BANK BRADESCO annual report, Q4 FY2023

Business context and reporting period

Banco Bradesco S.A. is a Brazilian financial-services group operating primarily in Brazil through banking and insurance, pension and capitalization businesses. This is its audited annual report on Form 20-F for the fiscal year ended December 31, 2023, prepared under IFRS as issued by the IASB. It is not a standalone fourth-quarter earnings report; the filing does not provide a clear set of Q4-only results.

Unless noted otherwise, financial amounts below are in Brazilian reais (R$) and rounded to billions. KPMG issued an unqualified opinion on the IFRS financial statements and reported effective internal control over financial reporting as of year-end.

Financial performance and position

Profit and margins: Profitability weakened as funding costs rose faster than interest income. Management cited higher costs for time deposits, repurchase agreements, issued securities and insurance liabilities. Net interest income fell despite growth in average interest-earning assets.

Credit quality: Loans overdue more than 90 days were 5.1% of the portfolio at year-end, versus 4.3% in 2022. Expected credit losses were R$53.7bn, equal to 8.5% of gross loans, compared with R$59.2bn and 9.0% a year earlier. Coverage of loans more than 90 days past due was 164.6%, down from 209.4%. Net loan write-offs rose to R$35.7bn from R$12.9bn in 2022.

Cash flow and funding: Operating activities used R$0.2bn of cash in 2023, compared with R$49.8bn provided in 2022. Investing activities provided R$83.6bn and financing activities used R$23.1bn; cash and cash equivalents increased R$60.4bn. Deposits were the principal funding source. Year-end balances included R$272.4bn of securities sold under repurchase agreements, R$245.0bn of securities issued and R$50.3bn of subordinated debt. These funding balances are not a single measure of total debt.

Segments: Banking segment net income was R$6.0bn, down 56.8%; insurance, pension and capitalization segment net income was R$8.8bn, up 35.3%. The insurance segment reported R$106.5bn of insurance income in the segment disclosures; IFRS presentation under IFRS 17 differs from segment reporting under Brazilian accounting rules.

Material changes versus the prior comparable period

• Net income declined 32.4%, largely reflecting lower net interest income and higher expected credit losses.
• Funding expense increased 19.6%, while interest income rose 5.4%; the net interest margin contracted by 1.2 percentage points.
• Fair-value gains on financial assets and liabilities through profit or loss rose to R$10.9bn from R$0.8bn, partly offsetting other pressures.
• Gross profit from insurance and pension plans increased 29.8% to R$5.2bn. The claims ratio was 80.3%, broadly unchanged from 80.2% in 2022.
• Gross customer loans contracted 4.1%, driven by a 10.0% decline in corporate lending; individual loans increased 0.7%.
• The group adopted IFRS 17 from January 1, 2023, with 2022 re-presented under the new standard. The 2021 insurance figures are not directly comparable on this basis.

Outlook, management commentary, risks and unusual items

Management described 2023 as challenging and 2024 as a transitional year. It is accelerating a multi-year strategy focused on customer experience, digital transformation, organizational changes, efficiency and technology. Management expects some results in 2024 and says the benefits and initial effects on profitability are expected to emerge more substantially from 2025; it did not provide numerical earnings guidance.

• Macroeconomic exposure: Brazil’s 2023 inflation was 4.62%; the SELIC rate ended the year at 11.75%, after reaching 13.75% in 2022. Inflation, interest-rate changes, currency movements, slower growth, fiscal uncertainty and geopolitical shocks may affect margins, credit quality and funding.
• Credit and market risk: Rising delinquencies, borrower defaults, collateral recovery challenges and fair-value movements in securities and derivatives could increase losses. Financial assets at fair value through profit or loss and through other comprehensive income represented 31.2% of assets, according to the filing’s risk disclosures.
• Cybersecurity incidents: The filing reports a 2022 data-access incident at subsidiary Banco Bradesco Financiamentos and a July 2023 ransomware incident at Bradesco Securities, Inc.’s New York branch. The latter involved unauthorized access to certain employee, administrative and institutional-client data; the filing says it did not interrupt operations or affect other Bradesco units.
• Legal and tax contingencies: Provisions for probable losses totaled R$20.3bn at year-end. Possible-loss claims included R$46.7bn of tax and social-security matters and R$10.0bn of civil claims; these are possible exposures, not booked provisions. The STF’s pending economic-plan litigation may affect costs, and the company says the impact of Brazil’s tax reform cannot yet be estimated.
• Unusual items and accounting: The 2023 income tax line was a benefit of R$4.3bn, versus an expense of R$3.2bn in 2022; management attributed the variation primarily to lower pretax income and a higher interest-on-equity tax benefit. Other operating expenses included R$1.0bn of restructuring provisions. IFRS 17 changed insurance accounting and required new or modified controls.
• Capital allocation: Bradesco’s bylaws provide for a minimum distribution of 30% of adjusted annual net income, subject to legal and regulatory conditions. The filing reports R$11.3bn of 2023 interest on equity, including R$5.0bn approved for payment in June 2024.

Most important facts an investor should verify

• Review the audited IFRS statements and notes for the basis of net income, the R$4.3bn income-tax benefit, and the effects of IFRS 17.
• Confirm credit trends: 90-day delinquency, net write-offs, expected-loss coverage and the performance of recent loan vintages.
• Assess funding costs, deposit mix, repurchase-agreement reliance, capital ratios and LCR/NSFR against regulatory minimums and prior periods.
• Check subsequent filings for 2024 performance, progress and costs of the transformation plan, and any quantified profitability guidance.
• Monitor developments in significant possible-loss litigation, tax reform, credit-card interest-rate regulation and the reported cybersecurity incidents.
• Verify the timing and amount of approved interest-on-equity payments and any changes to buyback activity or capital-distribution constraints.