we have focus is obviously because of the risk reward proposition, but also because we believe we have a differentiated product here. The digital payroll loan, or consignado digital, we say in Portuguese, is a very-

Ángel Santodomingo (CFO)

Efficient offering, I'll say best in class, where customers that are served to our app, payroll customers, they can really, through a digital process that takes seconds, they can raise their payroll loans in a digital way. Part of our strategy has been digitalizing more and more our contracts. Last year, we had a record year of hundreds of anchors, hundreds of contracts, of payroll contracts with anchors were digitalized. The second part of our strategy to be wider is we obviously focus on INSS, so the pension customers. We obviously focus on government-related, we have a very strong franchise in private sector payroll loans. We have very large penetration given our cross-selling attitude. Our wholesale business is strong.

We have a lot of payrolls with our wholesale clients. We've been able to have payroll anchoring contracts with several of those wholesale customers. That has been a very successful part of our strategy. Joining the digitalization effort plus a private, sector-oriented, cross-selling effort with our wholesale business, together with a lot of emphasis in terms of our distribution retail network, those three things together have been a success story for 2022. We are very confident that with the same pillars, we will have an even stronger 2023 in payrolls.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Mário. Moving forward, our next question comes from Eduardo Rosman from BTG. Hi, Eduardo. How are you?

Eduardo Rosman (Senior Analyst)

Hi. Hi. Hi, everyone. Good morning. I have one question here, and it's related to your capital base. You know, you ended the year with a core capital of 10.8%. It's down quarter-on-quarter and year-on-year. Trying to understand here what's the minimum level that you would like to work with. You know, naturally your profitability will likely be under pressure in the next few quarters, right? And you have a payout ratio of 50% which is above average, right? Just trying to understand here how you see your capital. If you could see, you know, a change in the dividend policy, you know, it would be interesting to know from you. Thanks.

Ángel Santodomingo (CFO)

Thank you, Eduardo. Okay, let me elaborate a little bit around capital and payout. Yes, we did close at 10.8% of Core Equity Tier 1. We have always said that we wanted to be at around 11%, and this is where we are and where we have been managing both risk-weighted assets growth and payout. You're right, our payout last year has been around 52%-53%, which is a kind of a conclusion of how we see risk-weighted assets growth and how we see return on equity on a structural basis looking to the future. As a reference, 50% payout may work. Obviously, we will adjust that according to the board and according to each of the different years.

I mean, on the long term, this is where we kind of think about in terms of payout. In terms of capital, not only we are comfortable with this 11% that was mentioned, I also said throughout my presentation that we do have a new regulation, the famous 229 coming from the Central Bank of Brazil, that it was due to start 1st of January, and it has been postponed to 1st of July this year, 2023, okay? This is a series of kind of advancing and getting closer to Basel III, in conclusion, it means around 70 basis points to our Core Equity Tier 1, additional 70 basis points, 7-0, to our Core Equity Tier 1 ratio.

Not only by profits and by growth, but also by this new regulation, we will again be well above the 11%, and we will probably have to manage that to get closer to the 11%. This is our strategy in view of our capital.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Mário. Our next question comes from Rafael from Citibank. Hi, Rafael.

Speaker 8

Hi, guys. Good morning. I have basically 2 questions here related to... one related to asset quality. You mentioned that the new vintage are performing a bit better, and it should result in better asset quality going forward. When I look specifically for the quarter, it seems to me that the NPL creation is in fact accelerating, especially if put together the asset sale in the quarter. Just to understand if it's maybe here is the peak, and we should start to see asset NPL creation is specifically to perform better in coming quarters?

Also, if you could comment on the asset quality for the renegotiated portfolio, if this is one of the reasons for this increase in asset, in NPL creation, or if there is any change in the asset quality of the renegotiated portfolio. Thank you.

