Q3 2016 Banco Bradesco S/A Earnings Call

Nov 11, 2016 AM EST
BBDC4.SA - Banco Bradesco SA
Q3 2016 Banco Bradesco S/A Earnings Call
Nov 11, 2016 / 03:00PM 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 & IR Officer

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Conference Call Participants
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   *  Jorge Kuri
      Morgan Stanley - Analyst
   *  Thiago Batista
      Itau BBA - Analyst

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Presentation
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Operator   [1]
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 Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's Third Quarter 2016 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. We inform that all participants will only be able to listen to the conference call during the Company's presentation. After the presentation, there will be a question-and-answer session when further instructions will be given. (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, and therefore depend on circumstances that may or may not occur in the future.

 Investors 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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 Hi, everybody. Welcome to our third quarter 2016 earnings conference call. We have today with us participating in the call , our Executive Vice President, Alexandre da Silva Gluher, our Executive Managing Director and Investor Relations Officer, Luiz Carlos Angelotti, the CEO of our insurance company, Bradesco Seguros, Randal Zanetti.

 I'll turn the presentation now to Luiz Angelotti to start.



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [3]
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 Welcome everybody. Thank you for joining our conference call about the third quarter of 2016. This quarter, we had the setup of acquisition with HSBC, then we try to review the information about the sector, the incorporation of the numbers of the HSBC in our balance sheet, then I'll try to do the deals.

 We having in October the setup, after that recent integration of our operations to Bradesco platform. Then we are very optimistic with the benefits of synergies and the opportunities that we will get in the next period with acquisition that -- additional profitably that is our objective with these investments.

 And I will start with the -- slide two with the highlights. Our adjusted net income in the quarter is BRL4,462 million that is compared with the second quarter, we had an increase of 7.2%. Please let me compare with the same period of 2015. These decreases related to our -- the decrease of delinquency ratio during the period.

 Our annualized return on average equity is 17.6%. We have the total assets this quarter BRL1,270 billion, BRL161 billion came from HSBC acquisition. Our expanded loan portfolio is BRL521 billion with an increase of 10% considering acquisition of HSBC, but excluding HSBC asset, we had decreased our loan portfolio around 6.8% because of the lower demand in the operation.

 Our operating efficiency ratio, we have now 38.2%. The increases that we had compared with the periods before is related to HSBC assets. Our expectation is running after one year of acquisition, we will be running next to 41% and our objective is in two or three years to return for the same level that we had that is around 37% that is getting the objectives or the benefits of the synergies and improving opportunity to offer more products for the HSBC clients. Our BIS ratio has (inaudible).

 Then now I'll turn to Carlos Firetti, who will explain the next slides of our presentation.



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 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [4]
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 Okay, thank you, Luiz. So, now we are going to more details on the results. In slide number three, we have the main adjustments, we have in our net earnings this quarter. There was a series of adjustments related to the incorporation of HSBC. Basically, these adjustments are the ones that were made in that point through the P&L. Besides that, before incorporating HSBC, we made some adjustments in HSBC related to the adjustments operatings of their credit portfolio aligning with ours, also additional provisions about BRL1 billion or little bit more comes in HSBC and also some contingence provisions. All didn't go through the P&L. This is reflected in the reduction of the book value of HSBC and is incorporated in the goodwill we will amortize going forward.

 In Bradesco, basically, we have the following adjustments. The impact of the alignment operatings in the Bradesco side, basically downgrading ratings of loans in the Bradesco portfolio to the level of clients that have lower ratings in HSBC. The impact of that net of taxes was BRL716 million. Also we made this quarter an increasing technical provisions in our insurance company mostly related to the provisions for individual health insurance plans that impacted our results in the BRL592 million net of taxes, we returned that as referred.

 We also have this quarter the definitive decision on case in the courts related to the contributions of social security on self-employed service providers. This is a discussion that has been going on for a few years and we have a positive decision on that and we reverted the provisions and that's impacted positively our results of BRL575 million. We also removed that as non-recurring.

