Banco Santander (Brasil) - Earnings Call - Q4 2024

Transcript

Camila Toledo (Head of Investor Relations)

Good morning, everyone, and thank you for joining us for our 2024 Closing Results video conference. We are live from our headquarters in São Paulo, and we will be dividing this event into three parts. First, our CEO, Mario Leão, will talk about the main highlights of the year and the directions for our growth in the coming quarters. Next, our CFO, Gustavo Alejo, will present a detailed analysis of our performance. And finally, we will have our Q&A session. I will now give you some instructions. We have three audio options on the screen: all the content in Portuguese, all the content in English, or the original audio. To choose an option, just click on the button at the bottom center of your screen. If you have questions, click on the hand icon at the bottom of your screen.

The presentation we are about to give is now available to download from our IR website. And now I'll hand over to Mario to start the presentation. Good morning, Mario.

Mario Leão (CEO)

Good morning, Camila. Thank you. Good morning, everyone. It's a pleasure for me to be here once again to talk about the closing of 2024 and the fourth quarter results. We're here live from our headquarters at 10:01 A.M. I would like to start by highlighting, as we always do, I mean, the overview of the quarter and also consolidated figures for the year end. Starting with the numbers, as you already noticed, we delivered BRL 3.87 billion or BRL 3.9 billion in net income. This is another step towards the right direction. It's a number that grows quarter on quarter. In the interannual comparison, this number grows even more.

And so, more than the result itself, which is positive, we also grow in the way we generate the results. We will have the opportunity to share with you the quality behind the numbers, and we are very pleased to deliver that profitability. This is a clear note that how we are growing. We are growing 17.6%. This is a good evolution quarter on quarter, and the evolution that will come of many percentage points. And how do we do that? Well, here we highlight just a few ways. We have a very strong growth in our NII, over 100% in terms of interannual, even more, 16%. We will give you more details further on, and this represents gains in terms of assets and liabilities or funding.

This is, you know, has to do with our deposit accounts, but this is a disseminated growth with great pricing discipline and great discipline to grow our balance sheet in a very correct and technical way, seeking for profitability quarter on quarter. Fees, you know, great strategic focus, and we've been talking about that consistently. We posted consistent growth in almost all lines, quarter on quarter and year on year. We have good discipline on the cost of risk. Our cost of risk is coming down, and we will be able to give you more details about that for every portfolio, and we have a good discipline in terms of capital allocation with a growth agenda, but not linear, but it's very much focused on the segments where we want to grow more. I mean, expenses are under control.

It's going towards efficiency and efficiency ratio increase, and expenses, you know, under control and growing lower than the inflation, with, you know, collective bargaining, IRR, and then we want to share that with our employees. In terms of messages, we will give you. We have a few takeaways. We continue to work strongly to build a very sound business, diversified and also resilient. We continue to transform our service model in our offering geared towards the main segments of the bank, and we will elaborate further on that, and we have a very good discipline in terms of executing our strategy. Last year, we delivered and consolidated our strategy, and so, in summary, we will highlight a few points. Here, I have four main messages, but in summary, 2024 is when we consolidated our transformation, well, certainly, we have to continue on this transformation path.

We will do a lot more in 2025 and 2026, but in 2024, that's when we consolidated the design we had forecasted for the bank, and the results, you know, came along. I mean, none of this here is new, but this is just an idea of how we concluded the year. First of all, we turned the offerings in our institutional positioning. Now we are signing in a different way. We just launched that with you when we had our first quarter release. So now we are starting a new campaign, a new brand positioning, which is quite robust. With that, we also launch a new offering, which is our free offering, and this has evolved consistently and quite well.

A few months later, we relaunch our Select, which is high income, and we are also monitoring our brand positioning, and we do the same with small and mid-sized companies. We evolved in our service model a lot in the stores with SMEs. We are now serving clients by micro regions. We remove the experts, you know, for SMEs from the stores, and we cater service through the platform. So our service has evolved in a very robust way. So we hope that 2025 is the year of further consolidation. We also made advances in our investment channel. This is a strategy which I've been, you know, repeating for a few years. We are building a large investment franchise, selling third-party services off funds and also liabilities from the bank. We have a strategic convergence of a full banking offer from Santander.

And our digital brokerage firm is one of the most successful ones in the market with the best NPS score, and we will have the convergence of this offering, and we will continue to talk about that. And technology is another highlight. Chat is the major channel. It grew more than 200%, more than 2.2 times in the last two years. The product offering is very lean, and with that, we are improving the way we deliver services to our clients. Now, speaking about some strategic businesses, we selected four strategic businesses. The first highlight of the year in terms of individual business is our consumer finance. The market as a whole grew, and I think we grew more than the market itself, and certainly much better than the market itself. Our consumer finance for auto, for vehicles, is one of the most robust ones in the country.

Our market share ranges between 20% and 21%, and this portfolio grew 20% in one year alone, but more importantly, we grew with quality. We are working with ratings of eight, nine, 10, and these are the highest ratings we've ever had. We acquired a lot of clients, and we focus on price discipline. We will soon talk about the funding rate and how that increases throughout the year, so our individuals and consumer finance is pre-fixed, and so, with a high cost of funding, we were able to have a very good price discipline, and at the same time, we were very selective in terms of our clients, and to conclude, our consumer finance, which is the largest one in Brazil, is now 100% digital, so we delivered to dealers and end users a very seamless experience.

The second highlight at the top, our SME business, and I've been saying for a few years that our main mission remains, even though the macro scenario is a bit more difficult, but it doesn't mean that our growth will be linear, but we will continue to grow. And we have a lot of appetite. We want to double the size of our SME business, SME portfolio. We are growing almost two digits, 9% year on year, but we are also growing in terms of our positioning, coverage ratio, and we will certainly capture a lot more synergies. Another highlight is our cards business. I mean, transactionality is well represented by our card business. I mean, we are constantly relating to our relation with our customers.

This, what measures a transactional relation for individuals and corporates, is part of our main focus, and we evolved a lot in our credit card business. 88% of our base are made out of account holders. We are working with the holistic client and not just by area. We grew the platform 15% year on year and the average spending of clients that we grew that by two digits, which is a very sound growth. We are selling credit cards at a very good pace. We are more interested in extracting more value from the base that we already have, extracting opportunities from the base, which is better than the marginal opportunities. We are doing both, but we are trying to extract even more value than what we currently have. Now I'm talking about funding. Funding is another highlight.

Looking at the consolidated year, we had the best year of our history, BRL 23 billion in funding. Our AAA, our internal channel, we have almost 2,000 advisors. Their net inflow per advisor was 16 million BRL, which compares quite well in terms of other players in the market, and our NPS stood at 82 points, quite high. Now, speaking about client with primacy or principality, well, I will give a spoiler to you now because we are just a few months from launching our major project called OneApp. Our OneApp, it's been, you know, in construction for almost two years. It's not a new version. In fact, it's a new app, and this new app will consolidate all of our other apps and all of the service experiences in one single place.