Ángel Santodomingo (CFO)

Well, let me, let me elaborate a little bit. In terms of quality of risk, I mean, I think, and we have been quite intense in this, in this remark, I think that we all have to understand the through-the-cycle concept, okay? We are managing a bank not for this quarter, not for next year, next quarter. We are managing a bank through the cycle. We've got a cycle now that, as we have said, it is pressured on the revenue side, and it still hasn't got better on the provisions on the quality of risk side.

What we are seeing is that that selectiveness is provoking, as you said in your question, that the new vintages are far better than the ones we have been producing, let's say 4 or 5 quarters ago. We saw some numbers. Mário mentioned the NPL, how it compares the new vintages with the old ones. In some cases, almost half of it or 70%, 60% of what it used to be, the different ratios, the loss absorption ratio, et cetera. Yes, we are seeing a quality where we want it to be. And where we are producing with a strong growth levers but with controlled quality. This is basic to understand how the future may look like.

In terms of NPL formation, in terms of renegotiation, all these things, you've got the numbers. I mean, the renegotiation portfolio has more or less been stable. We have said quite openly since the 1st Q of this year that we have been proactive with our clients, absolutely proactive. We wanted to help them, and this is something that is both on a duty side, but also on an economic side. We made a campaign in January 2022, and we have throughout the year continued to be proactive in the renegotiation of these debts. Yes, it is something that in, again, through the cycle view, in this point of the cycle, we have all to understand.

The NPL formation obviously is a conclusion, as you perfectly said, of all what I have said in terms of quality, sale of portfolios, renegotiations, et cetera. Thank you.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Angel. Now I would like to call Pedro Leduc from Itaú for his question. Pedro, good morning. On mute.

Pedro Leduc (Analyst)

All right. Thank you. All right. Thank you for the question again and hosting the call. I would like to change subjects a little bit to client NIMs. We see it fell again this quarter, about 50 basis points, second one in a row. Related, we see client portfolio changes, some funding mix changes here as well. I would like to get your help to see how portfolio assignments or the renegotiation spreads had something to do with this NIM dynamic. At the end, trying to understand the moving pieces as we look into NIMs for 2023. Any help here would be much appreciated.

Mário Leão ) (CEO)

Thanks, Pedro. Great to have you here again. I'll start, and then Angel can complement with the actual figures. Directionally speaking, which I think is an important thing for us to lever, first angle, we are being more selective. On a marginal basis, the, let's call it healthy or active, or even recent portfolio, which is already representing 50% or almost 50% of the overall portfolio, like I mentioned before, that portfolio, because it is stricter in terms of risk appetite, rates, ratings, on the higher end of our scale, that means those clients, A, are fewer clients, of course, more competitive, and clients which absorb lower rates, naturally speaking.

The production of new assets, and I'm talking about new assets, compared to the maturity of older vintages, both maturities and provisioning of older vintages, that has a different spread dynamics naturally. It's by design, and you're seeing here some of the effects. Obviously, like myself and Angel mentioned before, the production of cost of credit in those portfolios will be lower, and it's already been shown, and that more and more will be visible in our results. The second angle is when we look at our renegotiation portfolio, which is one of the portfolios that grew most last year, as you can all see, that has to do with our attitude towards the credit cycle. We are proud to say we have a very strong individuals credit engine here.

As we look at this through the cycle, we had to be more proactive last year. We actually had a campaign last year, which was a disindividual one, which you all follow, which allowed us to talk to clients on a more proactive basis and earlier in the deterioration cycle. That caused our renegotiation portfolio to increase for sure. Some of that renegotiation, well, ends up being provisioned, of course, because although we renegotiate in some aspects, that buying time works for many clients, and it doesn't works for others. Yes, some of the effect you're seeing here has to do with the spread, the effective spread we have in our renegotiated portfolio, which tends to be lower as time passes than as they were compared to as they were before. Angel, I don't know if you want to complement.

