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, 2019
Accounting Standards: International Financial Reporting Standards (IFRS)
Auditor: KPMG Auditores Independentes (Unqualified Opinion)
Bradesco operates primarily in the banking and insurance segments in Brazil, with international branches in New York, London, Grand Cayman, and subsidiaries in Argentina, Luxembourg, and Mexico. The 2019 financial statements reflect the adoption of IFRS 16 (Leases) and IFRIC 23 (Uncertainty over Income Tax Treatments).
Key Financial Metrics (Year Ended Dec 31, 2019)
| Metric (R$ thousand) | 2019 | 2018 |
|---|---|---|
| Net Interest Income | 65,799,719 | 66,808,470 |
| Fee and Commission Income | 25,337,676 | 23,831,590 |
| Net Income (Total) | 21,173,207 | 16,748,439 |
| Net Income (Parent Shareholders) | 21,023,023 | 16,583,915 |
| Basic EPS (Common) | R$ 2.49 | R$ 1.97 |
| Basic EPS (Preferred) | R$ 2.74 | R$ 2.16 |
| Total Assets | 1,378,527,685 | 1,305,543,714 |
| Total Liabilities | 1,242,984,111 | 1,180,867,594 |
| Total Equity | 135,543,574 | 124,676,120 |
| Loans and Advances to Customers (Net) | 423,528,716 | 380,387,076 |
| Expected Credit Loss (Loans) | (12,532,133) | (15,091,975) |
| Cash and Cash Equivalents | 61,879,493 | 110,225,630 |
Material Changes vs. Prior Period
- Profitability: Net income attributable to parent shareholders increased by approximately 26.8% (from R$16.58 billion to R$21.02 billion), driven by lower expected credit losses and improved non-interest income, despite a slight decline in net interest income.
- Credit Quality: Expected credit losses on loans and advances decreased by R$2.56 billion (17%) compared to 2018, reflecting improved portfolio quality or provisioning adjustments.
- Liquidity: Cash and cash equivalents decreased significantly by R$48.3 billion (44%), primarily due to increased lending activity and investment outflows.
- Accounting Changes: Adoption of IFRS 16 resulted in the recognition of lease liabilities (R$5.7 billion) and right-of-use assets, shifting rental expenses to depreciation and interest expenses.
- Capital Structure: Share capital increased by R$8 billion via a 20% bonus share issuance in March 2019.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management emphasizes a solid capital base, with a Basel III ratio of 16.5% (down from 17.8% in 2018) and a Liquidity Coverage Ratio (LCR) of 143.8%, well above the 100% regulatory requirement. The organization maintains a forward-looking capital plan anticipating needs for the next three years.
Key Risks and Contingencies
- Legal and Tax Provisions: Significant provisions exist for labor claims (R$7.35 billion), civil claims (R$8.69 billion), and tax risks (R$8.39 billion). Total contingent liabilities classified as possible losses totaled R$39.7 billion (R$6.3 billion civil, R$33.5 billion tax).
- Operational Risk: The "Operação Zelotes" investigation regarding alleged improper performance of tax appeal council members led to a US$14.5 million settlement of a class action lawsuit in New York in November 2019. Management states this does not constitute an admission of guilt.
- Voluntary Severance Program: A program launched in August 2019 resulted in costs of R$1.82 billion for 3,418 employees.
- Acquisitions: Bradesco announced the acquisition of BAC Florida Bank for approximately US$500 million to expand US investment services.
Unusual Items
- Impairment: Impairment losses on intangible assets and goodwill totaled R$971.6 million in 2019, recorded within "Other operating income/(expenses)".
- Dividends: The company paid extraordinary dividends of R$8 billion in October 2019 and complementary interest on equity of R$4.25 billion in December 2019.
Investor Verification Checklist
- Credit Risk Models: Verify the assumptions used for Expected Credit Loss (ECL) calculations, particularly regarding macroeconomic scenarios and the migration of assets between Stage 1, 2, and 3.
- Tax Provisions: Review the status of major tax disputes (PIS/COFINS, IRPJ/CSLL) and the likelihood of reversal of the R$8.39 billion provision.
- IFRS 16 Impact: Assess the long-term impact of lease liabilities on future interest expenses and liquidity ratios.
- Legal Settlements: Monitor the finalization of the "Operação Zelotes" related administrative proceedings in Brazil and any potential follow-on litigation.
- Capital Adequacy: Confirm the sustainability of the 16.5% Basel ratio given the growth in Risk-Weighted Assets (RWA) to R$759 billion.