Banco Santander Brasil SA (NYSE:BSBR)
Q4 2015 Earnings Conference Call
January 27, 2016 07:00 AM ET
Luiz Felipe Taunay - Head, IR
Sergio Rial - CEO
Angel Santodomingo - EVP, CFO
Eduardo Nishio - Brasil Plural Securities
Victor Galliano - Barclays Capital
Good morning and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil SA’s results. Present here are Mr. Sergio Rial, Chief Executive Officer, Mr. Angel Santodomingo, Executive Vice President, Chief Financial Officer; and Mr. Luiz Felipe Taunay, Head of Investor Relations.
All the participants will be on listen-only mode during the presentation. After which, we will begin the question-and-answer session when further instructions will be provided. [Operator Instructions] The live webcast of this call is available at Banco Santander's Investor Relations Web site, www.santander.com.br/ir, where the presentation is available for download. We would like to inform that questions received via webcast will have answering priority. [Operator Instructions]
Before proceeding, we wish to clarify that forward-looking statements may be made during the conference call relating to the business outlook of Banco Santander Brasil, operating and financial projections, and targets based on the beliefs and assumptions of the Executive Board, as well as any information currently available. Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence, depend on circumstances that may or may not occur. Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander Brasil, and may cause actual results to substantially differ from those in the forward-looking statements.
I will now pass the word to Mr. Angel Santodomingo. Please Mr. Santodomingo, you may proceed.
Good morning. Thank you. This is Angel Santodomingo, CFO of Banco Santander Brasil. Thank you for joining us in 2015 results conference call. Firstly, I would like to turn the call over to our CEO, Mr. Sergio Rial, who will introduce and summarize our main messages. Then I will come back to present our view about the economic situation and results of the year and fourth quarter. Sergio?
Very good morning, so it's a pleasure being here with all of you, thank you Angel, thanks for being on the call. I would characterize the year 2015 around the following messages. First, I don’t need to say that it has certainly a challenging macro environment and I think the Bank has initiated a very preventive action plan, particularly in terms of NPL since 2014. So we’re glad to report unchanged NPL levels in the fourth quarter, hardly any deterioration when you look at from a provision level ’14 to ’15. So I believe that to be a highlight in light of the macro environment.
Second highlight, double-digit net profit, so despite the environment the Bank has been able to post an important double-digit net profit, a record year in terms of dividend payment, all of which I think reinforces the notion hopefully to shareholders of our commitment to value creation. Equally important and perhaps the most foundational piece of our strategy is that the experience of the Santander customer has improved, so we have paid a lot of attention around quality, around flexibility, digital, making customers happier with the Bank as they interact with the Bank through different channels.
On the wholesale side, I think we’re also glad to report that despite the challenging environment, the Bank has been able to continue to deliver an integrated model very-very focused on the upper-end of the corporate segment in Brasil, but also the middle segment where I think we have shown particularly expansion and growth through our merchant acquiring business GetNet. That’s another important growth pillar that I think we have been putting attention, and I think that attention will continue for the years to come.
Equally and in terms of new growth pillars, I would also mention our payroll business, what we normally call locally, Consignado, through our JV, Bonsucesso but also inside of the Bank. And the leadership that we still have and we’ll pretend and we’ll intend to keep it for the years to come in the financing side. I mean despite a challenging auto financing market our financing business has posted a very good profit level with very low levels of delinquency, which shows that most of our models have been historically tested and I think we know the levers we need to manage.
All-in-all, a solid year and despite all I have mentioned I think we’re also proud to show that we paid quite a bit of attention on cost management. The Bank will post at the end of ’15 of last year real savings of 15% in the last two years. So not an insignificant goal achievement and if we compare if we would deduct some add-ons that I think we have added along those years GetNet and the payroll business Bonsucesso that I mentioned, the savings would have reached even more than 20%. So cost management remains an important attribute of the Company, transcends the CEO. It is ingrained in the culture and that’s something that I think we want and we’ll continue paying attention.
