Good afternoon, ladies and gentlemen and thank you for waiting. We would like to welcome everyone to Bradesco's Fourth Quarter 2022 Earnings Conference Call. This call is being broadcast simultaneously through the Internet in the Investor Relations website, bradescori.com.br/en. In that address, you can also find the presentation available for download. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Eduardo Botero [ph], IR Head. Please go ahead.

Hello, everyone. Thanks for joining our call for the fourth quarter 2022. We have here in the room Octavio de Lazari Jr., our CEO; Cassiano Scarpelli, Executive Vice President and CFO; Moacir Nachbar Jr., Executive Vice President in charge of Risk; Oswaldo Fernandes, Executive Director; Carlos Firetti, IRO; and Ivan Contijo, Bradesco Insurance Group CEO. I move the floor now to Firetti.

Thank you. Hello, good afternoon, everyone. Thank you for joining our conference call for the fourth quarter '22 results. We posted a net profit of BRL20.7 billion in 2022. BRL23.7 billion excluding the impact of the full provisioning for a specific large client. These numbers are below the levels we want to deliver and below what we consider to be the recurring levels Bradesco is able to show. We are certainly not satisfied with them. Our investors can be sure that we are working to change it as soon as possible. We are confident that we can return to levels of performance we used to produce in the past. Our goal is to return to a sustainable ROE above 18%. The dip in profit and returns in 2022 can be explained mainly by 3 factors; the negative impact from the fast Selic-rate hikes on our asset liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies, and additionally, provisions amounting BRL4.9 billion in [Technical Difficulty].

Ladies and gentlemen, please hold while we reconnect our speakers. Speakers, you may now proceed.

Okay. Sorry, we were temporarily disconnected. So returning here, the dipping profits and returns in '22 can be explained mainly by 3 factors. The negative impact from the facility rate hikes on our asset and liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies and Additionally, provisions amounting BRL4.9 billion in the fourth quarter related to 100% of our exposure to a specific wholesale clients. In our expected performance for 2023 reflected in our guidance. The main effect on our results still comes from the increase in loan losses provisions. In the Retail segment, credit provisions should be higher in the first half of the year and should decline in the second half, growing full year in line with the loan book. Provisions in the wholesale segment will remain low but we are not going to have reversals as occurred in 2022. Part of the recovery in the bank's return will occur naturally and gradually up to the end of 2023 with improvements in market NII and cost of risk. Asset liability management results is rebounding with the renewal of the fixed rate loan portfolio with new loans at rates adjusted to the current scenario, leading to improved results throughout the year. In terms of delinquency, we adopted the necessary measures to control the behavior of the individual and small companies' portfolios revisiting models and our risk appetite. Consequentially, provision expenses shall reduce in the second half '23. Looking back it seems clear that we should have tightened our credit policy and risk appetite earlier on the retail portfolios. Elevated inflation since mid-'21 has led to much faster and stronger income loss for our clients over '22 than we expected, mainly with the rising food and fuel prices. Bradesco has historically had…

[Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs.

A couple of questions actually. I guess, first, just help us understand what's -- what do you need to see or what needs to happen to get back to that 18% ROE and time frame that it would take to get there? I mean, do you need interest rates to come down? Obviously, some normalization in terms of asset quality, do you need NPLs to come down? Even expenses and I know it's part of it, the other expenses given the expense guidance above inflation but just to help us think about the path to returning back to those normalized ROEs? What it would take to get there? And then the second question, just to understand a little bit on the provision guidance. You said cost of risk to grow kind of -- or provisions grow in line with the retail portfolio growth and I know corporate provisions are kind of normalizing. But does that -- do you expect the deterioration that we've seen in the retail portfolio to continue at the same pace that we've seen sort of the last 2 quarters? I know part of it is your exposure to lower income segments. But when does that -- I know you said it will peak in 2Q but when do you think that starts to sort of deteriorate at a slower pace? Just to help us think about the evolution of that.

