Banco Bradesco — FY2017 Form 20-F summary
Business context and reporting period
Banco Bradesco S.A. is a Brazilian banking and financial-services group with banking and insurance, pension-plan and capitalization-bond segments. This is the annual report for the year ended December 31, 2017, not a standalone fourth-quarter report; the supplied filing text does not provide a clear set of Q4-only results. Consolidated financial statements were audited by KPMG and prepared under IFRS.
Key financial metrics
| Metric | FY2017 / Dec. 31, 2017 | Comparable period |
|---|---|---|
| Net interest income | R$50.6 billion | R$56.7 billion in 2016; down 10.6% |
| Net income | R$17.3 billion | R$18.0 billion in 2016; down 3.8% |
| Net income attributable to controlling shareholders | R$17.1 billion | R$17.9 billion in 2016; down 4.5% |
| Income before income taxes | R$23.7 billion | R$31.9 billion in 2016; down 25.6% |
| Net fee and commission income | R$22.7 billion | R$20.3 billion in 2016; up 11.8% |
| Retained insurance and pension-plan premiums | R$70.0 billion | R$65.0 billion in 2016; up 7.7% |
| Net impairment losses on loans | R$16.9 billion | R$15.4 billion in 2016; up 9.8% |
| Net interest margin | 4.9% | 5.7% in 2016 |
| Return on average equity attributable to controlling shareholders | 15.7% | 18.6% in 2016 |
| Return on average total assets | 1.4% | 1.5% in 2016 |
| Total assets / total equity | R$1,224.4 billion / R$117.7 billion | R$1,192.0 billion / R$105.5 billion in 2016 |
| Customer loans, gross / net | R$373.8 billion / R$346.8 billion | Gross R$392.1 billion in 2016; down 4.7% |
| Customer deposits | R$262.0 billion | R$232.7 billion in 2016; up 12.6% |
| Subordinated debt | R$50.2 billion | R$52.6 billion in 2016 |
| Cash flows: operating / investing / financing | R$35.6 billion / (R$18.2 billion) / (R$43.3 billion) | Net decrease in cash equivalents of R$26.0 billion |
| Basel III total capital ratio / Tier 1 | 17.1% / 13.1% | 15.4% / 12.0% in 2016 |
| Short-term liquidity coverage ratio (LCR) | 156.2% average for 2017 | 181.8% average for 2016 |
Cash and cash equivalents shown as a balance-sheet line were R$81.7 billion at year-end. The cash-flow statement reports R$156.1 billion at year-end under its cash-equivalent definition, which includes short-term interbank investments.
Material changes versus 2016
- Lower interest rates reduced yields on interest-earning assets and drove most of the 10.6% decline in net interest income; the average net interest margin fell from 5.7% to 4.9%.
- IFRS net impairment expense increased 9.8%, while the gross customer-loan portfolio contracted 4.7%, principally from lower corporate lending. Individual loans increased 1.8%.
- Fees and commissions rose 11.8%, and retained insurance and pension-plan premiums rose 7.7%, partially offsetting weaker interest income and trading gains.
- Personnel expense rose 21.9% and depreciation and amortization rose 24.9%. The filing attributes higher personnel and administrative costs partly to the HSBC Brasil integration; depreciation included amortization of acquisition-related goodwill.
- The 90-day BR GAAP delinquency ratio improved to 4.7% from 5.5%. Under the filing’s IFRS measure, loans overdue more than 60 days were 5.6% of gross loans, versus 6.0%; impairment coverage of these loans increased to 130.2% from 106.0%.
- Customer deposits grew, while funds from securities issued declined to R$135.2 billion from R$151.1 billion and subordinated debt declined to R$50.2 billion from R$52.6 billion.
Outlook, commentary, risks and unusual items
- Outlook: No specific Bradesco earnings or loan-growth guidance is provided in the supplied text. Management expected capital expenditures in 2018 and 2019 not to be substantially greater than historical levels and anticipated funding them from internal resources. The filing describes expected global economic growth, but this is not company-specific financial guidance.
- Brazilian conditions: Brazil’s GDP grew 1.0% in 2017, IPCA inflation was 3.0%, and the SELIC rate ended the year at 7.0%. Management identifies the Brazilian economy, interest rates, inflation, exchange rates and political uncertainty as material influences on credit quality, margins, funding and securities values.
- Acquisition and restructuring: Bradesco completed the R$16 billion HSBC Brasil acquisition in 2016 and continued integration in 2017. A voluntary severance program attracted approximately 7,400 employees and cost R$2.3 billion; management estimated annual personnel-expense reductions of R$1.5 billion.
- Accounting transition: Management estimated that IFRS 9 adoption from January 1, 2018 would reduce equity by approximately R$2.2 billion, net of tax, and produce R$4.7 billion in additional gross expected-credit-loss provisions, including commitments and financial guarantees. These are estimates, not reported 2017 results.
- Legal and regulatory matters: Provisions for litigation totaled R$18.5 billion at year-end. Possible-loss tax assessments not provisioned totaled R$18.9 billion. The filing describes Operation Zelotes proceedings and a U.S. investor class action for which exposure could not then be estimated. In Operation Greenfield, subsidiaries agreed to pay R$113 million in December 2017 and the payment was made; they did not admit civil or criminal liability. A proposed settlement of Petrobras-related underwriting proceedings remained subject to judicial ratification. A savings-account inflation-adjustment settlement was affirmed by Brazil’s Supreme Court in March 2018 but remained subject to appeals and customer participation.
- Other risks: Bradesco’s results are heavily concentrated in Brazil; risks include borrower defaults, market and foreign-exchange exposure, liquidity and funding availability, regulatory changes, competition, cyber and operational disruption, and uncertainty in litigation and insurance claims. The filing also notes Fundação Bradesco’s control of 57.0% of common shares at year-end and that no Board member was considered independent under the cited Brazilian-law criteria.
Investor facts to verify
- Confirm the Q4-only results separately: this annual filing reports full-year results, not a clear standalone 2017 fourth quarter.
- Reconcile IFRS results and loan-loss measures with BR GAAP disclosures, including the basis for the 4.7% delinquency ratio and the 5.6% IFRS impaired-loan ratio.
- Track realized credit quality, provisioning and recoveries against the 2017 loan contraction and reported 130.2% impairment coverage.
- Verify IFRS 9’s actual opening-equity and provision effects against management’s estimates.
- Assess whether HSBC integration synergies and the severance program deliver the stated recurring savings, and monitor litigation developments and provisions.
- Check capital and liquidity ratios, funding mix, and the difference between balance-sheet cash and cash equivalents and the cash-flow-statement measure.