So our current app works very well, but this will be a totally new experience. I'll tell you a bit more when we have our next earnings release for the first quarter. We will focus on a small product, but this is a topic for 2025, and it will cover the entire year of 2025. But throughout the third quarter, we will have a more solid evolution. I'll tell you more about it, but in summary, this represents a big leap in our journey. We already made substantial improvements. We improved the digital experience for both corporate and individuals, but we want to go further. We will launch a major app, and this is being built together with the Santander Group. We can give you more, you know, details during the Q&A.

Speaking about, you know, customer experience, you know, individuals and corporate hit record numbers at the end of last year, which is quite positive. Certainly, we want more. I don't think 63 should be, you know, a ceiling for corporate or 49 for individuals, but these are impressive numbers, and we intend to grow even more throughout the coming years. I mean, individuals has great penetration, and for the second year in a row, we were number one in this website that measures stability and complaints. So we are very pleased to have the best stability among all the players in the financial market in Brazil. In terms of clients, we reached about 70 million in February, and we're already surpassed that market. But even better than the gross number, I always like to look at how many active customers we have.

Last year was the year where we grew the most, our number of active customers. We grew 2.2 million active customers in one single year, which, you know, results in 8% growth. Even more than funding, we were able to bring the primacy of these clients. We have primacy of these clients, which is very good. How are we doing that? We are doing a lot of things here. We just talk about hyper-personalization, and I've been insisting on that topic for quite some time. I'm not going to go through every item of this slide, but we are moving forward with a new platform, totally redesigned for CRM. In fact, our CRM was everything for everyone.

We would say, I mean, it covered the big mass of people, and the capacity to hyper-personalize was not very robust, but we started, you know, personally personalizing it or hyper-personalizing it back in 2022. So now we have, you know, pieces, photos, offerings, prices, and terms totally hyper-personalized together with Open Finance, and we embrace that very strongly. We were one of the banks that grew the most. We are the financial platform with more consents in the corporate segment. Therefore, Open Finance evolved a lot, and this in turn results in a huge capacity of making our clients to feel unique. To conclude, well, Gustavo will give you the numbers, so thank you for now. So Gustavo, the floor is yours.

Gustavo Alejo Viviani (CFO)

Thank you, Mario. Good morning, everyone.

I'm going to start the presentation by talking about our loan book, evolution in the full year as well as in the quarters, the result of the disciplined search for greater profitability, as we have declared to the market for quite a few quarters now. In the individual segment, we grew by 1.5% in the quarter, with emphasis on products leading to greater loyalty and transactionality, such as cards. Cards grew by 10% in Q4 and 16% in the full year. In cards, it is important to say that we had a qualitative growth. We made better use of our base, focusing on middle and high-income clients. The low-income portfolio, on the other hand, has lost share with a drop of 17 percentage points in the last three years. That's very important in terms of quality of the portfolio.

And in addition to the quality of the portfolio, we saw greater transactionality as we're going to see momentarily. Consumer finance, as mentioned, maintained the good dynamics seen in the previous quarters, posting robust growth of 5.1% in Q4. As we said before, we're very satisfied with our credit quality. To give you some color regarding that, quality of credit, Mario mentioned, 80% of the total portfolio of consumer finance is classified with the best ratings. Ratings 8, 9, 10 account for 80% of the portfolio, representing an increase of 15 percentage points compared to December 2021. In small and medium-sized enterprises, we see an important evolution, growing 6% in the quarter, especially in this quarter in government lines. And here we see an important and balanced combination in the segment of credit income, fees, and funding. It is super balanced and super important in terms of the portfolio.

We know how to work in this segment and are prepared to move forward with quality and at the right pace. We'll look at the macroeconomic environment and our performance. On the right-hand side of the slide, we see our funding. The disciplined management of funding prices has helped to improve average costs in relation to our funding stock, which goes hand in hand with the objective of changing the composition between wholesale and retail in our liabilities. We see that individuals are growing 2 percentage points in the last 12 months, so the evolution of the strategy is there. In addition, we optimized our funding instruments that improves costs. We issued credit notes about 20% more in terms of volume growth in the quarter, with good market prices and an important demand for these securities by the market, which is very important.

On the next slide, we present the performance of our revenues, which grew by 14% over the year. Net interest income, NII continued to expand in the quarterly and annual comparison. In the last quarter, client NII performed well, both on the assets side with the prioritization of more profitable lines and segments. We've been talking about this, and on the liability side, with an increase in the funding results due to the rise in interest rates. As a result, the spread increased, importantly, by 60 basis points. And this is not only due to the higher Selic rate, but also because of the rigor and discipline in asset pricing. Market NII saw a lower performance quarter on quarter, which can be attributed for the most part to a lower result of our treasury operations. Q3 was very good.

Q4, a slightly lower performance quarter on quarter, and there was little impact of the Selic hike. I emphasize, as we mentioned before, that we have focused on reducing sensitivity to interest rate variations in our results. Fees showed good performance, good and recurring performance throughout 2024. We recorded growth of 10% in the full year and 3.4% in the fourth quarter, which once again brought us to all-time high levels. The result of our strategy of focusing on transactional products, and this is working really well. Again, I would once again like to highlight the 13% growth in cards in Q4 and 19% growth in the full year, a result well above the expansion of our client base driven by higher spending coming from relationship, transactionality, and loyalty.

Loan operations and consortia showed increases in the quarter and considerable improvement in the year on year comparison, as you can see in the table. In insurance, we see the effects of a lower production of credit life insurance for payroll loans. That's something we showed before. It's a decision that we took aiming profitability and some reduction in renewals of insurance during the period. But insurance ended 2024 with a 15% growth. On the next slide, we are going to talk about the quality of our assets, a reflection of our well-balanced loan granting and well-adjusted portfolios. We kept loan loss provisions, LLP, practically stable in the quarter. As a result, our cost of risk fell by 3.5%, a reduction of 50 basis points in 12 months, very important. Here, it's important to note that we're beginning to see potential signs of a more challenging macro environment, more court-supervised reorganizations.

You have followed this in the media and the market. More court-supervised reorganizations in agro and corporate, but these are portfolios with good guarantees and better resolution expectations. With regards to delinquency, short-term and long-term indicators remained practically stable. The increase you see in short-term delinquency among corporate is attributable to a higher volume of overdue payments in the quarter, and there are some cases that are one-off and are in the process of being settled in the short term. I know you're going to ask in the Q&A, so I will talk about Resolution 4,966. The capital adjustment in 2025 will be around 14 basis points. We can speak more about that. We are focused on sustainable growth and long-term growth of our portfolio. We do active risk management. We have discipline in pricing and technical rigor in resource allocation. That's why we have the results we are posting.

Next, I'm going to talk about expenses. We are making progress in our quest for efficiency with an emphasis on a correct cost control, allocating expenses to be more profitable. Over the year, the growth in expenses was in line with inflation, actually a little below. In the quarter, we had an impact on personnel expenses, a 4.6% increase related to the collective bargaining agreement, in addition to the increase in variable pay during the period, which is important and related to our growth. As regards to administrative expenses, the increase results from the increase in marketing and data processing expenses as a result of the greater transactional activity, more business, and that is positive for our operation. Once again, expenses grew below revenues and contributed a lot to the continued operating leverage of the bank.

