Q3 2017 Banco Bradesco SA Earnings Call

Nov 01, 2017 AM EDT
BBDC4.SA - Banco Bradesco SA
Q3 2017 Banco Bradesco SA Earnings Call
Nov 01, 2017 / 03:00PM GMT 

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Corporate Participants
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   *  Alexandre da Silva Glüher
      Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers 
   *  Carlos Wagner Firetti
      Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research

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Conference Call Participants
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   *  Carlos G. Macedo
      Goldman Sachs Group Inc., Research Division - VP
   *  Jorge Kuri
      Morgan Stanley, Research Division - MD
   *  Marcelo Telles
   *  Mario Lucio Pierry
      BofA Merrill Lynch, Research Division - MD
   *  Philip Finch
      UBS Investment Bank, Research Division - MD, Global Banks Strategist, and Latam Banks 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 2017 Earnings Results Conference Call. This call is being broadcasted simultaneously through the Internet in the website, banco.bradesco/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, 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 Director.

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 Carlos Wagner Firetti,  Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research   [2]
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 Hi good morning, everybody. Welcome to our conference call. We have today with us here in Sao Paulo are Alexandre Gluher, Executive Vice President and Investor Relations Officer for Bradesco; Octavio de Lazari, Executive Vice President and CEO of Bradesco Seguros; and Luiz Carlos Angelotti, Executive Director.

 To start our conference call, I'd like to turn to Alexandre Gluher.

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [3]
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 Thanks, Firetti. Good morning and for some of you, good afternoon. Thanks for joining our third quarter earnings release conference call.

 I will start with the main highlights in Slide #2. This quarter, net earnings reached BRL4.8 billion, an increase of 2.3% quarter-on-quarter and 7.8% year-on-year, representing a return on equity of 18.1%. The results show good consistence in consolidating our positive trend that should be maintained in 2018, as the economy continues to improve.

 We highlight another reduction in our delinquency ratio, which maintained the improvement trend observed in the previous 2 quarters. The Individuals and SME non-performing loan ratios improved 41 basis points causing a drop in the total NPL by 17 basis points in the quarter despite some pressure from the corporate segment. The NPL (inaudible) reduction permitted a drop in the cost of risk. We understand that this trend should continue, which may allow us to return the best -- to the best historical levels towards the end of 2018. Total cost performance is among the main highlights, stable this quarter and reduced 3.9% when compared to last year. And this is a consequence of our tight control and creates the base for another good performance in 2018, as we capture the full benefits of the adjustments we implemented. As anticipated, we continue to optimize the distribution network reduced in this quarter 223 branches, as these adjustments continue as we -- the distribution network to the evolution of our customers needs. An improvement event in our adjustment process was the conclusion this quarter of the special voluntary severance program. We already disclosed that 7,400 people decided to join the program and leave the company which [will appear] mostly until the end of this year. The non-recurring cost of this program is BRL 2.3 billion and we'll have an annual recurring reduction in personnel cost of about BRL 1.5 billion.

 Loans volumes growth remains a challenge. In the Individuals portfolio, we observed more consistent origination [in the previous quarter] to have an expansion of 0.7% year-on-year. In the Companies segment, we will still seek the loan book stability, we see conditions for a better performance in the coming quarters. Our capital continues to expand organically presenting an increase of 90 basis points in the third quarter with Tier 1 reaching 13.4%, giving us a very comfortable position for the future growth. We will continue to optimize our operation focusing on the origination of loans of good quality, improvement of the portfolio of products and (inaudible) which should allow us to capture revenue synergy. We understand that our results should maintain its consistent evolution. Thank you for your attention and now Firetti will present the rest of numbers.

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 Carlos Wagner Firetti,  Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research   [4]
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 Thank you, Alexandre. Now, we go for details of our results starting in Slide #3. We have the adjustments to our accounting net income. Basically, the main adjustments are the goodwill amortization and the impact of the one-off provisions for the voluntary severance program of about BRL 1.3 billion.

 Going to Slide 4, we have the details of the program, 7,400 people joined this program and as Alexandre mentioned BRL 2.3 billion total cost. Estimated annual benefit in terms of reduction of personnel expenses of BRL 1.5 billion.

 In Slide #5, we have our income statement. I will go into details of most of the slides and the following slide, only highlighting the ROE of 18.1%. We reached this quarter return on assets of 1.5%. Our shareholder's equity grew 11.9% year-on-year, while assets grew 3.3%.