 We adjusted as non-recurring the goodwill amortization expense and net of the tax benefit. The gross goodwill amortization expense was BRL427 million. Our decision was to adjust only the portion net of the tax benefit and also we adjusted there is no recurring expenses related to a lump-sum bonus payment related to the qualities of our gain that was closed in the third quarter, that was BRL191 million. With that, the adjusted net income for Bradesco consolidated was BRL4,462 million.

 In page four, basically we have the evolution of our adjusted net income incorporating HSBC. Basically incorporating HSBC, earnings grew 7.2% QonQ, without HSBC earnings grew 3.7% QonQ. The contribution of HSBC to our earnings was BRL148 million this quarter. In nine months earnings incorporating HSBC, dropped 4.3% and without HSBC, dropped 5.4%. There is a -- you have there the impact to net earnings only to call attention that this is the last quarter you will be able to see the numbers of Bradesco standalone and HSBC isolatedly. Starting in the fourth quarter, we will be able to show only consolidated numbers since after the integration we completed in early October, actually we have already disconnected IT and all systems related to HSBC. So we only have the accounting on consolidated terms.

 In page five, we have the breakdown of our net earnings. We always highlight the diversification of our results. Insurance represented in the third quarter 34% of our earnings. The banking operations represented 66% of our earnings with fees representing 28%.

 In page six, we have information related to our total assets return. Basically, our total assets grew year-on-year 20.9% including HSBC. HSBC added BRL161 million to our total assets that's amounted BRL1.27 trillion. HSBC assets represent roughly 13% of total assets. Our equity grew year-on-year 14.3% and the return on asset, including HSBC, 17.6%, only Bradesco 17.4%.

 In the chart below we have our operational coverage ratio and efficiency ratio. The coverage ratio that is fees divided by costs dropped to 78% when we consider the consolidated number. Without HSBC, it would be at 80%. The efficiency ratio in the quarter already considering the incorporation of HSBC, reached 41%. We believe we will be able to return the efficiency ratio to past levels over the adjustments you'll be able to do in the next three years.

 In page seven, we have the details on our net interest income. Basically, total net interest income with HSBC was BRL16.9 billion, and without HSBC BRL14.5 billion. Total NII grew without HSBC 5.4% year-on-year in the quarter isolatedly and with HSBC 23.3%. Our (inaudible) results dropped a little bit from BRL179 million in the second Q to BRL101 million in the third Q without HSBC.

 In page eight, we have the breakdown of our net interest income, the interest earning portion. Basically, we have some comments on this, basically focusing on Bradesco standalone. Credit intermediation grew 8.5% year-on-year, but dropped 1.3% QonQ mostly due to the impact of volumes. Insurance NII grew 7.8% in the -- year-on-year, 3% QonQ. In securities and others, there was a drop of 15.6% QonQ, growing 10.2% year-on-year. In this line specifically, this drop QonQ is related to the fact that we have this quarter lower incurred revenue from the IPCA inflation. We have bonds that are indexed to IPCA. This IPCA inflation dropped in the quarter something like 7 bips and this needs to lower financial revenues due to that and also give them some operations on the portfolio of our investments.

 In page nine, we have the credit intermediation information. Basically, here we can see that the spreads in our portfolio continued to increase, reaching 12.5%. This is basically due to the repricing of the portfolio considering the increase of spreads we have seen in the past months. We basically are growing nicely. We believe there is still some room for seeing this repricing pattern in the credit intermediation margin a little bit ahead.

 In page 10, we have the information for our capitalization ratios. Basically, considering the phasing, our Tier 1 ratio reaches 11.9% in September, dropping from 13.7%. The core capital dropped to 11.1%. We ended this quarter 0.8% from the approval by the Central Bank of subordinated debt that was Tier 1 capital compliance. In terms of a fully loaded, basically we have a ratio of 11.3% considering core capital, plus 0.8 in terms of Tier 1 amounting 12.1% total Tier 1 capital.

 We see this, it's very comfortable. We should be adding more capital organically in the coming quarters, coming from the accumulation, retention of earnings. We believe we can add easily more than 100 bips per year through earnings retention.

 So going to page 11, our expanded loan portfolio. Basically focusing here in the portfolio without HSBC. Without HSBC, our loan book dropped 6.8% year-on-year. This is also impacted by the FX depreciation in the quarter, the drop was 1.2%.

