Business Context and Reporting Period
Company: Banco Bradesco S.A. (Bank Bradesco)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2010 (First-time adoption of IFRS)
Business Overview: Bradesco is a multiple-service bank operating primarily in Brazil through two main segments: Banking (retail, corporate, investment banking, leasing) and Insurance (auto, health, life, pension plans, and certified savings plans). The financial statements were audited by PricewaterhouseCoopers and approved by the Board of Directors on April 14, 2011.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric (R$ thousand) | 2010 | 2009 |
|---|---|---|
| Net Interest Income | 32,771,291 | 27,190,512 |
| Net Fee and Commission Income | 9,394,538 | 7,847,382 |
| Operating Profit | 14,747,064 | 11,836,306 |
| Net Income (Total) | 10,052,193 | 8,300,843 |
| Net Income (Controlling Shareholders) | 9,939,575 | 8,283,007 |
| Basic EPS (Common) | R$ 2.52 | R$ 2.12 |
| Basic EPS (Preferred) | R$ 2.77 | R$ 2.34 |
| Total Assets | 602,954,024 | 489,683,951 |
| Total Liabilities | 551,795,459 | 445,037,244 |
| Total Equity | 51,158,565 | 44,646,707 |
| Loans and Advances to Customers (Net) | 210,280,182 | 174,240,350 |
| Deposits from Customers | 192,475,948 | 169,946,116 |
| Subordinated Debt | 26,314,946 | 23,103,977 |
| Net Cash Flow from Operating Activities | (27,846,458) | 39,263,050 |
Material Changes vs. Prior Period
- Profitability Growth: Net income attributable to controlling shareholders increased by approximately 20% (from R$ 8.28 billion to R$ 9.94 billion), driven by higher net interest income and reduced impairment charges.
- Asset Expansion: Total assets grew by 23% to R$ 603 billion, reflecting a 19.3% increase in the loan portfolio to customers.
- Impairment Reduction: Impairment of loans and advances decreased significantly from R$ 10.81 billion in 2009 to R$ 5.76 billion in 2010. The percentage of impaired loans in the portfolio dropped from 7.9% to 6.8%.
- Cash Flow Volatility: Operating cash flow turned negative (R$ -27.8 billion) compared to a positive R$ 39.3 billion in 2009. This was primarily due to a massive increase in compulsory deposits with the Central Bank (R$ 47.3 billion outflow) and significant growth in loans to customers (R$ 81.6 billion outflow), offset by inflows from deposits.
- Capital Adequacy: The Basel Index (Capital Adequacy Ratio) stood at 14.74% at year-end, with a capital surplus (margin) of R$ 14.3 billion.
Guidance, Outlook, Risks, and Unusual Items
- Capital Increase: In December 2010, shareholders approved a capital increase of R$ 1.5 billion via private subscription to strengthen capitalization for future credit expansion. Payment was scheduled for February 2011.
- Acquisitions: The bank completed the acquisition of Ibi Mexico and RFS Human Management in 2010. A subsequent event in January 2011 involved increasing the stake in VisaVale (CBSS) to 50.01%.
- Risk Management:
- Credit Risk: Maximum credit risk exposure totaled R$ 712 billion. 98.8% of loans neither due nor subject to impairment were classified as low risk.
- Market Risk: Value at Risk (VaR) for the trading portfolio was R$ 22.9 million (99% confidence level). Stress testing indicated a maximum estimated loss of R$ 521 million.
- Liquidity Risk: The bank maintains a Minimum Liquidity Reserve and manages mismatches via daily monitoring and access to asset-backed markets.
- Contingencies: Significant provisions exist for tax and social security obligations (R$ 9.1 billion), primarily related to disputes over Cofins, INSS, and PIS calculations. Management believes provisions are sufficient.
- IFRS Transition: This is the first year of reporting under IFRS. Significant adjustments were made compared to Brazilian GAAP (BR GAAP), including the fair value measurement of derivatives and changes in consolidation rules for associated companies.
Key Facts for Investor Verification
- IFRS Adoption Impact: Verify the reconciliation between BR GAAP and IFRS figures, particularly regarding the treatment of derivatives, pension plans, and business combinations, as this is the first year of IFRS reporting.
- Operating Cash Flow: Investigate the drivers of the negative operating cash flow, specifically the impact of Central Bank compulsory deposit requirements and loan growth on liquidity.
- Impairment Quality: Review the methodology for loan impairment provisions, noting the significant reduction in charges and the concentration of low-risk assets (87.1% of the portfolio).
- Capital Adequacy: Confirm the Basel Index of 14.74% and the status of the R$ 1.5 billion capital increase approved in late 2010.
- Tax Contingencies: Assess the magnitude of tax provisions (R$ 9.1 billion) and the likelihood of resolution for disputes regarding Cofins and INSS.