Banco Bradesco S.A. (BBD) Q4 2023 Earnings Call Transcript

Banco Bradesco S.A. (NYSE:BBD) Q4 2023 Results Conference Call February 7, 2024 8:30 AM ET

Company Participants

Marcelo Noronha – CEO

Andre Rodrigues Cano – Executive Vice President at Banco Bradesco

Cassiano Scarpelli – Director Vice President

Carlos Firetti – IRO

Conference Call Participants

Thiago Bovolenta Batista – UBS

Daniel Vaz – Santander

Bernardo Guttmann – XP

Mario Pierry – Bank of America

Tito Labarta – Goldman Sachs

Jorge Kuri – Morgan Stanley

Eduardo Nishio – Genial Investimentos

Rafael Frade – Citi

Arnon Shirazi – Santander

Yuri Fernandes – JPMorgan

Pedro Leduc – Itau

Paulo Gomes – HSBC

Marcelo Noronha

Good morning, I am Marcelo Noronha, and I’m here live speaking from Cidade de Deus, it’s 10:32 AM to present the numbers for the full year of 2023 and of Q4 2023. After that, we will have a second topic. Our guidance for 2024. You probably read our book in our guidance for 2024. To us, 2023 was a challenging year.

It’s not the result we would have loved to deliver to you. And the guidance of 2024 falls short a bit. But to us, 2024 will be a year of transition of transformation at Bradesco. And lastly, the third topic is our strategic plan, of course, here bringing the executive summary of the plan that we put together in the last 60 days. I will present that to all of you.

And then we’ll be able to debate that during the Q&A. And I will be available to all investors for us to talk later. We already have some meetings scheduled for buy-side and sell-side investors so we can speak about our clients for the next five years in more detail from 2024 to 2028. So now I have the challenge of presenting at the same time that we present an income statement of Q4 ’23 to speak about full-year results, the guidance, and the strategic plan in an executive summary, as I mentioned. So I’ll try to do this as quickly as possible so we can have our Q&A.

Let’s start with our numbers. Our results. As you can see, we have an additional number in lighter color was the end of the quarter with KRW4.3 billion. Here, we had an ALL enforcement for two cases in the wholesale bank. We were a little more conservative in these two cases.

We reduced the ratings, that’s why our recurring net income was KRW2.9 billion. In addition, we had two major nonrecurring events. As you can see here in this last topic here on the right of the screen. The provision for the restructuring that we had and the contingent liabilities. I think you should comment on some positive aspects of our income statement.

Wholesale ALL was forced in the two cases that I mentioned, and this is relevant. We have a comfortable coverage level for the wholesale bank for this year with the reduction of ALL in mass retail. Just that we’re going to show a reduction in all delinquency ratio. We cannot show the higher delinquency that we had for SMEs and mass retail. Credit stats accelerating.

I will show you that this happened for individuals and SMEs. We had market NII recovering, total NPL dropping 50, and here, there’s another positive point which differentiates with this in a position. We are growth that has a bank business and also the largest insurance login Latin America. Our insurance group with a higher level with an ROAE close to 25% in 2023. Our operating expenses were within the guidance, and I will detail more on our expenses.

So moving forward, like I said, we had an inflection of the curve for both individuals and SMEs in the vital going 1.3% despite a reduction we had in our appetite for risk in 2022, 2023 and also a change of level for SMEs, posting a 1.5% growth quarter-on-quarter. We had the write-off of a well-known case, which happened in the end of 2022 in Q4 of 2022 to call your attention to our average daily production. In the second half [indiscernible] increased because we changed our credit models and to policy for individuals, which became more restrictive than in the past. Yes, it’s true. But we’ve had new controlled vintages, the singles for SMEs.

We tested modules in April, we implemented the new models as of September, and restarted to grow again in the segment of small and midsized companies, again, with more control and credit policies. So we won’t have any issues in the new vintages, which are performing really well. As I mentioned, the delinquency ratio. We can see all curves of NPLs dropping, some for the second to second. So we have this portfolio under control.

Our coverage ratio grew to 165% and NPL creation decreased. I mentioned these two cases, we had in the wholesale bank with total provisions of BRL10.5 billion in Q4 and three before, this is our net interest income, NII. We reduced rose capital, as I mentioned, in the end of 2022 and throughout 2023. And of course, we stopped having new productions for a while. We resume that towards the end of the year and continue to grow.

We will definitely grow, but step by step with good vintages, both in mass retail and in SMEs. In terms of personal credit, working capital, and other lines that we’ve been growing. And our market NII is a highlight, posting growth in Q4, BRL0.7 billion, seeing good expectations for [indiscernible].Fee and commission INCOME. We know that this is a line item that is under pressure. I think the whole market is talking about that, particularly in card income.

We posted 3.4% growth quarter-on-quarter. However, we know that animal payments boepd over time were compromised because we had a structural change here on the brake with free cars. So that impacted current income, but our loan operations grew quite well in Q4 because of this resumption that I mentioned. We grew in consortium eminent and in checking account. We have challenges because of payment accounts, but we continue to work on that to offer better pace, we have a good expectation for capital markets for [indiscernible], as for our operating expenses, I think I should make three comments here.

Number one. In 22, looking at the line item, other operating expenses… Also a reduction in 2022. So that’s a baseline for comparison in 2023 — lower base volume. Therefore, we have a greater valuation.

And we balanced this line item of other operating expenses in 2024, bringing them back to the levels of 2019, 2020. So there’s some fluctuation in these ratios. And personal exposes, looking at the last indicator, we see a 6.4% increase despite the collective bargaining agreement, which meant a 7% salary increase and administrative expenses, we grew 2.5% inflation. We had a reduction in customers at this point as you can see on this slide. You can see this on the screen in our earnings.

Let’s talk about the insurance growth. And I think that this is a big highlight in our results. We had exceptional results along 2023, growing about 21%, 21.1%, 2023 over 2022. Net income growing significantly, almost 25% ROE with revenues greater than BRL100 million. Insurance group went to a whole new level.

So regarding our IUC, we declared 11.3 as you can see in the graph and our vessel Tier 1 grew 81 bps compared to Q4 2022, reaching 13.2% as you can see. So done with that, let’s move to the [indiscernible]. The comment is that we have an expected growth for our loan portfolio of 7% to 11%. In the middle point, we’re talking about 9%, slightly above what the market should expect. Yes, the expectation is around 8%. Why is that the NII does not follow the loan book because of the average portfolio effect will grow month by month step by step.

And not really, we will have total NII, depending on the mix, we should also improve our mix, but above the average portfolio, and we are going to see improvements in 2025. Fee income 2% to 6%, suffering some pressure, as I mentioned, operating expenses. That’s not the best ratio. We have an effect of other revenues and expenses. But I think that we are doing quite well regarding personnel and administrative expenses.

We’ll speak about our goal in terms of operating efficiency targets. So the expected growth is 5% to 9%. Regarding the insurance group, we expect growth from 4% to 8%. The natural question for new is why only 4% to 8%, but there are three phenomena to mention here. First, the reduction in interest rates that should reach 9.5% in 2024 December 2024.