 The SME book, the Company's portfolio dropping 10.8% with large corporate dropping 7.6%, and SMEs dropped 17.1%. Individuals is doing better, growing 2.1%. That growth comes from real estate financing portfolio that is growing 20.2% year-on-year. Payroll loans growing 8.1% and credit cards 12.3%. HSBC added BRL80 billion to our expanded loan book that amounted BRL522 billion, including HSBC.

 In page 12, we have our delinquency ratios, basically we have marked the information we believe which should focus on the analysis in terms of total NPL, basically it grew from 4.64% to 5.35%, also impacted by the attractive portfolio as a whole is shrinking considering an adjusted number excluding the HSBC, and the impact of a specific client that impacted our 90-day of NPL this quarter. The NPL would be 4.87%. So basically the increase in NPL is mostly related to the specific case that this is going to be written off already in the fourth quarter and is already fully provisioned.

 We believe that the trends of asset quality are under control. We believe that the peak of NPL can be in the fourth quarter as we have been saying and probably we should see more meaningful drops in NPL ratio at year end of 2017. In terms of short-term delinquency ratios, we have a pretty good performance in companies and we had some increase in individuals, we believe this might be related to the strike that kept main of our branches closed at the end of the quarter, but anyway even considering this small increase in individuals, short-term delinquents, we don't see any different trends and things we are also close to the peak of NPLs for individuals.

 In page 13, we have the NPL creation and allowance for loan losses. Basically, we think there's good news here on the NPL creation that dropped from BRL5.4 billion in the second quarter to BRL5.2 billion, excluding HSBC and the specific client. Basically, we have been creating provisions covering the formation consistently over our history. You can see since fourth quarter 2014, actually we have been covering around 100% or more every quarter. So we believe our provisions that make us very good labels of provisions and very consistent provisioning methodology.

 In terms of provisions, we had this quarter excluding the impact of HSBC, BRL4,553 million that was a reduction comparing to the number, excluding the specific client in the second Q. We believe the peak of provisions this year might be already in the past probably first Q 2016. We are still running at a high level of provision, the quarterly ratio last quarter at 1.44%. That level in the chart as you can see was 0.87%. We believe we can go back to that at some point maybe in 2018.

 Going -- page 14, we have the composition of our portfolio. Basically, if you break down between corporates, SMEs and individuals, SMEs representing 21% of our loan book, a decreasing state over the last few years, corporates representing 46% and individuals are close to 33%. And individuals basically big migration from higher rate credit lines to lower rate.

 Today at payroll loans and mortgage represent about 41% of our total loan book. We believe this is behind the very big -- our capacity, despite the varying Company prices keeping our NPL ratios, special individuals actually doing relatively well.

 In terms of -- in page 15, we have our provisioning ratios, basically total provisions represent 10.1% of our loan book. We have an excess provisions over the meaningful requirement by the Central Bank of BRL7.5 billion and an excess of provisions over the net charge-offs of BRL22 billion.

 In the chart below, you can see the coverage ratio basically excluding HSBC and the specific case, our coverage ratio remained at close to 200%, 198.1% for 90 days and 162% for 60 days NPLs.

 On the renegotiated portfolio, we have this quarter the renegotiations from HSBC that push up the renegotiations -- total renegotiations to 15.8, but excluding HSBC, the number would be 14.4%. We keep very high levels of provisions on this portfolio 65% provisions to the renegotiated portfolio, and the NPL ratio has been consistently around 27%, 26%. Only remembering this, renegotiated portfolio are -- renegotiations for loans that got into past due loans at least one day late and this is already part of our total loan book and NPL ratios.

 We have in page 16 fee, basically fees are growing for Bradesco standalone 8.4% year-on-year, cards grown 5.6%, checking accounts 18.2%, we believe we are doing quite well considering the environment and we think we should keep the good performance going forward.

 In expenses, we have our total expenses in page 17 growing 8.1% year-on-year comparing the nine months, 3.5% QoQ only till the third quarter, the expenses grew 5.6% that shows where the marginal deceleration comparing to the level we are still growing in the [year at 8%] considering our guidance for Bradesco standalone that we are reviewing this quarter we think we would be consistent with the middle of it, the 6% growth.