Ángel Santodomingo (CFO)

You're absolutely right. I mean, just to add to this selectiveness argument, you have also the mix. We have shown to you we are growing in real estate, in mortgages, sorry. We are growing in agro. We are growing in payrolls. I mean, these type, we have a 65% collateralized exposure in individuals. We have moved the balance sheet not only to a more solid one, but also to a more collateralized one, which also means, obviously, that has lower cost of risk, and also means having lower cost of risk, that the spread is lower. If you remember from the presentation, we are at about 1, it's, I think, I think it's 1 year or 1 year and 4 or 5 Qs at the same level in terms of spread, okay?

I think it was 10 point something, which means that, we maintain, we've gone through an upwards point, but we are maintaining past spreads in terms of, portfolio, but obviously much more comfortable.

Mário Leão ) (CEO)

Pedro, if I may just quickly complement an angle which we don't talk much because obviously the emphasis is more on individuals and perhaps PMEs. On our wholesale business, obviously there's the subsequent event, I won't cover, but the overall performance of our mid corporates and large corporates business has been over the credit cycle, including over the last many years, have been very healthy and record by record.

The thing about this is we've been very selective in wholesale in particular, so large corporate and ultra large corporates, we have been very selective, not due to credit appetite, but due to marginal ROE. We haven't grown more our wholesale business last year, particularly because not because we didn't have the credit appetite, but because the spreads there were lower than we believed were fair for us to place our capital on those deals. That has marginally improved this year, given the subsequent event. Let's see how it evolves throughout the year. I guess this was also asked before. Yes, we've seen a marginal increase in at least short-term spreads in wholesale.

Let's look at whether that prevails throughout the year, and obviously it's gonna be positive because we are lighter, if you will, in our wholesale business because we're more conservative in terms of capital allocation here.

All right.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Mário. Thank you, Ángel. The next question is coming from Flavio Yoshida from Bank of America. Hi, Flavio. It's good to see you.

Flavio Yoshida (Research Analyst)

Hi. Good to see you guys. Thanks for the opportunity to ask questions. I was remembering here, and you guys were vocal on the fact that Santander was the first bank to become more conservative on loans, turning more selective on origination there in September of 2021, right? If I'm not wrong. However, we're still seeing deteriorating early NPL trends, right? It's even higher than pre-COVID levels. We still see high loan renegotiation levels and also high provisions. All of this with spreads trending down. I was wondering if we are yet to see the positive effects of this changing strategy.

Also, a question related to this is there any signs, you're expecting to see in order to improve your credit risk appetite? Is it like better NPLs, better macro or, competitive environment?

Mário Leão ) (CEO)

Okay. Thank you, Flavio. I mean, I think we have spoken several times about quality, et cetera. The 15 to 90 days is much more volatile, as I have said several times. If you go to the 90 days, it's basically stable during the last 4, 5 quarters. It's stable if you compare it with last year, with 2 years ago. We have shown the new vintages that we are far more comfortable. All in all, again, it's a question of time. When will we open the pipeline again to other type of risks? Obviously, we have tests and pilot tests all continuously being made. When we see that things become to a profitable level so that we can reopen or reproduce in terms of volume growth. Okay, thank you.

Gustavo Alejo Viviani (Head of Investor Relations)

Now we have a question from Yuri Fernandes from J.P. Morgan. Hi, Yuri. How are you?

Yuri Fernandes (Analyst)

Hi, Gustavo. Thank you for the opportunity for asking questions. I would like to return to the loan growth. I guess on slide 12, you have some targets there, like commercial loans growing 13%, agribusiness loans growing 33%, consumer finance, that is basically auto loans growing 18% over a year, and industry is growing at 7% today. I would like to return to Flavio's questions on loan growth and just understand, like, the appetite of the bank. Because sometimes I hear Mário and Ángel saying the bank is too cautious, but those numbers, they seem pretty strong, right? For 2022 loan growth. I would like to ask this, like, how you are seeing loan growth? How much should Santander really grow?