We saw sequential improvement in the efficiency ratio with a drop to 5 percentage points in the full year. To end the results session, I bring you a slide for the full year. Mario has mentioned some of it. I'm going to detail it some. 2024 was a year of significant deliverables. The good performance reflected all of the actions we have implemented over the last three years. So it's a reflection of what we've been doing. We ended the year with an income of BRL 13.9 billion, up 48% year on year, and higher profitability with ROE close to 17% and core capital of 11%. We evolved in the composition of our earnings, with revenues growing well above expenses. We improved diversification of credit. We improved revenues, funding, and of course, we strengthened our whole balance sheet. Our balance sheet is more balanced and strong.

Lastly, I would like to emphasize that our work is geared towards the medium and long term with the aim of guaranteeing sustainability, ensuring robustness, and generating consistent results, as we have been showing. So thank you very much, and I'll turn the floor back to Mario for his closing remarks.

Mario Leão (CEO)

Thank you, Gustavo, to end so we can have a lot of time for questions. We have six main takeaways. They are basically the closing of 2024 and how we started 2025. We are already 35 days in 2025, and we count every day. So we have three big messages about clients and three big messages about the business, starting with the client, as it should be. We want to be, we're building a bank with 100% focus on a complete and principled relationship with the clients.

It means I want to be able to serve my clients A to Z, not every time, but anytime they need in the channel that they choose, the language they understand, the right offering for them. I want to have this full relationship, a complete relationship with them. With that, I will be able to have client primacy, as we have been saying, which is we want to be the main bank in the lives of our clients. Second big takeaway: how do we do that? With growing hyper-personalization, treating each client individually as a unique person. They should feel that they are our main client. We like to talk about the bank, about ourselves. I want to talk less about the bank and talk more about the client. It's not about the bank having primacy.

It is the client feeling that they have primacy with us and not the other way around. Three messages about how we're going to run the bank. Gustavo mentioned the how. How this message has to do with 2025, 2026, and the next 15 years. We want to continue to grow. We will continue to grow with discipline in managing our profitability and portfolio, so yes, we have a growth agenda, but it's not linear, not for all segments, not for all products, not aiming to have a bank share just for the sake of it. We want to do it smartly in a very dynamic way, and the top management, all the executive committee, myself, are fully dedicated to having a more clinical management of our portfolio. We have been showing this.

With this, we'll have diversification in terms of revenue streams, get client primacy, and proportionally increase funding and fees, and of course, credit is key. We are a bank. We know that credit is fundamental for the lives of our clients, but credit has to be the means and not the end itself. Credit is not the end itself. We have to be able to allocate our capital and credit in a smarter way. We've been doing this. We're quite satisfied with 2024, and to put it all together, we have technology. I don't have to have one, two, three slides to explain technology. Technology is embedded in everything we've said so far, in all of our messages, in all of the numbers Gustavo mentioned. There is technology. This is the big driver. It's the big differential that we'll pursue. We want to be distinctive in technology.

It's not easy because the bar is always going higher and higher, but we innovate and to catch up where we need to catch up and to do more. That's my final message, starting with the client and ending with technology, the two main pillars, with our leadership and our people doing all that. So now we are going to start the Q&A. It's going to be a pleasure to continue to answer your questions.

Operator (participant)

[Foreign language] Obrigada, Mário. Obrigada, Gustavo. Thank you, Mário. Thank you, Gustavo. We will now start the question and answer session. As a reminder, just click on 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, please, so that everyone can participate.

I'd like to start with a question by Bernardo Guttmann from XP Investments. Bernardo, hi, welcome.

Bernardo Guttmann (Analyst)

Good morning, Camila, Mario, Gustavo. Good morning, everyone. Congrats on the results. My question is about the retail segment. The bank evolved a lot. It's franchised, redesigned its high-income business, launching a new digital proposal in mass retail. In addition to the contribution of all this to the cost of funding, how does this benefit the bank to be more prepared to face perhaps a new credit cycle, which will be perhaps more adverse? What were the most structural adjustments made in this segment, and what can we expect in terms of credit policy? Is there any segment that should be prioritized in this context?

Mario Leão (CEO)

Excellent, Bernardo. Thank you. And that's a great question. We could spend the next hour speaking about that, but I'll try to be brief, and Gustavo can add.

Yes, we evolved a lot, and I briefly touched on that. We evolved a lot in terms of the way we are organized, and this means two pillars: what offerings we have for every segment and what is our model to serve. Of course, the journey is connecting all that, so last year, we delivered a lot in terms of offering and model of service. You mentioned retail. That's where we have the main transformation. We had a mass retail, the new digital offering. It's the free offering, credit cards with no cost forever, and many other benefits, not just that, and like I said, this has evolved quite well. We have brought in new clients and better quality clients on average compared to before. The onboarding has been very good, very assertive. We are not looking for a broad and totally open sea.

We are looking for new clients in a technical and scientific way. At the end, we have practically all Brazilians that are pre-mapped. We have pre-approved or zero limits for dozens of millions of Brazilians, so we can look for new clients in a very clinical and surgical way. In high income, as you mentioned, through the year, we had some repositioning. We had started doing this in 2022, and it was good. We started growing, to give you an idea, in Select. In the turn of 2021 to 2022, we had about 600,000 clients. We ended last year with 2.5x this number, and this was very organic. Some targeting, but we grew a lot in high income, and now we take one more step forward, which we mentioned in January in the press. We simplified our coverage model even further.

Now, we have a targeting of our old high income, Van Gogh, which was a nice brand, but it was just one more brand. We did a lot of analytics, and we talked a lot with the clients. We figured that we needed to simplify that even more. It was a brave move. Giving up a brand is not an obvious decision, but now we have the center of their client, our mass retail, the old low middle income, and the high middle income starts being Select. So that simplifies our offering. We're very excited with this new evolution. How does credit behave in face of all that? Since 2022, we have been evolving a lot, our models, our systems, credit journeys. That's a part which is less visible in the market. We invested a lot in redesigning our credit pipes and our loan granting.

Of course, in 2022, we had a lot of cuts, but our discipline of looking marginal production is daily. When the macroeconomic improves, I look at it every day. I run tests to see how we can feed that back. With a more challenging macroeconomic environment, we'll continue to make these decisions. Last year, before the interest rates increased a lot, the exchange rate increasing, we made important adjustments in Q3 as well as in Q4, and we didn't have the deterioration of December, which was partly reversed in January. So we have that kind of discipline. If I look at the number, we reduced our clean consumer credit in Q3. Payroll loans started in Q3, became more visible in Q4. Payroll portfolio dropped quarter on quarter, and I've been talking about this with you.

It's part of our discipline in terms of resource allocation, where I place my bets in our credit appetite. The margin, we continue to grow our balance sheet, and we'll continue to be very selective with an additional input of a more difficult macroeconomic environment. Of course, we want to grow even more in high income, but in high income, we'll be selective as we have always been, and now, with a part of our middle income having migrated, millions of clients migrating to Select, we are sure that we'll be able to serve these clients even better, so I'm optimistic to be able to grow in high income because it was a good portion of clients that were well served, but now we'll be able to be served in a differentiated way, but in mass retail, we have an agenda of growing with a focus on profitability.

