Banco Bradesco S.A. (BBD) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's Third Quarter 2021 Earnings Conference Call. This call is being broadcasted simultaneously thrill through 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. Carlos Firetti, Business Controller and Market Relations Director. Please proceed.

Hello, everyone. Welcome to our conference call for the discussions of our third quarter 2021 results. We have today with us participating in the call our CEO, Octavio de Lazari; our Executive Vice President, André Rodrigues Cano; our Executive Director and IRO, Leandro de Miranda; our CFO, Oswaldo Fernandes; Next Chief Executive Officer; [indiscernible], and Bitz Chief Executive Officer, Curt Zimmermann. I turn the floor now to Leandro.

Thank you very much, Firetti. Good afternoon, everyone. I hope you are well. Thank you for your interest in participating in our teleconference to discuss third Q '21 results. We present the highlights of this third Q in which we had good news regarding the COVID pandemic. Vaccinations have advanced significantly with the strong engagement of the Brazilian population. As a result, the disease showing a downward trend, indicating that we are on the right path. Given the scenario, we initiated our return to in-person work, following very strict sanitary protocols. We have returned 100% to in-person work at our branches as they play an essential role for the Brazilian population. In our administrative areas, we have established a gradual return scheme evolving as health conditions allow. The way we work in the post-pandemic area is different based on a hybrid model. All of our teams are combining in-person work with home office as it offers benefits for workers, productivity and cost reduction. The improvements in infection and death rates have put Brazil on the path to full reopening of the economy with an increase in economic activity. However, the scenario is still not entirely favorable. The agenda for reforms has not progressed and the inflation remains both high and persistent. The Central Bank of Brazil raised interest rates and has shown determination in trying to control inflation. However, this could have negative effects on the growth rate, especially in '22. With respect to our third Q '21 operations, we saw very positive results. Our net income recoverage, reaching BRL6.8 billion, an increase of 7.1% over the previous quarter and 34.5% compared to '20. Among the positive indicators, we highlight the recovery of the insurance results. The good performance in fee and commission income in the provision expenses remaining fully under control. As a result, the ROE for the quarter reached 18.6%, and the efficiency ratio also improved, reaching 45.4% in the 12-month period. The loan portfolio grew 6.5% in the quarter and 16.4% in 1 year. We were already seeing a good growth rate concerning individual clients. But this quarter, the expansion also benefited the SME segment. In this quarter, we have about 1/3 of our credit originated on digital channels, corresponding to BRL30 billion, providing the client with autonomy and security to serve themselves. Individuals account for 50% of this total, an evolution of 58% in 12 months, with 8% of credit requests coming from the mobile channel. Finally, I can highlight the excellent recovery in income from insurance, which grew 104% in the quarter and 2.6% in the year. With the evolution of the written premiums and the consistent improvement in both, the claims ratio and the financial income. These good indicators have allowed us to conduct a positive review of some of the lines of our guidance, as you will see later on in this presentation. Moving to Page 3. We'd like to present the main items of these results. In addition to the net income, which grew 7.1% in the quarter, we can highlight the strong performance of operating income, which grew 11.3% compared to the second Q '21 and 15.8% compared to the third Q of '19. The numbers show a stronger growth written than pre-pandemic period. The biggest contributions to the evolution of results in the quarter came from insurance, client NII and fee and commission income, partially offset by the reduction in the market NII and higher expenses. The main factor of which being the collective bargaining agreement of bank employees, which impacted the month of September. The annual changes are explained in part by the fact that the third Q reflects the impact of the dynamic more broadly. I believe it's important to highlight the dynamics of our results. Bradesco has diversified and with good quality mix of results with banking and insurance operations that complement each other. In the last quarter, the insurance group absorbed the impacts of the COVID effects, reflecting the worst period of the pandemic. In this quarter, it has come back on track. It has resumed its significant contribution, representing 23% of consolidated income. And when we look at the table on the right and below, we see growth in total revenues even in this complex scenario and a reduction in total expenses, which requires discipline results in a robust and growing EBIT. We will go into detail about these lines in the next slides. Slide 4 highlights the evolution of our loan portfolio. We saw a significant expansion of 6.5% in the quarter and 16.4% in the annual change. This growth reached all lines, mainly driven by SMEs with an increase of 27.8% and individuals with an increase of 24.7% in the 12-month period. In real estate financing, we have a comprehensive position with proprietary and partner origination channels. The origination grew 62% compared to the same quarter in '20. In '21, we have financed approximately 100,000 units to date, an increase of 85% compared to the same period last year. In addition, we have a more agile process for approving formalizing proposals. This is a true benchmark. Credit card growth reflects the increasing of the reopening of the economy with more transactions and greater use of credit limits. In SMEs, growth also points to the normalization of the economy with a greater demand for working capital. In other words, we have robust growth, both in the lines of low delinquency as in the lines of great spreads, which have resulted and will result in a better net interest income. We decided to revise our loan portfolio guidance as we have already exceeded the limit established in the previous guidance this quarter. Let's move on to the Slide 5 to talk about our provisions. ALL expenses in the quarter totaled BRL3.4 billion, an improvement of 3.7% compared to the previous quarter. As you can see in the chart, this is the same level achieved as 3Q '19, even considering the significant increase of more than BRL100 billion we had in the loan portfolio. ALL expenses in the quarter represented 1.7% of the portfolio. The drop reflects anticipation of credit provisioning. We did after the start of the pandemic as indicated by our expected loss model. In addition, structurally, it reflects the growth in low-risk portfolios. The good quality of recent yields and the great evolution we have seen in credit modeling over the past few years. We continue with very comfortable provisioning ratios. The NPL coverage ratio over 90 days was 297% and is still well above the pre-COVID level. Considering the entire renegotiating portfolio, this ratio was 115%. The coverage ratio should continue to fluctuate over the next few quarters as part of the process of normalizing credit conditions. The great performance that we are seeing in all ALL expenses also led us to revise guidance downwards. Let's move on to Slide 6. The renegotiation portfolio saw another quarter of decline, a trend that should continue for the upcoming periods. Although it has shown a small increase, the delinquency of this portfolio is below historical levels. We can highlight the high level of provisions, which