Q3 2015 Banco Bradesco S/A Earnings Call (English)

Oct 30, 2015 AM EDT
BBDC4.SA - Banco Bradesco SA
Q3 2015 Banco Bradesco S/A Earnings Call (English)
Oct 30, 2015 / 01:00PM GMT 

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Corporate Participants
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   *  Carlos Firetti
      Banco Bradesco S.A. - Market Relations Department Director
   *  Luiz Carlos Angelotti
      Banco Bradesco S.A. - Executive Managing Director and IR Officer

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Conference Call Participants
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   *  Jorge Kuri
      Morgan Stanley - Analyst
   *  Mario Pierry
      BofA Merrill Lynch - Analyst
   *  Saul Martinez
      JPMorgan - Analyst
   *  Thiago Batista
      Itau BBA International, S.A. - Analyst
   *  Victor Galliano
      Barclays - Analyst
   *  Pedro Fonseca
      Haitong Research - Analyst
   *  Boris Molina
      Santander - Analyst

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Presentation
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Operator   [1]
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 Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's Third Quarter 2015 Earnings Results Conference Call. This call is being broadcasted simultaneously through the Internet in the website www.bradesco.com.br/ir. In that address, you can also find the presentation available for download. (Operator instructions.)

 Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management, and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to future events. So, therefore, depend on circumstances that may only not occur in the future. You therefore should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements.

 Now, I'll turn the conference over to Mr. Carlos Firetti, Market Relations Department Director.

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 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [2]
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 Good morning, everybody. Welcome to our conference call for discussing our results for the 3Q 2015. We have today with us Mr. Alexander de Silva Gluher, the Executive Vice President of Banco Bradesco, Luiz Carlos Angelotti, Executive Director and Investor Relations officer of Banco Bradesco. I now turn the presentation to Luiz Angelotti to start with the main highlights.

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [3]
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 Good morning, everybody. Thank you for participating this conference call of our (inaudible) results for the third quarter.

 In the slide two, we have the highlights. Our adjusted net income reached actually BRL 13.3 billion in the nine months of 2015, increasing 18.6%. In the third quarter, Our adjusted net income reached actually BRL4.5 billion. Our ROAE reached 21.2%. The NII earned portion increased 16% in the nine months mainly because [this is the average spreads] relate to the corporate portfolio. We [start to have this] year some increasing in the rates, and the (inaudible) will continue during this year in the -- probably the first half of next year. Then, we expect to have some new benefits in this increasing. Another thing that helped the NII grow is the [funding] management, and the gains which (inaudible) [didn't mention].

 Our efficiency ratio remained at 37.9%. This shows our higher commitment with the control of costs and efficiency and our operating coverage ratio. The [relation between] fees and the fixed costs reached at 79.1%, the best level that we have in our ratio. The fees and commission increased 12.3% in the nine months. They are growing at the [double digits]. The main effect came from the segmentation progress, that we are creating new segment in the retail base of clients. This looks like (inaudible) of 2014.

 Then, you see here we start to capture the benefits. Probably this growing in the revenues, mainly from the accounting revenues. We will continues to reach a positive 2017, 2015, and 2016. We have [now] the benefits to make that came from [the cards profits] that are growing around the 15%, so current tax gains from the [immigration] of the products, and they grow on the volumes of transactions, and they grow in the client base.

 Our corporate expense grew 7.8%, below inflation in the last 12 months, and this shows here the commitment with the costs. The total assets amounted in the end of the quarter actually BRL 1.051 trillion. Our extended loan portfolio reached actually BRL 474 billion, and something that we need to highlight, that it allows for loan loss reached to BRL 28.6 billion in this quarter. And our coverage ratio for 90 days reached [actually around 206%], one of the highest level in the Company.

 Talk about the insurance business, the net income from [the foreign exchange fee] amounted BRL 3.9 billion in the nine months, and the premiums grow [weighted] at 18.6%. Now, Carlos Firetti continues with the next slides.

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 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [4]
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 Okay. Thank you, Luiz. Now, we will go with more details in our numbers.

 In slide three, basically the comparison between our book net income and our adjusted net income. We had some important events this quarter. Basically we had an accounting gain of BRL 2.341 billion related to the revaluation of tax credits due to the increase in the social contribution tax rate from [15%] to 20%. We offset these gains with some provisions, BRL 2.222 billion in the credit related provisions, part of it additional provisions, and part of it related to generic provisions related to the revision of ratings in some specific credits that clearly do not belong to this quarter.

 Additionally, we had expenses with contingent liabilities basically related to provisions for lawsuits that are, in our view, one-off effects. With these adjustments, the adjusted net income was BRL 4.533 billion, with [an] ROAE for the quarter of 22.1%

 In slide four, adjusted net income growth for the quarter, our net income increased 0.6%, for the nine months 18.6%. For the quarter, the main drivers for this performance came from the NII, the interest earning portion of NII, that was BRL 294 million higher. Fee and commissions, that contributed with BRL 262 million, and others, BRL 228 million, mostly related to our lower tax rate in the quarter. On the negative side, we had a lower contribution from NII from the non-interest, a negative contribution from higher provision expenses, and also from operating expenses which we will detail in the next [two] slides.

 In slide five, we have a breakdown of our net income. Basically, insurance represents 29% of our earnings, the banking business 71%, credit contribute was 34%, and fee is 29%. No credits-related revenue sources represent 66% of our total (inaudible).