Now talking about the Group, I think the slide -- the intention of this slide is the relevance of Brasil to Santander in terms of earnings, but more importantly is that despite the significant de-val that I think we have all seen in the real, I mean the Brasil still remains an important piece but not so much because of the number, but because of the quality of earnings continues to improve, so I think the earnings of Santander Brasil have improved, and I hope I think we also after now two years you start giving the market the reassurance of consistency being a lot more predictable and ensuring that what we are saying we are actually doing and delivering to all of you.
With that I'll pass the word to our CFO, Angel.
Thank you, Sergio. Turning in to the macroeconomic situation the market is recognizing that the adjustment process in the economy has been longer than previously expected, in between other factors due to the confidence level and uncertainties that -- in the political scenario. But we must say that the economy is being adjusted. We have a GDP cumulative drop in three years close to 10 percentage points and monitory policy in currency are already playing their roles, all this with a fiscal consolidation in process.
In 2016, we believe we will see a lower and more controlled inflation again in competitiveness and a clear improvement in clear accounts that we have already discounted to see. These three items together would give solid lead to a change of cycle. First, from the second half of 2016 onwards and going into ‘1 , we could see a slightly improvement in the economy not just because of a better shape of the above mentioned factors, but also due to a diminished risk perception and slightly lower market volatility and this scenario we will observe economic growth already in 2017. Growing our revenue in the highlights of 2015 results some of them have already been outlined by Sergio but I would draw your attention to the fact that despite the macroeconomic backdrop as was mentioned, we registered a strong positive growth, which was reflected also in the stronger over performance of our stock.
Numbers that have supported this movement are net profit reached 6.6 billion up 13%, net interest income and commissions climbed around 7%, the leader in cost control we continue to be leaders there with on the cost base increasing well below inflation in fact close to zero in like-for-like terms. Credit portfolio was up close to 7%, while funding was up 14% including our liquidity position, NPL remained stable at 3.2% in an environment that is putting pressure there, we have done a strong increase in coverage ratio we are close to 200% in coverage and would remain as in the past with a comfortable capital and liquidity position.
Let me go in each of the parts of the P&L with the concrete data, so moving to Slide 12. As I mentioned, net income reached 6.6 billion in 2015 an increase of 14.2%. But on top of this performance, and thanks to our extraordinary results presented in previous quarters in 2015, we increased yield and stakeholder remuneration strongly. We have announced 6.2 billion in total dividends out of which 1.4 billion were interest on capital. It is worth mentioning that we had presented positive growth as you know in the first three quarters of the year, we have dropped in fourth quarter mainly due to three facts. Market activities, we think the NII line that is as you can imagine the market activities are volatile by nature, seasonal increases in expenses and higher provisions, as we will see in detail in the next slides.
Moving to Slide 13, we can see the main figures of the P&L which will also be detailed in following slides. Before I draw -- I want to draw your attention that in 4Q 2015, we had complimentary provisions for a gross amount equivalent to BRL1.23 billion or 800 million after tax out of which in NII there were asset adjustments resulting on an impairment of securities on the amount of 417 million with and before tax 272 million after tax. As well in provisions, we would recognize an additional credit provision, or loan provision of BRL808 million, gross of tax 528 million after tax. Being 60% of this amount our complimentary or genetic provision for loan losses given the economic environment, while the remaining 40% was highly diluted to specific cases in the corporate sector. Those two events added as I mentioned to BRL1.3 billion before taxes impacted negatively the results for the mentioned 800 million after tax.
On the other hand, in this quarter we reversed non-recognized DTAs generating a net gain in fiscal results of approximately the same amount, BRL800 million. Plus offsetting the provisions I already mentioned, being more specific, these gains were originated from the first access loan recorded in the balance sheet, after the increase of the social contribution in tax that you remember took place in September in 5 percentage points. The impact thus of all these events in net profit was zero. Plus excluding these adjustments we highlight the following figures, net interest income decreased in the quarter due to market activity which as we previously mentioned presents a volatile last year, but NII increased 7% in this year.