anticipate effective delinquency. The current level of provisions in this portfolio represents almost 4x the observer delinquency. Moving on to Slide 7. The 90-day delinquency ratio rose 10 bps within our expectations. There was growth among both Individuals and SMEs, mainly coming from the renegotiated portfolio as I explained in the previous slides. But it's important to emphasize that we still have ratios well below the pre-pandemic period. In line with our active portfolio management practice, this quarter, we also sold portfolios that, in our view, did not compensate for the collection efforts of our teams. If the sales hadn't occurred, the over 90 days index have gone up an additional 10 bps. NPL creation in the quarter was BRL5 billion. The level of provisions below NPL creation is mainly due to the anticipation of provisions after the onset of the prices according to the expected loss models, as I mentioned earlier. Now let's go to Slide 8. The client NII benefit from the increase in the volume of operations and the increasing spreads, interrupting a sequence of productions. This spread pickup is very important when we think about the next quarters, and we believe it shall continue this way. In the quarterly change, the client NII grew by 4.3% and 9.8% in the annual change. We see an improvement in production spreads in our loan operations. We believe this should bank the client NII over '22. The reduction in the market NII is with the impact of the increase in the CDI on the ALL positions, partially offset by the higher results of the own -- working capital. Let's move on to Slide 9. We saw excellent evolution in fee and commission income which grew 4.1% in relation to the previous quarter and 7.8% in the annual change. The volume of credit card transactions was approximately BRL60 billion this quarter, surpassing periods that preceded the pandemic and even seasonal quarters at the end of the year. This performance is responsible for the strong growth presented in this line of revenue, a growth of approximately 8.2% in the quarterly comparison and 10.1% as the full year-to-date. Our checking account holders days increased by 1.7 million clients in 12 months, being one of the factors for the increase in the checking account line, which showed growth of 2.7% in the annual comparison, offsetting all the revenue losses from PIX. In addition, we see consistent client growth in our related companies, underscoring our ability to diversify both fiscal and digital revenue sources. In asset management, growth is due to the net capital increase of BRL23 billion in '21 and a more favorable mix with growth in multi-market and equity funds. In loan operations, the 8.5% growth is related to the expansion of the portfolio. We decided to review the fee and commission income guidance, since with the performance of this quarter, we have already reached the maximum point of the guidance that we had released previously. Now let's move on to Slide 10. Our operating expenses decreased by 2.5% in the first 9 months of the year compared to the same period last year. Personnel expenses increased compared to the previous year due to the higher provision for profit share in view of the significantly higher income and also the consolidation of BAC Florida as of the fourth quarter 2020. However, the most relevant in this quarter as of September was the impact of the collective bargaining agreement with bank employees. Administrative expenses have decreased 0.2% as for the year-to-date despite high inflation this period. Just to give you a flavor, GPM on 24.9% and IPCA of 10.2%, reflecting disciplined cost control, the evolution of digital channels and the optimizing of our physical presence and processes. The growth in this quarter is mainly due to the higher business volume and higher client acquisition expenses, especially at maximum bips. The change of the line of other income and expenses is explained mainly by the change in the nontechnical insurance provision. The high inflation scenario implies challenge for managing expenses as many of them are indexed to price changes. We will continue to act with discipline to keep costs under control, seeking growth below inflation. We went '21 with the closure of 179 branches and the transformation of 377 branches into business units, which will result in 556 branches, either closed or modified in their service and business model. Another highlight is Bradesco Expresso, which has more than 40,000 partners. Our network is structured around variable costs, which starts operating in a fully digital manner this quarter with a number of products such as checking accounts, loans, payroll deductible loans, credit cards and insurance in addition to our Bitz digital wallets. Moving now to Slide 11. We can see all our insurance operations once again saw significant growth in revenues and an excellent recovery in results, even with the events related to the pandemic. We can highlight the expansion of operations. The increase in the number of policyholders in almost all of the business lines of the insurance group. Costs related to COVID-19 were approximately BRL1.4 billion in the third Q and BRL4.4 billion as for year-to-date. It's worth noting that COVID-19 events in the third Q were 26% lower than the previous quarter, reflecting the impact of vaccination and a reduction in the number of cases. The financial income was also very positive, reflecting the effects that economic financial ratios in the period had on our financial investments. Our net income presents robust performance in line with last year. despite the 5 basis point increase in the CS LLL rates. Where it not for that, we would have seen a 2% expansion compared to 2020, even with all the effects of COVID-19 in '21. Like in the previous quarter, the scenario is still challenging, but based on what we have observed and what we have learned so far, we are reviewing the guidance again as we look ahead. Now we move to Slide 12. I in which we have examples of the strong growth in revenues of our insurance segments, confirming our perception that this is an essential service and a core business for Bradesco. We have managed to capture the opportunity based on our wide offering with diversity of products and channels for each profile and moment of life of our clients. On Slide 13, as we did for the previous quarter, shows the weak history of the dynamic related hospitalizations in our health care operation. As you can see, we are the lowest levels of hospitalization since the beginning of the pandemic. On Slide 14, going forwards, we show the data from the previous slide, but in a monthly view, we believe this trend of improvement should continue. We now move to Slide 15 to talk about our capital ratio. Our Tier 1 ratio was 13.7% this quarter, very robust and well above the regulatory minimum. And the same applies for our liquidity coverage ratio and our net stable funding ratio. We saw a 40 bps drop compared to the previous quarter, caused by the growth of room portfolio and the mark-to-market secured. Moving to Slide 16. We have a significant increase in the use of digital channels, as you can see, which offer our clients a greater convenience. The volume of mobile financial transactions increased 92% compared to the previous quarter. The number of accounts opening this channel also grew 84% in the same period exceeding 1.2 million accounts. Here, we already have BRL62.5 billion in loans from digital channels. This represented 29% of the total origination from the bank. If we focus only on the performance of the individual segment, digital already represents 53%. The numbers show the evolution diversification of our distribution channels and business sources, The Digital Bradesco. It shows the reduction in dependence on the brands for transactional activities. The future brands fundamentally depends on the evolution towards a