Business Context and Reporting Period
This Form 6-K filing covers Banco Bradesco S.A.'s economic and financial performance for the third quarter and the first nine months ended September 30, 2012. Bradesco operates as a universal bank in Brazil with significant operations in insurance, pension plans, and capitalization bonds. The reporting period reflects a global environment of monetary stimulus and a recovering Brazilian economy, with the bank maintaining a positive long-term outlook.
Key Financial Metrics
| Metric | 9 Months 2012 | 9 Months 2011 | 3Q 2012 | 3Q 2011 |
|---|---|---|---|---|
| Adjusted Net Income (R$ million) | 8,605 | 8,427 | 2,893 | 2,864 |
| Financial Margin (R$ million) | 32,684 | 29,063 | 10,955 | 10,230 |
| Fee and Commission Income (R$ million) | 12,837 | 11,137 | 4,438 | 3,876 |
| Allowance for Loan Losses (R$ million) | (9,804) | (7,576) | (3,303) | (2,779) |
| Total Assets (R$ billion) | 856.3 | 722.3 | 856.3 | 722.3 |
| Shareholders' Equity (R$ billion) | 66.0 | 53.7 | 66.0 | 53.7 |
| Return on Average Equity (ROAE) | 19.9% | 22.4% | 20.4% | 22.4% |
| Return on Average Assets (ROAA) | 1.4% | 1.7% | 1.4% | 1.7% |
| Capital Adequacy Ratio | 16.0% | 14.7% | 16.0% | 14.7% |
| Delinquency Ratio (>90 days) | 4.1% | 3.8% | 4.1% | 3.8% |
| Efficiency Ratio | 42.1% | 42.7% | 42.1% | 42.7% |
Material Changes vs. Prior Period
- Profitability: Adjusted Net Income for the first nine months of 2012 increased by 2.1% (R$178 million) compared to the same period in 2011. This growth was driven by higher fee and commission income and lower allowance for loan loss expenses, partially offset by higher personnel and administrative costs.
- Loan Portfolio: The Expanded Loan Portfolio grew 11.8% year-over-year to R$371.7 billion. Corporate loans grew 13.3%, while individual loans grew 8.7%. Real estate financing and payroll-deductible loans were key growth drivers.
- Asset Quality: The delinquency ratio over 90 days increased slightly to 4.1% from 3.8% in the prior year. However, coverage ratios remained robust at 179.0% for loans overdue over 90 days.
- Insurance Segment: Income from insurance, pension plans, and capitalization bonds rose 17.3% year-over-year. Written premiums increased 17.3%, driven by strong performance across all segments.
- Costs: Personnel expenses increased 14.2% year-over-year due to salary adjustments from collective bargaining agreements and a net increase in staff. Administrative expenses rose 7.0% due to business volume growth and the opening of new service points.
Guidance, Outlook, and Risks
- 2012 Guidance: Management projects the following growth ranges for the full year 2012:
- Loan Portfolio: 14% to 18%
- Financial Margin: 10% to 14%
- Fee and Commission Income: 10% to 14%
- Operating Expenses: 8% to 12%
- Insurance Premiums: 15% to 19%
- Economic Outlook: Bradesco maintains a positive long-term outlook for Brazil, citing ample foreign reserves, pre-salt oil exploration, and major sporting events as unique opportunities. The bank expects the recovery in the Brazilian economy to be sustainable, supported by government stimuli.
- Risks and Contingencies:
- Provisions: Significant provisions exist for tax risks (R$14.1 billion), civil claims (R$3.6 billion), and labor claims (R$2.5 billion). The bank notes that while some tax disputes have a good chance of a favorable outcome, provisions are recorded in full.
- Market Risk: The bank manages exposure to interest rates, exchange rates, and price indexes. Sensitivity analysis indicates potential impacts on net income from adverse market movements, though the bank utilizes hedging strategies.
- Regulatory: Changes in Brazilian Central Bank regulations regarding compulsory deposits and capital adequacy requirements are monitored closely.
Investor Verification Checklist
- Non-Recurring Events: Verify the impact of the R$2.1 billion gain from extending terms of available-for-sale securities and the corresponding R$2.1 billion expense for additional technical reserves in the insurance segment, which offset each other in the adjusted income statement but affect book income.
- Provision Adequacy: Review the coverage ratios for non-performing loans (179.0% for >90 days) against the rising delinquency trend to assess credit risk management.
- Cost Control: Monitor the Efficiency Ratio (42.1%) and the trajectory of personnel expenses, which are rising due to collective bargaining agreements, to ensure they do not erode margins.
- Capital Position: Confirm the Capital Adequacy Ratio (16.0%) remains well above regulatory minimums despite the expansion of the loan portfolio.
- Insurance Solvency: Verify the solvency of the insurance group, which complies with Solvency II standards and maintains a leverage of 2.3 times shareholders' equity.