 In Slide 6, we show the evolution of our net earnings in the quarter, it expanded 2.3% and year-on-year 7.8%. 9 months, we present an increased net earnings of 11.2%.

 In Slide #7, we have our net interest income. Basically, total net interest income dropped to BRL14.6 billion. One of the main fact leading to the reduction was the impairment of assets that we include in the net interest income, basically this impairment refers to corporate bonds, and it is the recognition of a definitive loss in the portfolio.

 In slide number 8, we have our interest earning portion of the net interest income, basically we had a reduction proforma 9 months of 6.7% and year-on-year in the quarter of 8.1%. The credit intermediation margin was mainly impacted by lower volumes, this is basically also [just presented] may impact on net interest income as a whole, while spreads are relatively flat. The insurance margin improved this quarter as we had last quarter basically with the impact of a higher EBITDA inflation that is recognized from our bond portfolio. In securities and others, we have the reduction this quarter, we didn't have the impact of dividend, we will -- we speak those with them in the fourth quarter.

 In slide number 9, we have the credit intermediation margin. The credit margins or credit spread still remain consistent. We had a slight increase in the quarter, after provisions we have the even bigger increase in margin, the same should remain as a trend for next year.

 In slide number 10, the expanded loan book. We had reduction in the loan book in the quarter of 1.4%. The individuals portfolio showed -- posted performance increasing 0.1% Q-on-Q, we think this is the beginning of a better trend. The company portfolio is still reduced 2.1%. Year-on-year we had a reduction of 6.7% in the total portfolio for individuals plus 0.7% and company's minus 10.3%. And this hasn't, the individuals portfolio, we see more consistency start to see recovering in most of the lines even car loans, which have been reducing for a few years presented this quarter a better trend. Looking to loan origination in the quarter, year-on-year, individuals loan origination increased 35% compared to the third quarter '16, and we have 21% loan origination in companies. For companies we still have to see further increases in loan origination's for [first] balance of the portfolio and then start to grow again.

 In slide 11, we have probably one of the best news, we have seen in the first quarters, the credit quality trend remain positive. We have the reduction of 41 bps in the NPL for SMEs, 41 bps for individuals, we have an increase of 28 bps for corporates caused by a few cases, while the total NPL reduced 17%, despite this pressure on corporates, we believe the trend for total NPLs remain positive and the NPL formation from corporate doesn't have a big impact in the total NPL.

 In slide 12, we have our 15 to 90 days delinquency ratio. In slide 13, we show the NPL formation, basically we have another reduction this quarter to BRL 5 billion from BRL 5.2 billion, our gross provisions covered a 100% of the NPL formation in the quarter. Our loan loss provisions net of credit recovered reached BRL 3.8 billion in the quarter, another reduction in the quarter reaching 4.14%. As we have been saying, we believe we still can continue improving this provisioning ratio during 2018.

 In slide 14, we have further details of our NPL creation, we have improvements in the SME portfolio, individual portfolio and a small increase in the corporate NPL formation to BRL 0.8 billion.

 In slide 15, we have our provisioning ratios. Our total provisions reached 9.9% of our loan book with our excess provisions remaining at BRL 6.9 billion. Our 90 days NPL coverage expanded from 202% to 208%. We think we have a very consistent provisioning level, and we think this coverage can actually continue improving in the coming quarters.

 In slide 16, our renegotiated portfolio, basically we brought this quarter a new information that is the renegotiated portfolio considering only loans that were still in our book, discounting the credit recoveries that also go to the renegotiated portfolio, so considering the total renegotiated portfolio, we had a reduction of about BRL 100 million, considering the renegotiated portfolio without the recoveries, basically the reduction was bigger and has been happening in the past 2 quarters.

 In slide 17, our fee and commissions income, basically we have the increase of 5% in the quarter year-on-year, 4.3% Q-on-Q, we think our numbers are consistent, we are showing good performance in the asset management, consortium's, brokerage and investment bank, and we believe we still have room for continued capturing, synergies [from] our acquisition, we already see some positive impact, but we think more benefits will come to us next year.