more consultative role for clients. They are going to grow and grow more and more into business units. Moving on to Slide 17. We launched BIA in a pioneering manner, as you know. It's the application of technology to support and assist clients depending on their questions and needs concerning products and services. BIA gradually adds new information interaction with clients, thus becoming more robust and assertive. The total number of interactions with clients reached the remarkable mark of 396 million this year alone, which represents an increase of 29% compared to last year. On WhatsApp only, we had 39 million interactions. Currently, BIA is responsible for 100% of the first-level support on Bradesco Fone Fácil helpline, and it's also responsible for the first level support in the employee call center. BIA is currently able to share knowledge on more than 90 products and services. We have vacated BIA squad and soon will be connected to the CRM, and we start making proactive offers always according to the needs and expectations of our clients. Now we move to Slide 18. Following our strategy of digital transformation with clients at the center, take into consideration of pillars of people, technology and business we created the Bradesco Experience, a department that integrates experience, digital channels and platforms for the creation of intuitive and customized journeys of financial services leveraged by partnerships. All of this using data intelligence and the voice of the clients themselves, which helps us understand their behavior regarding the Europe channel and their respective transactions. This way, we enable more food expenses within and between channels. The department has very high skilled professionals in digital strategy, platforms, new design disciplines, journey analytics and already has an agile mindset, which means that our professionals are positioned at various squads of the bank in most functional groups. Just to give you a flavor, in this Bradesco Experience, we already have more than 1,000 professionals involving the whole relationship journey with our clients. In total, our squad strives, already added to more than 3,000 professionals. Just to give an example, in addition to acquiring some start-ups like [indiscernible] and Forwards, and investments of our private equity funds, and we have also created and developed our whole digital environments. Moving on to Slide 19. Ágora reached 706,000 clients and increased by 70% in net funding compared to the previous year. The small drop in volume on the cursory in the quarter reflects the natural mark-to-market due to the increase in volatility in the markets that we saw in the quarter. Next reached an impressive 7.7 million client days above the 7 million target for this year, and the new target is 10 million clients by year-end. This represents 131% growth in the annual comparison. Next is a comprehensive bank and its mission to provide clients with innovative solutions and it's increasing a platform for products and services and also the marketplace with the launch in November. Bitz, the digital wallet we launched at the end of last year, has reached also a very remarkable 2.1 million accounts. And this week, it surpassed 4 million downloads. It has become the entry-level solution for people entering the banking markets, and thus plays an important role in client bank. It comes with an extensive network of correspondent banks, Bradesco Espresso, with more than 40,000 service points. Bitz and Next are totally separate from Bradesco, and they have full autonomy in their decision-making process. Now on Slide 20, we move to Digio. In this quarter, as you know, we made a purchase offer to obtain 100% of Digio shares, and we are awaiting regulatory approval for that. Digio was created as a credit card operation and has since expanded to become a bank that offer accounts, personal loans and cash-back solutions. It has over 2 million cards and a loan portfolio of over BRL2.5 billion. Digio complements our portfolio of digital companies and will remain separate, as it's in a moment of significant expansion, and we do not want to alter that. Moving on to Slide 21. In Bradesco, sustainability has always been embedded in our purpose. We are committed to the positive impact agenda. In the context of COP26 discussions we are present in Glasgow following the agenda reinforcing our commitment to mitigating climate change. As a financial institution, we took a lead role in that, engaging our clients in the transition to a greener and more inclusive economy. Climate change is part of our sustainability strategy. We adhere to the net zero as the first Brazilian bank taking part in this commitment. We also highlight our recent partnership established with Enel X, which should reach a reduction of 12,140 tons of CO2. -- equivalent per year of -- our actions have been confirmed through the recognition of the main ESG ratios and indexes in which we have been evaluated has been above the market average. Let's look at Slide 22 and our guidance, as we have been discussing throughout this time, we may change to 4 lines, loan portfolio fee and commission income, insurance and expanded ALL. In loan portfolio, we have reached 16.4% growth compared to last year, and we decide to change the range to a more aggressive 14.5% to 16.5%. In client NII, we are at 4.7%, and we believe that we will end the year more like the top of the range. Fee and commission income, we are at 5%, already at the maximum point of the guidance that we published at the beginning of the year. That's why we decided to change the guidance, which now ranges from 2% to 6%. In operating expenses, we are at a reduction of 2.5%. And we believe that it will end the year with a reduction of 1% in the whole year. In income from insurance operations, we are at minus 19.5%, and we decided to review the guidance as the evolution was better than expected in relation to COVID and financial income. The guidance for this line is now from minus 10% to 0%, and we believe that we shall be closer to 0. Finally, in expanded ALL, we have BRL10.8 billion as per year-to-date and we revised the guidance to BRL13 billion to BRL16 billion. We believe that will be between the middle and the top of this guidance. Now moving on to Slide 23. We want to extend the invitation to all of you to participate in our Bradesco Day, which will take place on November 10. Before thank you for your attention, we would like to share our view on '22. We believe that '22 will be a year of growth opportunities. We shall continue the very good growth in our portfolio and increasing client NII. We also shall see growth in fees. Cost as an expansion will continue under control. Any increase in delinquencies will be protected by our strong coverage ratios and provisions. Historically, and we believe in history, Bradesco has strived in all challenging years, particularly the pre-election months. '21 is a year in which we do not have the economy at full total as we shall see in 2022. We see GDP growth, especially from agri business, in which we are the leading private-owned bank as a very important source of growth. We believe the economic activity shall increase the level of employment and we shall have more clients from that. We see individuals and companies overall low leverage. So we have room to grow. We also see states with one of their largest cash availability ever in history to boost expenditures Finally, our digital initiatives Next, Digio and Bitz, are bringing new 10 million clients. And it's important to notice that out of this 10 million clients base, 75% do not have any sort of relationship with Bradesco. And so we are adding new 7.5 million clients to our 41 million client base. Having said that, we believe we'll continue our positive trends. I thank you, definitely now, and we put ourselves available for the Q&A. Thank you.

