Ladies and gentlemen, thank you for waiting. We would like to welcome everyone to Bradesco's Third Quarter 2020 Earnings Conference Call. [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 the general economic conditions, industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause the results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Carlos Firetti, Market Relations Director and Head of IR.

Hi, good afternoon, everybody. Welcome to our conference call. We have today with us our CEO, Octavio de Lazari; our Executive Vice President and CFO, Andre Cano; the CEO of Bradesco Seguros, Vinicius; and Leandro de Miranda Araujo, Executive Director and Investor Relations Officer. For starting the presentation, I turn the floor to Leandro.

Greetings, everyone. We are pleased to welcome you to our third quarter earnings release conference call. Throughout the third quarter, we have seen evolution in the reopening of the economy as well as a somewhat restricted return of the various day-by-day activities in a number of regions in Brazil. At Bradesco, practically, all of us have remained working from home, with about 95% of our employees from departments and affiliates working remotely. And as we had stated in the previous quarter, our work has gone very well, and we have seen a high level of productivity. We have prioritized the health of our personal clients as our top priority in all of our decisions. We have made great pride in the nearly six months since the onset of the pandemic. We have introduced new solutions at an unbelievable speed that made our digital services to clients even more complete. In addition, we have been focused on providing our clients with financial solutions in order to help them navigate their way through the crisis. The search for loan extension has almost vanished. In April, we extended BRL32 billion. In September, only BRL one billion. We will bring more details ahead. We intensified the restructure of loans in order to provide our customers with loans suited to their payment capacity, and we are also offering a large volume of new credit lines related to emergency programs. We see a continued recovery in the Company for the remainder of third quarter with a pickup in former employment, which would indicate an acceleration in GDP. We expect a 4.5% decline for 2020, but this is a far better situation than what we saw at the time of the first quarter disclosure. Spot anticipated reduction in the emergency aid, interest rates will remain low and…

[Operator Instructions]. Our first question comes from Mr. Mario Pierry of Bank of America.

Congratulations on your results. Let me ask you two questions. The first one is with regards to net interest margin outlook. As you mentioned, that you expect NII to grow less than your loan book next year. But I was wondering, what is the impact of a steep yield curve in Brazil, right? It seems like the yield curve has been steepening. What would happen to your margins if we see a further steepening of the curve? Also, my understanding is that your loan mix should improving going forward, so I'm a bit surprised that you're basically guiding for net interest margin pressure. So I wondering have -- yes. Yes, go ahead.

This is Andre speaking. Thank you very much for your question. You're pretty much right. I mean, I was -- I was making reference to the fourth quarter in 2021 due to increasing interest rates, recover of the economy. We do expect better margin, as I have just pointed out. So those are very important items in our NII, and we share your vision. That's how we see it as well. I was just making a reference to the last quarter.

Okay. Perfect. That's clear. So let me ask you the second question then. When you mentioned -- I think you mentioned that you expect provision charges to fall to the levels seen in 2019. Are you talking in nominal terms or as a percentage of the loan book? Because your loan book is probably -- is about 10% higher right now than it was in 2019. So if you could clarify that.

Yes. Basically, we were making reference to the additional provisions. So we do not intend to make additional provisions in 2021 as we did mark in 2019. But of course, you are right, as the portfolio grows, we shall have a pausing provisions for that.

Okay. And so a follow-up to my asset quality question. When you mentioned here on your slides, right, that the performance of the extended portfolio has been better than you expected, what do you think explains that? Clearly, as you mentioned, right, the economy is doing better than everyone expected at the beginning of the year. But part of that is probably related to all of the government support that has been provided. Do you think there's something more structural going on also that this portfolio is performing better than you anticipated?