 Basically, HSBC added this quarter BRL1.8 billion in expenses. With HSBC, expenses grew 25.9% QoQ. We believe we can capture at least 30% synergies on HSBC regional expenses with synergies on the administrative expenses coming faster and basically on the start on the personnel expenses taking up to three years and it should be captured mostly based on the turnover.

 Page 18, we have number for our insurance company. Basically with HSBC, the results for Bradesco Seguros was BRL1,502 million and ROE of 25.6%, but for focusing specifically on Bradesco standalone, the earnings for the (inaudible) was BRL1,429 million, 24.7% ROE. Premiums grew 8.8% year-on-year, looking to the quarter related to the premiums grew 12.5% so with these recovery results for adjacency quarters is related to the fact that we either have had last quarter expenses related to the liability, we have to do on the insurance company each past year, we had a (inaudible) expenses due to the second quarter. We won't have this quarter. Also we had some recovery in the loss ratios in the health insurance business mostly due to some reduction in free cash, despite that the claims in the health insurance are still relatively high.

 Going to page 19. We have the technical provisions and financial assets for the insurance company. With HSBC, the amount is BRL198 million only comparing the Bradesco's long technical provisions grew 17.6% year-on-year. Financial assets basically for Bradesco standalone grew 17.7% year-on-year and amounted with HSBC to BRL231 million.

 We have here in page 20. Our guidance for 2016, we have to revise it considering we had HSBC and we will not be able to provide Bradesco standalone anymore. Basically the only revision in Bradesco guidance standalone would be in the loan growth. For basically we are -- our portfolio dropping 6.8% year-on-year and when we revised the guidance, we also changed the number for loan growth having an expectation for HSBC. For the other numbers, we basically maintained the guidance for Bradesco, we think we are mostly in line with those numbers, adding expectations for HSBC in the second half.

 Basically, considering this, we can give some positioning in the guidance, how we -- progressing in terms of NII, the interest earning portion that the growth, including HSBC in the second half is 13% to 17%. Probably we will be in the mid-high portion of this guidance, in terms of costs throughout 2016, most probably we'll be in the middle of this guidance and in terms of loan loss provisions expenses, the BRL20 billion to BRL22 billion we would be in the middle. We also provide this guidance in the format of pro forma, but basically it's a franchise.

 Here, so basically to finalize, we completed this quarter the integration -- we completed in October the integration of HSBC in the weekend of October 8 and 9. We believe the integration was a success. We have integrated all systems, all operations of HSBC are ready running on Bradesco systems. We have already turned it off HSBC previous systems. It was our huge operation; involves a lot of logistics and people and we believe it was a big success.

 So now I'd turn the presentation to Luiz for his final consideration.



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [5]
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 Well, in our opinion, I think we had a very good growth in the quarter considering the environment. One important thing that we have to see is the deceleration of the delinquency ratio and we are very productive. We think incorporation of HSBC, I think, we have now a lot of portfolio with the synergy and with the sales. Our segmentation is improving off of our products for HSBC clients and we understand that probability of success. We will start to add volumes and we'll be accretive (inaudible) of this next quarter, but actually in 2017, we understand that we will get more faster benefits of the acquisition. And the synergies for being in two years, three years will be at a minimum 30% of the expectation that we will be more than this number because really we see a lot of benefits with the acquisition. With the integration, that Firetti explained, now all operations are in the same (inaudible) we will be much more efficient to get the synergies and the opportunities.

 Thank you for participating in our conference call and now we are opening for question now -- for the quarter. Let me start the Q&A.



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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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 I have two questions please. The first one in connection with the -- if I look at the disclosure that you provided on page 34 of your presentation, the book value that you recognized after all of the different adjustments for HSBC was BRL7.7 billion. On top of that you took a charge of BRL1.2 billion in Bradesco's numbers. So that was the acquisition price or not necessarily the acquisition price, I guess, the total money you've invested to get that asset around BRL18.8 billion over the shareholders' equity, you've got -- you are talking about 2.4 times book. You obviously need to add some benefits from the goodwill amortization so if you do the net present value, you're roughly like a 2.0 times, 2.1 times book. I'm just wondering how you make this acquisition accretive when you guys are trading at 1.6 times more, -- was trading at 2 times more. So like best-in-class banks are trading at well below what you paid for HSBC, which again, you provided on page 35 that we make any money.