[Operator Instructions]. Our first question comes from Tiago Binsfeld, Goldman Sachs.

First, I'd like you to expand on your final remarks regarding these constructive expectations for 2022. So I was curious to hear about how that should translate into asset quality. Any reference you can give us in terms of expected peak when that should happen in 2022? And then I'll ask my second question later.

Okay. No problem. I'm going to answer you and my colleagues here will be more than happy to complement any feature that may be necessary. First of all, we are on a risk-on mode. We believe that our credit models are well set. We believe that we have proven to be able to have a better seasonal portfolios as we have seen the new harvest. We also see that our delinquency is pretty much under control, and we still have a very robust position of provisions and a very high coverage ratio. So we shall increase even more in individuals and but we also intend to increase in large companies as well. Besides that, we have been very strong in mortgage and payroll loans. And we are going to keep on with trait the space, but we also show increased personal loans and credit cards since the economy, as our President has said earlier, is expected to be on a full throttle. So we believe that the retail as a whole shall bring a lot of benefits to us.

Okay. Let me complement with some points here, Tiago. In terms of evolution of NPLs, I think we're going to see NPLs rising only gradually. We are still below the pre-pandemic levels. For sure, given the change in mix with more mortgage, payroll loans and other collateralized loans, probably the NPL of our portfolio is these features is lower but we think we may still see some normalization. In terms of cost of risk, we believe for 2022, we're going to have still a good performance. We think business probably will grow more or less in line with the portfolio without a major expansion in terms of the cost of risk as a percentage of the portfolio. So we see the -- that our models over the pandemics and even the years before that, have performed and have been able to allow us to underwrite very loans with very good quality, and that translates in this good performance we are observing right now.

That was very clear. My second question would be on credit card fees. This line performed very well this quarter, but was still below the volumes growth, so lower than credit card spending. So I was wondering if you could comment on the main dynamics for this line. In particular, if you could comment on both the interchange part of it and the annuity fees that you charge, how those 2 are behaving? That would be nice to hear.

