6-K 1 bbdfs2020_6k.htm 6-K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
 
For the month of March, 2021
Commission File Number 1-15250
 

 
BANCO BRADESCO S.A. 
(Exact name of registrant as specified in its charter)
 
BANK BRADESCO
(Translation of Registrant's name into English)
 
Cidade de Deus, s/n, Vila Yara
06029-900 - Osasco - SP
Federative Republic of Brazil
(Address of principal executive office)
 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.  Form 20-F ___X___ Form 40-F _______

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No ___X____

 .

 
 

 

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

 

Table of Contents

 

Independent Auditors’ Report 3
Audit Committee Report 9
Consolidated Statements of Income 10
Consolidated Statements of Comprehensive Income 11
Consolidated Statements of Financial Position 12
Consolidated Statements of Changes in Equity 13-14
Consolidated Statements of Cash Flows 15-16

Notes to the Consolidated Financial Statements

1)   General information 18
2)   Significant accounting practices 18
3)   Risk Management 42
4)   Estimates and judgments 91
5)   Operating segments 93
6)   Net interest income 97
7)   Fee and commission income 98
8)   Net gains/(losses) on financial assets and liabilities at fair value through profit or loss 98
9)   Net gains/(losses) on financial assets at fair value through other comprehensive income 98
10)   Net gains/(losses) on foreign currency transactions 98
11)   Income from insurance and pension plans 99
12)   Personnel expenses 99
13)   Other administrative expenses 100
14)   Depreciation and amortization 100
15)   Other operating income/(expenses) 100
16)   Income tax and social contribution 101
17)   Earnings per share 105
18)   Cash, balances with banks and cash equivalents 105
19)   Financial assets and liabilities at fair value through profit or loss 106
20)   Derivative financial instruments 107
21)   Financial assets at fair value through other comprehensive income 112
22)   Loans and advances to financial institutions 113
23)   Loans and advances to customers 114
24)   Bonds and securities at amortized cost 125
25)   Non-current assets held for sale 126
26)   Investments in associates and joint ventures 127
27)   Property and equipment 130
28)   Intangible assets and goodwill 132
29)   Other assets 133
30)   Deposits from banks 134
31)   Deposits from customers 134
32)   Funds from securities issued 134
33)   Subordinated debt 136
34)   Insurance technical provisions and pension plans 137
35)   Closed Supplementary pension plans 145
36)   Provisions, Contingents Assets and Liabilities and Legal Obligations – Tax and Social Security 148
37)   Other liabilities 151
38)   Shareholders’ Equity 153
39)   Transactions with related parties 156
40)   Off-balance sheet commitments 158
41)   New standards and amendments and interpretations of existing standards 159
42)   Other information 159

 

2 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Independent Auditors’ Report

 

 

Independent Auditors’ Report on consolidated financial statements

 

To

Shareholders and the Board of Directors of

Banco Bradesco S.A.

Osasco – SP

 

Opinion

We have audited the consolidated financial statements of Banco Bradesco S.A. (“Bradesco”), which comprise the consolidated statement of financial position as of December 31, 2020 and the respective consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and notes, including significant accounting policies and other clarifying information.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Banco Bradesco S.A as of December 31, 2020, and of its consolidated financial performance and its consolidated cash flows, for the year then ended, in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

 

Basis for opinion

We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards, are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements” section of our report. We are independent of Bradesco and its subsidiaries in accordance with the relevant ethical requirements included in the Accountant´s Professional Ethics Code and the professional standards issued by the Brazilian Federal Accounting Council and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key Audit Matters

Key audit matters are those that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were treated in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and, therefore, we do not express a separate opinion on these matters.