Commissions should a good performance in the quarter being still below our ambition from annual comparison. Considering our aims of an increase in customers linkage commissions should accelerate overtime. The result of loan loss provisions totaled 9.7 billion in the full year with an increase annually speaking of 2.9% even in a challenging environment. General expenses remained under control reaching annual growth of 3.4% despite the perimeter impact of both GetNet and Bonsucesso. As mentioned before, we continue to be the cost control leader in this sector. And finally as mentioned, the net profit grew 13.2%.
Moving to Slide 14, we have the net interest income which totaled 29.6 billion in 2015 with an increase of 7% over the previous year and a decrease in the quarter of 3%. Two main highlights I would like to underline here. Clearly revenues increasing this year, even considering the spread compression and this is an important point. The spreads have reflected the change of mix in products and segments. Even with this effort over the past five quarters the spreads were stable at around 8.5% as you can see in the Slide. Since the impact of the change in portfolio mix has been offset by the positive cash movement and this is pure management initiatives.
The line over which is the main reason why the NII goes down as you can see considers among others results from the Bank’s balance sheet structural interest rate gap and revenues from customers in treasury activities, which increased 27% in the full year in 2015. However, in the quarter its decrease more than offset the increase in customer activities coming from two quarters, which were extraordinarily high I would say and we mentioned this in second Q and first Q results both in absolute terms and compared historically.
On Slide 15, we observe that the expanded credit portfolio totaled 331 billion, an increase of almost 7%, 6.6% in this year. It is true that volumes have reflected the economic slowdown. However, it is noteworthy that in line with our efforts to offer a high quality product to cash balance, we expanded our customer base. This allowed us to mitigate the economic recession effects in our portfolio. In fact, the individual’s loan portfolio increased 8% in 2015 driven basically by payable loans the Consignado loan that was mentioned before and mortgages. This also reflects how our de-risking portfolio strategy which is reflected on the risk side of the presentation as you will see afterwards.
In consumer finance, there was a decline of 7.7% mainly explained by the slowdown in vehicles in the auto sector. Our business model has both positioned our service as a sector leader, while maintained NPLs. SMEs the segment has been affected by the economic scenario, but it has showed resilience due basically to as we mentioned before our distinctive model which provides for example in the same offer current account and acquiring services uniquely in the market. Corporate loans grew 12% in the year supported basically by this exchange in rate movement.
On FY16, we see our funding evolution, the customer funding reached 287 or almost BRL288 billion with an increase of 14% or 0.4% compared to last year. Including assets under management and orders, it increased 14.2% or BRL515 billion. We continue therefore presenting a solid growth on the funding side which is one of our fundamentals for this business. We think this is basic going forward. We want to grow our client business not only through assets, but also through liabilities, providing profitability gains at an appealing level of risk. The difference of growth in between the liabilities and the asset side would of course be reflected in our liquidity position as you will see in the following slides in the loan to deposit ratio.
Moving to the next slide, we have also strengthened our commissions’ revenues. In 2015, we reached almost 12 billion, BRL11.9 billion increasing 7.3%. The performance was basically or mainly driven by current account increasing 11.6%, insurance 10% and the lending operations 10%. Above all, we ended the year going up in terms of revenue. In 4Q ’15, even considering the natural seasonality of this quarter basically all products presented positive growth in commissions. The negative variation in asset management, which is the unique there, reflects the sale of the custody business that we already announced to the market. The increasing commissions, is strategic for Bank. It diversifies revenues and brings more recurrence and stability of our results, resulting in an increase in the linkage and transactionality of our customer bases.
On Slide 18, entering into the quality part of the book, we see revolution of the non-performing loans which undoubtedly was the biggest challenge of the year and where we had a good performance both individually and up to the first two quarters which is the pilot information we shared today in relative terms versus peers. Starting from the left, the 15 to 19 days overdue portfolio, however showed an increase of 70 basis points in 4Q ’15. Fully explained by one specific fact in the corporate segment and consequently it does not suggest a wider spread worsening in the segment. Indeed, if we exclude this individual fact the indicator would have been kind of almost stable I mean we would have had 4% in total, the total ratio would have been 4% and in corporate it would have gone from 2.4% to 2.6%. Obviously I cannot speak out names, but as we speak the client is being regularized and thus the leading indicator would and should come back to levels similar to the first quarter, this is the 2.6% and 4% I already mentioned.