Tiago, we think we have done a very good job in the credit card business. I think we have been evolving in many features of our products, new products, products where we don't charge the annual fees, they are more based on volumes. And we can say Bradesco has probably the most diversified portfolio of credit cards in terms for all segments for all levels or all kinds of clients. What we are seeing is a very strong recovery in terms of transaction volumes. We are growing almost 30% year-on-year and for the quarter comparing to the third quarter '20. And we are also growing nicely if we compare to '19. We think this platform growth will remain. When you look to fees, we think they will continue to be a driver for the total overall fees we generate, the fact that it still grows below volumes somehow reflects the fact that we have new products, as a fact, in some cases, products without the annual fees. But I think the overall trend is positive, and I think that's going to be one of the drivers of sustaining fee growth going ahead.

Our next question comes from Jason Mollin, Scotiabank.

My question is in some way a follow-up to the prior one. I mean sounds like a pretty constructive outlook given the scenario for 2022, whether it's on growth or risk and fees. Can you talk to us about the risks that you see to this base case constructive scenario? Where do you see? Is it employment? Inflation? Is it government policies that don't allow -- don't really underpin an investment environment for companies given the uncertainty? What does Bradesco see as the key items to look to for the next year to identify.

Thanks, Jason. Thanks for the question. I guess the first risk that we all have is the pandemic itself. It seems to be under control, but no one knows if it's going to be a new virus or a new change in the virus that can jeopardize all the good path that we are running to. Brazilian population as a whole has responded very well to vaccination, and we expect to happen this way. It's going to be a very volatile year as a year before and presidential elections. Of course, as inflation goes on, and we believe that the Central Bank is very aware of that and responsive. We understand that the increase in interest rates in the way that the market is indicating shall help us to have inflation under control. But let's assume that for some reason, it's not enough. Of course, having high inflation takes to a much, much higher interest rates and it can jeopardize all the growth or the economy recovery here. The companies used to be more and more cautious in those years. So we believe that they shall have additional liquidity in their cash positions in order to face any kind of difficult that they may see throughout the year in the beginning of 2022. So I would say that those are the main risks, but my colleagues here may add any other that they see. But we are prepared for that. We have lived this before and we are very well set to seize the opportunities. We understand that inflation is finally under control according to the new speech and behavior of the Central Bank we see the population getting back to work, not only on a virtual manner. And we believe that, as Octavio said earlier, that at least 0.7% of GDP we take to the following year. And besides that, the agri business is very strong. So we shall see more employment, more clients and more business.

Do you think that you would add competition or, let's say -- maybe not so disciplined competition, raising money and putting money to work in businesses where returns are not a priority in the short term? Is that a risk to the outlook?

It's something so funny. Although we have a few banks in Brazil, the competition is always very fierce. It's extremely high. So it's impossible to imagine a fiercer competition. On the other hand, we shall have a bigger pie to share as the economy grows, we also benefit from that. So by the end of the day, we do not see ourselves losing results to other banks. On the contrary, we are very well prepared, either with open banking, PIX or any other banking products in insurance, and especially on insurance ones, to compete and to get market share. We see ourselves growing not only with the GDP as we have historically grown grew more than the GDP. So we shall be fine.

Yes. And just an additional angle on the answer. So far, we have seen a lot of impacts, a lot of wannabe competitors, mostly focused on growing the client base. We have seen very little in terms of new competitors on lending. The competition in lending as they understand is fuse, but mostly from the traditional competitors. And I think that's going to be the scenario for -- probably for still many years.

Jason, just to give you a flavor, very interesting there is that we have more credit given through our digital channels than the whole financial fintech market. So we are bigger than the whole fintech markets, just in digital channels. And of course, we have to add to that all the traditional channels that we have. It's BRL30 billion and BRL1 billion in insurance policies.

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

Congratulations on the results. Let me ask you 2 questions also, Leandro. Let me start here -- and to staying on the topic of asset quality, on your closing remarks, you mentioned that individuals and companies are with low leverage. However, this seems to contradict some of the figures that we saw from the Central Bank earlier this year, showing that the level of investments and best service of the Brazilian consumer is near all-time highs. So can you just explain then why the contradiction? Why is the Central Bank showing one number and you're seeing something different? And then I'll ask my second question.

Mario, let me take this one. Basically, first, the perception that consumers are overleveraged is something that really is not -- we don't see looking to our credit models and what we see from the clients that have underwritten loans with us. That's the first thing. Another thing, we have some stats from our economists, and I think even other economists are already taking noting of that, the methodology in terms of calculating the income by the Central Bank that is used in this leverage ratio that is based on the so-called [indiscernible], had some imperfections, especially considering the methodology they are using with phone calls to do the survey. We're going to present an interesting chart in the Bradesco Day that shows that actually the leverage from individuals actually didn't increase as is pointed by the Central Bank figures, but is more in line with what we see observing our base of clients.

Okay. That will be very helpful. I guess we will look for that then next week because we do get a lot of questions from investors nowadays about these figures from the Central Bank was a concern for a lot of investors. So if you can show that the leverage is not as high, I think it will be very helpful. And second question...

Mario, before going to the second question, just to share, we are going to be more than happy to have another meeting with you in our economists in order to clarify all the mathematics behind the Central Bank figures.