 

Assessment of the allowance for expected credit losses on loans and advances to customers, loan commitments, financial guarantees, financial assets at fair value through other comprehensive income and securities at amortized cost

As discussed in notes 2d viii, 3.2, 4, 21d, 23, 24 and 40, to the consolidated financial statements, the Bank has R$ 51,314,052 thousand of allowance for expected credit losses (ECL) related to loans and advances to customers and securities at amortized cost, loan commitments, financial guarantees and financial assets at fair value through other comprehensive income (FVOCI), as of December 31, 2020. The Bank recognizes a lifetime ECL for those contracts that have experienced a Significant Increase in Credit Risk (SICR) since initial recognition or are credit impaired, and a 12-month ECL for all other contracts. The Bank calculates ECL either on a group basis, using models, or, for certain significant exposures, on an individual basis, estimating the future cash flows including the value of related collateral. To calculate ECL on a group basis the Bank segregates the portfolio of contracts on the basis of shared credit risk characteristics and uses estimates of the Probability of Default (PD), the Loss Given Default (LGD) and the Exposure at Default (EAD) as well as estimates of the impact of projections of future economic conditions.

We identified the assessment of the ECL as a key audit matter. The estimation of ECL involved significant measurement uncertainty, primarily as a result of the complexity of the models and the quantity and subjectivity of the assumptions. These included: the overall ECL methodology, inclusive of the methodologies and assumptions used to estimate the PDs, EADs and LGDs; the future macroeconomic scenarios; the identification of a SICR (stage 2) and exposures that are credit impaired (stage 3); and, for ECL calculated on an individual basis, the expected cash flows including the related collateral valuation. The measurement uncertainty was accentuated by the effects of the Covid-10 pandemic on the current economic scenario and its possible effects in the future.

 

Bradesco 3

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Independent Auditors’ Report

 

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the process for calculating the ECL. This included controls related to: (1) the development and approval of the ECL methodology; (2) the determination of the methodologies and assumptions used to estimate PD, EAD, LGD and the future macroeconomic scenarios; (3) the validation of models used to calculate the ECL; (4) the calculation of the ECL estimate; and (5) the projection of expected cash flows, including related collateral values, for ECL calculated on an individual basis.

 

We involved credit risk professionals with specialized skills and knowledge, who assisted in: (1) assessing the Bank’s ECL methodology for compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); (2) testing the accuracy of the Bank’s PDs, EADs and LGDs using the Bank’s historical data and defined methodologies; (3) analyzing whether the contracts are segmented by shared credit risk characteristics for the estimation of PD by observing historical correlation; and (4) evaluating the relevance of the macroeconomic variables considered in the future scenarios by analyses of regression and historical correlation. We compared the consider indices projected by the Bank in the future macroeconomic scenarios with independent third-party projections. For a selection of contracts, we evaluated the ECL calculated on an individual basis, including the assessment of expected cash flows and related collateral. For a sample of contracts, we assessed the adherence to internal policies in the identification of SICR and the classification of financial instruments in stages 2 and 3.

 

Based on the evidence obtained through the procedures summarized above, we consider the ECL to be adequate in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2020.

 

Evaluation of the measurement of provisions and the disclosure of contingent liabilities - tax, civil and labor lawsuits

As discussed in notes 2j, 4 and 36, to the consolidated financial statements, the Bank is a defendant in tax, civil and labor lawsuits for which it has provisions of R$ 8,271,112 thousand, R$ 9,092,421 thousand and R$ 6,890,498 thousand, respectively. The provisions for tax lawsuits include amounts relating to the legality and constitutionality of certain taxes. The provisions for civil lawsuits include certain indemnity claims for alleged moral and economic damages arising from the Bank’s actions in the course of providing banking products and services, adjustments for inflation on savings account balances due to the implementation of economic plans by the Federal Government and certain other specific civil lawsuits. In each case, the Bank applies judgment to determine the likelihood of loss and estimate the amount involved. For labor lawsuits, the Bank uses a model, based on historical data. The Bank segregates the lawsuits based on certain characteristics and uses the historical data to calculate the provision for each group of lawsuits.

 

We identified the evaluation of the measurement of provisions and the disclosure of contingent liabilities for certain tax and civil lawsuits and for labor lawsuits as a key audit matter. The evaluation required challenging auditor judgment due to the subjective nature of the estimates, judgments and assumptions made by the Bank. In the case of the tax and civil lawsuits, those estimates, judgments and assumptions related to estimating the likelihood of loss and the amount of any such loss, and, in the case of labor lawsuits, they related to the segregations used in the model and the historical observation period.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the evaluation and measurement of the provisions and disclosures for tax, civil and labor lawsuits. This included controls related to: (1) the assessment of information received from external and internal legal advisors on tax, civil and labor lawsuits; and (2) the development and approval of the models and assumptions used to measure the provision for labor liabilities.

