Business Context and Reporting Period
This Form 6-K filing by Banco Bradesco S.A. (Bradesco) covers the third quarter and the first nine months ended September 30, 2011. Bradesco is a major Brazilian financial institution operating as a multiple-service bank with significant subsidiaries in insurance, private pension plans, and savings bonds. The reporting period was characterized by global economic uncertainty, including concerns over the Eurozone fiscal crisis and a deceleration in the Chinese economy, though Bradesco maintained a positive long-term outlook for Brazil driven by domestic demand.
Key Financial Metrics
| Metric | 9 Months 2011 | 9 Months 2010 | 3Q 2011 | 3Q 2010 |
|---|---|---|---|---|
| Adjusted Net Income | R$8.427 billion | R$7.120 billion | R$2.864 billion | R$2.518 billion |
| Book Net Income | R$8.302 billion | R$7.035 billion | R$2.815 billion | R$2.527 billion |
| Financial Margin | R$29.063 billion | R$24.038 billion | R$10.230 billion | R$8.302 billion |
| Fee and Commission Income | R$11.137 billion | R$9.804 billion | R$3.876 billion | R$3.427 billion |
| Total Assets | R$722.289 billion | R$611.903 billion | R$722.289 billion | R$611.903 billion |
| Shareholders' Equity | R$53.742 billion | R$46.114 billion | R$53.742 billion | R$46.114 billion |
| Expanded Loan Portfolio | R$332.335 billion | R$272.485 billion | R$332.335 billion | R$272.485 billion |
| Return on Average Equity (ROAE) | 22.4% | 22.5% | 23.1% | 22.5% |
| Capital Adequacy Ratio | 14.7% | 15.7% | 14.7% | 15.7% |
| Delinquency Ratio (>90 days) | 3.8% | 3.8% | 3.8% | 3.8% |
Material Changes vs. Prior Period
- Profitability Growth: Adjusted Net Income for the first nine months of 2011 increased by 18.4% compared to the same period in 2010, driven by organic growth in loan operations and higher financial margins.
- Asset Expansion: Total Assets grew 18.0% year-over-year, while the Expanded Loan Portfolio increased by 22.0%. Corporate loans grew 26.5% and individual loans grew 13.3% over the last 12 months.
- Margin Performance: The Financial Margin increased by 20.9% year-over-year, primarily due to higher volumes in loan and funding operations. However, the average spread on loans decreased slightly due to higher funding costs and portfolio mix changes.
- Expense Increases: Personnel and administrative expenses rose significantly (17.0% and 17.5% respectively for the nine-month period) due to collective bargaining agreements, organic growth in staff, and the expansion of the service network (451 new branches opened in the last 12 months).
- Asset Quality: The delinquency ratio over 90 days remained stable at 3.8%. However, the Allowance for Loan Losses (ALL) expenses increased by 18.2% year-over-year, including an additional R$1.0 billion provision recorded in the third quarter to guard against potential global economic downturns.
Guidance, Outlook, and Risks
- 2011 Guidance: Management projects full-year 2011 growth for the Loan Portfolio between 15-19%, Financial Margin between 18-22%, and Fee and Commission Income between 10-14%.
- Economic Outlook: Bradesco maintains a positive long-term outlook for Brazil, citing domestic demand, job market buoyancy, and infrastructure investments (pre-salt oil, 2014/2016 sporting events) as key drivers. The bank anticipates that the global economic slowdown will have a deflationary impact on Brazil but notes the country's strong foreign reserves provide a defense line.
- Risks and Contingencies:
- Global Economic Conditions: Risks include the Eurozone fiscal crisis, potential double-dip recession in the U.S. and Europe, and deceleration in China.
- Credit Risk: Potential increase in customer delinquency and the consequent need for higher loan loss provisions.
- Interest Rates: Changes in interest rates could adversely affect margins.
- Legal and Tax: Significant provisions exist for tax risks (R$11.6 billion) and civil/labor claims (R$5.4 billion), though management believes these are sufficient.
- Unusual Items: The third quarter included a R$1.0 billion additional provision for loan losses. Non-recurring events impacted Book Net Income, including a R$2.1 billion reversal of tax risks and R$501 million in labor provisions.
Key Facts for Investor Verification
- Capital Strength: Verify the Capital Adequacy Ratio of 14.7% (Tier I: 12.2%) against regulatory minimums and peer benchmarks, noting the inclusion of R$5.2 billion in Subordinated Financial Bills in Tier II capital.
- Provisioning Adequacy: Review the R$19.1 billion Allowance for Loan Losses (7.3% of the portfolio), specifically the R$4.0 billion in excess provisions, to assess the buffer against potential credit deterioration.
- Expense Management: Monitor the Efficiency Ratio (42.7% for the last 12 months) and the impact of the collective bargaining agreement on future personnel expense growth.
- Dividend Policy: Confirm the payout of R$2.838 billion in dividends and interest on equity for the first nine months, representing approximately 31.5% of book net income.
- Market Share: Verify Bradesco's leadership positions, including 19.7% market share in branches, 24.9% in insurance premiums, and 30.1% in technical provisions for insurance/pension/savings bonds.