 In slide 18, another very positive story, that is the operating expenses, we showed a reduction in total operating expenses of 3.9% Q-on-Q in the third quarter considering proforma 9 months, a reduction of 3.1%, basically we have a strong reduction in administrative expenses 5.8% where we were able to capture already a big portion of the synergies renegotiating contracts, shutting down the IT platform from HSBC. And we think we still have benefits to capture all the administrative expenses as we are still in the process of reducing branches that overlap with our acquisition, we reduced the 223 branches this quarter as a reduction in 12 months (inaudible) 492 branches and we believe we still have room to continue adjusting, there is a portion of adjustment from the overlap in the fourth quarter and going ahead adjusting according to the evolution of our client needs. In the -- in the personnel expenses, we already had a good performance, but the benefits from the voluntary severance programs are not reflecting in this quarter since most of this 4,500 people left the company in the end of the third quarter. Most of the people from -- that joined program will leave the bank until the end of the year, some probably until February. So, we still have benefit in the coming quarters from cost reduction. In Slide 19, we have our efficiency ratio at 41.5%. The operational coverage ratio of 75. 9%. In Slide 20, we have the numbers from our insurance company. We remain with good performance in terms of premiums. Our premiums are growing 5.1% year-on-year in the third quarter. Pro forma 9 months present increase of 6.7%. Net earnings for insurance company increased 16.8% QonQ with the return on equity reaching 20. 9%.

 In Slide 21, we have the formation on our capital, we continue adding cash on an organic basis as Alexander mentioned, we added 90 bps in capital this quarter. We believe we should continue seeing an evolution of -- in capital from earnings retention going ahead. Our common equity capital ratio was 12.4%, total Tier 1 13.3% considering our fully loaded calculation. And finally in slide 22, we have our guidance. We keep the guidance unchanged. Basically, we have some challenges here. For the expanded portfolio, we believe we can reach the bottom. I think it's feasible. In the net interest income, it's more challenging, but we believe we probably would be close to the bottom of the guidance. Fee and commissions probably center or center high. Expenses, we are more to the lower portion of the guidance, especially considering the impact of the severance program. Premiums, we are doing fine there and allowance for loan losses expenses, the guidance is BRL 18 billion to BRL21 billion. We believe we are going to be in the bottom or eventually likely better.

 So, with that, I conclude the presentation and now I open for questions.

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Operator   [5]
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 Thank you. Ladies and gentlemen, we will now initiate the questions and answer session. (Operator Instructions). Our first question comes from Mario Pierry of Bank of America. You may proceed.

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 Mario Lucio Pierry,  BofA Merrill Lynch, Research Division - MD   [6]
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 Good morning, everybody. Let me ask you 2 questions, please. The first one is related to your net interest income guidance. You're saying it will be challenging already to meet your full year guidance, but you had reduced your guidance in the previous quarter. According to our numbers here, your net interest income is down about 10% in the first 9 months of this year versus fist 9 months of last year. You got into minus 5 to minus 1, you're originally, I think, at 0 to 4. So, my question is, what is surprising you on the net interest margin or net interest income that you have been revising down your forecast? So that's question #1. Question #2 is related to your fee income generation. I think it has been a little bit weaker than what we were expecting. You had originally guided that you expected to see synergies from the HSBC transaction of roughly BRL1.1 billion in revenues. But when I look here, your number of its active accounts, I see that number of active accounts fell from 27.2 million people in September '16 to 25.8 million in September '17. So, can you just talk about, then give us more color on what's going on in terms of revenue synergies with HSBC, and your ability to maintain the clients that you acquired?

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [7]
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 First, starting on the net interest income guidance, only to remind the guidance for the net interest income from interest that is dropping 6.7%. We feel it's challenging. We would need (inaudible) something like 7% growth in net interest income in -- QonQ. The main point that has been impacting net interest income are loan volumes. Basically, we work hard in the center, but the recover actually is happening, but in the third quarter probably lower than we expected, especially in companies or in companies mostly. So, this is probably the main challenge. Another thing I call your attention is considering the asset liability management from the bank, part of the results from net interest income actually end up going to (inaudible) and we recognize these results as we accrue interest from the bonds we have there and we have -- showing a positive market to market in the past few quarters, but as I said, it's possible, but margins itself seems a little bit challenging. Volume is less challenging, productively modest, growth would be in the bottom of the volume guidance, but basically it's -- volume is the main source of challenges there. Regarding fee, I'd say that when you look to the larger clients, the debt reduction is not basically that we are losing clients we acquired from HSBC. The main source of loss is unemployment. We are a bank that is very strong in payrolls. We pay -- we have relationship with companies and their employees receive salaries in Bradesco with the unemployment that leads to some reduction in the number of accounts. This is one of the challenging fields as a whole, doesn't relate necessarily to difficult in HSBC. Regarding HSBC, we feel we are doing fine. We also suffer with the still relatively weak economy, but looking for instance a number we have very precisely that is the low origination for clients from HSBC. We are seeing a pretty good evolution with low origination for clients reaching numbers that are close to the average from Bradesco. So, it's progressing. As we have been saying, we believe we may be -- we will be able to capture its full synergies until the end of next year.