 In slide [five], we have our efficiency ratio. Our efficiency ratio in the quarter was 38.4%, but focusing on the accumulated for 12 months, 37.9%. That is still one of the best levels, or the best level we ever had. The operating coverage ratios that [are fees] and commissions compared to administrative and personal expenses, reached 79.1%. That is also our best level ever.

 In slide seven, we have some details of our NII, the interest earning portion and no interest earning portion. Basically, the no-interest NII was lower this quarter, BRL 26 million compared to BRL 126 million in the second Q, also related to the market volatility. Our [NIM] in the quarter continued increasing, reached 7.5% in the 12 months accumulated, growing 10 bps compared to the second Q. And the net income coming from interest increased 2.2% Q-on-Q.

 In slide eight, we analyze [specifically] the interest-earning portion of our NII. NII grew 16% year-on-year, 2.2% in the quarter. Credit intermediation margin grew 11.2% in the quarter, basically driven by a good performance on the funding side, where we have been able to improve our [markets in] funding, and also in the credit [tight], where we have been benefiting from the improvement in spreads.

 Insurance grew 32.3% in the year. It's still driven by a good performance in volumes. And securities and others in the quarter specifically came a little bit lower, mostly due to the lower IPCA inflation in the quarter. That is [an indexation] factor for part of the bonds we have in our portfolio.

 In slide nine, we have details on our credit intermediation margin. Basically, our credit intermediation margin was flat in the quarter at 11.5%. This performance was impacted by the mix effects, basically the effects -- the (inaudible) effect depreciation that increased the size of dollar inflows that has proportionately lower spreads.

 We still see the credit intermediation margins going up in the next quarter and throughout next year. Basically there is still room for repricing of our portfolio. As you can see, 48% of our loans have an average term over 30, 60 days. The average portfolio has an average term of 1.5 years, so the repricing effects will remain since spreads are actually higher. ** Basically, our net credit markets after provisions increased 1.1% in the quarter, and is growing 8.1% in the nine months.

 In slide 10, we have our numbers for our BIS ratio. Our BIS ratio in the quarter was 11.4%, a reduction compared to the second quarter. The main reason for this reduction is related to the mark-to-market in the securities portfolio, but mostly to the accumulation of tax credits first related to the revaluation of our [PPAs], and also to tax credits related to the hedge of our assets abroad. These tax credits should be consumed over the next two, three years, basically alleviating the (inaudible) capital position.

 Also, the price of assets have already improved in the quarter compared to the end of the third quarter, what also contributes to an improvement in this position. But, additionally, we see our capital position evolving organically over the next few years. We believe our capital growth more than 100 bps per year just by the accumulated profits we should have in the next two years, while risk-weighted assets that grew this quarter, mostly due to the impact of tax credits, and also the FX depreciation, will not grow that much. So, that basically give us a lot of comfort regarding our capital position. Considering the acquisition of HSBC, our BIS ratio is calculated in the 9.1% for the third quarter.

 In slide 11, we have our total assets. Total assets grew 6.4% in the last 12 months, with return on assets reaching 1.7%. Our equity grew 8.8% in the last 12 months, with ROE for the nine months reaching 21.2%.

 In slide 12, we have our expanded loan portfolio. Our expanded loan portfolio grew 6.8% in the last 12 months, 2.4% in the quarter. This was impacted by FX. Without FX, it would have grown around 1.7%. The highlights come from the corporate portfolio that grew 4.5% Q-on-Q and 12.8% year-on-year. The impacts from FX is larger in this specific portfolio. SMEs remained almost flat year-on-year. And individuals basically have been driven by payroll loans with growth of 17.9% year-on-year, and real estate financing growing 26.6% year-on-year.

 In the slide 13, we have our credit [quality] indicators. Basically, our 90-days delinquency ratio increased this quarter 9 bps for the total portfolio, well-behaved, as we have been saying. It would relate in the SME portfolio. We have an increase of 39 bps. Basically this portfolio is more sensitive to the economic (inaudible), but its increasing NPL is also related to the fact that this portfolio is not growing. Only as an example, if this portfolio were growing by 5%, actually this increase in the delinquents would be almost half of what it was.

 In the individuals portfolio, we have an increase of 22 bps. We have a good comfort -- level of comfort with this portfolio, given the change in mix. We will go a little bit deeper on that later. We believe that, for the fourth quarter, we should have a better performance for seasonal reasons. And for the future, the delinquents there should grow, but in our view gradually.

 In the corporate portfolio, we had a reduction in NPL by 14 bps, mostly due to higher write-offs, (inaudible) portfolio, and a little bit due to the FX depreciation. We believe that in this portfolio we should see delinquents ratio at least flat, going forward, in the absence of specific cases. Short-term delinquents ratio, 15 to 90 days, for the total portfolio went down 3 bps, driven by large corporates. And we had some pressure coming from the (inaudible) portfolio.

 In the portal (inaudible), we have numbers for our NPL formation and the gross provisions excluding what we considered to not recur, the additional provisions in generic non-recurrence provisions. Basically we show here that, first, the NPL creation went down in the quarter from BRL 4.4 billion in the second quarter to BRL 4 billion this quarter, and basically that our gross provisions reached 111% of the NPL creation, and very consistent to the [pattern] of provisioning we have been presenting over the last few years. That clearly shows that what we considered nonrecurring really does not belong to this quarter.