And then we have the variation of the indices GPM and we can see also the variation of insurance core and growth of 4% to 8% in 2024 means that if we go back to 2022, what do we see in the insurance growth to 25% and 30% in two years for the insurance group is large the largest on America. And lastly, our expanded ALL, BRL35 million to BRL39 billion. This is reducing. But we’re not reducing more because of the increasing loan book and the mix we want to have, which requires more provisions for expected loss. If the portfolio were more stable, we would have an expanded A provision or — so now, ladies and gentlemen, I’m going to move to our strategic plan mentioning our expectations.

Our expectation is that 2014 will be a year of position and transformation. Then I would like to make a comment such a strategic plan, such as the one we have adopted would naturally take about six months for us to execute, but [indiscernible] challenge of doing it in 60 days. We’re going to do it where the renowned consulting firm — it’s waken. I can tell them in looking supported by other cool firms so that we can have safe and monitors that we can execute perfectly. So what we’ve done was to follow academia by the book with the market diagnosis for Bradesco, then developing a plan.

And now moving on towards the execution here to have the entire market diagnosis as we developed. It wasn’t only the involvement of Brazil’s consulting team, but from different ventures in the world who came to support us in this diagnosis of the market with benchmarking technology, credit and so on. In addition to — well, after the diagnosis, we developed this plan that’s actually a set of initiatives. We had ongoing initiatives in the bank. And what we did was to revalidate those initiatives, measuring everything we had determined to make sure the initiative was valid, sound, and whether or not we should continue with them.

We maintain some others we identified that we had to change the way of getting it done and the perspectives that we have. And then there are others that were not part of our plan, and we’ve included them in the set of initiatives to develop our plan. And then we move into the execution phase. We do know the consulting, the company’s work, and the stage of execution. What we do is take the initiative, break it down at greater detail levels to conform the economic intervals that we determine, the timeline for the development, what type of investments we need to make.

In some cases, we are already making progress. We’re already entering the execution and detailing phase. Others are just starting this stage should on this process to further detail and execute the plan. But what happens when we develop the plan? We started with a new structure based on that strategic plan, and now we have [indiscernible] and a framework for us to pursue over the next five years.

Of course, when you develop a strategic plan, your plan is not static that you stick to it and do only that. No, the initiatives are reviewed. We may include new initiatives over time and also adjust whatever is or may not be working out as expected. So we entered into this execution process, which is the toughest, but it’s decisive for us to be able to deliver what we expect to deliver in our structure, and I’ll detail this execution process. Allow me to say that the plan is dense, it’s ambitious.

And we can’t, in one screenshot talk about the entire Brazilian market. I have here overall lines to discuss with you because this is the basis for what we’re doing. You’re going to see our starting point. So far as the Brazilian market, I don’t have to tell you, it’s one of the most resilient profitable markets in the world with good returns. The second point, the market represented according to our measures, 1.3 trillion in post-risk revenues in 2023, with approximately 30% to 40% of this revenue coming from mass retail, where we have extensive penetration.

But of course, the main challenge of mass retail is the cost to serve. And here, there is still some medium income share. SMEs represented nearly 15% of the Brazilian market’s total revenues. And our expectation for this segment is that it should double in value in five years. Bradesco maintaining its leadership position with 1.7 million clients and the largest loan portfolio with approximately JPY 100 billion in revenue.

And if we get this according to the Centrobank classification and Bradesco is one of the largest portfolios of affluent clients, prime clients, and close to private clients. And we have 1.7 million clients. Of course, here, there’s an opportunity for us to expand our share of wallet. Why am I bringing this customer base to you? I think it was never disclosed to the market.

It’s simple. We’ve received many questions. How are you going to compete in high income if you’re not in? How are you going to penetrate just bring these clients in? We’re not going to bring the clients in.

They’re already here. What we have to do is to improve our value proposition and our share of wallet. [indiscernible] is the anchor for possibility as well. So of course, I’m going to give you some very important figures during this presentation. What we’ve seen in this diagnosis, of course, the fintechs are beginning to grow, but they don’t respond or even 3%.

The main players are the incumbent banks, both in individual and corporate loans, and we have the opportunity to improve our credit structure. That’s what we’ve been doing as well as improve our modeling using more transactional data that we have. We have plenty of data in Bradesco as well as generative AI. The organizational structure, I’m going to talk a little bit more about this because this is very important to us. Here we’ve already changed the disclose organizational structure in our diagnosis was complex with excessive layers, unbalanced spend.

We need to admit it, right, what we had to improve, and that increases decision-making time and of course, also makes plans orientation difficult. We’ve already changed, and I will talk about this organizational structure in a minute. Investments in technology. Here with [indiscernible], we saw that we clearly invest the same amount the other incumbent banks invest in technology. However, we’ve been working on an IT transformation, migrating to the cloud, but we could.

And actually, we can accelerate this migration to the cloud before that deadline that we had expected, and we can also gain in our time to market. That’s what we saw. I really looked at this diagnosis with our IT team and the consulting company because I had doubts about this increase in productivity that could be a driver for time to market. And what we have to do is to effectively transform outsourced personnel into bank employees so that we can gain productivity, and that’s what we’re going to do, hiring 3 or 4,000 employees technology department but replacing with third parties. So it’s not a matter of cost.

It’s the way of doing it. And finally, we have a series of strengths with more than 71 million customers, and we are not or leader in all customer segments as we’re going to see. This snapshot tells you a little bit about our ambitions without getting into too many details. You can read it later, but we are either leaders or top three in all major five segments. So our ambition is to get from that market share that you see of 14% for loans.

I’m talking about the expanded portfolio here in Brazil to a share between 15% and 19% within five years by 2028, increase our SME client base going from 1.7 million to this figure here on the screen, reducing our operating efficiency ratio to around 8% in up to five: years. That’s the goal that we have set for this plan. Just to mention briefly this box here at the bottom. Maybe one of the main objectives of this plan, it is actually the main objective of this plan is to increase profitability, returns, deliver more ROE, but not in the next quarter, not only in 2028 but throughout this period, during these five years, quarter after quarter, step by step. That’s our objective here.And to summarize, where are we starting from?

That was the beginning of a very important debate for us. We’re not building a new bank. There’s no silver bullet here. We are reorganizing our bank to make it more competitive. But look, the starting point for Bradesco is high.

Whatever way you look at it, we had NPL problems we did. Are we going to pay for this? We are, we’re paying, that’s fine. We’re going to pay. We’re going to turn it around, and we’re going to increase profitability over time.

So we are leaders in SME, as I said, top two corporate and middle, top two private banking in Brazil, top two in the affluent market, as I mentioned. We’re one of the leaders in retail with more than 60 million clients, almost 30 million account holders in this mass retail base. We have the largest bank response in Brazil, Bradesco Expresso. We had important deliveries in the end of the year, combining eight platforms, more than 38 points thousands of points, and that’s the key for our turnaround in the service model, the reduction of the cost to serve, and the penetration of this retail segment. We have completeness of offers connected to payments.

What I mean here is Cielo, [indiscernible] in partnership with Banco do Brasil with more than IDR 1.2 trillion of total TPV in the year. Just reminding you, these companies here that have no lever removing [indiscernible] part without [indiscernible] that has another partner has effectively 10 billion [indiscernible].And we’re calling this [indiscernible] that responds a little bit to our strategic plan and we’re doing it here because we are highly able to invest with all of that cash available in this segment that remains profitable with companies that bring upwards of 40% ROE every year. There’s no need to status that we’re leaders in the insurance group. It’s the largest insurance group in Latin America with more than BRL100 billion in revenue in 2023. It’s a very important starting point for Bradesco.