 So how do you make this accretive and can you just help us go through the math on how this make sense and what exactly are on those returns that you're expecting and just as specific as possible, so we can understand what the rationale relating to the market?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [3]
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 Okay, thank you, Kuri for your question. We're comfortable with the acquisition. The goodwill that we have now is (inaudible) that will be with the amortization will be in five years. This is one we will cover on part of the prices in the stability of the goodwill. But with our tax will be covered in much of the price, you are very comfortable with the valuation.

 With the synergies, with the opportunities that we have in other products, we did the amount is (inaudible) and the network of bank you saw that we had a compensation then now we have other positions in the Brazilian market. When we talk about multiples, I think we understand that the size that we have now in the market reflects the multiples probably with the recovery of the Brazilian market, the multiples you return for the better level fixations that in 2018, 2019 we will have a much better numbers, than acquisition that we did is, looking for the future was the vast opportunity in the Brazilian market and that quarter we did -- we probably had some benefits -- with the acquisition recovering more one part of synergies that we started to benefit after the integration that we had mostly the higher benefits looking from -- in 2017 where working in a unit platform, I think in Bradesco we will reduce more faster the first time, and the personnel cost probably with the turnover that we have in the banking, mostly only using the turnover, we can adjust the structure of -- if we are using two years or maximum three years, then we are very comfortable with the acquisition and there probably we will have such as beneficial improvement with the additional profitability that you can count is HSBC benefits our strong synergies and improving -- we are very comfortable with the numbers and acquisition.

 What will happen now is, more strategically in the markets then some times the multiple doesn't reflect the benefits that we see with acquisition. Only complementing, we have provided when we announced a few math saying that in the first year it would be neutral, second year it would be accretive. Basically in a very simple way, basically we lose the income tax rate (inaudible) and considering the earnings from HSBC growth synergies, we will be able to match what we lose in terms of synergies probably during the first year and that makes in a simple way and I know the due in terms of EPS neutral in the first year. And considering the amortization of goodwill and considering the path on absorption of synergies that we believe or even if we believe three years is the full period for synergies, probably two years already got a picture of it. We believe it's going to be ready in terms of EPS accretive for us.



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 Jorge Kuri,  Morgan Stanley - Analyst   [4]
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 My second question is on your outlook. I know you haven't -- you have not provided 2017 guidance, but just on a qualitative basis, your view on NII for next year in the context of weaker, still overall weak volume environment, falling rates and loan loss provisions, how much can they fall when you continue to see unemployment go off and overall economic activity is being revised down across the board. So what -- how do you think demand adds off in terms of particularly NII and provisions for next year?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [5]
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 Okay. About provisions, extensions which allows us for loan losses, our expectation is that probably next year, this is not the final guidance, our expectations are considering what we can see above the economic expectations for 2017. Probably we will have the stability expense for loan loss, the allowance for loan loss but probably, we can have some decrease in the end of the year. We don't expect any increase -- it's most probable that we can have some decreases in the expenses at the end of the year because the environment and the economy we expect 1% growth in GDP. Probably, delinquency ratio will try to be stable. Only 2018, okay, we've seen in 2018 in the expense is what we expect.

 In the margin NII, we don't have the guidance now. What we can say that, what you helped in margin next year is probably we will recover some volumes in the loan portfolio, we expect some increase. This total market probably we'll grow something over 5% and our expectation is to grow in a similar way. We had this (inaudible) effect that our expectation is that probably will decrease. (inaudible). Then we probably will get some benefitting our fixed portfolio. Then some additional profitability will (inaudible) in our NII from this portfolio. When we talk about HSBC some benefit that we will have is the funding of the HSBC have the higher cost when you compare with Bradesco and then we probably start to manage it -- we're starting out to managing better the cost of funding the HSBC -- price that we will start to reduce. This and other factors will improve our NII next year. Then we don't have our numbers, but we expect some growth broadly, something closer around the loan portfolio growth as this is the main benefit that we expect for next year in the NII.



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Operator   [6]
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 [Jason], Scotia Bank.