 If you turn to slide 14, we have our changing, basically what is in our view the main driver for the relatively benign performance in terms of credit [quality] we are seeing. We believe we will continue to see in the future basically compare, for instance, 2008 with now the [participation] (inaudible) is reduced from 27% to 23.6%. And more importantly, in the individuals portfolio, looking to the breakdown, you can see that the participation of less risky credits, like more (inaudible) loans, reached 37.9% in September compared to only 12.7% in 2008, while the participation of car loans went down from 43.5% to 16.5%.

 In 2008, the portfolio was growing above 30% year-on-year, with a much higher level of downpayment in the portfolio. Today, this portfolio is still shrinking, and the downpayment is around 47%. What really makes it a much more secure portfolio than it was at any other moment in the past. This is basically why we say we expect this gradual increase in delinquents for the coming quarters.

 On page 16, you have our coverage ratio. Our coverage ratio in the quarter reached 205.7%, the highest level we saw since 2007. The 60-days coverage reached 168.4%, also one of the highest levels. This give us a lot of comfort for the current environment, and we see this provision as a conservative position covered for going through the current economic scenario. Our total provisions represent 7.8% of our total portfolio compared to net charge-offs of only 3%. The coverage ratio of charge-offs is 260%.

 In slide [16], we have details from our fees and commissions. Basically, fees are growing at 12.3% for the nine months of the year. The main driver is coming from cards, growing at 18.7%, and checking account fees growing at 21.4%, and consortium management is running at 19.5%. In the case of checking accounting fees, the driver is our segmentation. We created new classes of services in the retail segment, which recall is (inaudible). We are migrating our clients to this [class of] service. We have already migrated a large amount. And we provide higher value-added services in this for this segment, and they pay fees for it. We believe the driver in checking accounts will remain for the coming quarters, and should continue to be a driver for fees. We believe -- want to remain at the top of our guidance [of fees]. That goes from 2008 to 2012. And we expect this performance to continue next year, this good performance to continue.

 In costs, slide 17, our costs are growing 7.8% year-on-year, with personnel growing 5.5% and G&A expenses growing at 10.1%. Basically this quarter, we've had higher administrative expenses mostly related to marketing. That was an anticipation of expenses that otherwise would be reflecting in the fourth quarter, as for instance happened in 2014. Therefore, we believe that we will remain inside of our guidance that goes from 5% to 7% for the full year. We are relatively comfortable with this guidance.

 In slide 18, we have details on our insurance operations. We remain with our very strong performance in the insurance business, with net income growing 22.5% for the nine months, with ROAE of 26.8% for the third quarter specifically. Total premiums growing at 18.7%, with many highlights coming from life and pensions growing at 26%, and health growing at 20.7%. In slide 19, we have some highlights from our insurance business, with our coverage ratio at 86.9% in the third quarter, and with our technical reserves and financial assets in the insurance business still growing.

 Now, I turn the presentation to Luiz Angelotti to further comments.

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [5]
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 In closing, we (inaudible) that we had a good performance [even with] the scenario we faced in this first nine months of 2015. (Inaudible) solid ratios, such as the [efficiency] ratio remaining at 37.9% and the ROAE of 21.2%. We believe the provisioning level for the loan loss, and we have now at BRL 20.6 billion in provisions. The coverage ratio (inaudible) around 206%. Our main sources of income have posted double-digit growth, and our costs keep running below the inflation. Then, we have the (inaudible) how to maintain a good [relation] for our shareholders.

 Thank you for your time, and we would now be glad to take your questions.

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Questions and Answers
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Operator   [1]
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 (Operator instructions.) Jorge Kuri, Morgan Stanley.

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 Jorge Kuri,  Morgan Stanley - Analyst   [2]
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 Hi, good morning, everyone. I have two questions, if I may. The first one is on HSBC. Can you explain to us how you hedged the $5.2 billion that you're supposed to pay at the close of the transaction? Exactly how is that hedged? What percentage of the transaction is hedged? What is the carry cost of that hedge? And what does that imply in terms of your expectation for accretion of the transaction or impact on your capital, given that the currency has moved a lot from where you set the (inaudible)?

 And then, my second question is on asset quality. I mean, certainly things have done worse than you discussed earlier this year, in between renegotiated loans and NPLs. We've seen a bigger jump than you were expecting early on this year. The amount of provisions that you've created obviously make very clear what your concerns are, or I get the level of your concerns are.

 What lies ahead? At what point do you think the NPL cycle will peak? Your GDP expectation of 1.5% negative for next year looks optimistic at this point, I guess. Consensus is now moving closer to 2% and beyond. To what extent a repeat of 2015 when the currently contracted fee percent around that changes your view on asset quality? What is the sensitivity around that? Thank you.

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [3]
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 Thank you, (inaudible) the question. About the hedge of HSBC, we didn't [demark] from the normal operation that we do. The amount is a little higher, but the total hedge and the [price] that we signed, the BRL 17.6 billion, we will not [pay] with this hedge. (Inaudible) we are -- got back to about the volatility of the currency, then those affected the final price.

 About the -- when we -- we probably expect to have the approvals of the regulators, probably could have them in the end of this year or the beginning of 2016. Then, when we do the payment, after the payment, we expect to [drawing] the bank. And probably -- our ratios have (inaudible) simulation about the base ratios. When we said that we have how to have some (inaudible) [in a normal way], we have margins runoff in the [ratio] for two (inaudible). And our cost of (inaudible) will be an offer to maintain their issues, along with the levels of [debt we have said] that we need to have.