Looking to those segments, you should be growing at double digits in 2023. If I may, just on spreads, you are saying basically that spreads will remain flattish, more or less in line with the first two, right? If that's the case, maybe NII with clients should grow below the volume. Is that fair? Is that the first assumptions for you in 2023? Thank you.

Mário Leão ) (CEO)

Thank you, Yuri. I'll cover your the first bulk of your question, which is more a strategic one, and then I'll ask Angelo to cover the numbers per se. Your question is great, and I thank you for raising this. When we share our ambition here, and it's obviously highlighted as an ambition, it's not a guidance, but it's where we're directed. We did it last quarter, as you may recall, and we're doing this again. By the way, we're gonna keep repeating this because we wanna tell you how we're doing. We wanna show where we're focused on a more accelerated path than overall. Are we gonna grow so much in consumer loans unsecured? Probably not.

Are we gonna grow so much in other unsecured pieces of the business, although they have higher margins? Probably not. We highlight here some of the angles at which we're gonna grow at a more expedited way. Why we're doing this, not because we wanna show you just numbers, but we believe that these portfolios are on a risk-reward basis. Given the customer base we have, given the customer base with whom we have risk appetite, these are the portfolios which we can grow at a more accelerated pace. Companies I mentioned before, we've performed our record year last year in all different pieces of the business. We have a growing but important MEI business. Starting with the lower PMEs, mid-PMEs, and large PMEs, record year.

Middle corporates, large and ultra large, again, despite the subsequent event, we had a record year. We're very comfortable that with without any arrogance, we've evolved our maturity and expertise regarding these portfolios, and we are confident we can keep growing at a double digit rate. Agro, the same thing at an even higher double digit level. We believe we've expanded geographically enough. We've understood better, you know, the cycles, the vintages, and the different commodities we operate in Brazil. We're very comfortable that among wholesale and retail, it's not only a retail agribusiness, it's wholesale and retail, we're gonna grow at a even higher pace than we did last year.

Then consumer finance, which is secured, of course, because it has the auto there, but it's, but it's a, you know, a portfolio which is always more volatile and has its own credit costs. We believe we've evolved a lot in our risk models last year. We believe we have the right partnerships with the big OEMs. We believe we have a very strong distribution network with the retailers, the auto retailers, particularly in used cars. We are very comfortable, yes, we can grow here at a double-digit rate as well this year.

Ángel Santodomingo (CFO)

In terms of volumes and NII, NIMs, et cetera, we've got a country that will probably be growing at 1%, around 1% GDP plus another 5, around 5% inflation. That's nominal terms 6%. You've got FEBRABAN, the banks association, saying 8% growth in terms of volume for 2023. You've got the public banks' role, et cetera, et cetera. It doesn't look like it's gonna be a huge year in terms of volume growth. As Mário said, we have clearly analyzed and stated for you which are the lines in which we want to grow.

In terms of NII clients, et cetera, obviously I always say to you, let's calculate the NII net of cost of risk because, you always have one part, which is where do I produce, and the other part is what is the cost of risk that is happening linked to that. Obviously in different timing. It's not an easy one. We are confident in terms of both NII clients and NIMs. Thank you.

Gustavo Alejo Viviani (Head of Investor Relations)

Thank you, Ángel. Thank you, Mário. I would like to thank everyone for attending this conference call, which was my last as Head of Investor Relations, as we will be assuming a new position in the group. At this point, I would like to take the opportunity to thank you all for a such great partnership over the last two years. Also, I would like to introduce Camila Stolf. Please, Camila, as the new Head of Investor Relations, and will be in charge of the department moving forward. Welcome, Camila.

Thank you, Gustavo, and thank you everyone who's attending this video conference. Following this video conference, we and our entire investor relation team are going to be available for any further question you may have. I look forward to meeting you in the coming months, hopefully personally. Thank you and have a great day.