It doesn't mean I'm going to grow in all products and at the same pace as we had in the past few years. So same discipline. SMEs, we're more impacted by the hike in Selic, but we continue to grow in SMEs. We have the appetite of doubling in size. We have almost BRL 80 billion in our portfolio. We can have BRL 150 billion in a couple of years. Client base, we can grow some more millions of clients. We get to that, but with the same discipline of looking where are the subsectors that are more challenging. We'll work to be close to clients. We'll do restructuring. We're joined with other banks. So it's BAU, business as usual, part of our management, but we'll continue to grow SMEs.

In wholesale, you didn't ask about that, but in wholesale, for years, we've had this discipline of looking at things to see whether they make sense or not. Capital allocation continues to be a good source for large corporates. We have a GCM franchise. We love that. We make money in fees and in distribution. But in terms of our capital, we'll look at the Delta, RWA that makes sense with the loans. So we'll grow marginally this quarter. Sincerely, because of the exchange rate, not a lack of appetite. It's because it made sense to allocate capital in high income, middle income, and consumer finance. So it's a long answer because it was a broad question.

Bernardo Guttmann (Analyst)

Super clear. Thank you very much.

Operator (participant)

Our next question comes from Eduardo Nishio from Genial.

Mario Leão (CEO)

Good morning, Nishio.

Eduardo Nishio (Senior Equity Analyst)

Good morning, Camila. Good morning, everyone. Good morning, Mario. Good morning, Gustavo.

I have two questions. I mean, the first question is about 2025. We start the year with a more difficult landscape, the perspective of an increase in the Selic rate. So if you could tell us a little bit about how you see 2025 in terms of the credit landscape or whether higher Selic rate impacts your market NII in terms of fees, whether you will continue to grow double digits? And also, in reltion to OneApp, the OneApp, if you could elaborate a bit more on that app that you were launching? Also, if you could tell us whether you already tested with a controlled audience and what would be the launching timing and whether you will be able to also offer personalized offers?

Mario Leão (CEO)

Great, Nishio. Thank you for the questions. I will start from the last one.

Talking about OneApp, I mean, I just wanted to share the teaser with you. I mean, we were even discussing whether we would tell you about it now or in the first quarter, but since we are beginning the 2025, you know, we are starting this year. I know this is a teaser. We don't have a lot of information. I mean, in a way, it's on purpose because we want to elaborate more throughout the year. And so we are building it with our clients. Since 2023, we've been working on it. Just to be very precise, since the third quarter of 2023, I mean, it's a lot of work to build a new app because, you know, we already had an app, but we are doing that with a lot of research. We are listening to our clients and non-clients.

I mean, I know that we have excellent competitors, both, you know, digital banks or incumbent banks, but we want to be at least equal or we want to be very distinctive because this is how you win the game faster. The idea is to have a conversational app, much more than what we have today. The idea is to have an app that brings this hyper-personalization in a more tangible way. We already have that in our current app. I mean, I don't know whether you're a client of us or not, but some of their clients should already see that hyper-personalization as individuals. So we are already seeing that, you know, more personalized approach, and we will increase that relationship further with a OneApp. I mean, this is all I can say. This is the teaser I can give you.

After, you know, the first quarter, I will be able to tell you more about it. I mean, there will be more people testing and giving us feedback. This is something that will not move the needle too much in terms of our results for this year, but it is nonetheless a very important step because we move several points ahead, and this changes the journey experience and also the relationship with the clients and transactionality. The results will come 2026 and, you know, further on. We will start with friends and family on April 1st, but I'll talk about it more in the first quarter about the perspectives for the year. I will not give you numbers because the fact that we do not give guidance. But yes, every bank is sensitive to the macroeconomic environment.

I mean, I can't say, okay, it's 15 or 10 and everything will be the same. Of course, that's not the case, but we were working diligently to have some market sensitivity in the margin increasingly lower. I know that it's difficult for you to project things on the buy side; it's also difficult for them to understand it, but the bank has been in Brazil for 42 years, and we've always worked non-hedged. And Gustavo can tell you what that means in practical terms. This is something gradual that will not take place in one or two quarters, but I would say that in the short or mid-range, we will move towards an interest rate sensitivity that is quite different from what we had. So before this high spike, certainly this brings some benefits.

In terms of appetite, you might recall that in the third quarter, I told you during our Q&A session that we anticipated that we would grow a few percentage points less than what the market anticipated, and it was okay for me. And some people even said, well, Santander is probably less ambitious in terms of growing the portfolio, and that was maybe a negative highlight or less cautious. But in hindsight, I'm very comfortable with what I said because I think the market ended up converging to what I said, but I am the first one to raise my hand. We see already signs that it didn't make sense to think about a credit portfolio two-digit growth, but as I was saying, we continue to work hard in preparing the bank to grow because this is a growth agenda.

But I can't just say, oh, we'll be growing the same, nothing will change, but I want to be more technical and to give you more details because I know that we have shareholders and a controlling, you know, company that is constantly demanding results from us. But I'll stop right here, and Gustavo now can add some more comments.

Gustavo Alejo Viviani (CFO)

We had already talked to you about that in the third quarter. So in terms of market and sensitivity to interest rates, in September, we started hedging of marginal projections. In terms of duration, this contemplates a gradual projection throughout the period to reduce sensitivity. So in marginal production, you do the hedging, but you still have some stock. You know that the average term of pre-fixed transactions is 18 months.

So this gives you an idea of what could play ahead, but the decision has already been made regardless of the macro. This strategic decision was made in September, and we are executing to plan. This is a process. We are making progress. And again, this allows us to have more predictability, less sensitivity, but not only for 2025, but 2026, 2027, and 2028, and so on and so forth. So this is a strategic decision that has already been made, and it's just evolving. Now, if you talk about the portfolios, we are prepared to grow. We want to grow. We made adjustments. We always make adjustments whenever necessary. But now it pretty much depends on demand. So what could happen to the auto market if there is demand? We have, you know, what it takes to grow.

I mean, let's say the demand is the same, but the ticket is different. So with the same funding, you probably give a downgrade to the kind of vehicle that you buy. But we are well prepared, and technically, we are well adjusted to go through 2025 that may have different characteristics. We've been prepared, and we are prepared. The bank is a very large bank, so we've been prepared for quite some time. And as Mario said, from the third to fourth quarter, we made some additional, you know, cuts. We do that whenever necessary, and we make adjustments whenever we see performances that make sense in terms of profitability. So basically, this is it for 2025. There is a lot more to come. What was market volatility in December is already different. In January, there is a major difference between what happened in last December and January.

The expectations changed. The curves resume to, you know, the levels of what it grew in December. Therefore, we are prepared, and we are, you know, following the strategy already agreed upon.

Eduardo Nishio (Senior Equity Analyst)

Okay, thank you, and congrats on the results.

Camila Toledo (Head of Investor Relations)

Now we have a question from Pedro Leduc from Itaú BBA.

Pedro Leduc (Analyst)

Good morning, everyone. Congrats on the results and congratulations on the year. And my question is about NII and NIM. I mean, client NII was positive. It was not obvious if you look from the outside in terms of portfolio mix. It wasn't so obvious to explain it. I just want to, I would just like to ask you to elaborate a bit more on that line and looking at 2025 and whether client NII can grow above the portfolio. I know that client NII involves a lot of things. You have the portfolio mix, volume, and funding.