Okay. Tito, thank you very much for the question. I think the path for the recovery in ROE is the one I mentioned in the presentation. We believe that part of the reduction is related to things that will improve with time for sure, considering the actions we have taken, I mean, the asset liability management results that are included in the NII. This will improve throughout the year with the repricing or renewal of our loan book, especially the fixed rate loan book and it is already happening. The internal rate of our books is improving. And as the time goes by, it will take this rate closer and closer to Selic and this will drive the market NII upwards. It's -- today, the results and the asset liability management are still on the negative and we see them going to close to 0 at some point in the second half. The other part is the normalization in NPLs. We are at a moment in the cycle where NPLs are already higher than we believe is the more normalized level they should be through the cycles. And the cost of risk is already high. So this is something that will take our ROEs closer to 18%. I'm not -- we are not even at this discussion counting on actually going back to material gains in the asset billet management. But also, we think in parallel, we will be running and we are running some initiatives in terms of efficiency. We have been moving many initiatives in business areas like, as I mentioned, the investment initiatives in the high income segment. So I think altogether is behind these views, I would say, a meaningful part are related to the first 2 items I mentioned. In terms of time, I would say we believe we will close the year already with a higher level of return than what we have right now, maybe not exactly the -- what we think is the sustainable levels and we'll keep progressing in '24. I would say, at some point in '24 on a quarterly basis, it's possible we can get to those levels. That's what we view. Regarding the deterioration. As we pointed in the presentation, we have already seen the performance of new vintages of loans, especially in the consumer, consumer loans, retail loans improved, improving materially. We believe that keep going with those trends considering we have tightened meaningfully our credit policies, it will lead to a stabilization in NPLs as we pointed probably at the end of the first half, second quarter, let's call it and I think this is kind of the trend we expect.

Okay, great. That's helpful. Maybe just one follow-up, if I may. And just to understand a little bit on the deterioration and I know part of it is your lower income exposure but just thinking of other peers that have perhaps a similar exposure, the deterioration hasn't seemed as severe, at least until now. I mean, we're still getting more data on that. But just kind of curious, if there was anything specific to Bradesco that had your deterioration at least looking worse than peers in the industry?

Tito, we believe we have more exposure to low income. We have -- we are -- given our presence, given our historical positioning, we think we are fairly well-positioned in this segment. And we think this is a strength and I mentioned even at this moment, we are suffering given the cycle. But it is a segment that we believe have very high prospects in the future. The low-income segment in small companies, in our view, suffered more than any other segment in Brazil and considering that probably we are more exposed with suffered more. We admit that probably we took longer than we should for tightening our credit policies. Probably that made us to suffer a little bit more than we should. But anyway, I think we have more exposure to the sectors than our peers. I think there are some peers that are expanding their exposure but we are already there. We are already playing with small companies. We have credit limits with low-income individuals. We are a bank that has a strong presence there. I think that's probably the difference. But again, the message here, Tito, is really that we see the trends in credit quality already improving. And we believe we're going to make this path soon.

Our next question comes from Mario Pierry with Bank of America.

So 2 questions. Can you share with us the macro outlook that you have for 2023 and what is driving, right, like so that we get a better sense for your guidance, if you can share GDP growth and employment, inflation, that would be helpful. And then finally seeing the impact of that on the corporate. So if you could make some comments on how do you see corporates in general? I know you talked about like you don't expect to have reversals of provisions but if you can help us understand like if there are any specific sectors that you're most concerned about or should we get -- start getting concerned about like a more significant, more pronounced deterioration in the corporate segment in Brazil?

Mario, regarding our economic forecast, actually, we have recently increased a little bit our forecast. For 2023, we expect 1.5% GDP growth right now, IPCA inflation around 5.7%. Selic at the end of the year at 12.25%. So I think these are the main figures. In terms of unemployment, fortunately, I don't have it here in front of me but no major changes in the trends in terms of unemployment. I think this -- I'd say, even when we talk about unemployment, we can say that over the past year, unemployment has really improved. But what we see is basically in this segment, especially low-income segments and small companies, this was not really a driver that really changed the trends. I would say the low income, the loss of real income was probably the main factor. In terms of the small companies I would say it was possibly a continuation of the trends that started with the pandemic, remembering the lockdowns and all the suffering that some small companies had during that time. In terms of corporates, we still see what's going on as more like specific cases than a big trend. We believe companies in general or large companies in general have enjoyed a long period without any major CapEx programs with a big liquidity in the market, in the bond market, actually low spreads for some -- for many years and also no Selic for some time during the pandemic. So we think, in general, they are in a healthy position. So most of the cases we see are sometimes cases that somehow we're already in the radar or had some other best pest problems or in this -- in the case of the specific client, it was totally out of the radar. So I think the good news is we have a very strong level of provisions in our balance sheet for corporates. The coverage ratio for corporates, if we dividend put it in the presentation because it's like 7,000%. Basically, as you know, it's -- it doesn't make much sense because delinquency in corporates is more based on some one-offs than really something more continues. So we don't see a trend. We see some cases after a period and we didn't have any major case. Some of them might be related more to the kind of reduced liquidity we have seen capital markets for the past year than actually the level of interest, interest rates.

