Business Context and Reporting Period
This Form 6-K filing by Banco Bradesco S.A. (Bradesco) reports on the period ending June 30, 2010, incorporating a Fitch Ratings Full Rating Report dated June 7, 2010, and financial data through March 31, 2010. Bradesco is a leading Brazilian financial conglomerate with a diversified franchise in banking, insurance, and private pensions. The bank maintains a conservative corporate culture and a vast distribution network of over 71,000 points of sale. Fitch Ratings assigned a BBB Long-Term Foreign Currency Issuer Default Rating (IDR) with a Stable Outlook, constrained by Brazil's country ceiling.
Key Financial Metrics
| Metric | Q1 2010 (BRLm) | 2009 Full Year (BRLm) | Q1 2010 (USDm) |
|---|---|---|---|
| Total Assets | 532,626.1 | 506,223.1 | 295,748.9 |
| Net Income | 2,120.4 | 8,037.0 | 1,177.4 |
| Return on Equity (ROE) | 19.89% | 20.84% | - |
| Return on Assets (ROA) | 1.66% | 1.67% | - |
| Capital Adequacy Ratio | 16.80% | 17.80% | - |
| Loans Overdue >60 Days | 5.3% (Mar 2010) | 5.7% (Dec 2009) | - |
| Reserve Coverage | 151% | 148.6% | - |
Liquidity and Funding: The bank maintains solid liquidity ratios, with a significant base of retail deposits comprising approximately 60% of total deposits. Total deposits grew 20.3% in 2009. The bank holds substantial government securities to meet liquidity requirements and regulatory reserves.
Material Changes vs. Prior Period
- Asset Quality Improvement: Loans overdue for more than 60 days declined to 5.3% in March 2010 from a peak of 5.9% in September 2009 and 5.7% in December 2009, reflecting economic recovery.
- Profitability Trends: While Q1 2010 Net Income (BRL 2.12bn) was lower than the full-year 2009 total (BRL 8.04bn), recurring profit in Q1 2010 increased 9.8% year-over-year. The 2009 full year included BRL 426m in extraordinary net earnings.
- Loan Growth: Credit growth in 2009 was 6.1%, below the target of 8-12%, due to a decline in large corporate lending. However, Q1 2010 saw loan growth of 4% compared to the previous quarter, with strong performance in payroll deductible loans (+38.2%) and credit cards (+37.2%).
- Cost Efficiency: The cost-to-revenue ratio improved to 48.6% in 2009 from 55.1% in 2008, outperforming the peer average.
Guidance, Outlook, and Risks
Outlook and Guidance: Management projects credit operations to increase between 21% and 25% in 2010, supported by projected Brazilian GDP growth above 5%. The bank aims to maintain profitability around 20% in 2010. Fitch expects sustainable returns, though potentially stabilized below pre-crisis highs due to margin pressure from single-digit interest rates and increased competition.
Strategic Initiatives: Bradesco is expanding its retail and SME segments. Notable activities include the acquisition of Banco IBI S.A. in 2009 to boost credit card volume and a memorandum of understanding with Banco do Brasil to integrate credit card operations. The bank is also increasing its network of banking correspondents.
Risks and Contingencies:
- Margin Pressure: Resurgent credit demand and lower interest rates may compress net interest margins, offset partially by economies of scale.
- Provisions: Loan loss provisions remain a significant variable, though expected to decrease relative to 2009 peaks.
- Regulatory Changes: New local rules in 2010 regarding the treatment of credit provisions in regulatory capital and operational risk allocation for non-financial companies may impact capital ratios.
- Country Risk: Ratings are constrained by Brazil's sovereign ceiling; deterioration in the operating environment or delinquencies could pressure ratings.
Investor Verification Checklist
- Verify the sustainability of the 21-25% credit growth target for 2010 amidst competitive pressure on spreads.
- Monitor the trend of loans overdue >60 days to ensure it continues declining toward the historical 4.0% level.
- Assess the impact of new 2010 regulatory capital rules on the reported 16.80% capital adequacy ratio.
- Review the integration progress and financial impact of the Banco IBI acquisition and the potential joint venture with Banco do Brasil.
- Confirm the stability of the 151% reserve coverage ratio against potential future loan loss provisions.