 But, see, we have other ways that (inaudible) showing in the simulation, that we have the option to issue subordinate debt tier one, and we will maintain our (inaudible), something that we can do that we did many times in the past, is to pay (inaudible) offer new shares for our shareholders to use -- to subscribe [in advance] payments. It's something that's possible. We have (inaudible) paying the ratios around the level that we understand that to -- (inaudible) for paying at the bank.

 About the asset fee quality, I think you talked about the renegotiated portfolio, but that should grow a little more, but the normal grow that we expect for this period of the year is the correlation between the (inaudible) portfolio and the (inaudible) portfolio, very similar. We articulated (inaudible) box, but it is normal for the period. I think we did many investments, and to be very faster about how to deal with this operation and how to control the guarantees, and I think we could reduce the loss with the operations, the (inaudible) operation this portfolio. I think the (inaudible) we could maintain running a more lower level. But, the normal [goal] we understand that we have is because it is very close of the growth of the portfolio.

 And about increasing even (inaudible), we (inaudible) are increasing the additional provisions BRL 2.4 billion, and they are another part of the (inaudible) when we revise the ratios or the ratings of our clients, at some corporate clients, specific clients. It is true that (inaudible) was a moment to do this review. We have in the other side the gain or the account team (inaudible) social contribution. This is why we did (inaudible) in the provisioning levels.

 But, we understand that (inaudible). We don't need to use these provisions now, is a more conservative procedure that we did. The additional provision is -- probably is only (inaudible) stress situation that we probably will need to use. We have now BRL 6.4 billion. Is better you do the provisions when you are in better time, not clear when you are in a stressed time, because it is not possible to do provision. Then, we are (inaudible) any potential problem. We don't see any problem in the (inaudible). We see only -- because the economic environment is a little more -- and we have now the GDP grow in the countries, [not negative] growth, then we -- (inaudible) in the economy.

 But, we don't see any higher potential grow on the -- in the quality, in the -- to have a problem with the (inaudible). We understand that the growth that we have now is (inaudible) our expectations, and they are (inaudible). The provisions is a more -- because we are adopting more conservative procedures. And we don't expect to use this provision, but the additional provisions are the rating downgrade that we did for some clients is only one [of the reasons] for our [credit] policy.

 This year, or this time the year, we could [ask] (inaudible) about the GDP growth that -- our expectations in the beginning of the year for the GDP growth was that it will be (inaudible) better scenario, but we are -- finished the year more closer 3% of negative growth. Probably next year will be closer 1.5% of the negative growth, the GDP.

 We understand that probably the asset quality that we have now, as we told you during the conference that (inaudible), about our portfolio now we understand that we have better quality. The mix is better, with less risk. (Inaudible) investments in our (inaudible) to do the analysis systems for -- to approve [credits], then we did (inaudible) investments. Inside of the Company, we changed the procedures for to recover operations, and the (inaudible) we have now better procedures for to have a better.

 Then, I could [reduce] the risk, and we [would expect] to have an increase in the -- higher increase in the provisions, or on the expensive (inaudible) provisions. What we see probably, that we are now around 15% this year growth, 17% growth. We'll finish the year maintaining this level, 16% to 18% probably. And next year, probably we expect to have something close of this level, but you need to consider that the revenues from the margins of interest earned is increasing the NII. We think the spreads are increasing in the corporate portfolio, and they (inaudible) had more (inaudible) for to reprice (inaudible) portfolio, only 50% I think of our portfolio had the repricing (inaudible). We expect that the contribution from the revenues from spreads to continue, that we will maintain the margins after the (inaudible) growing at (inaudible).

 We do need to consider that we had other revenues that came from insurance and fees that we are growing in double-[digit] with more stability. We expect to maintain at [profitability] running around the level that we are having now.

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 Jorge Kuri,  Morgan Stanley - Analyst   [4]
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 All right, thank you.

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [5]
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 Thank you.

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Operator   [6]
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 Mario Pierry, Bank of America.

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 Mario Pierry,  BofA Merrill Lynch - Analyst   [7]
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 Okay, good morning, everybody. Let me ask you two questions. The first one, sorry, I'm going to stay on the asset quality topic. We're seeing the NPLs, they have been rising about 10 basis points per quarter for three consecutive quarters now, but we're seeing, when we look at the SME portfolio and the individuals portfolio, the deterioration is starting to increase, right? Individuals are growing close to 20 basis points, and SMEs just increased 40 basis points this quarter.

 So, my question then is related, what do you only expect a gradual deterioration? It almost seems to us, listening to you, that you expect the deterioration next year to be [stronger] to this year, but we're starting to see an acceleration. So, just wanting to understand why would things start to decelerate, going forward, in terms of NPLs?

 And my second question is related to what you just said about you're still repricing your loan portfolio, especially your corporate loan book. What I wanted to hear from you is about your ability to continue to increase rates, because looking at the Central [Banco] data, most recently we saw that spreads, at least in the last month, they had come down. So, just wanted to hear, rather than just the repricing of the loan book, is about your ability to continue to raise spreads going into next year. Thank you.

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 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [8]
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 Mario, related to the first question, the deterioration of the SMEs and the individuals, basically our view in terms of the gradual deterioration we expect is related to the (inaudible) mix with (inaudible). We believe our portfolio now is much less riskier than it was at any time in the past. There's a large number that our credit line that are doing very well and are sizable in their total portfolio.

 We had, in the case of individuals, an acceleration, but actually (inaudible) fourth quarter we may see some better performance. It's seasonal impact coming from the 13th [salary] and other things that helps.

