Business Context and Reporting Period
Company: Banco Bradesco S.A. (Bank Bradesco)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2020
Business Overview: Bradesco is a leading private-sector universal bank in Brazil, operating a prudential conglomerate that includes commercial banking, investment banking, leasing, insurance, pension plans, and asset management. The financial statements are prepared in accordance with Brazilian Central Bank (Bacen) Resolution No. 4,280/13.
Key Financial Metrics
| Metric (R$ Thousands) | June 30, 2020 | Dec 31, 2019 |
|---|---|---|
| Total Assets | 1,281,824,077 | 1,128,694,093 |
| Total Liabilities | 1,146,629,224 | 994,908,405 |
| Total Equity | 135,194,853 | 133,785,688 |
| Net Income | 6,888,141 | 11,862,521 (Prior Year H1) |
| Net Revenue from Financial Intermediation | (10,194,707) | 34,261,728 (Prior Year H1) |
| Expected Credit Loss Expense | (15,549,313) | (10,577,361) (Prior Year H1) |
| Cash and Cash Equivalents | 161,293,513 | 61,399,815 |
| Loans Portfolio | 421,558,639 | 376,438,407 |
| Basel Capital Ratio | 15.0% | 16.5% |
Material Changes vs. Prior Period
- Net Income Decline: Net income for the first half of 2020 was R$6.89 billion, a significant decrease from R$11.86 billion in the same period of 2019. This was primarily driven by a net loss from financial intermediation of R$10.19 billion in 2020, compared to a profit of R$34.26 billion in 2019.
- Derivative Losses: The bank recorded a net loss on derivative financial instruments of R$19.95 billion in H1 2020, compared to a loss of R$0.16 billion in H1 2019. This was largely due to exchange rate variations and hedging activities related to foreign investments.
- Increased Credit Provisions: The expense for expected credit losses associated with credit risk increased to R$15.55 billion in H1 2020 from R$10.58 billion in H1 2019, reflecting the economic impact of the COVID-19 pandemic.
- Liquidity Expansion: Cash and cash equivalents more than doubled to R$161.29 billion from R$61.40 billion at year-end 2019, bolstered by operating cash flows of R$111.13 billion.
- Shareholder Equity: Total equity increased slightly to R$135.19 billion, supported by a capital increase of R$4.0 billion via bonus shares and retained earnings, despite the lower net income.
Outlook, Risks, and Management Commentary
- COVID-19 Impact: Management highlights the pandemic as a major source of uncertainty, leading to increased risk aversion, exchange rate volatility, and potential deterioration in loan quality. The bank has increased provisions for expected credit losses to absorb potential impacts from a worsening economic scenario.
- Regulatory Measures: The bank notes various Brazilian government and Central Bank measures adopted to mitigate the crisis, including interest rate cuts, reduced capital requirements, and facilities for loan renegotiation (Resolution No. 4,782/20).
- Operational Continuity: Bradesco activated its Business Continuity Plan (BCP), with approximately 90% of headquarters employees and 50% of branch employees working remotely. The bank maintains full operational capacity.
- Key Risks:
- Credit Risk: Anticipated increase in loan arrears and challenges in realizing collateral.
- Market Risk: Volatility in the market value of financial instruments, particularly those issued by private companies.
- Liquidity Risk: Potential increase in funding costs due to market volatility.
- Legal/Tax: Significant contingent liabilities related to tax, civil, and labor lawsuits (totaling R$21.08 billion in provisions).
- Acquisitions: The bank is in the process of acquiring BAC Florida Bank in the United States for approximately US$500 million to expand services for high-net-worth clients.
Investor Verification Checklist
- Credit Quality Trends: Verify the evolution of non-performing loans (NPLs) and the adequacy of the R$43.09 billion allowance for loan losses in light of the ongoing pandemic.
- Derivative Exposure: Review the R$19.95 billion loss on derivatives to understand the specific hedging strategies and the impact of exchange rate fluctuations on foreign investments.
- Liquidity Position: Confirm the sustainability of the R$161.29 billion cash position and the bank's ability to maintain liquidity under stress scenarios.
- Regulatory Capital: Monitor the Basel ratio (currently 15.0%) to ensure it remains well above minimum regulatory requirements despite increased provisioning.
- Legal Provisions: Assess the status of major tax and civil litigation, particularly regarding PIS/COFINS and economic plan adjustments, which represent significant contingent liabilities.