BBD

Business Context and Reporting Period

Company: Banco Bradesco S.A. (Bank Bradesco)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter and First Half ended June 30, 2010
Context: Bradesco reported strong growth in the first half of 2010, driven by expansion in loan portfolios, improved asset quality, and robust performance in its insurance and pension segments. The bank operates an extensive network in Brazil, including branches, ATMs, and correspondent banking points.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Adjusted Net Income for the first half of 2010 increased 16.4% year-over-year (from R$3.952 billion in 1H09). Second-quarter adjusted net income rose 14.3% sequentially from Q1 2010.
• Asset Growth: Total Assets grew 15.7% year-over-year to R$558.1 billion. The Loan Portfolio expanded 15.0% year-over-year, with Individuals up 20.7% and Corporate up 12.0%.
• Asset Quality: The delinquency ratio for loans over 90 days overdue improved to 4.0% (down from 4.6% in Q2 2009). The coverage ratio for loans over 90 days reached a record high of 188.5%.
• Expense Management: Expenses with Allowance for Loan Losses (PLL) decreased 26.0% year-over-year despite loan growth, reflecting improved credit quality. Administrative and Personnel expenses increased 22.7% and 15.9% respectively year-over-year, driven by organic growth and the Banco Ibi merger.
• Insurance Segment: Net income from insurance, private pension, and savings bonds grew 9.0% year-over-year to R$1.404 billion. The combined ratio improved to 84.7%.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expects moderate but robust GDP growth in Brazil for the remainder of 2010, forecasting 7.5% growth for the year. Inflation (IPCA) is expected to remain around 5.5%, with the Selic rate potentially rising to 11.25% by year-end.

2010 Guidance Targets

• Loan Portfolio Growth: 21% to 25% (Individuals: 16-20%; Corporate: 25-29%)
• Financial Margin: 14% to 18% growth
• Fee and Commission Income: 7% to 11% growth
• Operating Expenses: 9% to 13% growth
• Insurance Premiums: 16% to 20% growth

Risks and Contingencies

• Macroeconomic Risks: Global instability, specifically sovereign debt concerns in Europe and a potential slowdown in China's economy, could impact commodity demand and Brazil's external deficit.
• Interest Rates: Rising interest rates in Brazil to combat inflation may affect loan demand and funding costs.
• Market Volatility: Unrealized gains decreased in Q2 2010 due to a drop in the Ibovespa index (-13.4%), affecting equity investments.

Unusual Items and Transactions

• Acquisitions: Completed acquisition of controlling interest in Ibi Mexico (R$297 million) and acquired stakes in Cielo S.A. (2.09% for R$431.7 million) and CBSS (10.67% for R$141.4 million) in July 2010.
• Partnerships: Signed a Memorandum of Understanding with Banco do Brasil to manage the "Elo" credit card brand.
• Non-Recurring Events: Adjusted Net Income excludes non-recurring items such as tax credits, provisions for civil contingencies, and partial sale results from prior periods.

Investor Verification Checklist

• Adjusted vs. Book Income: Verify the reconciliation between Book Net Income (R$4.508 billion) and Adjusted Net Income (R$4.602 billion) to understand the impact of non-recurring items like tax credits and provisions.
• Asset Quality Trends: Confirm the sustainability of the declining delinquency ratio (4.0%) and the high coverage ratio (188.5%) in the context of rising interest rates.
• Expense Growth: Analyze the 22.7% year-over-year increase in administrative expenses to ensure it aligns with revenue growth and the efficiency ratio target.
• Capital Adequacy: Review the Capital Adequacy Ratio (15.9%) and Tier I Capital (13.9%) to assess the buffer against potential credit losses or regulatory changes.
• Guidance Realism: Compare the 2010 guidance for loan portfolio growth (21-25%) against current macroeconomic forecasts for Brazil's GDP and credit expansion.