 Going forward, we are growing, as you know, in this portfolio. Basically part of it's because demand is low, but also because we have been cautious for some time. And there are material improves inside of the credit lines. It's not that only the mix improved, but each line is now better. We have the economy under pressure, but our individuals portfolio is better.

 The SME portfolio, as I said, this [calculation] put 5% growth [when you see] the NPL evolution would be lower. We have a portfolio that is not growing at actually year-on-year. It's shrinking a little bit. We see the portfolio. We see the indicators of credit (inaudible) of clients, and we believe that the most likely outcome, knowing deeply the company, that's a gradual evolution.

 It comes off repricing. The repricing comes -- it's more market-driven, and basically our point here -- we don't want to make any point that (inaudible), et cetera, but just by repricing, what has already happened, it still has a sizable impact in our credit markets. So, basically, the positive driver only from the repricing is already enough to offset most of the pressure, or a big portion of the pressure, that comes from credit quality (inaudible).

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [9]
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 Yes. On the (inaudible), also be the quality, then it (inaudible) for 90 days and 60 days, Mario. They (inaudible). They're not -- could be that the next quarter this -- we don't have an increase in the delinquents ratio. They're not -- we see from seasonal that there's some stabilization [that happens], but this is something that you need to consider in the (inaudible).

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 Mario Pierry,  BofA Merrill Lynch - Analyst   [10]
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 Okay. Let me ask you then, especially [since we've] been on the individuals portfolio, what concerns you the most about potentially leading to higher NPLs? Is it inflation? Is it unemployment? What do you think has the biggest impact on your individuals NPLs?

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [11]
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 Normally is it -- I mean, (inaudible) is the main thing that affected the delinquents ratio. But, as we told you, a good part of this portfolio we have now is payroll loans and the mortgages. That's why we had a very small delinquents ratio. More normally, why are we having some increases more in personal loans and the cards. But, as we told you, we are work -- we did investments in our systems, in our models to reduce the risk so that you had better comfort [on the] risk. We could reduce frauds, and we are more effective into charging the clients to be -- to recover the credits.

 And they (inaudible) -- and we are working (inaudible) the risks, and this is why (inaudible). We expect some increase, but is not something that (inaudible) converted into higher, which can be [then applied] (inaudible) for all this. What we see that in -- the expect that 2017, the economy will recover the growth. And it probably the second half of 2016 I think the environment will be a little better, and we expect some stabilization in the delinquents ratio and in the (inaudible).

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 Mario Pierry,  BofA Merrill Lynch - Analyst   [12]
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 Okay, thank you very much.

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Operator   [13]
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 Saul Martinez, JPMorgan.

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 Saul Martinez,  JPMorgan - Analyst   [14]
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 Thank you very much, Operator. Hi, guys, two questions. First, on your capital position, and I want to gauge whether your comfort level depends on your ability to sustain pretty high levels of profitability. And by definition, you hold capital for unexpected losses, but you're talking about capital and capital generation based on the expectation that you don't have unexpected losses, that your profitability remained very high.

 So, I want to ask you, does your view on capital really depend on sustaining close to a 20% ROE? And if you are wrong, is there a level of profitability when your profitability comes in some? What you might expect, given the macro backdrop, how do you feel about your core tier one at that lower level of profitability and a lower level of capital generation?

 My second question is on renegotiation of credits. You guys give less disclosure than some of your peers. You've renegotiated credit only for delinquent loans as opposed to renegotiations for performing loans. And obviously that could mask some strain if you're renegotiating loans that haven't fallen into delinquent status. Is there a big difference in terms of the trend if we were to look at the whole performing loan portfolio?

 And I ask that because you obviously have a very sizable SME book, and I would guess there, like at some of your peers, you would be seeing more renegotiations. So, my question is, if we were to have a more expansive view on renegotiations, would that number change? And if you actually do have that number, it'd be great to disclose that.

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 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [15]
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 So, I'm going to answer the first question. Basically on capital, our view on capital doesn't depend on our view on our profitability. Basically, first we would be generating still a lot of capital even at lower level of profitability. And there is also the scenario that risk-weighted assets are not going to grow materially for some time, maybe 2016 and 2017. The increase in risk-weighted assets this quarter came a lot due to tax credits and FX, but tax credits are going to be recovered over the next two, three years. We absorb that relatively fast.

 Our comfort comes from basically the fact that, remember, the level we have is still enough. Basically we have options, as Luiz assessed. We could issue subordinated debt once we can do what we have done in the past, like offering a subscription at a lower price when we pay the [difference]. But, basically, all the options we have, together with the fact that we will accumulate more capital, is what give us comfort with that.

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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [16]
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 The (inaudible) to have very small or (inaudible) be profitability for -- is on (inaudible) does not expect to have this. And about the asset quality, about the assets grow, probably the next two years we will have a very small grow in the assets, then it's something that you need to consider, that [they consume much] capital because (inaudible) this (inaudible) the next two years, probably.

 About the renegotiated portfolio, [this shows] (inaudible) Central Bank rules our portfolio. We have BRL 12 billion. This year it grew a little more than the total portfolio, was more related across the environment that we have nowadays, but this is the way that we show. (Inaudible) for this portfolio, the provisions around the (inaudible) probably normally what we (inaudible) is only one-third, 30% of the delinquents ratio of this portfolio. That is (inaudible) a little more, but (inaudible) the portfolio, [as we show].

