Business Context and Reporting Period
This Form 6-K filing by Banco Bradesco S.A. (Bradesco) covers the financial results for the first semester (1H) and second quarter (2Q) of 2017, with data as of June 30, 2017. The results include the consolidation of HSBC Bank Brasil S.A. and its subsidiaries, effective July 1, 2016. Bradesco operates as a major financial institution in Brazil with a diversified portfolio including banking, insurance, pension plans, and capitalization bonds.
Key Financial Metrics
- Adjusted Net Income: R$9.352 billion for 1H 2017 (up 13.0% vs. 1H 2016); R$4.704 billion for 2Q 2017 (up 1.2% vs. 1Q 2017).
- Earnings Per Share (Adjusted): R$2.99 for 1H 2017.
- Return on Average Adjusted Shareholders' Equity (ROAE): 18.2% (annualized) for 1H 2017.
- Return on Average Total Assets (ROAA): 1.4% (annualized) for 1H 2017.
- Total Assets: R$1.291 trillion as of June 2017 (up 16.8% vs. June 2016).
- Shareholders' Equity: R$106.807 billion as of June 2017 (up 10.8% vs. June 2016).
- Net Interest Income (NII): R$31.100 billion for 1H 2017 (up 4.2% vs. 1H 2016).
- Fee and Commission Income: R$14.926 billion for 1H 2017 (up 14.6% vs. 1H 2016).
- Expanded Loan Portfolio: R$493.566 billion as of June 2017 (up 10.3% vs. June 2016).
- Assets Under Management: R$1.918 trillion as of June 2017 (up 20.7% vs. June 2016).
- Basel III Capital Ratio: 16.7% (Total), with Tier I Capital at 12.5%.
- Efficiency Ratio (ER): 41.5% (12-month average) as of June 2017.
- 90-Day Delinquency Ratio: 4.9% as of June 2017 (down 0.7 p.p. from March 2017).
Material Changes vs. Prior Period
- Profitability Growth: Adjusted Net Income increased 13.0% year-over-year, driven by higher fee and commission income, increased net interest income, and higher income from insurance/pension operations, partially offset by higher personnel and administrative expenses.
- Expense Increases: Personnel expenses rose 28.2% year-over-year, and administrative expenses increased 16.3%, largely due to the consolidation of HSBC Brasil and higher salary/benefit costs.
- Asset Growth: Total assets and the loan portfolio expanded significantly, influenced by the HSBC consolidation and organic growth in individual lending (up 15.5%) and corporate lending (up 7.7%).
- Asset Quality: The 90-day delinquency ratio improved to 4.9%, down from 5.6% in the previous quarter. Allowance for Loan Losses (ALL) expenses decreased 6.1% year-over-year.
- Insurance Segment: Written premiums and contributions grew 12.4% year-over-year, though net income for the insurance segment decreased 7.6% quarter-over-quarter due to a higher claims ratio in the health segment.
Guidance, Outlook, and Risks
- 2017 Guidance (Revised):
- Expanded Loan Portfolio: -5% to -1% growth.
- NII (Interest-Earning Portion): 2% to 6% growth.
- Fee and Commission Income: 8% to 12% growth.
- Operating Expenses: 7% to 11% growth.
- Insurance Premiums: 6% to 10% growth.
- ALL Expenses: R$18 billion to R$21 billion.
- Economic Outlook: Management forecasts global GDP growth of 3.4% in 2017. For Brazil, they expect GDP stability (0.0% growth) in 2017, with inflation (IPCA) at 3.4% and the Selic rate reaching 8.0% by year-end. The exchange rate is projected at R$3.20/USD.
- Risks and Contingencies:
- Forward-looking statements are subject to risks including general economic conditions, industry trends, and operating factors.
- Specific corporate client transfers to loss status impacted NPL creation and write-offs in 2Q 2017.
- Regulatory changes regarding accounting standards for Cielo (payment processor) and financial guarantees affected non-recurring items.
- Unusual Items: Non-recurring events added R$1.370 billion to Book Net Income in 1H 2017, primarily due to goodwill amortization (R$1.119 billion) and regulatory adjustments related to Cielo (R$210 million).
Investor Verification Checklist
- Verify the impact of the HSBC Brasil consolidation on year-over-year comparisons, as it significantly influences asset growth and expense levels.
- Monitor the trend in the 90-day delinquency ratio and the adequacy of the Allowance for Loan Losses (ALL) coverage ratio (202.5% for >90 days).
- Assess the sustainability of the Efficiency Ratio (41.5%) given the rising personnel and administrative costs.
- Review the revised 2017 guidance, particularly the shift to negative loan portfolio growth expectations (-5% to -1%) compared to previous positive outlooks.
- Confirm the status of the "excess provision" for guarantees and its treatment under Resolution No. 4,512/16.
- Track the performance of the insurance segment's claims ratio, specifically in the health sub-segment, which impacted Q2 net income.