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 Mario Lucio Pierry,  BofA Merrill Lynch, Research Division - MD   [8]
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 Okay, let me go back then to the net interest income. As I remember, in our recent conversations, you're fairly confident that you would be able to maintain your net interest margin stable at least through the second half -- through the first half of 2018, which has benefits to your funding cost from a lower interest rate environment. Is that still the case or are you still feeling or are you getting a little bit more uncomfortable with the margin outlook as we go into 2018?

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 Carlos Wagner Firetti,  Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research   [9]
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 I think realistically, we can assume from stable to slightly down, I think it's more realistic at this point.

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 Mario Lucio Pierry,  BofA Merrill Lynch, Research Division - MD   [10]
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 Okay. And then finally, a follow-up on HSBC. Can you just -- do you have a number that you can provide to us about the retention rate of the clients that you acquired or the retail clients that you have acquired from HSBC? How much of the BRL 1.1 billion in revenues that you're expecting to get in synergies, how much of that has been realized?

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 Carlos Wagner Firetti,  Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research   [11]
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 Mario, personally we are not sharing this numbers, I can tell you that we didn't experience a material loss of clients since we finished the integration of systems or since we assumed HSBC in July '16. Most of the losses have been actually before we assumed the bank. But we can tell you we are progressing, we think -- as I said, it's -- loan origination is kind of a reference, in that case we are really -- we had the material increase from the levels we saw when we assumed HSBC.

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [12]
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 Mario, as a complement, we considered some group of HSBC regional clients and when we compare these groups with our similar group of regional Bradesco clients, we had seen in some groups, almost the same level of profitability, in some groups we reached 70% of the Bradesco profitability of client and in another groups around 90%, then there's a stage to grow more and to be more efficient with -- in these relationships with them.

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Operator   [13]
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 Our next question is coming from Carlos Macedo of Goldman Sachs. You may proceed.

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 Carlos G. Macedo,  Goldman Sachs Group Inc., Research Division - VP   [14]
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 I have a couple of questions. First, I want to go back to -- talking about margins. Your credit margin, as you show is now 13.2%, went up this quarter. And I think Firetti was talking before about how your net credit margin, which is 8.2%, (inaudible) 40 basis points. How you expect that to stay at this level? Just going back to what Mario just asked, I mean, you have -- your cost of risk is pretty much at the lowest level that it's been in several years, pretty close to where it was in 2014, 2015, in 2014, so specifically went across when things are much better. There might be a little bit to improve, but not that much. So, and you still haven't seen the effect of the whole rate and spreads on the credit margin, which should contract. Do you really think that, that can stay at 8.2%, do you think that will go [7.8, 7.5] how far do you think you can get, I mean this year, meaning more on the medium-term say by the end of next year, given the outlook stays as is. Second question, the loan portfolio for -- on the consumer side increased sequentially, I think it was the first sequential increase in auto loans since 2011, which is a very big shift, I would say. Obviously you saw conditions that improved and allowed you to be more aggressive or take more risk, do you think that there's something at the horizon for the SME book, which is one of the books that really suffered over the last 18 months, that could allow you to start growing that book again, over the next maybe couple of quarters? Thanks.