 The rest of portfolio we are maintaining according to Central Bank [rules], is following the (inaudible) and the risk evaluation. That is maintained in a normal way, and we follow all the Central Bank rules (inaudible) what we have.

------------------------------
 Saul Martinez,  JPMorgan - Analyst   [17]
------------------------------
 Okay, that's helpful. And just for what it's worth, my base case is not that your profitability could impair dramatically, but capital by definition is for scenarios that are worse than what the bank's case is. And I guess my question is more along the lines of, if you are wrong, and I don't have a crystal ball and you don't have a crystal ball, but if you are wrong and your ROEs are 15%, for example, or 16%, which is still a pretty good ROE, given the environment, is it fair to say you'll still generate capital, you'll still consume the tax credits with that level of profitability?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [18]
------------------------------
 We [make sure you understand] that we consider to maintain some margin for to support any stress movement that happen. Then, in our models and our (inaudible) is when we talk about (inaudible), the tier one ratios internally, and tier two ratio, the total ratios for Basel III. We consider to maintain some margin, some buffers, internal buffers, but support any surprises. But, we don't expect to have surprise, but the margins that I told you in today's (inaudible) percentage that we expect to maintain an additional [for all of the new requirements].

 Then, during the (inaudible) at [GSPC], could be for a moment that we'll be running very close of the minimum (inaudible), but we don't expect to have any surprise in the margins that we maintained during this period will be enough to support any volatility.

------------------------------
 Saul Martinez,  JPMorgan - Analyst   [19]
------------------------------
 Okay, great. Thank you very much.

------------------------------
Operator   [20]
------------------------------
 Thiago Batista, Itau BBA.

------------------------------
 Thiago Batista,  Itau BBA International, S.A. - Analyst   [21]
------------------------------
 Yes, hi, guys, thanks for the (inaudible). I have two simple questions. The first one, you got (inaudible) [coverage] ratio. The [coverage] ratio is not a very high level. Do you expect to see some contraction in the (inaudible) ratio or going forward [for the coming quarters]? We should expect an increase in the delinquents ratio?

 The second one, what do you believe will be your normalized level of taxes in 2016, for instance?

------------------------------
 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [22]
------------------------------
 Normalized level of what?

------------------------------
 Thiago Batista,  Itau BBA International, S.A. - Analyst   [23]
------------------------------
 Of tax rates.

------------------------------
 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [24]
------------------------------
 Tax rate? Okay, I will answer the first one. Basically, in terms of NPL coverage, we don't expect to consume this coverage. Basically, in a normal situation, we should basically continue provisioning the formation. The coverage may go down because we have a fixed portion that is the excess provision, and that essentially will be diluted on the total coverage. But, alas, we have specific events that we don't foresee, we don't intend to [constrain] this coverage provision (inaudible) than necessary.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [25]
------------------------------
 On the tax issue, what we expect for the next three years, [it mean] (inaudible) have the social contribution in the -- with 5% more with the total issue of 20%. Probably we will have an increase in the normal ratio on 4%, 5% regard. What we expect to -- the normal level was only 34%, (inaudible) will be running next year 38%. Probably it will start more in the second -- in the last quarter now for -- and to the end of 2018.

------------------------------
 Thiago Batista,  Itau BBA International, S.A. - Analyst   [26]
------------------------------
 Okay, thanks for the answers.

------------------------------
Operator   [27]
------------------------------
 Victor Galliano, Barclays.

------------------------------
 Victor Galliano,  Barclays - Analyst   [28]
------------------------------
 Hi there. Yes, my main questions have been answered, but just follow up on capital here, when you first announced the HSBC acquisition, you gave some fully loaded estimates there of 9.9%. In this third quarter now, you're down to 9.1%. So, is that 80 basis points of consumption? I just want to confirm here that there's nothing that's changed here in terms of the risk-weighted assets that you're expecting from HSBC. Is that down to what you said about the higher tax credits, and also the depreciation of the real?

------------------------------
 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [29]
------------------------------
 The HSBC, basically we are [now] using the (inaudible) on [issue] statements. We did the first analysis on the fourth quarter 2014.

------------------------------
 Victor Galliano,  Barclays - Analyst   [30]
------------------------------
 So, you're using a lower base of Q3? Okay. All right, thank you.

------------------------------
Operator   [31]
------------------------------
 Pedro Fonseca, Haitong.

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [32]
------------------------------
 Hello, everybody. I have a follow-up question on capital. Your capital ratios are now going down, particularly with this HSBC acquisition. What is your confidence level of capital? You have said it's 25% above minimum requirements, but I'm not so sure which one you're talking about. If we just focus on core capital, which is beyond [CapEx] capital a lot of us care about, and if you focus on Basel III fully loaded, is this the minimum requirement right now you want to focus on, the 25% above? Is that the requirement in 2019, that you want to be 25% above? What is it?

 And also, when you answer, can you kindly let us know why you guys insist on this unorthodox way of presenting Basel III fully loaded? Because it's not standard. And while different countries have -- may have different versions of Basel III, the concept of fully loaded is fairly universal, which is you pick all the adjustments, all the deductions that you have to make by 2019. It has nothing to do with what the balances will be in 2019, such as goodwill. It's all about removing them all now, because if you did that, obviously you're core tier one is most definitely not 9.1 fully loaded.