On the other hand the 15 to 19 days overdue of individuals' portfolio showed an increase over the previous quarter. If we move to the NPLs over 90 days includes as you can see a 3.2% and 10 basis points below the previous year. This was due to a combination of our efforts that we have already and also commented in previous quarters. Our credit mix is more focused on low risk products, a more robust model of customer knowledge and portfolio monitoring, and an increased collection capacity.
Regarding coverage, it showed a strong increase, as I mentioned in my introductory words of 19 percentage points, which positions us at a very comfortable level. In general terms, we expect that the current slowdown of the economy would lead to moderate negative trends in credit quality in the following quarters, as we have been stating during the past quarters.
Moving to the next slide, loan loss provisions totaled BRL9.7 billion in last year in 2015. With a slight increase of 2.9% over the previous year and an increase of 12.8% in the last quarter, the result of the year reflects a challenging scenario and at the same time the confidence in our risk model. As you can see in the upper part of the slide, the credit cost was stressed by the increase in provisions in the last quarter. The increase of 30 basis points in the quarter reflects a again, a more adverse economic environment. We continue to believe that the cost of credit will rise moderately during 2016.
On Slide 20, we see expenses evolution. As we previously mentioned, cost control is a cornerstone of Santander to grow in a sustainable way. In fact, in 2015, we maintain our cost discipline and the expenses grew less much less than half of the inflation. The expenses as you can see their totaled 17.3 billion an increase of 3.4%. Considering a constant perimeter, in a like-for-like way then, if it means excluding the impacts of GetNet, our acquiring business, and Bonsucesso, our payroll joint venture, the expenses would have been a stable in the year, this means almost zero, compared to an inflation close to 11%.
Additionally, the rise registered in the last quarter is seasonal and is basically due to the collective bargain agreement. It is not extrapolatable to next quarters. All-in-all as Sergio mentioned in his introductory words, we closed three years 2013, ’14 and ’15 with 15% saving in real terms against the inflation and in a like-for-like calculation 20% real savings. I would say an outstanding delivering to our shareholders and then in a way of managing to which we commit in the future.
In the next slide, we can see the operational improvement observed in 2015 that was reflected in three indicators that we consider central, efficiency, recurrence and return on equity. Our revenue growth was both the growth of expenses, expenses growth, the efficiency improved 100 basis points and ended on below 50% at 49.8%. Recurrency of recurrence increased from 66% to 68.5% I must say that every time that we improve this indicator, we bring to you, to the market more predictability and resilience in our results. As a result of all these advances, the return on equity increased to 12.8%. This evolution is important, but we know that we can and we expect to go beyond.
We push the increase in results in order to improve profitability and meet our shareholders’ expectations, but always maintaining good servicing levels which differentiates us from the market and this can be seen in the next Slide, on the Slide 22. We may see but we remain with a solid capital and liquidity position with stable sources of funding and adequate funding structure. The index loan to deposit reached 90.6, 91% improving almost 7 percentage points in the year a comfortable position reflecting the higher growth on the liability side. In terms of capital the Brasilia index stood at 15.7% the same level as the previous one. In addition to having this comfortable level, we have our Tier 1 a level one capital of excellent quality at 14.3%.
Now to conclude, I would like to give the floor to Mr. Rial.
Sergio, thank you very much, I really appreciate. So, a couple of remarks looking at ’16 and also ending the year we just spoke about, first of all, focus on asset quality. So I think you can really assure that we will remain very and I repeat very attentive to asset quality despite on the short-term NPL it was very well explained by our CFO sort of incidental related to one case not a structural in any form or shape. And as you can imagine no names can be mentioned at this point in time. So asset quality is a very important one.
