Business Context and Reporting Period
This Form 6-K filing by Banco Bradesco S.A. (Bradesco) reports financial results for the full year ended December 31, 2013, and the fourth quarter of 2013. Bradesco is a Brazilian universal bank and financial conglomerate operating in banking, insurance, pension plans, and capitalization bonds. The reporting period coincides with the bank's 70th anniversary.
Key Financial Metrics
| Metric | 2013 Full Year | 2012 Full Year | Variance |
|---|---|---|---|
| Adjusted Net Income (R$ billion) | 12.202 | 11.523 | +5.9% |
| Book Net Income (R$ billion) | 12.011 | 11.381 | +5.5% |
| Earnings Per Share (Adjusted) (R$) | 2.91 | 2.74 | +6.2% |
| Return on Average Adjusted Equity (ROAE) | 18.0% | 19.2% | -1.2 p.p. |
| Return on Average Assets (ROAA) | 1.4% | 1.5% | -0.1 p.p. |
| Total Assets (R$ billion) | 908.139 | 879.092 | +3.3% |
| Shareholders' Equity (R$ billion) | 70.940 | 70.047 | +1.3% |
| Capital Adequacy Ratio (Basel III) | 16.6% | 16.1% | +0.5 p.p. |
| Expanded Loan Portfolio (R$ billion) | 427.273 | 385.529 | +10.8% |
| Delinquency Ratio (>90 days) | 3.5% | 4.1% | -0.6 p.p. |
| Efficiency Ratio (12M) | 42.1% | 41.5% | +0.6 p.p. |
Material Changes vs. Prior Period
- Profitability: Adjusted Net Income grew 5.9% year-over-year, driven by higher financial margin revenue, improved fee and commission income, and higher insurance operating income. This was partially offset by increased tax, personnel, and administrative expenses.
- Loan Portfolio: The expanded loan portfolio grew 10.8% to R$427.3 billion. Growth was led by Individuals (+11.2%) and SMEs (+11.5%).
- Credit Quality: The delinquency ratio for loans overdue over 90 days improved to 3.5% from 4.1% in 2012. The Allowance for Loan Losses (ALL) expense decreased 7.4% year-over-year despite loan growth, reflecting improved portfolio quality.
- Insurance Segment: Insurance, pension plan, and capitalization bond income increased 12.3% to R$49.8 billion. Net income for this segment rose 4.3% to R$3.74 billion.
- Non-Recurring Events: Significant adjustments impacted the year, including a R$1.95 billion reversal of tax provisions due to adherence to the Refis tax program and a R$2.57 billion reversal of technical reserves due to regulatory changes in discount rates (Susep Circular 462/13).
Guidance, Outlook, and Risks
2014 Guidance: Management projects the following growth ranges for 2014:
- Loan Portfolio: 10% to 14%
- Interest Financial Margin: 6% to 10%
- Fee and Commission Income: 9% to 13%
- Operating Expenses: 3% to 6%
- Insurance Premiums: 9% to 12%
Outlook: Bradesco maintains a positive outlook for 2014, citing favorable prospects in banking and insurance sectors driven by social mobility and job creation. The bank expects credit volume to grow at sustainable rates with reduced risk exposure.
Risks and Contingencies:
- Macroeconomic: Risks include the reduction of U.S. monetary stimuli, potential slowdown in the Chinese economy, and volatility in commodity prices.
- Regulatory: The bank is adapting to Basel III capital requirements and new Brazilian Central Bank reserve requirement rules.
- Legal/Tax: Significant tax contingencies remain, though the Refis program resolved a portion of these liabilities. Ongoing litigation regarding inflation adjustments on savings accounts and tax constitutionality continues.
Investor Verification Checklist
- Verify the sustainability of the 5.9% net income growth given the 1.2 percentage point decline in ROAE.
- Confirm the impact of the R$4.5 billion in non-recurring tax and reserve reversals on the "Adjusted" vs. "Book" income figures.
- Monitor the trend in the Efficiency Ratio, which increased to 42.1% (worsened) due to higher operating costs and lower non-interest financial margins.
- Assess the quality of the 10.8% loan growth, specifically the concentration in Individuals and SMEs, against the backdrop of improving delinquency rates.
- Review the 2014 guidance assumptions regarding interest rate spreads and fee income in the context of the projected 10.75% Selic rate.