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Unidentified Participant   [7]
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 My question is related to lending in the individual segment, the consumer segment. Bradesco reported an increase in NPLs both early delinquency 15 days to 90 days, and for the 90 days some of the statements mentioned so this is may be partially attributed to the strike but maybe you could provide some color there and maybe some details looking at let's say credit cards. What portion of the usage of cards in the quarter were actually became revolving loans or credit and how is that number evolving, how has that been evolving. Are the usage -- are more people utilizing the cards as a source of credit or are more people actually paying their bills in for every month?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [8]
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 Thank you, Jason, for your question. When we talk about specifically about the express card portfolio, in the volume of the operations, we start to have a delinquency ratio increase, we had a reduction in one part of the such card numbers (inaudible), we can see a little higher delinquency ratio whenever we talk about non-clients, for our Bradesco clients we see a little better behavior in the delinquency ratio. Our expectation that probably this portfolio of credit cards will stabilize the delinquency ratio in the next quarter probably. In our portfolio of credit cards in the loan portfolio is normally more closer to the end of the year. You'll be able to see the transition of credit cards. We see a normal movement. We saw a bit this movement particular through the end of the year. I think, it's normal in our portfolio declines their operating installments. What we have here is that we are trying to reduce the revolving operations, for us, we don't have interest the clients stay in the revolving operations for too much time, then we try to offer them some better way or another operation that you have (inaudible) today, but normally we get a limit when we transfer them into this new portfolio.

 This is our normal management that we do in the portfolio. Then increasingly see a normal movement when we are more closer at the end of the year. In a short period the delinquency ratio came to 90 days or one part of the delinquency ratio related to credit cards or out of orders normally because with some non-clients or clients that the through don't automatically finish using tickets. Our cashier because it's right here in September, we believe that some part of the increased ratio in the short period is related (inaudible). But we don't see any addition, now we are seeing the portfolio or in the (inaudible). Our new operations are now new clients that we are selecting better clients using our systems and models to have a better new origination in the operations. Only if you have an idea, our ranges were processed during the price. Normally, big part of the movement was attracting the delinquency ratio in part of the product, but now everything is normal and returning for the normal levels.



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Operator   [9]
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 [Domingos Falavina], JPMorgan.



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Unidentified Participant   [10]
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 My question is, I've two questions. The first one is regarding the hedge you used to have for floating versus fixed. I understand you used to have historically a hedge of about BRL20 billion, you have lowered that to BRL1 billion. And it seems you went back to BRL20 billion and my question is sort of the impact on the NII for the 4Q given the recent decline on the yield curve. So should we expect some kind of a negative impact of equity, if you could provide any data about the magnitude of that to average 60 bps or 100 bps increasing annually one-year curve or the three-year curve. What can we expect, because it seems that your outlook for the reference slight decrease into the next year seemed a bit more aggressive than maybe unwinding as a result of the electoral outlook here in the US?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [11]
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 Speaking of -- probably with the volatility of the dollar and the ratio, it had some impacts in the capital ratios, but we don't expect a huge impact or after adjusting for acquisition, the ratio we understand that we have a very comfortable number. We had the additional improvement in the ratio with the new subordinated debt. Later on that is an additional -- we've had an additional 0.8% in our EBIT. Then probably we will have some impact. It is less than we had it in the third quarter of 2015. But we are very comfortable with the ratios that we have because it does impact to mostly in fact before this movement.



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Unidentified Participant   [12]
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 Remind me, I think that quarter you mentioned was the quarter you had about BRL6 billion, right, of negative impact that the bank reclassifying as a foreseeable for the security.



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [13]
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 No. The effect that we had last year with the volatility, throughout the mark-to-market factoring the equities. This is all a one-off effect because the rates variation or the mark-to-market in the equity. Another fact is the -- with the dollar increasing slightly here in Brazil, we had some increasing in the tax spread that when you do the average -- when you do the calculation for the delinquency ratio, you improved, we had an improvement in the reduction of tax spread. For the total movement last year was 1.61% or 1.2% and the variation of dollar was 30%, 35% I think. Then this has affected similar level of variation what we see is one impact we will have less than we had last year.