Second, we are committed to grow profits in local currencies. So I mean in year of 2016 most likely as challenging as the one we just saw. We’ll still pose opportunities not everything is weak or bad. And the opportunities are particularly as we see also on the liability side, we have historically an update a lot of attention to the liability side off the Bank and in a high interest rate environment as the one we have in Brasil, both myself and Angel we are going to try to look at the liability and see how we can exploit the quality of the balance sheet that we have, how we can also take advantage of being the only scalable international bank in this country, making sure that we also besides having an undivided attention to the asset side of the balance sheet we also start developing even more ingrained look from a profitability point of view on the liability side. It takes less capital, it's certainly less riskier, and we certainly have the means, the products and the people and certainly the balance sheet to extract more value out of that part of the balance sheet. So that’s perhaps as slight and long going forward.
Costs will remain a strength I think we are committed to keep it under inflation, as we go, as we have seen it over the last three years. And I think that should not change. And the other piece that I think it's important is on the wholesale side both corporates and large corporates. What I can reassure you is that capital management it's a very important piece of how we see it not because we don’t have it but because it should be treated with the care from a profitability point of view that it deserves. So we are not expecting significant spikes in capital allocation for the wholesale side, much of the contrary but we do expect and I think sometimes investors don’t fully appreciate the capacity to reprise, not only the new transactions as they come, but also the existing portfolio.
Wholesale portfolios in Brasil have relatively short duration which tends to allow banks overtime to re-price it. And I think hopefully more of that should happen over time even if volumes do drop as we start putting more limits around capital. So all in all an organization that will look on the liability side that we remain very committed to asset quality that we are as we mentioned on our investor conference committed to be as far as NPLs are concerned in line with the peers in the market. And also giving newer sense of stability, consistency, because that’s the other important piece in the organization, we have a stable organization, highly engaged. We just received our engagement score levels of last year. We have an organization that is not distracted with the present macro environment which is the contrary. I think Santander sees itself as a challenger and as a player they can actually grab quality market share from eventually public banks, or even some of the private banks that can be from time-to-time distracted.
But that’s not all what we do. So I think it's important also to hand with our commitment to society. This is a country that have pretty significant source of differences and I think we’re glad to show you an important contribution that we have done to society in Rio de Janeiro which is what we call the museum of tomorrow. It is the largest single investment of private institution and culture in the country. We haven’t used any tax benefits for that, so this is really out of the pocket. On one hand one can say why I think a society deserves second wheel it is where we have one of our largest client base, so there is some tangible commercial benefits to our retail franchise in the city of the Olympics this year. We have also done an investment to Inhotim, which is today the world's largest open-air art gallery in Andujar. We have put a gallery that basically focused on the Indians or the tribe, in the northern part of Brasil.
Second still giving back to society Santander is today the world's largest investor in university education in the world and in the case of Brasil having had a fundamental impact since 1996, as you can see on the slide. What we have to do here is to really, we have been able to form a very profitable segment in the universities as we call it, but we need to make, we need to probably devote more time and more brain power to extract more value out of students, as existing in future customers over our retailer franchise. So this is something that where the digital world comes in hand, where branches and ATMs are important but not as important for that sort of segment, so more to come out of the universities and graduates in general in terms of opportunity for us to expand our retail.
Last but not least it's what we call Amigo de Valor. This is the third largest investment or program to children in the country, after Global and after SBT program and we are very proud of the contribution of the Bank, so all in all the company that have had its role in the business society.
So with that I end and I assume Q&A will follow. Thank you very much for attending.
Thank you. We will now start the Q&A session for Investors and Analysts. [Operator Instructions]
Luiz Felipe Taunay
Hi. This is Luiz Felipe Taunay. I would start running through the questions that we received in the webcast. We received those questions regarding asset quality from [Guillermo Colter] from BBA; Saul Martinez from JPMorgan; Philip Finch from UBS; Tito Labarta from Deutsche Bank and I'll make up summary of the questions regarding the same subject.
So the question that basically ask to elaborate on why the early delinquency has increased sharply in that corporate book in the quarter. If this is possible to share which sectors were impacted by this and if there is somehow first signal of a wide spread deterioration in our corporate book. What is overall delinquency outlook that we have for 2016 and if somehow this dynamics can pose any kind of threat for our results in 2016?
