Business Context and Reporting Period
Company: Banco Bradesco S.A. (Bank Bradesco)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2016
Business Overview: Bradesco is a universal bank operating in Brazil through a prudential conglomerate structure. Activities include commercial banking, foreign exchange, consumer financing, housing loans, leasing, investment banking, brokerage, insurance, and pension plans. The financial statements are prepared in accordance with Brazilian Central Bank (Bacen) Resolution No. 4,280/13.
Key Financial Metrics (in thousands of Reais)
| Metric | 2016 (YTD) | 2015 (YTD) |
|---|---|---|
| Revenue from Financial Intermediation | 67,721,335 | 55,485,507 |
| Gross Income from Financial Intermediation | 36,351,753 | 7,968,454 |
| Operating Income | 18,101,881 | 7,580,711 |
| Net Profit | 8,255,309 | 8,717,354 |
| Total Assets | 880,005,378 | 844,769,114 |
| Total Loans (Gross) | 341,819,182 | 355,019,058 |
| Allowance for Loan Losses | (31,874,382) | (23,800,557) |
| Shareholders' Equity | 96,357,886 | 86,971,566 |
| Cash and Cash Equivalents | 162,780,848 | 177,093,388 |
| Basel Ratio (Capital Adequacy) | 17.7% | 16.0% |
Material Changes vs. Prior Period
- Profitability: Net profit decreased by approximately 5.3% to R$8.26 billion, despite a significant increase in Operating Income (138.8% increase). This was primarily driven by a sharp increase in income tax and social contribution expenses (from a credit of R$1.27 billion in 2015 to an expense of R$9.79 billion in 2016) and a loss of R$6.81 billion from equity in affiliates and subsidiaries, compared to a gain of R$9.22 billion in the prior year.
- Revenue Drivers: Revenue from financial intermediation grew 22.1%. A major contributor was income from derivative financial instruments, which swung from a loss of R$1.59 billion in 2015 to a gain of R$12.89 billion in 2016. Conversely, foreign exchange operations resulted in a loss of R$3.83 billion in 2016, compared to a gain of R$1.25 billion in 2015.
- Asset Quality: The allowance for loan losses increased significantly by 33.9% to R$31.87 billion. The provision expense for loan losses rose to R$10.64 billion (up from R$7.97 billion). Non-performing loans increased to R$31.15 billion (9.1% of the portfolio) from R$25.40 billion (7.2%) in 2015.
- Capital Structure: Shareholders' equity increased by 10.8% to R$96.36 billion, supported by a capital increase of R$8 billion via bonus shares and retained earnings. The Basel capital adequacy ratio improved to 17.7% from 16.0%.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition of HSBC Brasil: In July 2016 (subsequent to the reporting period), Bradesco completed the acquisition of 100% of HSBC Bank Brasil S.A. for approximately R$16.0 billion. The final value is subject to post-closing adjustments.
- Legal and Tax Contingencies: The bank maintains significant provisions for tax risks (R$7.10 billion), labor claims (R$2.93 billion), and civil claims (R$3.35 billion). Major tax disputes involve PIS/Cofins calculations and the deductibility of loan losses.
- Foreign Litigation Risk: Management noted awareness of North American law firms seeking plaintiffs for potential class actions regarding alleged violations of U.S. capital market laws. As of the filing date, the bank had not been officially notified, and the risk could not be quantified.
- Dividends and Interest on Equity: The Board approved the payment of interim interest on shareholders' equity for the first half of 2016 totaling R$1.00 billion, paid in July 2016. The total distribution of interest on equity and dividends for the period was R$2.91 billion (gross).
- Regulatory Changes: The bank is adapting to new Basel III capital requirements and changes in Brazilian tax legislation regarding social contribution rates.
Investor Verification Checklist
- HSBC Integration: Verify the final purchase price and the impact of the HSBC Brasil acquisition on future earnings and asset quality.
- Tax Provision Volatility: Analyze the sustainability of the R$9.79 billion tax expense and the status of ongoing tax litigation (PIS/Cofins) which could reverse provisions.
- Credit Quality Trends: Monitor the trajectory of non-performing loans (currently 9.1%) and the adequacy of the increased loan loss provisions in the context of the Brazilian economic environment.
- Derivatives Exposure: Review the composition of the R$12.89 billion gain from derivatives to understand if it is recurring or driven by specific hedging adjustments.
- Capital Adequacy: Confirm that the 17.7% Basel ratio remains sufficient to support the expanded balance sheet post-acquisition.