Yes. And just additionally, as people were pointing here to me, also we have all the growth in mortgage part of the -- on top of what I said, part of the increase in leverage comes from mortgage that is a much lower risk loan and somehow long term.

Yes, you have to consider the installments, not the overall amount because it's a 3-year transaction, right? So by the end of the day, what we see is the ability of and willingness of the clients to repay. And the durations have extended tremendously. So we have to take this into consideration as well. but we can get to a deeper dive afterwards if you wish more than happy to.

Perfect. No, that will be great. And the second question then is related to your insurance results, right? As you showed, they have rebounded much faster than you anticipated just last quarter. It seems like the improvement is both financial income, but also operationally, especially with claims. But when we look on Slide 11 here, it seems to me like your claim ratio still is relatively stable. So can you discuss a little bit about the trends between products? So I would imagine that life in auto -- well, at least life claims probably have been coming down, but health and auto have not. Can you just discuss the different dynamics by product? Because, again, I think this is a major upside for your figures in 2022, right? As you show, we had like BRL4.3 billion in COVID-related claims this year. And this number should decline quite a bit next year. So I'm wondering how we're going to see this decline in claims? Is it going to come first in life and then in health and then in auto? Or if you can discuss that, that would be helpful.

That's fine. First of all, I'd like to add another item in our list. We have grown our premiums dramatically. So we have an increase in sale, we have very good controlling claims and we have finally some sort of balance between IGPM and IPCA. You know that IGPM takes care of our liabilities and IPCA represents our assets. And the difference that we have seen was something I mean that we have never seen before, and it's totally abnormal. That's the reason why we see this from now on having a very good behavior. IGPM and IPCA shall be together. And so in this sense, we shall benefit. The insurance company is always comprised of the operational feature as well as the financial one. So they are part of the equation, and we believe that they are good on this matter.

Yes. Just a point on that. IGPM in the first half was a little bit higher than 10% more than IPCA. I think that's something that we don't expect going forward. But going to the loss ratio, we definitely had already a more substantial benefit in the life insurance part of the claims that were also hit by the costs related to COVID. The benefit from the improvements from pandemics came faster on that line. We started to see some benefits in terms of health, the thing we have is the improvement on loss ratio claims related to COVID was partially offset by the increase in frequency of normal procedures since people were holding some of the procedures due to the peaks of the pandemics. We think as time goes by, we will see a normalization on that. Claims on health will take a while to have a full normalization, but we think the trends are very good and that should be a good driver for the insurance perform going ahead. In terms -- and as Leandro said, in terms of premiums, we are delivering a quite good performance. We see strong demand for insurance products in life, in health and other lines. And we think that will be the new normal in the after pandemic operations.

In brief, we can see life reacting almost immediately. Health is going to take some time. It's going to grow on a stead base. And we may see auto recovering fully in 2022. That's our view for each segment.

Perfect. No, that's very clear. Yes. This can be a significant tailwind to your results in 2022.

Our next question comes from Olavo Arthuzo, UBS.

Congratulations for the results. I had just some 1 question, and I will shift a little bit the question's general topic. Actually, I would like to have a little bit more color about the marketplace of next because it was recently launched to the clients of the digital bank. So I wanted to understand how has been the dynamic of the cash back of next marketplace? In other words, if you could share with us how much was at the average for the cash back at this period of maturity of the marketplace. And also a follow-up question is how many available sellers there are in the platform?

Well, thank you very much for your question. We have Renato Ejnisman here on the line, and he's going to be more than happy to answer both questions. So Renato, please.

Okay. So thank you for your question. So we launched this literally yesterday, and it's been already a tremendous success level. So essentially, what we have is a full marketplace that we took a decision to launch before Black Friday. And we decided to have it with a number of differentiating factors considering the competition. So first of all, we have a very, I believe, incredible user experience. Everything is 100% inside our app. So our clients don't have to leave the app to go to another store or anything like that, as many of our competitors do. Secondly, we decided to be very aggressive on cash back, and that has 2 different things. I mean one is the clients receive the cash back as soon as the credit -- the payment is approved. So if the person is on a payment by credit card, as soon as the credit card approves, that transaction, the person receives on his or her account the cash back. And obviously, if they have -- if they decide to cancel the acquisition or decide to return the product, then we take back the other cash that was left on the half. And also, the third thing is we'll definitely increase the number of sellers. So we have a vast selection of sellers. When we launched, we launched with 14 sellers including some of the largest retailers in Brazil. So we have a pretty good suite of products there. But what we did was we started what is the typical demand on Black Friday. And we have almost about 90% of what client demand in terms of their purchases on Black Friday. And we will continue to grow after Black Friday. Obviously, there is Christmas. And next year, we intend to grow the marketplace to other features outside of the typical e-commerce area. Thank you.

Our next question comes from Marcelo Telles, Credit Suisse.

