Business Context and Reporting Period
This Form 6-K filing by Banco Bradesco S.A. (Bradesco) covers the financial results for the first semester ended June 30, 2017. The reporting period includes the full consolidation of HSBC Bank Brasil S.A. and its subsidiaries, which was completed in July 2016. Bradesco operates as a universal bank in Brazil with significant operations in insurance, pension plans, and asset management. The company reported a market capitalization of R$169.6 billion as of June 2017.
Key Financial Metrics
| Metric | Value (R$) | Comparison |
|---|---|---|
| Adjusted Net Income (1H 2017) | 9.352 billion | +13.0% vs. 1H 2016 |
| Book Net Income (1H 2017) | 7.982 billion | -3.3% vs. 1H 2016 |
| Total Assets (June 2017) | 1.291 trillion | +16.8% vs. June 2016 |
| Shareholders' Equity (June 2017) | 106.807 billion | +10.8% vs. June 2016 |
| Expanded Loan Portfolio | 493.566 billion | +10.3% vs. June 2016 |
| Assets Under Management | 1.918 trillion | +20.7% vs. June 2016 |
| Return on Average Adjusted Equity | 18.2% | Annualized |
| Return on Average Assets | 1.4% | Annualized |
| 90-Day Delinquency Ratio | 4.9% | -0.7 p.p. vs. March 2017 |
| Basel III Ratio (Total) | 16.7% | +1.4 p.p. vs. March 2017 |
| Efficiency Ratio (12-month) | 41.5% | +4.1 p.p. vs. 1H 2016 |
Material Changes vs. Prior Period
- Profitability: Adjusted Net Income increased by R$1.078 billion (13.0%) year-over-year, driven by higher fee and commission income, net interest income, and insurance income, partially offset by higher personnel and administrative expenses. Book Net Income decreased slightly due to non-recurring events, primarily goodwill amortization (R$1.119 billion) and regulatory changes related to Cielo.
- Loan Portfolio: The expanded loan portfolio grew 10.3% annually, with a 15.5% increase in operations with individuals and a 7.7% increase with companies. Quarterly growth was flat (-1.8%) due to low credit demand.
- Asset Quality: The 90-day delinquency ratio improved to 4.9% from 5.6% in the prior quarter. The coverage ratio for loans overdue more than 90 days stood at 202.5%.
- Insurance Segment: Written premiums and contributions grew 12.4% year-over-year. Net income from insurance, pension, and capitalization bonds increased 3.9% to R$2.644 billion.
- Capital: The Basel III ratio increased to 16.7%, with Tier I Capital at 12.5%, reflecting strong capital adequacy.
Guidance, Outlook, and Risks
- Guidance Revision: Management revised its 2017 guidance to reflect the full-year impact of the HSBC Brasil consolidation ("Pro-forma").
- Expanded Loan Portfolio: Revised to -5% to -1% (previously 1% to 5%).
- Net Interest Income (Interest-Earning): Revised to 2% to 6% (previously 3% to 7%).
- Fee and Commission Income: Revised to 8% to 12% (previously 12% to 16%).
- Operating Expenses: Revised to 7% to 11% (previously 10% to 14%).
- ALL Expenses: Revised to R$18 billion to R$21 billion (previously R$21 billion to R$24 billion).
- Economic Outlook: Management expects the Brazilian economy to stabilize in 2017 after a 3.6% decline in 2016. Inflation (IPCA) is projected at 3.4% for 2017, and the Selic rate is expected to reach 8.0% by year-end.
- Risks and Contingencies:
- Legal Proceedings: The company is involved in "Operation Zelotes" investigations regarding former executives. Management states there is no evidence of illegality by its representatives, and one executive was excluded from criminal proceedings. A class action lawsuit in New York regarding ADRs is pending dismissal.
- Provisions: Significant provisions exist for tax risks (R$8.1 billion), labor claims (R$5.4 billion), and civil claims (R$5.1 billion).
- Market Risks: Exposure to interest rate fluctuations, exchange rate volatility, and credit risk remains a primary concern, managed through internal models and hedging strategies.
Investor Verification Checklist
- Verify the impact of the HSBC Brasil consolidation on year-over-year comparability, as the company provides "Pro-forma" data to adjust for this.
- Review the "Adjusted Net Income" vs. "Book Net Income" reconciliation to understand the magnitude of non-recurring items, specifically goodwill amortization.
- Monitor the trend in the 90-day delinquency ratio and the adequacy of the Allowance for Loan Losses (ALL) given the economic recovery context.
- Assess the revised 2017 guidance, particularly the downward revision in loan portfolio growth and fee income expectations.
- Track the status of legal proceedings related to "Operation Zelotes" and the New York class action lawsuit for potential contingent liabilities.
- Confirm the Basel III capital ratios remain well above regulatory minimums to ensure solvency under stress scenarios.