 So, if you could just enlighten us a little bit, I think we'll all be very grateful. Thank you.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [33]
------------------------------
 Thank you. (Inaudible) that we show for normally, we have capital for to acquire [EDSEC] today, and we've maintained the margins (inaudible) in the fully loaded basis when we reach in the area of 2018. What we show here is a simulation of this fully load, and we understand that we have held capital (inaudible) to do the acquisition, to do the -- to maintain the bank running higher level. And you need to consider, for the next period, to have the profitability of the bank (inaudible) capital normally 100 bps per year (inaudible) mean that we expect for each year that we will have until 2018. Then, we are comfortable with this ratios.

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [34]
------------------------------
 [I'm not sure you've answered] the question. So, the 25% above minimum requirements, is this -- I mean, if we just think about core tier one, is it the ratio that's required right now? Is it the ratio required in 2019? Because the ratios are different. How should we think about these capital ratios, please?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [35]
------------------------------
 Today, with the acquisition, we have -- to tier one, and the additional margin that we expect to have 25%, 30%. We are comfortable for to do the acquisition today and to maintain the margins. And these margins will be maintained probably until the end of 2018, then now we have the [simulation].

 Then, we have now today margins enough to finish that (inaudible) acquisition and maintain around the 25%, 30% as we told (inaudible) our internal limits for to -- (inaudible) to maintain.

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [36]
------------------------------
 So, what you're saying is, basically with the capital in terms of what the regulations are right now and not how they're going to be in the future? Is that correct?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [37]
------------------------------
 Yes. We have today, [and we will have] in 2018 [this capital]. This simulation that we have [here] shows that we have the capital enough to do the acquisition.

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [38]
------------------------------
 Okay, but -- no, I'm not disputing that from an [EBITDA] point of view. I'm just trying to understand how you think about the capital on a rolling basis. From what you're telling me, you concentrate on what the regulation is right now, and you demand a 25%, 30% extra buffer. Is that correct, or am I mistaken?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [39]
------------------------------
 Yes. We have (inaudible) -- (inaudible) today will have the requirements at the level that we have to have now, and then we have the margins that we consider internally, this 25%, 30%. And these margins we will maintain after the acquisitions until 2018 as we expect to have.

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [40]
------------------------------
 Okay. I think what you're saying is that you look at the regulations as they are now, and you want to make sure that you keep the 25% margin all the way through to the future. Is that correct?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [41]
------------------------------
 Yes. The internal--.

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [42]
------------------------------
 --Thank you--.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [43]
------------------------------
 --Our internal regulation that we have -- our internal buffer that we have is at 25%, around 25%, 30%. Then, we'll (inaudible) buffer, the minimum buffer [outline].

------------------------------
 Pedro Fonseca,  Haitong Research - Analyst   [44]
------------------------------
 Okay. Well, thank you very much, but -- yes, thank you. You realize most banks think several years ahead in terms of 2019, what the requirements will be then, and then try to get a buffer, but all right. Well, thank you very much for your answers. Thank you.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [45]
------------------------------
 Thank you.

------------------------------
Operator   [46]
------------------------------
 Boris Molina, Santander.

------------------------------
 Boris Molina,  Santander - Analyst   [47]
------------------------------
 Yes, thank you. I'm going back to the situation of capital again. When we look at your slide on page number 10, it's fully loaded Basel III [evolution]. (Inaudible) on the basis -- can you hear me?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [48]
------------------------------
 No, we can't. Speak slowly and a little bit louder. We cannot hear you.

------------------------------
 Boris Molina,  Santander - Analyst   [49]
------------------------------
 Is this better?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [50]
------------------------------
 Yes.

------------------------------
 Boris Molina,  Santander - Analyst   [51]
------------------------------
 Okay, wonderful. I want to go back to the situation of the capital position of the bank. If you look at your slide on page number 10, we see a fully loaded Basel III common equity of 9.7 before the consumption of tax credits. I mean, (inaudible), because the (inaudible) have been growing for the last couple of years, and (inaudible) to become a concern, no?

 If you do a (inaudible) calculation just to see what would be the impact to this capital ratio if you didn't include the government guarantee, which is a very, I would say, toxic option to get government support in case of a crisis? We would have to (inaudible) somewhere between 200 and 300 basis points. And then, maybe like the 200 basis points from the HSBC acquisition, and we (inaudible) somewhat closer to 5%, 6%.

 Now, in the (inaudible) Central Bank has a history of allowing banks to operate with relatively low capital ratios (inaudible) the public sector banks, right? However, (inaudible) Central Bank, you have to stand on your own two feet. They're a no-product bank. They don't make an (inaudible) invest in other relation. And so, what I mentioned before, this capital is to take care of unforeseen situations.

 Now, my question for you is -- and obviously the Central Bank is not going to stop your acquisition. It's going to go ahead, and you're going to end up in the first quarter of a fully loaded true capital ratio of around 5%. Do you think that this is a comfortable level to take care of the financial tail risk that we think (inaudible) nobody expected two years ago (inaudible)? What happens if, two years from now, we are in a situation that is relatively weak?

 Now, I'm starting from that base, you say that you can make the 100 basis point. By the time that you reach this 12%, 13% level that you should have, being (inaudible) for sale, and (inaudible), it's going to take maybe eight years. So, my question to you is do you have any plan to accelerate (inaudible) capital ratios over the next 12 months? And I guess there's obviously a big problem, because (inaudible) tax assets -- for tax assets for nonperforming (inaudible) are twice the level they should be when you calculate it in the provisions times the tax rate. Obviously you cannot collect on your (inaudible) tax assets as you write off the loans and if this (inaudible) is going to continue to grow, as the economy weakens and you write off more loans.