So if you could talk about these three pillars, I would appreciate it. Thank you.

Mario Leão (CEO)

So, Pedro, I'll just start with a very brief introduction, and then we'll turn the floor to Gustavo. Thank you. This is a very good question. I will link client NIM with. We've talked about not only this quarter, but in the past quarters. Whenever we talk about the active management of the portfolio, when we talk about loan directioning as a means to get to transactions in our relationship with client, when we talk about not growing linearly, but choosing products and segments, everything has a connection with clients. And this also is connected to the overall portfolio with clients. And things are evolving quite well. We've never, you know, had such high funding. With individuals, last year, we had a very positive year, and this also has some other recurring effects.

When we talk about redirecting and this fine-tuning of our portfolio, Pedro, in practical terms, we are prioritizing, I mean, always looking at our, you know, credit criteria, but at the end, we are talking about focusing on products where I can have a transactional product that gives me floating, and floating, obviously, is also part of that client NIM commission. Fees is something on the side, but it does have a relationship with that strategy, and there is also a topic related to pricing discipline, and Gustavo, I'm sure we'll have something to say about that. Funding costs, I mean, I think it grew 400-500 basis points in on average over 200, but year on year, we managed to have a very good spread discipline.

So this reshuffling of the portfolio, you know, coupled with pricing discipline and the choice of products where I can also, you know, add price and have a better cross-selling, this summarizes the strategy. And a great part of the explanation behind the numbers is this, but Gustavo can elaborate further.

Gustavo Alejo Viviani (CFO)

Hi, Pedro. First of all, there is pricing discipline. The curves that are our reference in terms of giving prices door to door, door to door grew on average 500 basis points. We produced over the year 500 million BRL in loans. If we didn't have a good pricing discipline, there will be a compression over, you know, the credit spread. And it's important to be very rigorous and to look at every portfolio and see what would be the best organization of the portfolios to have better, to extract better benefits from that credit portfolio.

We do that every day, every week. We meet regularly to test elasticity and to test everything and what it takes for us to get there. Sometimes we test some things even in detriment of losing share. We do that very rigorously and with all of the details possible. I mean, to answer your questions, from that 60 basis points in delta in the quarter, maybe we could say that 60% of that comes from funding or deposits and things like that. And the remainder comes from our very rigorous discipline and credit spreads. I think this is pretty much where we wanted to go, but this is how we operated in the quarter. We will continue to pursue this discipline. What could happen maybe in the future? If future curves are lower, we have to keep our discipline to maintain the spread.

But we are not going to change our dynamics because it is working. And that differential, an important part of that comes from how we extract value from credit. It's important that we are growing. Not only that, but we are growing and we are expanding our credit spread.

Mario Leão (CEO)

And Pedro, to conclude, I think he'll also ask whether the market could expect us to grow, you know, client NIM above the portfolio. Certainly, yes. I mean, I think last quarter, there was a topic saying that the lack of indexation of the bank vis-à-vis the growth of the balance sheet. I mean, it's important to grow the balance sheet. I'm not going to demonize it because we will continue to grow. We do have the necessary capital to grow, and we will invest in growth where, you know, we have to invest, like clients, etc.

But the major challenge that I put forward last year, and now this is becoming more practical, is how can I extract more value from the capital I have and from what I have? It doesn't mean that it will come from the same client, the same product. I can reshuffle things, and we see that that happening. So we want to de-index growth and do exactly what you said. We want to grow results more than what we have to grow balance sheet. And with that, we will increase profitability much faster when compared to what we would have done, you know, the old way. And we would, we will do that with, you know, with everything that Gustavo said, not only this year, but throughout the next coming years.

Pedro Leduc (Analyst)

Thank you very much.

Operator (participant)

Next question from Daniel Vaz with Safra Bank.

Daniel Vaz (Lead Analyst)

Good morning, Camila.

Mario, Gustavo, congratulations on the results. I'd like to go back to a point Gustavo mentioned, hedging of the new production starting in September, when we'll look at the sensitivity when you have three shock scenarios. It looks like scenario two when we have an increase in the interest curve impacting your funding. When we look at the number, there is a relevant impact in the trading and banking portfolio. So what is, what do you think that the hedge for next year will help your ALM? Because all analysts are looking at a negative number of around BRL 2 billion. I'd like to get your opinion about the market since we talked about clients to understand what you're expecting for 2025? Thank you.

Mario Leão (CEO)

All right, thank you for the question. This is a very complex question, but let me try to address that. It's what I said.

We are in this progression of hedging. What will happen is we'll have a lower exposure, less exposure, but we'll still have some exposure. On the banking side, we'll have some exposure. If the portfolio conditions are maintained, depending on how we produce the portfolio, we'll have more or less position. If we produce as we are producing, we'll give you an example of what happened in Q4. If we produce less in the portfolio of payroll loans, I'll have less sensitivity because I'm originating less for something which is pre-fixed compared to Selic rate. So we'll continue to reduce our sensitivity with hedging for the banking book. It will depend on the composition of the portfolio in 2025 because, and that depends on the rigor we established and how we are going to go about this. We won't grow in a disorganized fashion or portfolios.

That can imply more or less sensitivity. It's hard to say ex ante. And we have the FX, which has a higher carry than 2024. This is a given because we have a portfolio, you know, the size of the portfolio, and that implied in capital effects due to marking to market. And that's the logic. We will reduce our sensitivity. We all have our FX positioning. I cannot really give you a number because we can have positives depending on the futures curves and how they behave. They can mitigate the sensitivity effect. So what is important to you, in my opinion? You can do a number of calculations. You can calculate sensitivity to interest rates, and you have to see the progression of Selic rate over time. You cannot compare point against point. You have to see a progression because NIM has to do with unexpected events.

So you have to think about how to do the math. But what is more important is that we will follow the script. The script will not change in 2025. We will not change our policy because 2025 is different, because our policy will remain. So your question is great, but it is quite complex to address. But that's how you have to think. You can start with sensitivity. You have to look at the average of Selic rates, the trajectory of Selic, but there are variables that still have not happened. So ex ante, it is very hard to do this calculation. I mean, I think it's not that simple, but that's how our balance sheet behaves. Our balance sheet is quite large, so it has a progression.

Putting it differently, we don't expect anything similar to the 2021 to 2022 impact, which lasted for a good part of 2023. The expected increase is relevant, but it is not compared to what happened before when we started having that Selic rate hike. But in practice, the fact that we are managing the business in a more evolved way, we will mitigate that. You will see this effect being amortized along 2025 and part of 2026. But of course, there will be some impact given the carry of our portfolio. But we are working with that, Gustavo, to have a renewal of the securities, exchanging the securities that we have to potentially have positions that are able to be realized. In January, we had some progress. So over time, we'll be able to manage our portfolio with mitigating factors as all banks do.

But this is a decision that we make in mid-Q3. We start executing in September, and that was a decision made. It's being executed, and it is independent of Selic increasing 100 points or 150 points or remaining where it is. The decision has been made and will be positive for the management of the bank and for your ability to read our earnings and be able to project over time.

Daniel Vaz (Lead Analyst)

Okay. Very satisfactory answer for a very complex question.