Okay. No, that's helpful. So just let me follow up then on your loan growth guidance of 6.5% to 9.5%. It basically reflects no real loan growth than in 2023. Can you specify or give us a little bit more color on what kind of growth are you expecting for each segment, like broken down between individuals, corporates and SMEs.

We will grow less than the average implicit in the guidance for SMEs, especially because we have tightened the origination model or the credit policies more in small companies. And I would say most of our SME book is made of small companies. We should grow more or less at the same pace in individuals and corporates. But individuals, comparing to the recent test, there is a change. We should grow less in clean credit lines and more in other collateralized lines.

Our next question comes from [indiscernible] with UBS.

Actually, I just have one. I was following the conference call in Portuguese and I just wanted basically to shift the conversation here to the regulatory front in Brazil. First, I would like to hear from you about the FGTS loans because A lot of noise emerged during these recent weeks related to the termination of the products. So I just wanted to hear from you about what does the bank, I mean, think about the future of this product, the cash loans? And if you could share with us what is the market share of Bradesco in terms of origination of this product, it would be helpful. And a follow-up on this. I would like to know more about the government program called Disney Hall, I mean I just wanted to hear from you as well what does Bradesco understand about how will be the shape of this program, the format of this program for renegotiating loans from loan income segments?

Okay. Olavo [ph], related to the loan. I'd say, in theory, it was a good product but there is not much at all much to say. I think there was a regulatory change. It will not existing more. We haven't played in this segment on a material way. We have some loans in Digio but it's a very, very small portfolio. So it's not operations which we have done anything in the bank. And as I said, our portfolio considering what Digio was doing and what is very small. Can you remind me about your second question is renegotiation?

Yes. The government program, call it [indiscernible] related to the renegotiation. Do you have any comments about it?.

Yes. We still have to hear more about what is the final shape of this program. It's still under discussions. I think the banks are talking with the government. But probably the program involves more than only banking loans. It probably will involve utility bills and other debt. We believe it is potentially a good idea. And the fact that there would be some sort of guarantee to create an incentive for doing it if it is well structured. So we are looking at it and we think it's an interesting idea but still not much in concrete to talk about, I would say.

Our next question comes from Gilberto Garcia with Barclays.

I had a couple of follow-ups, first, on allowances. You mentioned that they should be more firm low higher in the first half. Can you give us a sense of that magnitude like how much should we expect, say, in the first quarter?

Gilberto, I'd say we're not going to provide quarterly or partial guidance on the provisions. I think, overall, I think it was fair to give this guidance but that view of what would be kind of the flow of these provisions. But as I said, it should be more in the first half than in the second half. Also because, as I said, we believe NPLs might be peaking around the second half [indiscernible] other part of the provisions happening in the first half.

Okay. No, that's fair. And on market NII. As you mentioned, it is moving in the right direction. Do you expect it to be positive for the full year?

Again, we moved our guidance to total NII, Gilberto. The idea is really focusing on the total NII. As I said, we have the guidance for total NII between 7% and 11%. What is implicit there and is that market NII improves throughout the year with the asset liability management, getting bad getting improving in the second half but I will not provide guidance for the parts of the margin anymore. But as I said, we are going to continue reporting them. But just for modeling and for the analysts to follow it.

Okay. Understood. And a last one, if I may, on your guidance for expenses, it's significantly above what you have been posting the last years. Is this more of a sort of catch up? Or is it more about projects that could help you come back to lower expenses in the next years?

The main reason for the range for the guidance in expenses is the line other net operating expenses. In this line, we have a low base of comparison in 2022, considering that we had some reversions of provisions, mostly related to things like lawsuits and other events. And this reduced the line in '22. So the causes of its variation in '23 is a normalization. If we isolated the personnel and administrative expenses line. we would see this group growing like inflation or even below inflation. We have important efforts to reduce costs there. So the driver is the other line.