 

We obtained and read the letters received directly from the Bank’s external legal advisors for certain tax lawsuits, and the documentation prepared by the internal legal advisors for certain civil lawsuits, which included an assessment of the likelihood of loss and an estimate of the amount of such loss. We compared these assessments and estimates with those used by the Bank, and considered historical data and information related to the lawsuits in question as well as to other similar lawsuits in order to evaluate the provisions and

 

4 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Independent Auditors’ Report

 

disclosures made in relation to these matters. We involved tax professionals with specialized skills and knowledge, who assisted in the assessment of the likelihood and estimate of loss of certain specific tax lawsuits based on the technical merits of the Bank’s position and the supporting documentation. We also involved legal professionals with specialized skills and knowledge, who assisted in the assessment of the likelihood of loss in certain specific civil lawsuits. For the labor lawsuits, we: (1) evaluated the length of the historical observation period used by the Bank by comparing it to the results of using alternative periods; (2) tested the accuracy of the segregations used in the model; and (3) tested the accuracy of the Bank’s model using the Bank’s historical data and defined methodologies. For civil and labor lawsuits, we tested the sufficiency of the provision by comparing actual disbursement in the year to the amounts provided for at the previous year end.

 

Based on the evidence obtained through the procedures summarized above, we consider the measurement of provisions and the disclosure of tax, civil and labor contingent liabilities to be adequate, in the context of the consolidated financial statements taken as a whole for year ended on December 31, 2020.

 

Assessment of the recoverability of deferred tax assets arising from carry-forward tax losses

As discussed in notes 2t, 4 and 16 to the consolidated financial statements the Bank has R$ 68,515,007 thousand of deferred tax assets arising from carry-forward tax losses as of December 31, 2020. The Bank recognizes these deferred tax assets to the extent that it is probable that future taxable profits will be available against which the carry-forward losses can be utilized. The Bank’s estimates of future taxable profits are based on its business plans and budgets which require the Bank to make a number of assumptions related to future events and conditions. Changes in certain assumptions about the future, such as growth rates of the principal lines of business, interest rates and foreign exchange rates, could have a significant impact on these estimates and, consequently, on the recoverability of deferred tax assets arising from carry-forward tax losses.

 

We identified the assessment of the recoverability of deferred tax assets arising from carry-forward tax losses as a key audit matter. The evaluation of the estimates of future taxable profit and the underlying assumptions required subjective auditor judgment because of the sensitivity of the estimate to minor changes in the assumptions and the degree of subjectivity associated with those assumptions. This subjectivity was accentuated by the uncertainty related to the possible future effects of the Covid-19 pandemic on the economic situation.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the process to estimate future taxable profits. This included controls related to the development and approval of key assumptions for the budget and the final estimates of future taxable profits.

 

We involved corporate finance professionals with specialized skills and knowledge, who assisted in assessing the assumptions, including growth rates of the principal lines of business, interest rates and foreign exchange rates underlying Bradesco’s estimate of future taxable profits, as well as the possible effects of the Covid-19 pandemic on the economic situation. We evaluated the Bank’s ability to accurately project taxable profits by comparing the estimated taxable profits for the year ended December 31, 2020 made in the prior year with actual taxable profits in 2020, taking into account the impacts of Covid-19.

 

Based on the evidence obtained through the procedures summarized above, we consider the assessment of recoverability of deferred tax assets arising from carry forward tax losses to be adequate in the context of the consolidated financial statements taken as a whole for the year ended on December 31, 2020.

 

Evaluation of the impairment testing of goodwill and intangible assets

As discussed in notes 2g, 2i, 4 and 28 to the consolidated financial statements the Bank has goodwill of R$ 7,093,544 thousand and other intangible assets with finite useful lives of R$ 3,631,848 thousand. The Bank performs impairment tests for goodwill at least annually and, for other intangible assets with finite useful lives, whenever there is objective evidence of impairment. As part of the impairment test of these assets, the Bank estimates recoverable amounts ​​of the relevant Cash Generating Units based on the present value of future cash flows. In order to estimate future cash flows the Bank estimates the growth rates for different businesses, income streams and expenses based on its business plans and budgets which, in turn, are based on a series of business and economic assumptions.

