Business Context and Reporting Period
Company: Banco Bradesco S.A. (BANK BRADESCO)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2017
Key Context: Results reflect the full consolidation of HSBC Bank Brasil S.A. (acquired July 2016), which significantly impacts year-over-year comparability. The period was marked by a favorable macroeconomic environment in Brazil with falling interest rates and inflation.
Key Financial Metrics
| Metric | 1Q 2017 | 1Q 2016 | Variance |
|---|---|---|---|
| Adjusted Net Income | R$ 4.648 billion | R$ 4.113 billion | +13.0% |
| Book Net Income | R$ 4.071 billion | R$ 4.121 billion | -1.2% |
| Earnings Per Share (Adjusted) | R$ 3.19 | R$ 3.20 | -0.3% |
| Total Assets | R$ 1.294 trillion | R$ 1.102 trillion | +17.5% |
| Shareholders' Equity | R$ 104.558 billion | R$ 93.330 billion | +12.0% |
| Expanded Loan Portfolio | R$ 502.714 billion | R$ 463.208 billion | +8.5% |
| Assets Under Management | R$ 1.944 trillion | R$ 1.589 trillion | +22.3% |
| Return on Average Equity (ROAE) | 18.3% | 17.5% | +0.8 p.p. |
| Return on Average Assets (ROAA) | 1.4% | 1.5% | -0.1 p.p. |
| Basel III Ratio (Total) | 15.3% | 16.9% | -1.6 p.p. |
| 90-Day Delinquency Ratio | 5.6% | 4.2% | +1.4 p.p. |
Material Changes vs. Prior Period
- Profitability Growth: Adjusted Net Income rose 13.0% year-over-year, driven by higher fee and commission income (+16.0%) and Net Interest Income (+4.9%), partially offset by higher personnel and administrative expenses.
- Loan Portfolio Expansion: The expanded loan portfolio grew 8.5% annually. Loans to individuals surged 16.3%, while corporate loans grew 4.9%. The quarterly decrease in the portfolio (-2.4%) was attributed to low credit demand.
- Asset Quality: The 90-day delinquency ratio increased to 5.6% from 4.2% in 1Q 2016. Management attributes this primarily to a specific, fully provisioned corporate client. Excluding this client, the ratio would have declined.
- Insurance Segment: Written premiums and pension contributions grew 18.2% year-over-year. Net income for the insurance segment remained stable compared to 1Q 2016.
- Capital Structure: Shareholders' Equity increased 12.0% due to retained earnings and a 10% stock bonus issued in March 2017. The Basel III ratio decreased slightly to 15.3% due to regulatory adjustments, remaining well above minimum requirements.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management maintains a positive outlook for Brazil, citing favorable macroeconomic conditions, falling interest rates, and improved terms of trade. The bank expects the Selic rate to reach 8.5% in 2017. Bradesco projects GDP growth of 0.3% for 2017.
2017 Guidance (Pro-Forma)
- Expanded Loan Portfolio: Growth of 1% to 5%.
- Net Interest Income (Interest-Earning Portion): Growth of 3% to 7%.
- Fee and Commission Income: Growth of 12% to 16%.
- Operating Expenses: Growth of 10% to 14%.
- Allowance for Loan Losses (ALL): R$ 21.0 billion to R$ 24.0 billion.
Risks and Contingencies
- Legal Proceedings: The bank is involved in "Operation Zelotes" (indictment of former executives) and a related class action in New York. Management states there is no evidence of illegality and is cooperating with authorities. No provision has been made for the class action as it is in a preliminary stage.
- Delinquency: While the 90-day delinquency ratio rose, management notes that specific corporate provisioning impacts the headline number. Short-term delinquency (15-90 days) decreased.
- Regulatory Changes: Changes in reserve requirement rules by the Central Bank of Brazil (Bacen) effective May 2017 may impact liquidity management.
Investor Verification Checklist
- HSBC Consolidation Impact: Verify the extent to which year-over-year growth is driven by the inclusion of HSBC Brasil versus organic growth.
- Specific Corporate Client: Assess the risk exposure and provisioning adequacy regarding the specific corporate client cited as the primary driver of the increased 90-day delinquency ratio.
- Legal Exposure: Monitor developments in the "Operation Zelotes" investigation and the New York class action lawsuit for potential financial or reputational impact.
- Expense Management: Track the Efficiency Ratio (40.8% for 12 months) to ensure operating expenses remain controlled despite the integration of HSBC and rising personnel costs.
- Capital Adequacy: Confirm that the Basel III ratio remains stable above regulatory minimums as prudential adjustment factors increase.