And one of the qualitative points that I consider important here is the first bank to use AI in the client’s day-to-day life with our BIA. We’re top of mind for 18% of resilience humanized customer service that are extremely valued by our clients. This point here of our culture that I think is a value at high sense of belonging that our employees have, and that sound brand that Bradesco has, and then I moved to this Mandala image with 10 initiatives, five business initiatives and five enabling factors, mentioning very quickly. We want to revolutionize our model — for retail, we will create a new affluent segment prime — it was the top of the prime segment. We’re going to talk more about those details.

We’re not going to say exactly how the segment is, but this is an ongoing initiative. We’re going to adjust our customer service model to the SMEs with a new network of platforms. We’re already doing this, delivering 122 platforms to scoping €350 million of revenue and improve our value proposition with remote digital service for those up to BRL3 million that are part of our network as well as micro companies as well. Payment model for us here, it is to redefine our action and one of the items that goes through the public offering that we mentioned about Cielo. We are a lot more competitive with the SMEs and larger companies together with our acquired and other businesses, the credit cycle.

What we did was create the credit business unit that responds directly to me, and parts that were fragmented in the bank analysis decision. Portfolio management. Collection credit recovery. And now a portfolio management unit, everything combined, and we’re going to increase all of that using generative AI and a lot more data for us to increase the efficiency of our model, operating efficiency to ensure competitiveness and returns. This is great at our organization. We have a series of initiatives that will be developed for us to evolve in operating efficiency including a good review of our footprint that is ongoing.

Culture model organizational structure. I will talk to you about in a minute. It’s very important that we’re already working on this. We’ve done this already for technology, the idea is to accelerate technology and intergroup synergies and innovation, we have a lot of detailed initiatives, but I will not get into the details in this presentation. And how do we guarantee a safe, efficient execution of our strategic plan? The separating teams in to run the bank and change the bank.

Since the bank we’re creating the CTO figure that’s Chief Transformation Officer, which is the Vice President is from the company because he knows exactly which keys open the doors. Every initiative has a senior team led by a director, a superintendent from the bank with a dedicated team, the transformation office to provide support to the CTOs and for us to be able to deliver this execution at a fast pace every week, and we’re going to keep track a new MIS that we’re implementing in our organization that we’ll be able to follow each of the initiatives online in real time. And we’re going to execute all of the different points at once. That’s why execution is crucial at our business. This year is our new structure.

There are six business units or support units plus a chief of staff, we created wealth, we had the spin-off from retail, creating the business unit for digital businesses that’s going to focus on mass retail customers. I can’t detail everything right now. We can talk about it later. The [indiscernible] responding directly to me. We are reporting retime Treasury CEO is our CFO with separate structures.

He will dedicate most of the time most of his time to be CDO, CRO related to risk, HR, and the chief staff, which there really has new strategic initiatives and the whole inorganic growth [indiscernible]. It is important to observe the bottom part. What we have already done during this period with that diagnosis about the structure I mentioned. We increased the effort spend by 15% in that group that reports to the CEO with a number of around 6%, but we changed the spin of control throughout the organization. We reduced significantly the layers of the leadership and [indiscernible] the Vice President, only 40% of this number of executives were between 1 and 3.

Now 100% of them are in these levels and one to end of three, which means we significantly reduced our leadership group of vice presidents, all the way to executive superintendents. So eliminating some positions. I don’t need to mention them individually here, but it is a fact that we had some colleagues leaving since the last year. And more recently, we also had some colleagues who helped us in the past, leaving the company, and the fact is we have been changing. For example, we have that in the past, take over also an Executive Officer [indiscernible], who is the Head of a corporate unit was promoted to Executive Officer.

He would be replaced as Head of corporate. And of course, that other job position was filled by somebody and he will go to the fourth flow. So this is now the Executive Officer will be in the front line. It is the case of one colleague that we recognized. And this position will be filled by the skills, ability to execute of this person to prepare for my future succession and the succession of the vice president, so people will continue to run that business unit.

We didn’t replenish those empty seats. We did have some promotions of vice presidents and executive officers, but with no replacement so that at the end of the day, reduces our management cost, and it leads to a simplification of our structure. As an example, to the organization, we created this Executive Committee and these two boxes, digital business. We’re not bringing you details now. We’re in the process of hiring one Vice President in the market.

For the first time, we’ll bring in the value officer from the officer from the market. And here, we have the level of human resources with a human resources structure to help us in the transformation process. And in the process of partly changing our culture to a culture of transformation. This is a practical example of what we’ve done. And very soon, we’ll be announcing the names of these two C Street colleagues and other colleagues who will complete our executive management.

And moving towards the end, bring you some initiatives here with some of our ambitions in the case of retail, this is our ambition to grow the customer base, to maintain customer centricity. So the fact is we have high penetration with 60% municipality in this retail customer base. Second, we know ambitions to have a strength on the stream. But in this case, we are delivering this new segment of the new affluent segment. I have a colleague leading this with her own team and with the support of the consulting firm, she mapped 105 opportunities in this F1 segment, and we will be improving our value proposition in high net worth clients.

In SMEs, as I mentioned, implementation of new branches and a change in way to manage. And in our value proposition, I’d like to remind you, we hold 20% market share. We did have high delinquency. That is true, but we have changed the model. So we will compete to remain in the leading position in this market with our ambitions on the screens.

I spoke about credit. Our ambition is to grow our market share from 15% to 19% in a five-year time frame. And we know what this means, we will know what this means in our final conclusion. I’m not going to be mentioning each one of them. I’ll just say that our conclusions are represents a significant advance profitable financial market.

We are already in the execution phase of a solid idea strategic plan. The group has experienced that will be leveraged. The starting point of Bradesco is quite high. Fourth, we’re making great strides towards delivering ambition initiatives, realigning our organizational structure, particularly in the last 30 days. We will have a new human resources coin.

We are working on it. We will sit and debate in the month of February to approve by March this new org structure connecting all of the levels of evaluation, compensation and performance for the executive group. We have these goals here on this topic I talked about the efficacy ratio, and we will find the leadership in the most profitable pace. No reason why we shouldn’t be fighting for these retail clients. It’s not binary.

They’re not physical or digital, they’re both, and we are mapping all that, and we will compete on reducing the cost to serve, improving our value for position with solid credit modeling and take advantage of our competitive hand and our level of penetration in retail. And here, some data for you. What does credit growth mean? Credit is the big anchor of results in revenue in the Brazilian market. It is still dominated by the incumbent bank with some share of the fin tax, as I mentioned.

But if the market grows, as our team has forecasted together with the consulting forms, 8% CAGR until 2028. This means that in 2028, we are going and expanding additional expanded loan book of 3.3 trillion. From 2019 to date set, the loan book grew INR 2.4 trillion, again expanded loans. So if we grow our share, this potential, substantial growth here, and we have the potential to grow even further and get back a significant portion of these PR3.3 trillion and a big commission. Our biggest goal is to increase our profitability and return over the next years, transforming the organization and executing the plan with discipline.

We will be periodically showing you everything we do and everything we intend to deliver. Thank you for your attention. We’ll start the Q&A. I’m here with my colleagues, I said, I’m speaking to you live. We continue to be live.