Our next question comes from Brad Jones with Sage [ph].

My question was actually also related to market NII. So you may not be able to answer so maybe let me paraphrase it separately. Can we assume that the negative -- the most negative from market was in Q3 and that once we start to see interest rates being cut that will be turn positive just given that sees showed of the 1.5 billion per 100 basis point move? So whatever you can say would be great.

Yes, Brad, the market NII line is composed by a few components. One of them is the working capital of the bank. Also the treasury business like trading, flow trading, mostly flow trading, not really risk-taking positions and the asset liability management. There, this line is based to the net fixed rate exposed of our balance sheet funded by the regular cost of funding of the bank that is mostly floating. That is what makes it liability-sensitive as shown in the sensitive analysis from what we published. So it shows 400 bps reduction in rates. Our NII increases BRL1.58 billion. It's looking to the trends. We -- even if we don't have a reduction in rates, the market NII should the asset liability management continues repricing, given that old loans mature, new loans come at the rates already adjusted. So we believe by the end of the year, this component of the asset liability management will be already zero in terms of results on a quarterly basis, looking during the quarters. And it would benefit if interest rates go down at any moment after that.

Our next question comes from Pedro Leduc with Itau BBA.

Thank you very much for the question here as well. A little bit on OpEx, please. Guidance for 9% to 13% year-over-year. I realize that's got some other effect in it. But I wanted to see if you guys have given some thought to maybe boosting up the profitability lever via efficiency if there's room within personnel all the digital bank initiatives that you guys have done to understand your combining brands and looking to downsize some stuff? Anything there that could help us understand a little bit what you can do maybe for profitability via costs, OpEx would be much appreciated.

Thank you for the question, Pedro. We are always very attentive to opportunities in terms of cost efficiency. As you mentioned some, we are really looking to our digital initiatives. We think we can extract some synergies there basically in terms of as I said, combining and even merging some of these initiatives are making especially then closer to Bradesco, taking advantage of marketing of client acquisition and other benefits we can get. But also, we mentioned in some points of our presentation, one of the key things for us going forward is really a reduction of the cost of serving our clients. We think we have to get more and more efficient on that. We have -- we still believe the brains are useful, brains are a very good vehicle for doing business to contact clients but they certainly will be different and probably less costly in the future. So that's where we have a big focus right now in reducing the cost of serve our clients. I think this is really a big point we have been exploring a lot here in the bank.

Our next question comes from Juan [ph] with Scotiabank.

My question is related to the competition in the low-income individual segment. So can you talk about how you see the competition in this segment now? And how this compares to what was happening in 2020 and 2021, 2022? And also, what is your expectation for how the competitive environment may evolve in 2023 and 2024? And what opportunities that they have for you?

Okay, Juan. I think the competition in the low-income segment or is very strong. We have not only traditional banks but especially digital banks. We believe we have some advantage. We position ourselves in a more complete way. We still believe that our position with points of contact with the clients with brains has value in that process. We believe also that having corporate relationships and relationships with entities where we can have the payroll of companies, of and have a stronger relationship with these clients from the beginning is an advantage for Bradesco. And also the credit relationship. This is exactly right now is kind of a pain in the sense that we are suffering with NPLs. But we have this relationship through credit as our one of our strengths in the relationship with clients. And we believe this will continue even if we have temporary adjustments in our credit policies. So this is the way we play in positioning ourselves in the market.

And one more question but this one is related to capital and dividend. So given the current level of capitalization and the expectation for earnings for 2023. What can we expect in terms of the payout ratio in 2023?

Juan, we're not going to commit specifically with the payout ratio. But as we had said in the Portuguese call, we expect to pay the interest on capital IOC at full. For sure, we're going to look at capital, we're going to monitor but we believe, considering our expectations that our capital will grow even with the payment of interest on capital. And that will take the payout to a relatively high level if it happens. We think in our estimate, as I said, even with that event, we would see capital still growing in 2023.

Thank you. Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for their closing remarks.

So, thank you all for the participation in our conference call. Our Investor Relations team is available for any further questions you might have. Thank you very much. Have a good afternoon.

That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a great rest of your day.