Thank you. I would like to start the answering this through the question of its wider spread situation, I know the answer is clearly no. I mentioned in my presentation that first we are we cannot speak our names as you know but we are speaking with one name, I also mentioned that the client is being regularized as we speak so our expectation, we believe that even within this same month that lead indicator would come back to the levels I mentioned which would be a stability around the top element indicator around the 4% or especially the corporate one that we are speaking, it will move from 2.4 to 2.6 I think it was in the quarter. So the answer is clearly no. There is not a wider spread impact, we moved this client into these 15 to 19 days as in the same day of the presentation the client was not regularize and as I had mentioned it is happening right now.
In terms of outlook, I will say that we cannot change to our view all these leading macroeconomic a scenario would impact this part of both the ratios and the P&L as you are seeing the cost of credit is trending upwards. We see we have outperformed strongly during the last two to three years though the sector piece etcetera we remain today probably the best player in terms of quality. We expect to maintain that situation and move and probably with the sector or with the general trend in terms of deterioration. We see marginal deterioration or we will there will be but we see marginal deterioration and we expect with that deterioration happening that 2016 results will maintain the positive tone you have seen in the past.
Luiz Felipe Taunay
We have received one question regarding the outlook for 2016 from Phillips Finch of UBS. The question is could you please provide us any color on the outlook for 2016 in terms of loan growth, margins cost and asset quality?
Thank you, well in terms of starting through firstly through the balance sheet I will say that again and speaking about the environment and that we will have this year as you know the consensus is close to 3% GDP growth and I mentioned in our presentation meaning already in three years a 10% drop in almost in GDP; volumes will not be as strong as in the past. We are expecting up to mid single-digit maximum I will say so modest growth negatives in real terms on the asset side and that will be probably the main balance sheet driver. On top of that, we will continue with our policy of improving spreads and mitigating or time to mitigate and the change of mix that is happening. That change of mix also has driven in a position in which the risking of the portfolio in general terms has provoked what I mentioned before in terms of evolution of quality and what we expect going forward.
With regards to the P&L as you perfectly mentioned we do not give guidance but I can comment that it will be on some of the trends. In the end in NIM I already commented both volumes and prices NIM will clearly depend on evolution of volumes but I would expect positive territory in general terms and we will see the strength of that positive territory. We are putting focus as I mentioned in commissions we do have a space there, we expect to cover other space probably within the next years, so 2016 should be one of a continuation of the positive momentum we are starting to see. This is a clear reflection of linkage, this is a clear reflection of growth of clients, and this is a clear reflection of management priorities in terms of having the right clients with the right services and the right products.
So I would expect that to perform positively. And the other two asset quality I already mentioned in terms of cost we will continue with as Sergio mentioned we will continue with our focus on cost that means that obviously if you compare the next three years with the past three years the trend should go towards inflation but the management objective will be to maintain cost below inflation. We will see how we deliver and we can finally deliver it because as we go forward obviously the difficult is higher.
Luiz Felipe Taunay
We received a question from Saul Martinez, JPMorgan regarding past decision. The question is the Brazilian tax authorities had recently start to rule on tax disputes evolving goodwill amortization, especially in the case of privatized companies. Some of the ruling has been unfavorable to corporates. Do you worry about the implications these ruling might have related to the tax disputes you have with authorities, notably involving the acquisition of Banespa?
I’ll take that one. And so I think, this is Sergio. I think it's an appropriate question relative to the environment. My answer to that is not, it doesn’t worry us. I think we have a strong case. This is just part of normal course of businesses, there are number of disputes on different fronts, so, nothing that I would necessarily being worried at this point in time. I would let it be run through the system through the normal processes we have seen before, so nothing to worry as far as we’re concerned.
Luiz Felipe Taunay
We received a question from Mario Pierry from Merrill Lynch. Your free float is only 10%. What are the benefits of keeping your shares listed?
I would say as you know since the IPO event the commitment of Santander Brasil and Santander Group in general terms with the market has been best practices in all sense. So, the benefits are obvious I mean we maintain our pro-market way of dealing with things and that involves a lot of things. That involves the information that you receive, that in both interaction with you with the market which is I will say good and positive for both sides. It involves management also pressure in terms of achievements, in terms of profitability, in terms of usage of capital. So I would say that they are positives on both sides for the market and for Santander Brasil we maintain our commitment and we said this quite clearly when the bid offer was done couple of days ago that we maintain our commitment to keep on being present informing and having dialog with the market. And this is what we are doing and we are doing it because we think it is positive as I said to both sides.