I have my colleague Casciano, CFO; and now our CEO, our IRO, Carlos Firetti, sitting on my left and Andre Cano, who is going to be the new IR officer in [indiscernible]. Andre Cano has been working with us for seven years now. Andre has a good background — recently, he was the Chief of equity strategy in the global markets of BBI. He would really well with the buy side. So we’ll be starting in a new role.

Ready. We have a transition period with Andre and then our colleague, Firetti will take a new role at the bank together with us in Bradesco. Firetti, I think I’ve spoken too much. That’s why we have four people here so that we can all speak Marcelo. Before anything, I would like to welcome Andrea [indiscernible] said we’re going to have a transition.

So interacting with you for a while still. So welcome, Andre. [indiscernible].

Andre Rodrigues Cano

Thank you. [indiscernible] would be a pleasure to work with you closer to Marcelo, Casino, the whole management. So I’d like to thank already for the support during the transition period. It will be a pleasure to take on this new role.

Marcelo Noronha

Thank you. All right. So now we will begin the Q&A session for analysts and investors. We have Ivan Gontijo, CEO, insurance group also joining us online. He will be participating in the Q&A.

Question-and-Answer Session

[Operator Instructions] So we’ll start with Thiago Bovolenta Batista with UBS.

Q – Thiago Bovolenta Batista

[indiscernible], Andre. Good luck in your new roles. I have two questions. First in our strategic plan, you indicated 8 percentage points, that would be an ROA of about 400. This is only the ROE will not go to be the cost of capital.

It will be close to the cost of capital. People use between 14 and 15. So you just want to go back to the cost of capital? Or could we expect an ROE above the cost of capital. That’s number one.

Second question regarding loan income segment. We in the Morgan have the perception that the segment is having negative returns. How are you addressing this point in your strategic plan?

Marcelo Noronha

Tiago, thank you for the question. It is a pleasure to be speaking with you. So first ambition is not to deliver just the cost of capital, this is an indication of ER, so we have a number of indicators, ambitious indicators. Some things we haven’t spoken about here, we are not going to be talking about to the market. But we want to deliver — our main goals to deliver superior profitability and return.

And we want to grow step by step, quarter after quarter. But in a five-year time frame, we want to be in a different game level. I don’t want to promise. I prefer to surprise you rather than promise and not the liver. One expectation we have is that naturally follow along the quarters of 2026 perhaps on one of these quarters, we will be surpassing the cost of capital.

We have a high ambition regarding operating efficiency, and we will make this happen. We have growth, particularly reevaluating our footprint. To me, operating efficiencies cross-cutting, it is in our strategic plan. And perhaps this is the biggest lever for operating efficiency gain. As for retail, what we have seen with the consulting firm, and I’m not going to get into too many details is that we have clusters.

In some clusters, we are profitable. We have a significant share of wallet I spoke about our incapacity. The secret here lies in the cost to serve. That’s why we want to review our footprint. We tend to reduce it, but it’s not binary 100% physical under percentage No, of course, will migrate to digital.

I have to know in which channel to operate, at least remembering, Vitesco Espresso. We have one department which is B2B2C. And I said, we implemented a new system with tablets to our merchants. They serve clients. They do business, providing customer credit, selling cards, opening checking accounts and having transactions as well.

So they have the ability to serve clients. So we do enjoy some advantages that I don’t see in other competitors. They have other advantages that we might not have. I respect competition a lot. I think we have very competent people in Brazil, both in the incumbent banks and in the new commerce in stages.

But we have the largest correspond banking system in Brazil with more than 38,000 points of service, and we can compete very well in the low-income segment. In addition to the cost to serve, we have the credit risk. We are monitoring this closely with good credit modeling to capture what is necessary and to be profitable in most of these clusters. There might be a cluster here and there that we don’t want to work with. Okay, Tiago.

That’s the rationale, but we can compete. This is what we proved in our own internal diagnosis. It’s really important that we mention it is. And over time, we will be delivering these results. Thank you, Thiago.

Our next question, Daniel Vaz from Santander.

Daniel Vaz

Thank you, Firetti. [indiscernible] as the new CEO of the bank coming in with a good challenge of putting the strategic plan into place. Good luck, Firetti and Andre, I’d like to explore the culture and targets for the high levels, C-suite for the bank and others with this kind of control, more agile, more efficient, and we see experiences outside of Brazil or throughout Brazil that this target for C level is essential. So if you can talk about the changes that you’re working on or outlining for this. Thank you.

Marcelo Noronha

Thank you, Daniel. During the presentation, I said that we’ve been working on a new plan for human resources that will be discussed in February and delivered in March. That takes into account this new structure precisely. And I talked to all of the bank’s leadership team showing the new plan, those who work directly with us at every step of the way, had already seen it, that we are going to deliver a new performance assessment methodology, depending on the level, the weights are different, and we are going to recognize and compensate that that’s in the run the bank and the team that’s going to change the bank as well. We’re taking excellent people to change the bank because that’s crucial to us.

We are going to deliver a new payment scheme for the executives of the bank. We have that already in many departments, and we’re going to replicate it to the entire organization with a greater flexibility for some positions that somehow were kind of socialized when we were to hire or pay those variable income, and we’re changing all of that. This is all well based. We are going to make progress, and you will be able to see that over time. But our expectation is to approve this quarter so that we can implement it after that with our team.

Moving on to the next question, [indiscernible].

Unidentified Analyst

My first question is about the credit quality. NPL is dropping, but that’s based a lot on write-offs. So starting 2024, how do you see the credit quality of the new vintages and how is that translating into originations, especially for no income. And second, it’s more strategic. What are you thinking about in terms of the team you want to attract for the stage this phase for the company?

I know it’s the perspective. What do you think will Help you succeed?

Marcelo Noronha

First, we are monitoring very closely all of the new vintages. We’re working with much better ratings for individual loans and for SMEs as well. So all of the VPs are involved. We didn’t focus only on the credit people and the segment people, but everybody is involved, and we are monitoring this very closely. We’re seeing good vintages.

We still need to improve some lines to improve our mix and help us in this growth of NII, client NII, it’s step by step, but it is going to happen. You can be certain in this last quarter, I saw the inflection point of this curve, both for individuals and micro, small and midsized companies. And we are working on during the year, we’ll maintain traction to grow during 2024 with controlled vintages. So I think that here, we also have an important quick win in this new credit structure that we can capture value for other initiatives that we’re implementing as well. Now the team that we want to attract, and we have a headhunter doing the election for us in discussing debating.

We had an assessment process in our team since starting in December. So we’ve been working, creating development plans for our leadership colleagues who will remain with us either unchanged or on run. So [indiscernible], we will attract people with different skills from what we already have people with flexibility, with an easy relationship and person that can deliver digital skills with our colleagues at Next, Bradesco and Dico as well, and who can also bring more knowledge. And in human resources, we also want to change our paradigms to be more aligned with the market, having growing ambitions for our organizational development. I can also tell you another concern that we had since you talked about the team, and I think it’s very important. We are giving recognition without increasing the operating cost.

As I said, we’re actually reducing this cost. And this is also an example for the organization. We were only able to set aside the team for change and the team for run because we reduced the layers and change the spend. Otherwise, how were we going to do that with departures and taking people or change the bank. It was difficult to run this business with the directors leading.

So of all supporters, five of them are owed to replace me to be in the succession plan as well as the Vice President, and those who have been recognized new executive officers who will continue to run their departments not being replaced. There’s also five of them with the age and background to replace any of the vice presidents who are here as well as myself, take on my seat in the dual time toward the association. Thank you, Renato.