Hello, everyone, and congratulations on the strong results. I have 2 questions, and I apologize I missed it on the beginning of the Q&A, but -- so I apologize if I repeat. Can you comment a little bit the outlook for your margin with the market? I understand for this year, I think kind of like the soft guidance was around 20% to 30% reduction in margin in the market. And as rates continue to go up towards 10% or maybe more next year -- and I think you are probably BRL1.6 billion in this quarter. Should we expect this to continue to decline next year? And I understand you're very optimistic on your client NII and it definitely should be. And how should we think about the evolution of your overall NII including the market with for 2022? That's the first question. And then the second question is with regards to your capital position? And if you can just -- how can we square things in terms of potential for, say, higher payout or extra dividends? And if you -- I understand you're in a better capital position, right, than your peers, but on the other hand, we have potential approval of the tax reform and that would be a potential hit of 400 basis points, give or take, for the large banks in general, probably phase in -- But still, would that prevent you from paying be let's say, more aggressive on the payout or coming up with an extraordinary dividend? How should we think about your product strategy in light of, let's say, potential negative impact of -- from the tax refund if approved, of course?

Okay. Thank you so much, Marcelo. I guess I'm going to start from your second question because it's pretty much straightforward. We have a very strong capital position. Despite of all the possible tax hikes that we shall see that, we feel that it does not affect us in a way that prevents us from doing business. We will see you room to pay very decently our shareholders. And the way we see it is that we have to -- the more we can, get very fast to our historical levels, that shall be around 40% just in dividends, okay? Besides that, if we think that the price of the shares are not according to where they should be, we are going to use the repurchase programs as we have started this year. So that's the first question. So we intend to pay our clients well. We are going to wait to see the definitions on taxes in order to define what is the best, the optimum capital according to the market opportunities and challenges as well. And we are going to pay dividends and repurchase stock, especially if we have a personal dividend being taxed, right? The first question is that we are not so much focused on the market margin. We are more and more focused on clients. We intend to be the bank that makes money with clients, rendering services, giving them the best product as we understand them better than anyone regarding to needs and ability to repay that. Therefore, we believe that, as we have said before, 2020 was an extraordinary year for our treasury. It was opportunistic. But now we shall see our NII improving but much more because of the margin with clients than the margin with markets. So there shall be an improvement, but it comes from clients.

Yes, Marcelo. As you know, since the beginning of the year, we have been saying that for this year, it was already said that we would have a reduction in the market in NII comparing to 2020. We discussed a number, a range between 20% and 30% reduction. We stick with this number for 2021. And we can say that for 2022, we should have another reduction. But as Leandro pointed, we should have a much stronger NII from clients from the good trends in terms of the loan book. We see the production of new loans with higher spreads, and that should continue helping the marketing credit, but also the positive trend in the margin from our funding part of the business, that directly benefits from higher Selic. So overall, we think the -- as Leandro said, the client NII portion is a very much more important than the market NII.

That's very helpful. If you allow me just to test the question, totally out of the box, and I'd be interested to hear your thoughts. And as you know, we have been the IPO of a big digital bank. The valuation that has been depressed, it's almost more than double your market cap. And how do you feel about that? And how do you see -- what are the -- what is the potential opportunity to monetize your next business?

Well, this is a very interesting question, but I guess the market always has the answer. The price is given by the market. So the good part of that is that as we are getting more and more digital, as you could see that nowadays representing credits more than the whole fintech industry, including the bank, including the bank. And we are using more and more our digital channels. More than 50% of our transactions are ready for there. So we shall have much, much higher multiples.

Okay. Yes. I understand. So you feel that this part of the business is being -- or there is certainly underappreciated in your valuation currently?

No question about it. I mean, Octavio has said earlier, our strategy in native digital banks as we have Next and Digio, and also Bitz as our wallets. Imagine this universe altogether with more than 10 million clients just beginning and with our support and operational agreements with us in order to understand credit better than any financial institution from the fintech world, I mean, they are -- I would say, their major weakness is credit concession. It's credit measurement, assessment and concession and we are kings of that. So this is something unique that our digital platforms benefit from.

Our next question comes from Pedro Leduc, Itau BBA.

I wanted to pick your brains a bit on a relative performance positioning for the next year. And of course, you enter 2022 with a very strong momentum, and this is underpinning your optimism, which is great. And of course, you are aware of the more challenging macro outlook. So when we hear you talking about double-digit loan book growth, again, I can't avoid thinking that this would imply you gaining share next year. Is that a fair assumption? And if so, growing ahead of the market, what do you believe is driving this? Is it better processes? The digital origination, which is picking up a lot or you've been able to be more competitive with end rates to the consumer? And how do we avoid having to add more risk to keep gaining share?

Pedro, Leandro speaking. Well, pretty much the 3 pillars for that. The first one is that we believe that the economy shall grow. We have 0.7% going forward. We have the agri business. And we shall have a better economy with more employees earning their salaries and being able to finance their dreams. And therefore, we shall increase our portfolio as a whole. We also believe that in volatile years, companies -- especially the big ones, they tend to be more conservative to enhance their cash position. We have inflation, so by the end of the day, it also grows the portfolio as a whole. And besides that, we believe that the pie shall grow it's not only going to be a matter of taking some one's market share or take it to the other. But we are very well positioned to get more market share too. We intend to be leaders in every single segment that we play. So I would say that there's a combination of pie growth, a little bit of more market share, inflation and economy picking up.