Operator (participant)

Now we have a question from Eric Ito for Bradesco BBI. Eric,

Eric Ito (Analyst)

hello, Camila, Mario, Gustavo, thank you for the opportunity. Congratulations on the results. Regarding 4,699, you mentioned the expectation of impact on net shareholders' equity. So what are you sharing in terms of expectations for recurring impact in terms of provisioning, commissioning for the brokers, impact on revenue?

What can you share in terms of the potential impact of 4,699? Gustavo?

Gustavo Alejo Viviani (CFO)

The impact on capital, I think, is clear in 2025 and what it will be. And then we have the phase in. It depends on our capital, our performance, and so on and so forth. But it is important that you know what is the impact for 2025. There will be a benefit of the deferral of some fees and payments, and there will be an increment of our provisions given the fact that 4,966 being different, 4,966 has some flaws. It costs more to originate, so there will be more provisions now compared to 2,682. We cannot give you numbers ex ante again, but this combination of the positives, the positives due to deferral and more provisions given the new rule, I believe that everything will be quite adjusted.

Of course, we have to run a few months. This is a new dynamic, but we estimate that there will be a neutral impact given the adjustments for deferrals versus this new dynamic of ALL. ALL price will be different than in the past. So net, we believe that this is going to be a neutral effect. And let me add to that. There were a lot of questions in Q3 and in our conversations that we had in between the calls. Questions regarding what's going to happen to CET1, the capital base, and payout. You're possibly going to be asking about that. So again, we are at about 11%. We are comforted with that order of magnitude. So it's an order of magnitude that gives us peace of mind, and it's part of our alignment with the group.

Again, we're part of a group that has a CET1 close to 13, 12.9. So our way of operating Santander Group, zooming out now, is to have adequate capital with the adequate buffers at the different affiliates, but surpluses of capital at the group level, which in my point of view makes a lot of sense because there are shareholders there that see the portfolio as a whole in euros. So we get to a level which is super okay in our view. And talking about payout and distribution, it allows us to continue to have an agenda of value with a payout level which is compatible with what we had last year. But with the bank growing over the years, we want to nominally continue to have a greater payout. The fact that deferral happened, it is positive.

It is positive for the industry and for us because it will allow us to have the progression we've been having with IOC, dividend payout, and so on and so forth.

Eric Ito (Analyst)

Perfect. Super clear. Thank you very much.

Operator (participant)

Now, next question comes from Gustavo Schroden from Citi.

Mario Leão (CEO)

Good morning, Gustavo.

Gustavo Schroden (Analyst)

Good morning. Good morning, Mario, Gustavo. Thank you for taking my question. Congrats on your results. Mario, just answer the question I had about the level that is lower than the historical numbers, but I think it's here to stay. I just want to insist on this topic. I mean, it's lower when compared to your track record. I'm not saying that it's inadequate. It's just lower than your historical numbers. With the level of results posted by the bank, the bank at one point had, I mean, achieved 17.6% of ROE.

I mean, you've covered an extensive journey when you face more difficult times with a 9.5% ROE. This equity one close to 11%, I mean, CET1 close to 11%, with the growth of NIM, efficiency also improving, can we start working with a 20% ROE? Do you think that this could be a reasonable number? I'm not asking for guidance. I just want some direction. Because if there, do you think that the bank could leave that number of 10% and go more towards 17%-18%? Maybe we should look at a larger time horizon, and I'm talking about CET1 because that has an impact because 11% gives you more leverage, and this could also allow for higher returns. If you could elaborate a bit more on that topic, I would appreciate it. Thank you.

Mario Leão (CEO)

Thank you, Gustavo. Thank you for your question.

I will start from where I finished the last question. When I refer to that 11, which is a very comfortable level, I'm not saying that it will be 11 or 11.0 or 11, whatever. In fact, we do not have a problem in working at a level around 11. I don't want to give any guidance, but just so you understand how we think. 11 or below that, I do not have to aim at, you know, 11, 12, just so that we will be more comfortable in terms of CET1. 11-ish, I mean, that doesn't make us uncomfortable at all, and Santander shareholders are not, you know, uncomfortable with that. I mean, how do you see our mission in terms of profitability? We continue to pursue, and I said that some quarters ago, not only in this situation, but in other interviews.

We are still seeking for that level of 20. 20 is not our final goal. I mean, we shouldn't even have a final goal. We should always pursue raising the bar, but this is a level that we should pursue, and this is part of what we do, and you have to constantly ask us about that 20 number. I don't see 20 as something that will happen in a very short period of time, but certainly, this could be like the end game in the point of view of numbers of this current cycle that I'm calling the transformation of the operation. I mean, this transformation can only be materialized in this phase, and I'm sure it will be much better when we reach that level of 20. Yes, we will pursue 20. I continue to believe in that number. Every quarter, we can visualize.

We cannot touch it, but I can visualize what are the levers that will allow us to go there. We have to work better in terms of our cost to serve. We have to be more efficient. I mean, it's nice that we are now at 38, but 38 is obviously not the level we want to be. We have to get an additional five points of reduction. So we have to work diligently. This year, we have many challenges. I mean, our top-line growth was 14. Our top-line may not grow the same 14, but we have to start working, you know, in that, you know, in grasping more things. I mean, our revenue is three times higher than expenses, higher than ALL. So we have to be very focused. And with that, we will continue to get there. We will continue to converge towards that 20.

The closer we get, of course, you have to look for more. Every 1%, we'll raise the bar. I mean, we have to look for ways to increase that further with a lot of discipline, of course, but you can be demanding of us. It is just a mix of how larger jaw can open. And so 2025, our discipline will be even greater. But the top line has to be one that we will not regret later on because we don't want it to impact our cost of risk. Basically, this is it.

Gustavo Schroden (Analyst)

Thank you, Mario. It's very clear. And thank you. And again, congratulations.

Operator (participant)

We also have a question from Mario Pierry from Bank of America.

Mario Pierry (Managing Director)

Good morning. Congratulations on your results, Mario, Gustavo. I had two questions. I mean, they are follow-up questions. The first question, I mean, Gustavo just talked about efficiency.

When we look at it, you are increasing expenses below inflation. I just want to have a better understanding. What are the initiatives you have in the pipeline for the coming years that would allow you to grow below the inflation? Having said that, I mean, given the needs that banks have to invest in technology, etc., Mario, you said that you see that there is additional room to improve efficiency. So I just want to understand a little bit of that.

Camila Toledo (Head of Investor Relations)

Mario, we cannot hear you. Your sound was muted.

Mario Pierry (Managing Director)

Okay, here. I'm back. I'm back. Now, I just want to have a better understanding where that will come from. And my second question, Mario, has to do with the drop in your retail wholesale portfolio. Because if we exclude foreign exchange variation, I think that portfolio was 11% or 12%.

That's a large number considering the interest rate landscape of 12%-13%. I know that that involves a little bit of allocation because you're allocating more capital to more profitable lines. But there was a very significant drop, and this is what drew my attention. I just want to understand whether you were anticipating some problems in some areas of the economy or whether you were concerned about some industry sectors and you want to reduce your presence.

Mario Leão (CEO)

Thank you, Mario. Those were excellent questions. I'll answer them in the same sequence of your questions. You asked us about our efficiency agenda and looking at the expense side. I will comment on a few topics that are not new, but it's always nice to reinstate them. I earlier said that, I mean, how do we pursue that 20?