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Unidentified Participant   [14]
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 My second question is one on the SME side. We see a lot of filings for bankruptcy actually, very resilient, even growing at the margin. But the NPLs for you if you adjust for the shrinkage of the loan book, they are starting to stabilize. I mean, deteriorating at a lower base. My question is, in your view when should we see the peak in the NPL for the SME, when should we start to see actually even that maybe coming down?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [15]
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 The SMEs, we did, I think, for that had a little more higher delinquency ratio. So because when the small companies had more effect with the small consumption in the Brazilian markets, then we understand that's probably, we are very close of the peak. If we don't being in the next part, we will be in the first part of 2017. We are working hard trying to improve the part of our modules. We are working in to move our portfolio for lower (inaudible) portfolio. Now our new origination of loans had less delinquency ratio, then I thought -- we are very close of the pitch when we talk about and old portfolio that has a little more higher delinquency ratio probably the worst operation that had probably will continuously have integration to the write-offs.

 And the rest of the portfolio has the best (inaudible). Our expectation is that what used to be reaching the peak is probably end of the year now or beginning of the year in this when we talk about SMEs. When we talk about total ratio, probably we are in the center of the range of the year is we are close to the peak. And we are comfortable our expectation is that we don't have any -- our guidance before the loans loss expenses are probably now considering the HSBC numbers. Probably we will finish the year around the middle of the guidance, yes it will close up the middle of the guidance and we don't see too much risk in our portfolio.



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Operator   [16]
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 (inaudible) Santander.



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Unidentified Participant   [17]
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 My question is actually on your acquiring company, the company you have, Banco Cidade. Banco Cidade has been losing market share in points of sale. So we are taking about -- basically, we are talking about less SMEs Bradesco could be selling expensive products. So my question is how uncomfortable Bradesco is with this situation? And if there is any strategy trying to avoid this situation?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [18]
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 I think Cielo is a company, we have their participation in the Company, but we compete with Cielo. I think nowadays, practice is the relationship with the client. We are more closer to clients than we have a lot of broader operations with the clients. Then we try to offer packages to attract the clients which boost our relationship in financial terms. This is the way that we are working our clients. I think we are having (inaudible), but we are competing in a normal way which is Cielo, I think our one important market. So I think we have the, we are more closer to the clients. Then it is relation about each product that you are pricing, then we try to show for our clients that this is a total benefits of the relation that the banking benefits in operations and I think we are having some success in this process.



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Unidentified Participant   [19]
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 So far, there is no let's say initiative acquiring initiative from Bradesco ordered in Cielo. Cielo is the only and solo vehicle for Bradesco?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [20]
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 Cielo, during the movement, we worked for Cielo to improving the conservation demand actually in the acquiring operations, and in improving what we -- we compete with Cielo operations. We don't have any strategies to create any company to compete with Cielo. Cielo is our many say when talk about acquiring is the most important. And we are working for Cielo continues going. But in some situations we are competitive to rock Cielo and these are lower normal situation, when you have the opening companies asking in the market, both companies are interesting then.

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Operator   [21]
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 Thiago Batista, Itau BBA.



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 Thiago Batista,  Itau BBA - Analyst   [22]
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 I have just one question on the capital side. In your calculation of the core capital Q1, after full loaded and after the adjustments of, after the tax spread goodwill amortization, you calculate an increase in the capital of 0.9%, this is mainly the good view of the announcement with synergies. So I have two questions on this. The first one, the good view is the market could you that you believe you will be able to amortize into the end of 2018. And how much is or what is the synergies of HSBC that you mentioned that you mentioned in this chart?



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 Luiz Carlos Angelotti,  Banco Bradesco S.A. - Executive Managing Director & IR Officer   [23]
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 This is a, I think synergies, these are all the, is not benefits of synergies, this is only goodwill amortization. I think it is wrong to interpret synergies. These are the effect of only goodwill and asset amortization until the final implementation of --.



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Operator   [24]
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 Excuse me ladies and gentlemen, seems there are no further questions, I would like to invite the speakers for their closing remarks.



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 Carlos Firetti,  Banco Bradesco S.A. - Market Relations Department Director   [25]
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 Thank you, everybody, for participating in our call. The Investor Relations Department is open to receive further questions you may have. Thank you very much.



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Operator   [26]
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 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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