Next question Bernardo from [indiscernible].

Bernardo Guttmann

Marcelo, we show a lot of success in your new role. Building on the prior question on incentives, and I ask a question, but in a broad way regarding the transformation process of tides you’ve been in this role for a little time noon. You’ve had different positions at the bank. And in the presentation, it’s clear that we have a wide diagnosis of the necessary changes to be made. But I’d like to focus on one specifically.

Bradesco has a very traditional culture that has been very well worked on over the years in terms of robustness and cost. But the new environment is quite competitive. And the moment that the bank is dealing with brings about a different sense of urgency. You need to have different agility to react into change of housing. How has this initiative being received in the bank regarding the adjustments that need to be made?

And what paradigm do you still have to break because that will give me an idea of the priorities of your agenda of transformation.

Marcelo Noronha

Thank you for the question. This is a big question. What I can tell you is, number one, I think that we have to learn from the past. We did have some conviction. And when we sit and we deeply debate each topic, it’s almost like you opened up your kimono and you see what you need to do.

So without beating around the bush, I’ll go to the answer. The Board of Directors gave me autonomy and has been supporting me in 100% of the changes. We also wouldn’t have changed the [indiscernible]. I wouldn’t be telling you that I’m in the process of hiring a C level for HR and a C level of food digital. And in other levels of the org structure as well, we are in the process of hiring a lot of people.

So I have the support of the Board of Directors, 100% support. And this has been really nice, the kind of debate we are having. The Board of Directors is aware and we put everything on the table. We were very pragmatic. It’s no use of the laser.

There’s a sense of urgency. We have to change. We have to do it. And that’s kind of my style on this file up some colleagues here of the executive management. We go straight to the point Bernardo.

Little philosophy, a lot of pragmatism. I think we were able to break down the main paradigms. The other paradigm is the compensation that we are delivering now. There was no time been to 60 days since cover. And in order to do all the ad, we just didn’t work during Christmas night, Christmas Eve New Year’s.

Other than that, everyone, including the consulting France, have been working long hours on Sundays, I’ve been working on Sundays with my colleagues to deliver this urgently with this level of depth because if you look at the whole thing we’re doing, it’s not [indiscernible], and you’re already executing because that’s crucial. It’s no use having a notable book, promising things are not doing them, but we are doing it. Already.

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

Mario Pierry

I have a question about cost and efficiency. You talked about improving the efficiency ratio, but when I look here, your provision is BRL570 million this quarter to restructure branches. So I’d like to understand what that means in the short term. And what are you thinking to get to this efficiency ratio target. How do you think about your headcount number of branches because you think when we look at the bank today, the bank has about 86,000 employees with about 2,700 branches, 32 employees per branch, it seems to be very high, high number.

How are you thinking about this metric? That’s my question.

Marcelo Noronha

Thank you for the question. So let me answer it. I’ll ask you to recalculate the metrics because you can see 2,700 is. But in fracs, we have 7,000 weeks of sale, 7,000. Even with the reductions 7,000, we have two additional branches.

We have points of service, which is like mini branches. So it’s — we have even smaller than mini branches. So we have set of branches with different characteristics. So you would have to divide the number of employees by 7,000 and up by 20. Having said that, we are reviewing our first and will deliver some basis.

We had an expectation, in line with the new plant, we changed our expectation. We have been more ambitious, more strict. And events two things. The idea is not to reduce the sales force, but rather to gain efficiency. The second thing I told you, we’re going to be hiring 3,000 to 4,000 people in technology.

So we’re exchanging expense lines. Personnel lines will grow, but we would reduce operating expenses with the hiring of cars parties. So perhaps that’s the main point in terms of efficiency gain. But this is a cost-cutting initiative in the organization. We are discussing some areas.

We are discussing the existence of the points of sale, the scale, we will automate the processes and execute this much faster. It’s all mapped out. The whole operating efficiency project is divided into several initiatives, not just one. The one I mentioned here is the largest. But periodically, we will be updating you showing our evolution and our performance quarter after quarter — quarter-by-quarter.

So more towards the end of the year, beginning of next year, we will be seeing some important changes in the organization. Well, in addition to everything you mentioned on sale, we should not get the restructuring of the affluent segment. A lot of the sales force will be allocated to improve our account loading and the way we will manage such important clients for the bank. In terms of branch efficiency, it’s a lot more corporation there has to do with operating synergies among the different departments at the playing. So under this big framework, there will be a reallocation of people and that is fundamental for us to have change initiatives and the run initiatives, working continuously and going in the same direction.

Let me add to what Cassiano said. [indiscernible] that I can have a branch with one manager serving mass retail, and this would not make sense as the manager could be managing SMEs. So we will be reallocating the salesforce, it’s all mapped out, and we are now refining it so that we can start executing.

Next question, Tito Labarta, Goldman Sachs.

Tito Labarta

A couple of questions on the strategic plan from just looking at Slide 13, some of the comments you made, right, that the market represented $1.3 trillion in post risk revenues, 30% to 40% in retail and that the biggest challenge is the cost to serve and you mentioned for the entire market. I mean, just I could argue that, that’s really the biggest challenge for the incumbent banks, right, for the fintechs have a much lower cost to serve, right don’t have the brand to network, to have the employee base that you have — excuse me, employee base that you have. So what can you do to get your cost to serve down? Does it mean that you will need to invest quite a bit in the business first, we look at your expense guidance above inflation. I mean, do you think that continues for some time before you’re able to bring down the cost to serve?

And then somewhat related on that same slide, a couple of bullet points later. You mentioned that credit is the primary anchor and challenge for fintechs, which represent less than 3% of the market. But you can argue they’re also gaining share at least one or two are gaining share very rapidly. So just to understand your ambition to get to that 15% to 19%, given that you could argue that the market has gotten more competitive in the last few years, what can you do to really capture that market share given that other competitors are also growing very fast.

Marcelo Noronha

What we have here to compete in this market, as you asked. The revenue I mentioned, you mentioned it again. And then you said about their retail… 40% of total revenue, how can we compete with the cost of fintechs? It’s a fact that our main challenge is the cost to serve, of course, that the right credit model for that, but cost to serve is key.

And as I said, we assessed or evaluated clusters, and we found out that in some clusters, we are able to compete, and we have a significant share of wallet, but we are going to have to reduce the cost to serve. And we identified exactly where we have to get to. And now we’re detailing this. But let me tell you other things that are worth mentioning. First, Bradesco has high penetration in this segment.

Not all incumbents have that. But this principality, as I said, is again around 60%. Not all incumbents have that. Bradesco has, in its DNA, the relationship with this type of customer. We need to change the cost to serve.

We have Bradesco Espresso as a very important competitive lever, not only as a channel, but I also told you we can serve those customers with a variable costs instead of having fixed costs and some points of sale around throughout Brazil. So we have different competitive levers that can allow us to compete in this market. But look, Tito, know that we have a market of 30% to 40% of the total revenue of banking business in Brazil. And it’s a market that can be divided with three or four banks or fintechs and everybody can hold 20% of share and be big. That’s another important thing here to have scale.

We have scale to serve this market and to be able to compete in this market. That’s how I see it. There is room for those will serve in a certain way. And there is days for those who will serve in a more connected way. That’s what I think for Bradesco over time, and we’re going to show you that.