But a very important part of that means that we want to have gains in the cost to serve. We made some progress throughout the year. We will tell you more about the metrics. But in-house, you know, in between our earnings release calls, we talk a lot about that. The reduction in the cost to serve involves two things. The unit cost to serve. We have to drop that cost very quickly, especially in segments where, you know, the purchasing power is lower. That is mass retail. So the only way for us to have a more profitable segment, which is our mission, and that is not yet achieved in the mass retail. So the only way to do it is by reducing the cost to serve per client. But there is also another agenda that involves managing nominal costs.

This nominal cost has some detractors, meaning we live in a country with inflation. I mean, the exchange rate has improved, okay, but the average exchange rate will be higher than that of last year. And as with any large companies, we have expenditures in euros and U.S. dollars, and we are expanding our operation in several fronts. I'm increasing our sales force with smaller companies. We call it Companies One. We have my investment portfolio, which is AAA. So to combine all of these drivers that involve more expenses, technology is one of them. We want to invest more in technology. I concluded my presentation talking about technology because technology is behind all of that and has an impact on every single number that we talk about here. So how do we manage that? We have to be very disciplined in terms of where we have to make reductions.

Mario, we do the self-funding of our own growth. I will just give you some examples of what we are doing. The most obvious example has to do with the reduction of our brick-and-mortar, you know, stores. We are doing that, you know, in a very concrete way. In the last three years, I think we were able to reduce our network, physical network, by 30%. If we look at 2025, I think by the end of the year, we will have reduced our physical network by another impressive amount. I mean, is there any magic number? No, there is no magic number. But we want to, I mean, reduce that by like a thousand stores. This is like the brick-and-mortar stores. We will get there.

And in the meantime, we will continue to challenge ourselves to arrive at an ideal number, not a number itself, but we want to have a number of stores that will just serve our clients the way they want it. I mean, clients are less demanding in terms of going to the brick-and-mortar stores. We will have less stores, but smaller journeys will demand a lower number of calls. We will seek efficiencies coming from our remote channels. Our major sales channel is remote. We renamed it now, and it's called Pulse. We have 10,000 people there in the remote channel. I'm not saying that we will cut that number to 5,000 out of 10,000, but we want to serve our clients better through that digital journey. That's why the digital first is important.

We have the need, and we see the need of having a lower number of brick-and-mortar stores, and we want to increase the efficiency of our remote channels. A third path for efficiency is pricing journey. Once I reduce by almost 40% the total number of products I have in my inventory by three years, that's something relevant. I said before that we had more than 300 cards, and we will end with 10-12 cards in our offering. That's because we have some co-branding, you know, some corporate cards. So the simplification of cards also is a sign that we are simplifying the journey to our clients. They understand what we're selling better.

We can simplify the offering into a very few products rather than hundreds of products, and the processing track is lighter and cheaper, and it's much simpler to serve these clients in, you know, in the after-sale channel. Certainly, we want to invest more in technology, more investments in new systems and in cloud. I mentioned One App that entitles a large investment, but we have to see where the funding will come so that the nominal cost, you know, should evolve as minimal as possible. The conceptual challenges, I mean, I don't have to evolve that BRL 25 billion, you know, that's a ballpark figure of our expenses. And large companies, yeah, large companies was also part of the question. I mean, talking about one-on-one management to portfolio management, large corporates, there is a concern.

No, of course, we will monitor the corporate segment as a whole and look at the evolution of Selic, you know, corporate, almost 100% of large corporate. They fund themselves with post-fixed rates, and this increases the marginal cost of funding of the companies. And we look at that very closely, the same way we did in the past. But now the bias is that we have, you know, we look at who is more leveraged. If there is something to be done, and when there is a union, we are trying to talk to unions and have a more organized conversation with companies. The capital markets are still a major source, but a company that is high in debt, they will probably try to get new debentures or CRA in the market. But this exchange variation doesn't have anything to do with this marginal issue or Selic, etc.

But I have to be more rigorous in terms of where I will allocate my capital. We have finite chips in terms of capital, CapEx, technology investments, people, why not? And all of these chips have to be allocated in a very disciplined and technical way. Wholesale is a good business. Certainly, that's where I came from. But given the fixed income capital, we have a very strong DCM. Given the strength of the capital markets, particularly the domestic one, we compete with different scales. So every large transaction, be it those that go to the market, that I can put it in-house or bilateral ones, we try to see whether that loan pays off, both in terms of the profitability and the cross-selling that comes with it. In fact, maybe I would say I would rather get the distribution fee. Well, but the portfolio will go down.

Okay, but I look at the relationship as a whole. I look at the ROE of the relationship, and I look at the ROE of the whole business. Our wholesale ROE is very good, and I don't want to compromise that ROE just because I just want to show you that I am growing the wholesale portfolio for the sake of growing. I mean, last year, I decided to grow 20% of the consumer finance portfolio with a very good ROE, which is helping us to recover. So this discipline of allocating these finite chips with no restriction, neither capital or macro, but I have to see where I will allocate it and whatever it makes sense for us to allocate in the wholesale, we will do it. And we are growing exposure.

Mario Pierry (Managing Director)

Thank you, Mario. We're very clear.

Operator (participant)

Thank you. A [Foreign language] gente vai agora com o Thiago Batista.

We have Thiago Batista with UBS.

Thiago Batista (Analyst)

[Foreign language] Bom dia, Camila. Bom dia, Mario, Gustavo, Débora. Good morning, everyone. Congratulations on the results. Very consistent results. I have one question about the private payroll loan, this new version, this new model that is being discussed. How do you see the potential for this market? I know it needs some regulation. We haven't got details about the rules, but what are the potential issues you see in this model? I know I'm only allowed one question, but I have a follow-up question regarding margin. You spoke about it. Gustavo mentioned that about 60% of the client NIM expansion was due to funding spread. So in funding, funding was almost a flat quarter on quarter. I think it increased to 0.2%-0.3%, and the portfolio grew 3% in the quarter or close to 3.

I want to understand this loan-to-total funding ratio, 93%-96%. Was this a one-time off in the quarter? Is this a trend? And would this explain the 60% client NIM? And I'm sorry, I asked two questions, but one was a follow-up.

Mario Leão (CEO)

You want to start with the follow-up of the margin? I think it's worth detailing this. All right. NIM, there are two different blocks of growth in funding. One is the higher Selic. That's number one. And number two, the composition of funding is different. If we have a composition with more demand deposits, more retail, more retail, the delta will appear. We have been talking a lot about this in our strategy. Our strategy is based on individuals and legal entities, the transactionality, transactional deposits. This combination gives rise to a delta plus the Selic. So that was in Q4. Anti-dynamic.

Our goal is to continue with this dynamic. Our dynamic is to continue to expand the individuals segment, quickly expand transactionality so that we have more and more deltas compared to the overall cost of funding and share of that in the client NIM. If Brazil has liquidity, if individuals have liquidity, and we get more transactionality, this trajectory will persist, so this is how we are working. We are less concerned about growing volume. We are more focused on quality of volume. As you saw, we increased the credit notes in the quarter because we have fewer credit notes. There was a market demand. The credit and NII for these issuances. So we're really good given the demand. This is an instrument that has no reserve requirement, and in the composition of the whole liability and funding, it makes sense, and that's what we are looking at.