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [15]
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 Thank you, Carlos. Regarding margins and also you related to cost of risk, looking to our portfolio and specially looking to our loan vintages and the level of new cost of risk originated from these vintages, we can still continue, improving for -- gradually for some quarters. Remember that even though we are -- we have already improved, we are still higher than what we see as the bottom and then on top of that, remember, the mix shift to lower risk, so we have been changing the mix to lower and lower risk for a few years, but actually given the crisis, the cost of risk increased, not improved. So we feel we still have room for improving cost of risk. In terms of margins, basically as I said, we have some impact from depositions in our asset liability management, some fixed rate depositions in the loan book and [on GAAP] we should have some benefits from that. For sure, the reduction in the SME book that is of fixed rate portfolio and reduces a little bit something tax of that comparing to other moment, but that is still there as I said, there are also results to be accrued to the margins in the (inaudible). We don't see any pressures in spreads. We do believe that as the economy improves we may see some corrections in spreads, but we don't think there will be any disruption spreads, this is more a gradual adjustment has probably volumes improve. So we believe this will become incidental improvement in volumes. Then linking that with your question, on loans, we are seeing kind of a wide spread recovery in the individuals portfolio, which this time in the origination of improving in almost all spread lines, even personal loans. We saw the first growth as you said in the auto loans in years, and we feel that this trend should remain. We probably will continue to see improvement in the individuals portfolio. In companies, is a little bit more challenging given that -- even with the recovery in the economy, actually companies are more recovering inventories basically enjoying a better moment than actually starting investment phase. So even with that, we still as sales grow, as companies start to sell more, the increasing volumes on receivables actually creates the base from our lending, you'll know especially for SMEs, the ability to grow with clean credit lines is limited, the cost is too high, the risk is too high, as we have more receivables as the economy picks up, that creates the base for -- maybe growing more even in the SME portfolio.

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 Carlos Wagner Firetti,  Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research   [16]
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 One important strategic point is that, that we are working for volumes of course in credits, but we are focused on quality, more on quality than market share. Then we are selected to give credit is to produce credit, as I said looking for volumes, both preserving and reaching better levels of quality.

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Operator   [17]
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 Our next question is coming from Jorge Kuri from Morgan Stanley. You may proceed.

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 Jorge Kuri,  Morgan Stanley, Research Division - MD   [18]
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 Can we just go back to margins, I'm sorry, so your net interest margin as you reported on the interest portion of your asset excluding training and [permanent] assets was 6.9%, that's down from 7.2% in the previous quarter, so there is an acceleration in the contraction in margins down 30 basis point this quarter versus 20 basis points in the previous quarter, for the first 9 months of the year, you are down 60 basis points. So, given your asset sensitivity and the fact that average interest rates continue to come down and your bank book will reprice at the lower rates, where do you think -- when and at what level did you think your margins are going to bottom up -- bottom down. So, you are 6.9%, how much more should that go down and when is that -- what quarter of next year do you think that that will reach the bottom? That's my first question. And then on the second question, I'm going back to third question that Mario made on HSBC. If I look at your operating results pre-provision for the first 9 months of this year, which include HSBC compares to the first 9 months of last year, excluding HSBC, that number is down 5%. So, I'm just wondering where is HSBC and if I look at Itau for example with no acquisitions and they have stated that they're even more asset sensitive. Their 9 months pre-provision operating profit was down 2% versus you're down 5% and you added whole new business. So, I'm just trying to figure out where is HSBC and when are we going to see some of the benefits. You said that it was going to be fully consolidated in 6 months and hasn't. I mean I don't know if it's played out or not. So, maybe can you tell us what's the contribution of HSBC to your operating results in the first 9 months of this year?

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 Carlos G. Macedo,  Goldman Sachs Group Inc., Research Division - VP   [19]
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 Considering margins, we -- despite this reduction, as I said, we have still results to be recognized margin that were actually marked in equity and this is going to be -- this interest will be accrued at we convert to the maturity of this month. So, basically we believe that margins, nothing else happening probably should bought on by the end of the year or around the end of the year. I think that that's when all the actually (inaudible) business from our balance sheet, probably most of it is actually gone. For the following years, there is a lot of moving parts, not effective on the margins, but as I said, the volumes we do believe next year volumes will be better, and depending on how things progress, we believe '19 could be even a better year with room for really [risking off] the portfolio. So -- but basically strictly on your question probably the (inaudible) will not be -- the reduction is not going to be short, is going to be gradual, especially due to the combination of gain from our asset liability management positions. Regarding HSBC, basically the thing is we have a lot of moving parts. The economy from the -- actually it hasn't been helping in terms of -- since we incorporated HSBC. It's starting to improve only now. We have been doing a good job in terms of cost reduction and that is not fully reflected in the numbers this year. Actually, since we have been advancing a lot in the cost side in the past few quarters, actually the benefit from this cost reduction will actually reflect more next year. Even this quarter, where we had the voluntary dismissal program where almost 4,500 people left. Actually, they left at the end of the quarter. There is no major benefit reflected there also. We closed branches throughout the quarter. So, on the cost front, we are doing the job and capture a meaningful amount of synergies. On the revenue front, basically big part of the synergies come from talking client to client and convincing them and telling them better services and charging for it. It has been a challenging environment, and as we said, the process is moving, but we couldn't go faster than expected. So, basically we believe we can still capture meaningful synergies from HSBC until the end of '18. That is actually what we have been saying. We were actually able to do faster than expected the capture of synergies on the cost front. But actually on the revenue front, it's going to be -- it will take a little bit more time. We did already achieve good results in terms of increasing the origination of loans per a client. This is something that as loan growth peaks up, we believe it will be important source of growth, but so far we are in the process of capturing the revenues on the service side.