 So, if we (inaudible) banks [sitting on performing loans], is it something that you think we should -- I think you should accelerate, because these (inaudible) tax assets are losing net present value every month. So, is it something that -- is there a plan that you have apart from those credit (inaudible) issues? (Inaudible) cutting your (inaudible). Is there something that you can do that you want to (inaudible) increase?

 And then, my second question is regarding asset quality. And we've seen (inaudible)--.

------------------------------
 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [52]
------------------------------
 --Sorry, to be very honest, we got very little of what you said because we can't hear you very well. We got a little bit, but if you're going to do the second question, speak slowly, please.

------------------------------
 Boris Molina,  Santander - Analyst   [53]
------------------------------
 Okay, I'm sorry. The second question is related to asset quality. Now, if we look at your individuals nonperforming loans, stripping out what would be (inaudible) conversions for mortgage and (inaudible) loans (inaudible), your (inaudible), like, [it's called consumer] (inaudible), and net performing loans had been relatively (inaudible) the last couple of quarters now, and they're heading to levels we saw in the previous cycle.

 Do you have any expectation of how or when the (inaudible) asset quality is going to peak in relation to the moment when unemployment starts rising? Suppose if unemployment starts rising in June 2016, thus in the (inaudible) nonperforming loans continue to increase three to four quarters after that? Is there something that can (inaudible) from that you have in your models? Thank you.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [54]
------------------------------
 Thank you. About the capital, we are comfortable with the acquisition -- with the level of the acquisition, okay? We are not (inaudible), and we will -- our timing is looking what we can -- how we can do in the internal (inaudible). And our possibility we (inaudible). If you understand that will be necessary, then to issue a subordinated debt tier one is something that we can do to internally -- to use some reorganization for to improve the -- or to have some gains which the capital. Then, around -- we are [outline] analyzing how to improve, how to have (inaudible) use our capital.

 And we are not stopped. We are (inaudible) thinking, and planning how to use better the capital of the bank, and how to maintain our internal requirements for to have the margins as we require. Then, we are not stopped then there. We are managing the capital of the bank and considering how we (inaudible) the potential FX with the acquisition and the other FX.

 Then, we are [studying opportunities] in improving sometimes. We will continue to (inaudible) normally, but -- so we can [move it] as we did many times in the past to pay dividends and to use the (inaudible) for to issue new shares. Then, is (inaudible) our shareholders if today wants to buy (inaudible), they can do, but they only use the (inaudible).

 You want (inaudible) normally. We are comfortable with the capital levels, and we are managing the capital ratios for to maintain the banking running, maybe to buy a [GSSE] after the approvals of the regulators.

------------------------------
 Boris Molina,  Santander - Analyst   [55]
------------------------------
 Sorry, (inaudible), do you have any plan to address the (inaudible) from loan loss provisions? Because they have been growing pretty sharply over the last year. There's an issue about collecting your tax benefit from the government, and these nonperforming loans are hanging on the balance sheet. We would like to see bank (inaudible) of these nonperforming loans that have been (inaudible) in order to collect the [34%] tax benefit on the face value that you lost. This is a huge amount. It's BRL 23 billion now, so [44%] of (inaudible). So, is there something in the plan to deal with this?

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [56]
------------------------------
 We don't have nonperforming loans hanging on the balance sheet. Particularly we have (inaudible) in our provisions, and we have loans that follow the normal evolution. You know the rules here. We do the provisioning after the (inaudible) rate (inaudible). Six months later, we put the write-off. It's plain. It's simple. And that's what happens in Brazil. It's straightforward and very conservative.

 Basically, we have provisions, and -- we have additional provisions. And one thing, even after we have the write-off, it still takes one year, or year and a half, to have the tax credit tax deductible. That kind of the unit thing we have in Brazil, and that's why Brazilian banks carry so much tax credit.

------------------------------
 Boris Molina,  Santander - Analyst   [57]
------------------------------
 Okay. Okay, wonderful. And the -- and a consumer [peak] relative to the main (inaudible), do you have any (inaudible) that you could use?

------------------------------
Unidentified Company Representative   [58]
------------------------------
 We have been saying we believe NPLs will peak by the second half. That's our views on this, probably they peak together. And the loan growth starts to pick up a little bit. So, that's our view of (inaudible) NPLs (inaudible).

------------------------------
 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [59]
------------------------------
 Yes. And NPL formation, actually you see NPL formation has already pointing down this quarter.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [60]
------------------------------
 (Inaudible) today. They both (inaudible) this quarter. (Inaudible) the increase, the (inaudible). In fact, you'll see some (inaudible) could be some (inaudible) this quarter.

------------------------------
 Boris Molina,  Santander - Analyst   [61]
------------------------------
 Okay, wonderful. Thank you so much.

------------------------------
 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director and IR Officer   [62]
------------------------------
 Thank you.

------------------------------
Operator   [63]
------------------------------
 Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for any closing remarks. Ladies and gentlemen, please hold while we reconnect (inaudible). Mr. Speaker, you may proceed.

------------------------------
 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [64]
------------------------------
 Hi, okay. Thank you, everybody, for participating in our conference call. The Investor Relations department is available for any other questions you may have. Thank you all.

------------------------------
Operator   [65]
------------------------------
 That does conclude the Banco Bradesco's audio conference for today. Thank you very much for your participation, and have a good day.




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