We can grow. It might be a little flat, but overall, it needs to be positive from the standpoint of NII. And that's how we will go about in the next quarters based on transactionality and relationship between individuals and legal entities. I'll speak quickly, briefly about the payroll loans. In a nutshell, there's a big potential. To give you some big numbers, private payroll loans in the whole market accounts for about BRL 40 billion, BRL 670 billion, which is the size of payroll loans in the market. So INSS, the public payroll loans, have much bigger numbers. Of the BRL 40 billion, we have 30%. So we and another player have basically two-thirds of the market given our presence in payroll, which is a big part of the franchise and will continue to be. So it's BRL 12 billion. In our BRL 71 billion payroll loan portfolio, it's a small part.

We like it, and we have been entertaining more of that given the caps and so on and so forth. But it has a gigantic potential. So my view is with this new e-Consignado, as the government is calling it, it has the potential of unlocking a huge volume and value. It is a concession, but it is a better concession with better guarantees when we link the payroll loan; we separate it from the payroll itself. Of course, the employer remains an important element, but that loss of credit, which increases a lot when a client leaves one job and moves to another job. We've had low NPLs, but NPL will increase for us and for the whole market when the client leaves an employer. The cost of risk tends to be reduced. Competitiveness will increase, but it will increase in a much bigger pie.

In a meeting with the government last week, and this was very much talked about in the media, we said, and I said that I imagine four or five times the current size was not an exaggerated estimate. It will not happen in December, but it will happen in the next couple of years. You asked about challenges. There are a number of challenges regarding systems connections. There is a centralization in the government systems because that's where we have the information of eSocial, but it's a direction that makes sense. We at Santander embrace this. I believe that Febraban, the Federation of Banks, embraces this. This is an evolution for the market. It's not a marginal product. It's a product we are going to be talking a lot about in the coming years. This is very positive that the government is addressing that.

The government is calling private and state-owned banks to embrace this. So we're very optimistic about the e-Consignado.

Thiago Batista (Analyst)

Okay, thank you.

Operator (participant)

We will now move to the last question from Yuri Fernandes. Hey, JPMorgan. Yuri, hi.

Yuri Fernandes (Analyst)

Hello, Camila, Mario, Gustavo. Thank you. Congratulations. Not only on the earnings, but also on the deliverables and client primacy. There is a lot of speech about this, but we are looking at your metrics. Most of my questions have been asked and answered. I'd like to explore quality of portfolio. We have seen more concern. There is food inflation. People are getting a little worried about what could happen in terms of delinquency, default over 2025. Of course, there is a lag. Things are not immediate, but I would like to hear your take on this. In also your individuals number, normally we have 15-90 day overdue tends to improve.

I think that it increased marginally 10 basis points, but I would like to understand if this slight worsening in 15-90 days is a one-time off or is it a trend of worsening?

Mario Leão (CEO)

Thank you, Yuri. I'll be very brief, and then I'll turn the floor to Gustavo. Thank you for participating. You're the last, but not the least important question. You always have good questions. Some questions ago, I mentioned that there's this debate. I'm immune or I'm not immune. It is impossible to say that a bank operating with capital and with loans is immune. Even those that do not operate with credit are not immune to the macroeconomic environment. There are points of sensitivity in the whole balance sheet associated with the macroeconomic environment. It's a good thing we know about this.

We acknowledge that it's BAU, business as usual, in managing a bank, but the fact that the macroeconomic scenarios are more difficult and more challenging, that makes us adopt more measures rather than fewer measures. So to say that we were going to grant loans the same way that we did six months ago, well, it's not going to be the same. But we have been preparing the bank, and we talked about this in Q3. I said we should grow some percentage points less than what we predicted as an industry. I said that in the Q&A. And well, and then all of the other peers are reviewing and suggesting that they are going to grow less. There's a suggestion of growing the portfolio as a whole in high single digits. I think that this is going to be revisited along the year.

Again, we'll try to bring results without needing to grow the balance sheet a lot, but marginal return on loan is not going to be the same if the macroeconomic is not the same. So we're going to be more constructive with the macroeconomic environment, which is more challenging. Gustavo, perhaps you can mention where you're focusing on individuals that have less to do with the rate itself, but they have to do more with inflation, with food inflation, with disposable income, which is very relevant. For legal entities, it's a hybrid of the two.

Gustavo Alejo Viviani (CFO)

Yuri, let me stress what I mentioned before. We are very comfortable with the performance of our portfolios, and we have been adapting, adjusting the portfolios on a weekly basis when needed.

So regarding the 15-90 day past due, we did adjustments in September, in the last months of the quarter, in some clusters. And I'm talking about individuals here. We saw a performance which was not adequate. So all of the adjustments have been made. Now looking forward, which is not in 15-90 day, if we see some detachment, and it can happen, it's way too early. Inflation, the inflation effect, is not 100% felt, but we'll follow the same routine we followed in recent years, particularly in the last four months of 2024. I'm not so worried about 15-90 day past due. This can be a reflection of adjustments already made, and we have to see how the population will perform. So nothing changes in terms of the dynamic.

And that's why I affirm, and I state again that we have peace of mind with our individuals' portfolio and consumer finance that can be more susceptible to a different scenario in 2025. So the adjustments have been made. We made adjustments in the last four months. If necessary, we'll make more adjustments and always with the same discipline.

Mario Leão (CEO)

This variation in 15-90 day past due does not worry me, but we have to look at the performance in 2025. And the same applies to legal entities. They have a different sensitivity. Inflation does count, but there is more effect of the interest rates. And just last week, we made a lot of adjustments. It's BAU. And Gustavo mentioned the weekly review. It applies to legal entities as well.

Whenever we need to do so, we'll cut loans, although we want to double our business in legal entities. This cannot be a decision that I execute in a linear fashion every day without looking at what's happening in the macro environment. Gustavo mentioned agribusiness. We're going to have a better agribusiness year, but it will not be as good as it was until 2023. You know that our agribusiness portfolio last year kind of stayed stable, having doubled in 2023. We'll adjust the portfolio and the margins, and we'll share this with you. We can speak more about that in the upcoming Q&As. Will it be the same as it was six months ago? No. We believe that we have to have a well-balanced portfolio to feel less any deterioration of the macroeconomic environment. Any adjustments in marginal loan granting, that's a daily decision.

We'll make these decisions as we have done from September to December of last year. We have marginal cuts, and if needed, we'll continue to do so with a view of optimizing what we have in our portfolio. Almost BRL 700 billion in the expanded portfolio, and we'll continue deriving value from the existing portfolio, and we'll continue to grow the margin.

Yuri Fernandes (Analyst)

Thank you. Very clear. Thank you very much.

Camila Toledo (Head of Investor Relations)

[Foreign language] Bom, com isso, a gente with that, we end the Q&A session. I would like to thank you all for joining us this morning. Immediately after this video conference call, myself and the entire Santander Brasil Investor Relations team will be available to answer any other questions you might have. Thank you very much. Have a great day, and I'll see you next time.