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 Jorge Kuri,  Morgan Stanley, Research Division - MD   [20]
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 Thanks, Carlos. If I just may follow up on my first question. So, you said the bottom of margins end of this year or maybe beginning of next year and I also asked how much more are there coming down, so 6.9%, what do you think the bottom is, what level? (inaudible) your third quarter?

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 Carlos G. Macedo,  Goldman Sachs Group Inc., Research Division - VP   [21]
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 I prefer -- let's change a little bit the way we refer to this, because turning it to more alliance with the way we present our guidance, not in terms of margin, more in terms of NII as I said. This year, the bottom of our guidance for margin is minus 5. We will be probably slightly lower than that. For next year, we believe NII may be from a stable to somewhat down or slightly down. So, that's what we expect for NII, you can translate it to the NIMs.

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Operator   [22]
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 Our next question is coming from Marcelo Telles of Credit Suisse. You may proceed.

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 Marcelo Telles,    [23]
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 Thank you for your time. I have couple questions. And I think the first one is actually a suggestion. I think it's caused a lot of confusion, in terms of the NII analysis from what I have seen from the question before, we got an impact of the impairment, so on the comment to put the impairment losses in the provisions as one of your competitors do, because I think it's causing quite a bit of confusion. I mean for instance if you look at your pre-tax earnings -- pre-tax pre-provisioning earnings in the 9 months of the year, that's actually not down 5%, is actually flat. So, because the impairment is in a different line. So I just -- I think that will help understanding better the NII trend, but in that point, I just want to also reconcile the dividend that you guys receive apparently twice a year from one of the [equity management] that you have. I understood this has been -- it's quite material and you received in second quarter, but you did not receive it in the third and very likely you're going to receive in the fourth quarter, right, and this seems something that you guys received every year. So if you could elaborate on that, that can also explain the impacts, I think it could be some hundreds of millions, that could be reverted into fourth quarter? So if you could explain that, clarify that, that will be good? And my other question is regarding the loan growth. As you mentioned that you expect better loan environment next year, how much of our loan growth you think, you'd be able to achieve next year? Do you think like 3%, 4%, sounds like the number and more specifically in terms of your SME book, which has been declined [establishes] being the risky, when do you think we should start to see a growth in the SME portfolio?

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [24]
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 Thank you, Marcelo. Regarding the impairment, we think you are right. We cap the impairment as we are reporting that is actually the right way considering the accounting placed impairment should be, plus on a managerial point of view, probably it is better to have it together with the cost of credit, and we will do that next year. We discussed about that in the middle of the year when changing the guidance, but we felt that changing that probably would create even more confusion, so we decided to keep it for this year and change it probably for next year, but we think you are right.

 Regarding the dividends from the Bradesco BBI Investment, what we can tell you is, we see slight failure, you can take that for granted. The quarter, when we receive it depends not entirely on us, it depends on the company that is paying when they formalize it, so we didn't receive it this quarter, it's going to be in the fourth quarter to avoid confusion -- the best we can say is it's slight failure one first half, one second half by contract. But we cannot really give too much precision on which quarter it will be. And we receive this year once in that second quarter. Basically in terms of loan growth, our economists basically believe loan growth for next year for the market should be something like 5%. If that's the case, probably we would be growing something like that or slightly better, so that's the reference. Certainly it seems that individuals who believe in the fact in the company's portfolio trends afterward. But it's not a formal guidance, only a reference on what we believe for the market as a whole.