Well, basically, you have pointed out two of the three main reasons. Definitely, we were much more concerned in the beginning of the second quarter, as our CEO has pointed out earlier in the morning. At that time, we had nearly 0 visibility of what could happen this year. And we are, by nature, very conservative. Therefore, the economy recovered much, much better and faster than we expected. So economy recovery was definitely the main reason. The government support as well as ours, we landed with much more resources than was released from our composers. And the way the bank adjusted itself to support clients as a whole was basic to have such a recovery in the portfolio. And the third reason for that is that we put a lot of capital to work aligned with the other banks. So the society as a whole benefit from liquidity on an organized fashion, and we have seen also that the big companies were very cautious. They raised a lot of money with the banks in the beginning of the second quarter, and it also helped to have a healthy chain of suppliers and clients benefiting from that.

And Mario, just add one more. As you know, we had a big crisis in '15, '16, then all the volatility in the election '18. So basically, if you look to our loan growth before this crisis, we are not coming from a period of a boom in credit. Actually, the year where we really accelerate, that was at the end, that second half '19, we were accelerating a little bit more in the first quarter '20. But the clients we have there are very good. Basically, the loan-to-value in the operations is relatively low, basically less than 50% in mortgage, in car loans is less than 50%. So basically, even in the SME space, we were not booming in credit before this thing happened. So really have very good clients there. So I think that also, in addition to what Leandro said, helps this good performance. And the relief will finish. But as our requirements point, there was a big accumulation of savings in Brazil, probably not necessarily the people that will stop receiving the benefits are going to be the same the safe, but actually, macroeconomically this is also a caution that probably will help the -- to keep the economy going for a little bit more and also help on the credit quality side.

[Operator Instructions] Our next question is coming from Mr. Geoffrey Elliott.

It's Geoff Elliott from Autonomous. Two kind 0f -- two questions, if I could. The first one is, can you tell us when you expect overdraft balances to reach that trough? Is that the end of the year when corona voucher payments expire? And then secondly, can you help quantify the savings that you're typically realizing either by closing a branch or by converting a branch to one of these lighter units that doesn't have the full branch infrastructure?

Geoff, Leandro speaking. Right, basically, we do expect to reach a peak in our delinquency in the second or third quarter of 2021. But it do...

Sorry, maybe I wasn't clear on the question. The question was when are the overdraft balances going to reach a trough? It wasn't about delinquencies. It was about the balances because, obviously, that's one of the factors that has fed into the pressure on net interest income.

Probably we are only 2 right now. And as -- and the economy is returning to kind of a normal pace, we believe that maybe already in the first quarter next year, we could start to see some improvement.

Okay. Let's move to your second question regarding to how much savings we shall have when we close the branch. Well, it varies from 30% to 40%. Pretty much, we have around 30% relief when we transform the branch into a business unit because you have no security costs there. So your calculation should consider from 30% to 40%.

Yes. In terms of the impact in costs, again, we are not releasing a formal guidance on the full amount of the savings, but as we said, this is the basis for allowing us to have a nominal reduction in costs again next year on top of the very strong reduction we already had this year.

Okay. But can you give us any sense of how many million reals per year when you close down a branch?

Yes. At this moment, we prefer not. But it's a sizable reduction that, as I said, will allow us to reduce cost nominally after a big reduction this year.

Our next question is coming from Mr. Mario Pierry from Bank of America.

Okay. Since there were no other questions, let me ask a couple of other questions that I had. First one is related also to these charges that you talk of about BRL800 million for the -- to adjust your cost base. Is this primarily severance charges? Or does it relate to costs of like transforming these banks into smaller branches? And I was wondering because you have had already a sizable reduction on your branch base so far. So I was wondering if there were any extra charges related to this closing that you had already. Do you have any of those expenses embedded in your 9-month figure? And then the second question was related to fee income generation. And if you can just give us what is your -- what do you think is the impact of open banking, the impact of pits on your ability to grow fees in the coming years?

Okay, Mario. Well, regarding to the extraordinary provisions that we are making of BRL800 million to the cost restructuring, pretty much it's all there regarding to all the expenses related to make them close or transform into a business unit. And it just applies from October on, so we expect to use it in the fourth quarter. And regarding to fee income generation, it pretty much depends on the interest rates and how it's going to be the dynamics of the market next year. We expect, as the inflation is returning to higher levels and the economy is expected to increase speeds, that we shall have higher interest rates as the future fixed rating markets are showing and pointing out. Therefore, we shall benefit from this, and this could impact the asset management market as well and the underwriting market. Regard to overdraft, I guess it's pretty much done. We do not expect any reduction on that, so we shall have some recovery. And of course, with the end of pandemic and recovery of the economy, we shall get to normal related to our past history on the products that clients use to ask us. So 2019 shall be a good proxy.