Very good. Understood. And if I were to transport that question on to credit quality a bit. Of course, your individual portfolio NPL. You are comfortable with it, and that's fine. The mix is on your side, definitely, but it already rose ahead of the industry in this 2Q in all the individual NPLs. And so if I were to make the same question for loan book growth but for credit quality for next year, we believe it will be performing more in line with the industry or slightly better given the mix and the processes or you can accommodate a little more risk using the coverage ratio?

I was just talking here to Firetti because you have a table that shows this exactly that our nowadays is much lower than our historical levels. So of course, we see the NPL growing, but it's still below our historical levels. And we were aware of that since the beginning. That's the reason why we have made so much provision ahead of the market. We have been so much conservative than the rest of the market regarding to coverage. So it's expected to grow, but on a very good behavior when we see our historical levels. I commit to send it to you afterwards this track record of ours regarding to our coverage ratio and NPL formation.

Yes. Just complementing here, as Leandro said, we have a very strong coverage. We are still at 297% ahead of our competitors. For next year, we still -- we think NPLs will increase a little. They are still too low. I think that's a trend. But considering our more conservative mix, we think this increase is going to be contained. Overall, we believe we can expect the cost of risk as the growth and provision expenses to be relatively in line with the growth in our portfolio, meaning a stable or relatively stable cost of risk as a percentage of portfolio.

Our next question comes from Stag Lissette from Lis Capital [ph].

I have a question relating to the dramatic change in the yield curve that has happened since May. It's one of the most dramatic that I've seen during my 40 years in the investment business. And I wonder how Bradesco is coping with this because short rates has been going up from below 4% to over 8% and yield curve has flattened out. And I'm -- the rate is about the same between 2 and 10 years. How is the bank doing under this? I would say it's a negative drag because normally, banks works well when you have steep yield curves. So that's the one question. And another one is more general. I think the Brazilian Central Bank is chasing a ghost inflation, which is not there. I mean interest rates, short risk, have been pushed up 100% from below 4% to 8% since May, and this will affect the growth, inflation, I think everyone must understand that inflation is coming from that the currency has collapsed. I mean the real has been going from BRL4 to the dollar to almost BRL6. That's important inflation and it's temporary. So I think under the Brazil Central Bank has been doing very, very badly, and they put up interest rates, and it hasn't helped the currency at all. Normally, when you put up rates, it gives, but -- and the real is still at 5.65, 5.70. So that's a more general question. First question, what's happening to the yield curve how it's affecting Bradesco. And then you can have some comments on my complaints maybe about the Brazil Central Bank chasing ghosts.

Thank you for your questions. Regarding your concerns on the very strong move of the yield curve I understand your point of the general impact of that in banks. In our case, probably heard the discussion on the market NII, this reduction in this portion of our results is where we capture this impact of the higher yield curve. On the other side, I think the -- one of the major difference from Brazilian banks to banks like in Europe, for instance, is actually the duration of the loan book. We have a much shorter duration. The repricing of our portfolio has happened faster. So we can reprice and put loans and assets at higher rates relatively fast. I think that's how we cope this. That's why we are saying -- we believe the market -- the client NII that is where we have the spread portion of the margin benefits on the credit side with actually improving spreads. And on the other side, on the spread from funding. We have fully passed through to the rates, the higher used curve. And I think that this fast repricing is how we cope with that. Regarding the Central Bank, I think I understand your point, mostly it's understood that actually, the Central Bank has to move to control inflation. I think that it's going to have results. And that's probably -- that's the appropriate move.

Our next question comes from Carlos Gomez, HSBC.

I want to ask specifically about the real estate market and your lending to real estate, which has been growing quite considerably. You are concerned about the economy for next year. Does that also extend to real estate and to mortgages? And second, at what point do you think that the funding from [indiscernible] from savings accounts might be insufficient and you might need to change the nature of the product? Or do you change the way we do finance mortgages in the market?

Carlos, Leandro speaking. We do not see it as a concern. We believe that as we have higher employment rates, this is a dream of client of ours of Brazilian. So they shall get into mortgage financing, the more they can in order to have their own home. We have a very good loan to value. The loan is very, very small when you compare to the total amount of the portfolio. And besides that, we have no pressure from savings as a source of funding so far. So we are good. I mean, we are positive with that the trend shall keep on going. The key is the loan to value.

And any pressures on the other side by competition? Any pressures on margins at this point?

Well, we have a lot of competition, especially from Caixa Economica Federal that is the leader in this segment. the other banks are trying to catch up as well. We see competition. But by the end of the day, this is a very important product to us since mortgage allow us to have around 8 products being cross sold. So we have a head of the industry, a process that is very fast, very effective and the rates are pretty much aligned.

So is it going to be understanding of serving clients and anything else.

Since there are no further questions, I would like to invite the speakers for the closing remarks.

Well, thank you very much for making the time to be with us. We are very proud of the results of the organization as a whole third Q we are positive for the fourth quarter and going on in 2022. We hope you have a nice day and keep on with your health. Take care, everyone.

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