 Regarding SMEs, as I mentioned, we believe the growth in SMEs is largely dependent on basically -- on more demand and more sales and more receivables, high quality receivables that backed the credit lines where we can really operate with more volumes. We think that -- we're going to be seeing that, probably, starting the first half next year, we believe that's on a Q-on-Q basis, probably the first half last year is a good target for us, starting to see some recovery in growth, in SMEs in the first quarter. You saw, if you see to this quarter, the SME portfolio actually the reduction decelerated, this was still a meaningful one, 1.8% in the quarter, it was actually lower than for large companies, we think there's Q-on-Q reductions probably can -- will continue reducing fourth quarter -- they have some --

 be some better performance there, but really we are still seeing improvements. As I mentioned, if you look through loan origination of three credit lines in the third quarter comparing to third quarter '16, there is a growth of 21% year-on-year. So origination is improving, we still have to see more -- higher growth in these origination's to lead to an equilibrium in the portfolio.

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 Marcelo Telles,    [25]
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 Just one final question, if I may. Regarding your insurance business, particularly the [technical] result of insurance, when you look at the numbers, we do see still relatively a high loss ratio, that you wish to have back in 2014, so how should we think about your insurance business down the road, I mean with the economy improving, (inaudible), stabilizing or is that you grew, could that be aligned with a potential, as a positive surprises down the road? Thank you.

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [26]
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 I think the most important problem in terms of loss ratio, it comes from a health insurance, that actually we suffered with the economy. We lost the clients during the process. There was an impact from unemployment. But as unemployment reaching the peak and then if it stabilizes, and the economy improving with the new loss ratio there can -- health insurance can improve materially. This quarter, there was already a meaningful improvement in the loss ratio for health insurance. It basically -- it helps and we think we will see more consistent numbers in improvement in the health insurance in the coming quarters.

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Operator   [27]
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 Our next question is coming from Philip Finch of UBS. You may proceed.

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 Philip Finch,  UBS Investment Bank, Research Division - MD, Global Banks Strategist, and Latam Banks Analyst   [28]
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 3 questions from me as well. First of all regarding your capital position. Clearly you've been rebuilding capital very well, since the HSBC acquisition. I just want to know, at what level of capital the common equity Tier 1 ratio, would you want to reach before you start to think of deploying more capital to shareholder i.e., raising your payout ratio? Second question is related to your asset quality and specifically cost of risk. Again, a very good progress on this front especially in the latest quarter with cost of risks coming down significantly to around 4%, so the question is how much lower can we go especially given the loan competition -- today it's very different from what it used to be, being a lot more defensive or conservative, so how much low can we go and also how quickly? Thank you very much.

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 Alexandre da Silva Glüher,  Banco Bradesco S.A. - EVP, Chief Risk Officer, IR Officer & Member of The Board of Executive Officers    [29]
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 Okay. In terms of capital, basically we have been adding capital organically sequentially, our fully loaded ratio including the SMEs for use of tax credit and goodwill amortization is 13.3% Tier 1, 12.4% common equity, is still a good level. Basically, we don't have at this moment of the plans of changing any of our policies in terms of capital deployment. We are still in the final steps of implementation of BIS III, with the yield we can ahead potentially grow more. So, we probably will be adding a little bit more capital organically until the end of next year. But that said, we actually have been paying more dividends. If you look to our current payout, considering we have been paying interest on capital at full, it has been higher than 40%, but it's quite good. Basically, we don't have a kept for dividends, we never had. So, basically there is no restriction in paying more. So, probably we should -- also the base of calculation for paying dividends is the accounting earnings that still has the impact of goodwill amortization. But it's -- we think we should add a little bit more capital throughout of -- from next year. And regarding asset quality, how long it can go. As you'll -- we think as you said, we have a change in mix -- you have witnessed change in mix, given the cycle, we have actually an increase in delinquency ratio in cost of risk. And as we improve our credit quality, we see that our new vintage are performing better -- still performing better than the current levels. We think it still has room to improve. We don't have a target, but it wouldn't be -- it would be possible to actually at some point at the end of next year to give -- to reach very low tariff levels.

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Operator   [30]
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 Thank you. Ladies and gentlemen, since there are no further questions, I would like to invite the speakers for their closing remarks.

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 Carlos Wagner Firetti,  Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Former Head of Equity Research   [31]
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 Thank you very much all for participating in our conference call. The Bradesco's Investor Relations department is available for answering any other question you may have. So, thank you, all.

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Operator   [32]
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 That does conclude our Banco Bradesco's audio conference for today. Thank you very much for your participation. Have a good day.




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