And then I think you asked about the side how we’re going to grow. Yes. We are going to grow effectively with good models. We have the capacity to do that with good credit models, a good follow-up portfolio management, and we are going to have portfolio management looking at the entire expanded portfolio from the retail bank to a wholesale sale bank, how we’re going to operate capital allocation. That’s obvious.

But we have distribution capacity. So I believe that today, competition is a lot more among the incurrent banks rather than fintechs. They still have a small share. So of course, they have opportunity, and they will grow a little bit more, but we have the levers, and we have the capacity to distribute in growth, depending on our models. That’s what I showed in the last quarter, we had that inflection point for the curve, both for individuals and SMEs.

Thank you. Thank you, Tito. Our next question Jorge Kuri, Morgan Stanley.

Jorge Kuri

Yes. Good morning, everyone. Thanks for taking the time to do this and progress Marcelo on the new goal and best of luck. I wanted to ask about the return on equity that’s embedded in your plan and your ambition, your return on equity based on the 2024 guidance, it’s going to end up roughly at 10% to 11%. That’s half of what the guidance for Itau, which is your biggest peer is.

I wonder how long do you think it’s going to take you to close the gap vis-a-vis and your best-in-class peers, five years out, if you execute your transformation program, where should the ROE be? That’s my first question. And first question I’ll ask my second one later.

Marcelo Noronha

Thank you for your question. As I mentioned, our ambition, our main target is to grow our profitability over the next five years quarter by quarter. We have an opportunity to show better ROE maybe at some quarter during 2026.As I mentioned, I believe in the first question that was asked. That’s when we probably will be able to exceed that cost of capital. And the idea is for us to grow during these five years, delivering comparable returns with our shareholders’ expectations and compatible with our expectations.

That’s our ambition. There’s no date and time. There’s no deadline-specific date for this delivery — thank you, Jorge, for your question. But this is what we pursue as the main goal of our strategic plan. Thank you.

Jorge Kuri

Thank you, Marcelo. And my second question is about the C-level compensation package and particularly your compensation package, what type of targets is it linked to? Is it return on equity? Is it market share? Is it stock price?

Can you walk us through how the success of the bank and your success are tied together?

Marcelo Noronha

Okay. So look, we are reviewing this plan. We’re preparing, as I said, a new human resources plan to be implemented by the end of this quarter. We’ll discuss it during the month of February. And the idea is to approve it in March in order to implement it.

And then the C-level will be connected to this total compensation that we’re going to determine. Of course, we already have references and benchmarks in the bank. We are still working with the previous policy, but I believe that we are competitive enough to bring C-level individuals to our organization with competitive compensations. And we’ll compensate both people who are on the rate bank and those on change the bank, recognizing their respective roles here. And then look, you talked about the indicators, so the indicators will depend on each of the departments, right?

Where they are. We have indicators related to the plan, and we’re going to have indicators department by department for digital, of course, physical to effectively implement this new human resources plan. Of course, the higher the level of the executive more linked to the whole they are, the higher the hierarchic more relationship it has with what they effectively do and deliver.

Next question from Eduardo Nishio with [indiscernible].

Eduardo Nishio

I wish you a lot of success in the new strategic plan [indiscernible]. My question is more related to the cycle and how this should change with the new strategic plan. In this past cycle, in my own assessment, you had three big challenges if we can call them that. treasury, market NII, there was way below the peers, ALL, particularly in the low-income segment, which negatively impacted the results of the bank. And your digital strategy, which was then restructured and now is under the bank.

So if you could speak about these three points, what will they be like with a new strategy? I know you have very few days, just 60 days since you took over. But do you see any structural change in these three pillars?

Marcelo Noronha

Thank you, Nishio for the question. I will divide the answer with my colleagues. So I won’t be the only one speaking here. I’ll ask my colleagues to begin, and I will add to their themes.

Cassiano and then Firetti, feel free to contribute.

Cassiano Scarpelli

Thank you. The market NII, as you said, suffered in 2022, ’23. 2023 recovered almost €1.7 billion compared to 2022, and it became positive. In 2024 in our guidance, it’s basically the natural levels that we had in prior years. So that’s a phase that is behind us.

The whole loan book originated in the prefixed area and did well in our trading desk and client desks working strongly. So for the treasury, we believe that we now are handing the baton from the difficult period to a more normalized period of 2024 onwards. That’s for ALL. Marcelo mentioned we had ability to pay, particularly low-income cards, and as Michel mentioned, in our numbers, we see the important means that all delinquency curves are reducing, which is very good. All our testing in the new cohort puts us in a very good position regarding additional ALL allowance for low lawsuits.

So this still poses a reduction in mass retail. This has been happening in growth given the growth of the loan book, the nature of the loan portfolio with different types of clients. With more risky clients, we need more provisioning. So this year, that’s when we will be paying the bill this past bill and study in 2025, we will have a more natural cycle in terms of gallons for loan losses. As for the ALL as Marcelo showed, we recognize that we have adjustments to make, not only in ALL but in the whole credit cycle, which is reflected in our credit business unit, they will look at credit in an integrated way.

The loan book, quality of credit approval. So these structures in our view, will give a lot more effectiveness to credit management. We will also be making adjustments in terms of credit modeling. I think that modeling has always been a strength in this bank. But there’s always room to evolve and cost improvement.

So we do acknowledge the need for adjustments in this part of the strategic plan. And Nishio, let me add, digital. Strategic paths are not limited to one. You can choose different paths through different paths, different organizations who can achieve common goals with both initiatives being successful. We decided in the past to better next DG.

And then we saw that the values, the prices of the business changed in the market with a decent growth. So now we brought this close to Bradesco because it’s a core business for us. But there are a lot of lessons learned in value here embedded in Devon NEXT. Our client base continues to grow. We continue to do things differently.

I’ve that DG is an important laboratory for us also in our strategy for visco digital. So everything is closer to us, whether we’re going to integrate the platforms or not, well, we’ve seen so many interesting things with the new diagnosis. That perhaps will integrate next, keep the brand. So we have beyond bank. Our market place.

We brought it from NEXT. We just delivered it for friends and families here at Bradesco. So we are testing this introduction with Bradesco-based but also connected to NEXT. We have another part of Beonbank, which is agribusiness, another marketplace. So this theme of beyond bank is quite often.

So we do some business for us to move around. So this goes to serve mass retail, low and middle-income clients that can potentialize our business with multi-brand, this is not totally defined yet. We can take on path. We’re different path. Secondly, regarding market NII, they’ve talked about this. We have good expectation of a normalization along 2024.

Thirdly, ALL allows for loan losses, we could have a higher cost in 2024, which I consider to be a transition year because we have a substantial growth of the loan portfolio. To expected loss. This is called ALL. If we were flat in growth, we would have less ALL. But we are putting efforts to have client NII with adequate losses in the new cohort vintages.

Next question from Rafael Frade with Citi.

Rafael Frade

Wish you a lot of success to all of you in your new roles. I wanted to tap into [indiscernible]. We have a lot of discussions in the market in terms of how the low profitability of Patisaran the last two years was linked to a structural issue or related to the context. But this has more exposure to smaller companies and lower income segments. But I think there’s also a market element, but you’re also saying that you have a lot of opportunities to improve your operations.

We talk a lot about lower-income segments. I’d like to understand more about SMEs. Marcelo, at the beginning, you said that Bradesco is a leader in the SME segment. It is an important part of your profitability, it’s a part that had an important portion of the NPL formation in 2023. So what have you identified in neurodiagnostics that could be quickly improved, something that could be deficient?

