Banco Bradesco S.A. — 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide a clear standalone Q4 income statement. Consolidated financial statements are prepared under IFRS as issued by the IASB.
Business context and key financial metrics
Bradesco is a Brazilian banking and financial-services group with banking and insurance, pension and capitalization businesses. Brazil generated 96.9% of reported interest and fee revenues. Amounts below are in Brazilian reais (R$).
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets, year-end | R$1,305.5 billion | R$1,224.4 billion |
| Loans to customers, gross | R$411.5 billion | R$373.8 billion |
| Customer deposits | R$340.7 billion | R$262.0 billion |
| Total equity, year-end | R$124.7 billion | R$117.7 billion |
| Net interest income | R$66.8 billion | R$50.6 billion |
| Net income attributable to controlling shareholders | R$16.6 billion | R$17.1 billion |
| Cash and cash equivalents, year-end | R$110.2 billion | R$156.1 billion |
Net interest margin was 6.2%, up from 4.9%; net yield on interest-earning assets was 5.7%, up from 4.1%. IFRS return on average equity attributable to controlling shareholders was 13.4%, compared with 15.7% in 2017.
Material changes versus the prior year
- Net interest income rose 31.9%, mainly because lower funding costs more than offset lower average yields on interest-earning assets.
- Net income attributable to controlling shareholders fell 3.0%; total net income fell 3.3%. Income before tax declined 18.1%.
- Non-interest income fell 22.8%. A major factor was the shift from a R$9.6 billion gain on financial instruments held for trading in 2017 to a R$11.7 billion loss on financial instruments at fair value through profit or loss in 2018. The new IFRS 9 categories affect comparability.
- Customer loans grew 10.1%. Loans to individuals and corporations increased, while the customer loan portfolio had contracted in 2017.
- Delinquency over 60 days declined to 4.2% of gross customer loans from 5.6%. Bradesco separately reported BR GAAP delinquency over 90 days of 3.5%, down from 4.7%.
- Customer deposits rose 30.1%, with time deposits increasing to R$195.4 billion from R$125.6 billion.
Cash flow, funding, capital and liquidity
- Cash used in operating activities was R$6.5 billion, versus R$35.6 billion provided in 2017. The filing attributes the 2018 use principally to an increase in customer loans and other assets, partly offset by higher customer deposits.
- Cash used in investing activities was R$34.5 billion; cash used in financing activities was R$5.6 billion. The resulting decrease in cash and cash equivalents was R$46.6 billion.
- Major funding sources included customer deposits, R$190.9 billion of repurchase-agreement obligations, R$148.0 billion of securities issued and R$53.6 billion of subordinated debt. Repurchase-agreement obligations declined from R$233.5 billion.
- The Basel III total capital ratio was 17.8%, up from 17.1%; Tier 1 was 13.7%, and common equity was 12.3%. The filing states the total ratio exceeded the applicable 2018 regulatory requirement.
- Fourth-quarter average Liquidity Coverage Ratio (LCR) was 171.8%; year-end Net Stable Funding Ratio (NSFR) was 126.1%. The filing describes both ratios as meeting applicable requirements.
Outlook, management commentary, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management describes a strategy focused on organic growth, digital investment, asset quality, operating efficiency, insurance growth and selective alliances or acquisitions.
- Management cited Brazilian GDP growth of 1.1% in 2018, IPCA inflation of 3.8%, and a year-end SELIC rate of 6.5%. It highlighted fiscal uncertainty, including the pending pension reform, and global trade tensions as risks to the outlook.
- Bradesco adopted IFRS 9 on January 1, 2018, replacing the incurred-loss model with expected credit losses and changing financial asset classification. The adoption reduced opening equity by R$2.1 billion, net, and makes some prior-period comparisons non-comparable.
- Expected credit losses for customer loans were R$31.1 billion at year-end, or 7.6% of gross customer loans; coverage of loans overdue more than 60 days was 178.7%. The filing says estimates depend on models, economic scenarios and management judgment.
- The real depreciated 17.1% against the U.S. dollar in 2018. Bradesco reported net foreign-currency exposure of R$48.2 billion, or 38.6% of net assets, after derivatives; adverse currency movements could affect results.
- Provisions for labor, civil and tax matters totaled R$19.8 billion. In addition, tax and social-security cases classified as possible losses totaled R$20.7 billion. The filing does not characterize these possible-loss amounts as probable or provide a single expected payment amount.
- Two executives remained defendants in Operation Zelotes proceedings; a U.S. securities class action and a Brazilian administrative inquiry were also disclosed. Bradesco stated that it found no evidence of unlawful conduct by its representatives. It also disclosed unresolved litigation related to historical savings-account inflation adjustments and Petrobras underwriting proceedings.
- Other key risks include Brazilian macroeconomic and regulatory changes, credit deterioration, market losses on securities, competition from fintechs, cyber and data-protection failures, insurance claims uncertainty, and controlling-shareholder influence. Fundação Bradesco held 59.1% of common shares at December 31, 2018; the filing states none of the directors was considered independent under the referenced criteria.
Important facts for investors to verify
- Reconcile the R$11.7 billion fair-value trading loss and assess the effect of IFRS 9 on year-over-year comparability and reported earnings.
- Review the expected-credit-loss assumptions, stage migration, write-offs and coverage, particularly as the loan book grows.
- Assess the sustainability of deposit growth, reliance on short-term repurchase funding, and the decline in cash and cash equivalents.
- Confirm capital and liquidity ratios against the applicable regulatory definitions and requirements, and evaluate the effect of currency exposure.
- Review the status, provision treatment and potential financial impact of tax, labor, civil, Operation Zelotes, Petrobras and savings-plan matters.
- Consider governance and shareholder rights, including Fundação Bradesco’s control of common shares and the limited voting rights of preferred shares and ADS holders.