Okay. Just going back then, when I look here over the last 12 months, right, you have closed about 800 branches and your employee base is down to about 4,000. Did you incur any extra challenges in the last 12 months related to this closing and declining the employee base?

We made some provisions also to that throughout the year, and now we are going to expand it. So the idea is to spend the money on a cash basis to -- on the following month, but most of it will be expanded now in the fourth quarter. The reason for that is that you remember that Octavio, our CEO, in the end of the first quarter, announced that we would reduce 400 branches. And now we are increasing this number. So we have to have additional provisions toward to that. That's the reason why we decided to make this additional BRL800 million.

Our next question coming from Mr. Marco Turna of [indiscernible] Capital.

Just can you -- apologies, I know you've probably gone over this earlier -- in earlier periods, but just clarify the difference between the extended and renegotiated portfolio. The extended portfolio is -- just got an inter payment holiday and you tacked on those months at the end, whereas the restructured portfolio had something more fundamental. Can you just clarify the difference between the 2?

Okay. Basically, the renegotiated portfolio is something we have always done that is basically when a client has a problem, you reach a deal with the client, sometimes expanding the mature, giving more time, making the loan longer. Sometimes, changing the terms and even renegotiating sometimes interest rate. In the case -- or if it is a loan that is either written off, sometimes actually bringing the loan back to the balance sheet, this is what goes in the renegotiated portfolio. This is business as usual, what all banks do with clients that have problems at some point. The expanded portfolio is something unique. It's based on a regulation issued by the Central Bank in the beginning of the crisis in March. And basically, we can do it only for clients that were not late before beginning of March. And in this case, it involves only grace periods. We did mostly for 60 days. If the client requested, we did it for another 60 days. We try to make it shorter to have kind of a reference if the clients paying or not. So that's the difference. And basically, we cannot do expansions for more than six months. We are doing much shorter than that. And that kind of -- that thing will finish by the end of this year, even though the flow of new expansions kind of reduced a lot. Now it's almost 0.

And what is the -- and what percent of the -- and this is business available for all borrowers, correct? It's not held for retail SMEs that include corporates?

It doesn't include corporates, it includes up to midsized companies. Companies from up to BRL500 million per year. That's kind of up to -- we go up to this kind of client. Most of it is individuals, is small companies, but we have some in the mid-sized company. We disclosed this number, for instance, I don't have for the third quarter right now. But for the first -- second quarter, we had BRL61 billion in extended loans, midsized companies made for something like BRL15 billion. So corporate, we don't extend.

And I'm sorry, one final thing on this. And just the size of that loan book for the midsize, if you take the total size of the midsize reals plus the individuals who, for this, didn't happen, what's the size of that loan growth coming for clients?

The size of this expanded book?

No. No, the total size. So we've got $73.5 billion, which has some kind of grace period, $60.4 million have returned to normal. That $73.5 million is on a base of what, like there's $150 billion? I mean, how many billions of your loan book took advantage of this at one point? That was --

No, the €74 billion is actually -- when -- we have in the presentation a slide in on Page 12. Basically, as of October 23, we had BRL73 billion extending. This is the total that was extended at some point, BRL73 billion. That probably makes something like 14% of the loan book, give or take. But...

14% of the loan book that could take advantage of it or 14% of total loans?

No, 14% of the total took advantage. But right now, out of the 73, 60.4 has already returned to payment. Regular payments are not in default. They have already made the initial staff payments after the grace period. What we have without still in the grace periods and that should finish mostly by November is BRL11.7 billion that makes for only 3.7% of the loan book.

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

Well, I would like to once more thank you all for making the time to be with us. And now we finish the conference call. Have a great day. Bye.

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