Perhaps you could elaborate on the diagnosis for this segment of SMEs.

Marcelo Noronha

Thank you, Frade. Good to see you again. All right. SMEs. As I mentioned, we are leaders in the SME segment.

We have a significant share, but Frade, we have to admit. I think we had a credit policy, which was perhaps a little more open is red, perhaps we stopped granting credits a little later than we should have, have to admit these things. But Bradesco despite of the Brazilian social pyramid in lower income and SMEs, we’re very present in these segments. So when there’s a delinquency issue, we tend to suffer more proportionally or in absolute trends than peers regardless of having higher leverage as we should have stopped before earlier. That’s a given.

This bill is being paid. But when I look at the segment, it has the right size, it is profitable. And I’ll tell you, most clients and SMEs are paying their loans. They are not the language. Most of them are okay.

They have been paying off their loans, and they have been making doing business with us. So we are leaders. We have new credit moves. We have new credit policies, these credit policies. Are they more restrictive somewhat more restrictive than in the past?

Yes. We are a little more conservative than that we got less conservative in the transformation of the bank, but more conservative in managing credit risks based on the new modeling. But we have a new opportunity of quickly reversing because NPLs dropped, delinquency is dropping. That’s under control. We went back to growing.

Like I said, we had an inflection point in Q4. So the number is under control. Yes. What are we doing in this segment? We are creating 122 platforms in as I mentioned in a presentation.

We have delivered some on the end of the year. We’ll deliver 122 platforms in 2024 as quickly as possible with the team fully dedicated to this target of clients, Tier 1 between 3 and 5 million in the main cities. But you see, we started working with some radius, but we are increasing this segmentation as to putting this client base when we have a complete network of platforms. For the target from 0 to BRL3 million, we improved the whole work on remote service. Also for micro-entrepreneurs in terms of digital, physical service, and remote online service.

So we increased the first of sales or sales cores in the segment of seaway because we see this opportunity. Besides in order to get more traction and more safety, we brought in some credit analysts to work more specifically close with these platforms. We have been doing some good testing which ensures to us most… Because part of this credit rent is judgmental. And we have a different management model different than what we had implemented in our client management or we started with that segment of 50 million with a different way of managing the performance, now we are trying to educate and train managers.

We’ll have to be monitoring this in the central line fashion so that we can do all time management and monitoring of the portfolio, so we can make decisions regarding risk management regardless of centralized portfolio management. These are operational details. So I do risk assessment. The contracts? And how do I monitor…

Because if you get their first enjoy benefits. So we have models and indicators to manage this, just like we do in other segments. So here, we are improving this management model so we can be a lot more competitive here in terms of delivering good customer service and experience and in terms of managing our credit risk regardless of other people and other tools managing the portfolio. Added to that, we have the public acquisition offering of Cielo, what we call OPA. We want to bring payments and other synergies with this SME segment, which is highly profitable and should double in size in the next five: years as mentioned.

Thank you. Next question, Arnon Shirazi, Santander.

Arnon Shirazi

[indiscernible], welcome to this position. My question is more related to 2024 to talk about your guidance. You gave an expectation of the increase in the loan portfolio, but I’d like to understand where this growth is coming from. If it’s more individuals, more companies, and also about the rate for ’24, I think it changes the perspective that the analysts have for the year.

Marcelo Noronha

I can answer in terms of growth, I believe I can say that we’re going to be growing in our main lines very closely. As we’ve been saying, we’re accelerating credit origination in retail. This origination has been significantly growing. It’s still not overflowing to lead to portfolio growth as the portfolio hasn’t responded yet. But the main driver for growth includes personal lines, on wholesale, retail, and small and mid-sized companies where we’re also accelerating.

This growth will accelerate during the year as the guidance includes 7 to 11, we have significant growth in in line or above the market, of course, the average portfolio grows less, and that’s what translates into the margin guidance that’s slightly lower. In terms of the rates, you can consider between ’16 and ’18 as a reference, the tax rate. Yes, the idea is to grow the entire portfolio with the expanded portfolio as Firetti mentioned. Thank you, Arnon.

Next question Yuri Fernandes, JPMorgan.

Yuri Fernandes

Good morning, good luck with the management of the company and the plan. My first question is about the bank’s capital generation. I believe Bradesco has good capital [indiscernible] it’s not a matter of funding. But when we think about ROE, as you mentioned, no, maybe in 2026, it will exceed the cost of capital. And we look at the 2024 guidance, it should be a rate of 10%, 11%, maybe slightly higher, but with the portfolio accelerating, as Firetti mentioned.

And in the past years, we’re looking at you maximizing the benefits of IOC. And the bank has been paying relatively good dividends, but that implies a smaller capital growth. My doubt is how should think about this choice between growth and capital and how to fund growth. Considering it may take until 2026 to improve profitability a little bit. The capital cost may be broad in this plan for you to get to that 15% to 19% market share.

So if you can talk a little bit more how to think about the payout and this dilemma between investment growth and capital would be my first question. And the second, very quickly, Norona, about Cielo. If you can give us more details about the strategy behind it, if there’s any discussion and about this public acquisition if there’s any discussion about the select rate around the price of the software. Dividends was very clear. You have a relevant focus on Cielo, but there is no — it’s not clear whether there’s a correction for the Selic rate.

Marcelo Noronha

Thank you for the question. Cassiano, I believe if you could begin and I’ll add and talk about Cielo.

Cassiano Scarpelli

Thank you, Yuri. It’s a pleasure to see you here again. On the capital side, we understand here that our projections are all considering sufficient capital to maintain the credit growth. Of course, in our strategic plan and even for the new approach for the Central Bank’s operating risk that we’ve been discussing in some of the brands, and we can talk about it in person. And to grow, and it also makes capital more robust.

So the strategy, as Marcelo said, our transformation pattern is to seek growth of our profitability growth in our net income that are also a significant part of our capital composition. And we see it as natural to continue to work the basic benefit of IOC for as long as it exists. And this year is no difference for the moment from everything we’re seeing with our business cases and the planning and the budget process. We understand that at least over the next few years, we will be comfortable in terms of capital to support the transformation process and the bank’s growth.

Marcelo Noronha

Yes, Judy, that’s what Casciano said. We ran all projections with the expected growth levels, and we have sufficient capital to do it, and we’re comfortable with that. In terms of Celano, you asked two questions. So first, whether there’s going to be a correction. That’s not the information we have.

That’s not what we have in mind for the time being. We don’t have that perspective about this direction [indiscernible], and the second is about Cateno, there is no discussion about separation from Cateno at this time. We are offering these stocks to the markets, the public acquisition offering because there are some important strategic points that I mentioned in our plan. And on Banco do Brasil’s size, they also have good penetration on legal entities. And for both of them, the strategic aspect is essential because then that gives us greater strategic freedom to review our value proposition here for SMEs and even for larger companies since Cielo can also penetrate larger companies in their acquiring business.

And on Banco do Brasil, we won’t get into their strategic decisions that they don’t get into ours, but we’ll have the liberty to do that. There are already separate commercial teams in the company, but it’s a closed capital company that effectively allows us to move faster, make faster decisions because we need to do that now. And then a question that may originate from your question, and I’d like to add here is that so if it’s a closed capital firm, are you going to be able to have the governance to do that? The answer is yes. And it is, yes, because we have other partnerships with Paco Brasil, ALL Livelo.

