April 13, 2017 / 6:28 PM / 4 months ago

Exclusive: Banco do Brazil CEO to double down on expense controls

Paulo Rogerio Caffarelli, CEO of Brazil's state-controlled bank Banco do Brasil SA, poses during an interview with Reuters in Sao Paulo, Brazil, April 13, 2017.Paulo Whitaker

SAO PAULO (Reuters) - State-controlled Banco do Brasil (BBAS3.SA) is conducting a thorough revision of supply contracts and operational processes to streamline expenses, an area that has kept management "very uneasy," Chief Executive Officer Paulo Rogêrio Caffarelli said on Thursday.

In an interview, Caffarelli said his team is "tidying up the house to cut redundancies wherever they are and readjust that cost structure downwards." Banco do Brasil has targeted general and administrative expense growth between 1.5 percent and 4.5 percent for this year.

Caffarelli said that he would like to bring down Banco do Brasil's expenses, regardless of the minimum 8 percent pay raise stemming from a collective bargaining agreement for this year. A list of steps that he announced in November, including a voluntary retirement plan for over 9,000 employees and the closure of over 400 branches, could deliver 2.3 billion reais ($731 million) in cost savings this year, he added.

"I'm not comfortable at all with that guidance," Caffarelli said of the expense growth target, which executives vowed in February to keep at the lowest end of the range.

The cost-cutting initiative that Caffarelli has championed is part of efforts to bring Banco do Brasil's return on equity (ROE) above fundraising costs. Such a tack, which includes focusing on domestic lending and stepping up digital banking, has spurred a 94 percent surge in shares of Brazil's No. 2 bank since May last year, when he took over.

Even as banks continue to wrestle with Brazil's harshest recession ever and fallout from a corruption probe into state firms and large corporate borrowers, Caffarelli is spotting signs of recovery in certain consumer lending segments. He noted that disbursements of payroll-deductible loans are growing this year at the fastest pace in more than three years.

BANCO PATAGONIA

By putting profitability above market share, Caffarelli is also trying to reduce Banco do Brasil's return-on-equity gap with private-sector peers and giving the lender room to generate capital organically.

Paulo Rogerio Caffarelli, CEO of Brazil's state-controlled bank Banco do Brasil SA, gestures during an interview with Reuters in Sao Paulo, Brazil, April 13, 2017.Paulo Whitaker

ROE has remained at single-digit numbers for an entire year, and it came in at 7.2 percent in the fourth quarter - about one-third of larger rival Itaú Unibanco Holding SA's (ITUB4.SA) 21 percent and a fraction of smaller peer Banco Bradesco SA's (BBDC4.SA) in the period.

A revival of credit among individuals and companies will be slow, he said. Confidence and activity indicators have recently shown improved readings, but data suggests credit markets face more headwinds, he noted.

Paulo Rogerio Caffarelli, CEO of Brazil's state-controlled bank Banco do Brasil SA, gestures during an interview with Reuters in Sao Paulo, Brazil, April 13, 2017.Paulo Whitaker

The bank expects no "single-case corporate borrower" forcing it to set aside extra loan-loss provisions in the first quarter, Caffarelli said.

Lending-related activities contribute to 60 percent of Banco do Brasil's profit, although fee-related income is responsible for the bank's most profitable business lines.

As such, Banco do Brasil is inclined to sell unessential assets and keep those that generate fee income. Banco do Brasil's only option for the sale of a stake in Argentina's Banco Patagonia SA (BPAT.BA) remains a follow-on equity offering, he said.

The creation of a new vice presidency spot, which will soon be proposed to Banco do Brasil's board, will come at "zero cost" and may help enhance the alignment of interests between the bank and listed insurance unit BB Seguridade Participações SA (BBSE3.SA), Caffarelli said.

"To me, the move makes all sense because the unit is a relevant generator of fee income for the bank, and it will cost us nothing to create it," Caffarelli said.

Speculation about the creation of that position triggered a 4.4 percent slump in Banco do Brasil's stock on Thursday.

Additional reporting by Tatiana Bautzer, Alberto Alerigi Jr, Daniel Flynn and Maria Pia Palermo in São Paulo; Editing by Bernard Orr

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