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…

[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.