And there, they are all delisted companies. And we have this view of one and the other, and we have very good management, each one of us driving our channels and making the business development. It’s not going to be any different in Cielo’s case. Thank you, Yuri, for your question.

Next question by Pedro Leduc with Itau.

Pedro Leduc

Thank you, Firetti. Welcome, [indiscernible], I wish you a longer of success in this new chapter of your lines. That’s a quick question. Just to clarify regarding the outlook for efficiency. We see the EMA and OpEx of this year running above inflation.

Well, this is a period of investments and other costs that come with the transformation. I guess we could imagine as G&A growing then inflation in 2025, 2026? Or should we think that the efficiency ratio would improve because of revenues, while investments are kind of multiannual in a sense?

Marcelo Noronha

Obviously, we want to grow revenues a lot but the adjustments that we will be making in terms of reducing the cost to serve in our structure will be implemented partly along 2024, and flat should start giving us higher effects in 2025 in terms of reaping the panned, improving the efficiency and evolving those line items. Now when we look at our expenses for 2024, administrative and personnel expenses will grow basically in line with inflation in our projections. There’s slightly more pressure on the line item others because of provisions for civil claims and other provisions that are part of that line item. But in administrative and personnel line items, we already have a good level of control for 2025, we’ll start capturing benefits. So this is summarized.

Revenues are important. But of course, the biggest capture will come from reduced expenses.

Pedro Leduc

If I may ask a question about SMEs. We’re discussing its strategy to assume growth in retail. And I know that SMEs are a relevant segment for Bradesco. It’s a profitable portfolio. So what is the turnaround strategy integrated with the recent announcement of Cielo if you could elaborate for SMEs, it would be welcome.

Marcelo Noronha

As I mentioned, Pedro, I’ve been dividing SMEs into three segments: Tier 1, €550 million. We’re having new platforms that are being opened in the main cities of Brazil, we’ll expand the radius of those eventually. So we are locating the sales force with more prepared people. We are training people. We started opening these platforms in the end of last year, and we’ll continue these openings in 2020.

We expect to deliver 122 new platforms with a much more focused and established management. Like I said, with a new management model, including portfolio [indiscernible], not just in a centralized way, but also decentralized and a better customer experience for our clients. We’re also changing the value proposition and increasing the sales force in the SMEs 0 to 3 million because these are more decentralized in the branches in Brazil and also for micro-entrepreneurs with remote service and digital servers. Naturally, we expect to improve the value proposition and it’s linked to this OPA, the Cielo OPA or OPA is the public acquisition offering and other strategies are going to the market. If I may add neuron.

Also, the use of transactional information. That’s the best use we can put our CRM for. We have been working a lot on this. And the product verticals looking more and more to this niche. The new cash platform that we are introducing.

So we had CRM, the transactions database are in new products and the new account loading, all subdivisions of SMEs with all that, I believe that we are well positioned to have growth in this new segment. But let me add something. We’ve accelerated credit grading to small companies in Q4. That was the inflection point. What we see is that now that we have this monetary easing in Brazil, that’s a tailwind that will benefit small companies and low-income segments or small companies, as Marcelo mentioned, they have the account for 15% of the banking value to be captured in the market.

As this will double in five years, these 15 can become 25%, and here’s where we can create value and growth. That’s why we will increase from 1.7 million to 2.5 million clients, showing clearly that we want to gain market share in this segment. Pedro, I can tell you all incumbent banks are here fighting for this market. This is what we see, and I’ll tell you, we’ll be in this but will be competing because we don’t want to give up the leading role that we play in this segment.

Now we are moving to the last question from Paulo Gomes with HSBC.

Paulo Gomez

Again, good luck in this new stage and really good to see Andrea back, [indiscernible]. I had two questions. The first one goes back to capital. Could you give us the potential impact of the proposed tax reform on your capital ratio in the sense that the DTAs will probably be impaired it is passes it is now, what would happen to your capital where would that 11.7% Tier 1 go? And also related to that, what — I mean, you said you have an adequate level of capital, but what is the level that you want to maintain in the coming years?

And my second question is more generic. I mean, in your new strategic plan, one of the assumptions is that you are going to broad market share. That’s unusual for a large bank like yours, what makes you think that Bradesco can significantly increase its size in a very competitive market?

Marcelo Noronha

Okay. Thank you for the question. So from the standpoint of capital, the impact of tax credit is about 0.8 to 1 percentage point starting in 2025 in terms of tax-credit operations. This is what we’ve seen. Now obviously, we’ll still have a year, the Central Bank of resell.

But looking at this as a whole. So there might be some changes in terms of the capital, some buyers in terms of capital. If there are no specific assessments for the banks, the impact should be between 0.8 to 1 percentage point. One had to that, there are a number of changes underway. There’s resolution 29.

It changes the capital requirement for operational risks. That’s the impact of 0.8 percentage points on capital. There’s also the IVA reform. It will be implemented very, very gradually. It will have a little impact on capital.

And there is a third front here, which is the income tax reform. This has not been submitted yet. It will probably be submitted in March and then we’ll be able to do our assessment. Having got the details on the table to evaluate this. So this impact is for deferred taxes or for recovery is 0.8% to 1% percentage point, it’s differed.

And this regards the market share gain. I think that I’d like to remember that in this past year, because of a reduction in risk appetite to control delinquency, we ended up losing some market share in some markets where we can play an important role. So in resuming credit origination coupled with our initiatives and our strategic plan, we see room to regain this market share that was lost that happened because we reduced our risk appetite. And also, the strategic plan brings some initiatives that will increase our competitiveness in the credit market by integrating the credit process or through those initiatives for SMEs, for example, and the whole positioning that we are reviewing in our retail operations. We believe that this resumption and market share increase will come naturally, given our positioning at this moment.

Let me add to what you said regarding the affluent segment, high net worth clients that Marcelo mentioned in the strategic plan. It’s very important. We have 1.7 million clients a very important potential share of wallet. We believe that by doing all this reformation of delivery of content in relationship building with Apple, we have the possibility of expanding our share of wallet and naturally get a market share of these high net worth client. May I just add. We have centres in different segments as the SMEs in retail business, with low-income clients.

We have a strong penetration there, but we have many strengths in wholesale banks in affluent or high-income clients, SMEs, as I mentioned, we are leading in SMEs. We have an important penetration in Moove country with different value propositions with different segments inside of SMEs. So we believe that we have strong distribution channels to improve our loan portfolio maybe in 2024, but over the next few years over the next five years, that is the plan. Thank you very much for your question. Now I would like to thank everyone.

We are going to close this video conference call. And I remind you that all of the questions that were not answered during the meeting will be answered by our Investor Relations department. May I just make a final comment here. This is my first conference with all of you. And I would like to say that I thank you all for your attention here today.

We already have, as I said in the beginning, we already have some meetings scheduled with international buy-side meetings to investors tomorrow, local buy-side colleagues, sell-side colleagues, and we are open to talk to explain with more details all of these plans for the future, not only myself, but my colleagues here as well from the Investors Relations department to give you more detail, not only this week, but even later. I am open to welcome you here. It will always be my pleasure to talk to all of you. Thank you, Firetti. Thank you.

Once again, thank you, everyone, and this concludes our video conference. Thank you very much.