Luiz Felipe Taunay
Two more questions coming from Merrill Lynch. Can you be more specific on cost measures being taken? What should we expect in terms of branch closures and layoff? And the second one is you had a 90% payout this year. Given the weak macro environment and thus weak outlook for loans growth, as well as high capital ratio what should we expect for payout in 2016?
I'll take this Sergio. I'll take the branch network one. I think unlike some of our competitors off course we have 3,500 branch network, so scale is we certainly have scale but if we believe to be appropriate but not to a degree that is actually a disadvantage. So where we see ourselves is actually in certain parts of Brasil we probably need to expand some branch network particularly to the west side, the bank has now with somewhat emphasis on the agro industrial side, which is a side and a segment in Brasil that continues to expand traditionally Banespa, one of the acquired banks, was very strong in that segment and I think overtime the bank has lost a little bit its roots in the segment that only really one private banking, one private bank is operating besides Banco do Brasil.
So I would expect some branch openings towards the west side of the country and then so the rest of the network just a normal optimization, so where I think what you are going to see is different sizes branches being more segmented to the spaces becoming a lot more intelligent as we run real estate. I would say banks are in real estate sometimes we forget and there is quite a bit of capital deployed to that real estate. On the other side that I think sometimes markets are not necessarily observing is understanding the mix between owned and rented and I think we certainly have a number of them that are actually leased and I think that's one of the areas that we are going to continue to pursuing savings. Having a four or five year or 10 years lease agreement with Santander today it's like valuable to a number of landlords. So there's quite a bit of still cost opportunity to continue optimizing our infrastructure, as we see it, but just to give you one example. On the payout I pass to our CFO, Angel?
Thank you, Sergio. You are right, we had this payout ratio. And the reality, I would answer this question in two ways. The first is our criteria so far our retailer has been to optimize the usage of payout as the environment consumes less or more capital and we plan to continue in that way so we will the both will decide that in each of the deals and each of the moments up to what level the optimization of that payout has to do with the capital level and the generation of profits. But I would that's the kind of the short-term answer no I would like to address this in a little bit more on a medium term way, which is you should manage capital ratio depending on the moment of this cycle.
I will say this is a medium and long-term big error because you will always tend to these too much capital out when you are on the lower part of the cycle and there were other and actual capital in the other parts of the cycle is specifically in these type of countries in which you tend to consume capital when the cycle is positive, so I will say I would like to manage capital across the cycle. We have capital, obviously. We will optimize that usage of capital, I have mentioned in the past that is there hope on our opportunities we have the duty to analyze and we are not thinking of doing then back, if there are we would analyze as we have done in the past. Our idea is to inorganically grow the franchise as strongly going forward and use that capital across the cycle. This is one piece of the question that I did not address which was related to layoffs and I don’t like to give an impression that I just overlooked at.
A couple of things on layoffs, so one other thing's that's it's important for me and I think for management is what I call human capital metrics. Productivity is going to be something that we are going to start say even more attention and start measuring and what do I mean by that. So for example when you look at consumer finance company we have the leading finance company in the country and many in some of the activities that are today perform by the bank and certainly would be perform differently as we embark on a more digital space.
So we have the leading car finance or car Web site which is web motors in the country, so we are looking at different ways through different partners in this case Accenture for example. How can we actually provide a better experience, to be faster, to be better at what we do in car finance throughout the country, so that we can actually secure that leadership that will go through redesign and improving the way we handle processes. So productivity is what it's going to lead into sometimes rationing of individuals and infrastructure but not related to what I would call the classic branch infrastructure that's not what's leading us.
And at the same time I'd like to mention that I think would be in the lot of attention to the quality and skill set of our people. We are glad to announce that this year our people on the back of the 6 million, 6.2 dividend yield and the earnings that also include that extraordinary. We are going to have one of the highest profit sharing programs to date to our employees and the retailer franchise, which I think is really fundamental in an environment where people are not even thinking about getting variable comps, significantly higher than they have seen in the past. If it's well-managed and well-communicated, we can actually create the right environment for highly focused and energized organization for 2016 which will definitely need.
[Operator Instructions] We will now start the Q&A session for investors and analysts by phone [Operator Instructions]. Our first question comes from Eduardo Nishio from Banco Plural.
In 2015, if you look at the level of provisions then including the one-offs you had an increase of almost 24%, as allowance for loan losses. Just wondering what is for 2016, what would be the outlook for that, for allowance for loan losses? If you can give us some color how you see that evolving in 2016, I appreciate it. And my second question is on your managerial accounts. You had an adjustment for allowance for loan losses of BRL809 million and NII of BRL417 million. Just wondering the origin of that those adjustments, I assume that you had some adjustments in the third quarter, so wondering if you had further adjustments this quarter, one-off gains that you offset with those adjustments? Thank you.
Since you’re asking about details about very detailed I think it's better that we talk afterwards offline and we can go through all the details that you’re posing, okay?
Our next question comes from Victor Galliano from Barclays.
Couple of questions from me, first, on NII and looking at that breakdown that you gave us on page 14, so talking about the others segment there, if you see that and you expect that to normalize then should we expect that to come down in to the level of much more as it was in 2014, where you saw a contribution there of about BRL5.2 billion, BRL5.3 billion? That's my first question. My second one is, I'm afraid, returning to the issue of asset quality. And just looking at the E2H portfolio, and obviously that has increased sharply in Q4, by my calculations it's now back up at over 7% of total loans. Would you expect this to reverse in the coming quarter with the one big corporate that you've got going into the 15 to 90 day NPLs, that's my second question and what do you think is a reasonable level of coverage of your E2H portfolio, going forward? Thank you.
Thank you. With regards to the first question in terms of NII, I mean you have seen the historical figures I mean the part that is what we call other, which is basically in non-client activities tend to be volatile. So, I wouldn’t say that it has to come back to historical levels. I will say that it will depend on our quarterly basis. It tends to generate around 20% but of the total NII that’s the rule of thumb that could vary as we have seen in the last three-four quarters. I would underline probably here the other way around, which is if you see the credit, the loan part of the NII, continues to trend positively in the last five quarters or four quarters, it has trended positively. Our aim is to maintain that trend and as was mentioned also to improve the liability side of it. And we will manage with the volatility of the markets trending and I mentioned also that we expect positive territory for NII, so that means that we should or we will decide to achieve a positive evolution on total NII.
With regards to credit quality, you’re right. The increase in that portfolio in the E part is the main that we have been speaking and that has provoked that 15 to 90 days increase. The normal thing would be that, that main goals into what we could call the normal part of the E rating which is companies that are performing and this is what I was mentioning that when I said as we speak it's being solved and regularize. So I would say the total amount would not move but what we will see is we think that classification that amount being classified as normal and this is what we are currently managing and seeing if we find a solution or we do not find that solution. So I will say the asset would be no the certain amount will not change it will change the breakdown.
Okay. And in terms of coverage, what do you foresee there versus the 2H portfolio? Would you expect that to trend back up north of 90%?
That depends always on the situation in this type of cases that depends on the situation of each of the companies the internal rating that we assign in our knowledge because as you can imagine this type of companies and information is detailed and analyzed by our rich performance so it totally depends on that type of analysis and as you can see because you have there the percentages that we probably is not they varied obviously and they increase I'm not going to give you a number any specific number because as I mentioned the processes on each way but you can see the general coverage ratio that we said by letter in the public information.
[Operator Instructions] Thank you. The Q&A session is over. And I wish to hand over to Mr. Sergio Rial for any closing remarks.
Well nothing not a lot more to add. Just thank you I really appreciate the time and we continue working for keeping the same trend that I think you have seen over the last two years of the bank hopefully ’16 will be better than ’15 as ’15 was better than ’14, that's what we are going to try to do for you. Thank you very much.
Banco Santander Brasil's conference call has come to an end. We thank you for your participation. Have a nice day.
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