 

We identified the evaluation of the impairment testing of goodwill and intangible assets as a key audit matter. There is a high degree of subjectivity in determining the significant assumptions, including the growth rates for

 

Bradesco 5

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Independent Auditors’ Report

 

different businesses, revenues and expenses, and the discount rates used, which was accentuated by the uncertainty related to the possible future effects of the Covid-19 pandemic on the economic situation.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the impairment testing of intangible assets, including controls related to: (1) the development, review and approval of the growth rates and discount rates used to determine the present value of future cash flows; and (2) the independent review of the calculation methodology to perform the impairment test.

 

We involved corporate finance professionals with specialized skills and knowledge who assisted in: (1) evaluating the growth rates used for different businesses, revenues and expenses by comparing them to information obtained from internal and external sources, including the possible impact of the Covid-19 pandemic on these assumptions; (2) evaluating the discount rates used in the impairment tests by comparing them to ranges of discount rates that were developed independently using publicly available market data for comparable entities; (3) assessing the Bank’s ability to project cash flows by comparing the prior year’s projections for the year ended December 31, 2020, as subsequently adjusted by the Bank for the expected impacts of Covid-19, with actual cash flows in this year; and (4) testing the mathematical accuracy of certain steps of the present value calculations.

 

Based on the evidence obtained through the procedures summarized above, we consider the evaluation of the impairment testing of intangible assets to be adequate in the context of the consolidated financial statements taken as a whole for the year ended December 31, 2020.

 

Evaluation of the measurement of insurance and pension plan technical provisions

As discussed in notes 2l, 4 and 34 to the consolidated financial statements the Bank, has R$ 279,465,384 thousand of technical provisions related to insurance and pension plans. To measure certain technical provisions and to perform the liability adequacy tests, the Bank uses actuarial techniques and methods that require judgment to determine methodologies and define assumptions including expected claim amounts, longevity, persistence, inflation of medical costs and discount rates.

 

We identified the evaluation of the insurance and pension plan technical provisions as a key audit matter. The assumptions used in their measurement are subjective and this subjectivity was accentuated by the uncertainty related to the possible future effects of the Covid-19 pandemic on the economic situation. Minor adjustments to certain assumptions can result in significant changes in the measurement of these liabilities. Subjective auditor judgment and specialized actuarial skills and knowledge was required to assess the assumptions as well as the actuarial methodologies used.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the liability adequacy tests and the measurement of technical provisions. This included controls related to: (1) the development and approval of actuarial methodologies and assumptions in respect of expected claim amounts, longevity, persistence, inflation of medical costs and discount rates; and (2) the review and approval of the final calculations.

 

We involved actuarial professionals with specialized skills and knowledge who assisted in: (1) evaluating the methodologies used in the measurement of certain technical provisions and the liability adequacy tests by comparing them to market practice; (2) assessing the assumptions related to expected claim amounts, longevity, persistence, inflation of medical costs and discount rates, by comparing them to the Bank’s historical experience and publicly available information, including the possible impact of the Covid-19 pandemic on these assumptions; (3) testing, through the use of a specialized software tool, the accuracy of certain technical provisions based on the Bank’s historical data, assumptions and methodologies; (4) developing, through the use of a specialized software tool, generally accepted actuarial techniques and independently sourced assumptions, an independent estimate of certain technical provisions; and (5) assessing the Bank’s ability to accurately project claims by comparing historical estimates of the last 3 years with subsequent payments made.

 

6 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Independent Auditors’ Report

 

Based on the evidence obtained through the procedures summarized above, we consider the measurement of the liability adequacy test and the technical provisions for insurance and pension plans to be adequate in the context of the consolidated financial statements taken as a whole for the year ended December 31, 2020.

 

Application controls and general information technology controls

Bradesco's technology environment has processes for managing access and changes in systems and applications, for developing new programs, besides automated controls and/or controls with automated components in the several relevant processes. In order to maintain its operations, Bradesco provides its employees with access to systems and applications, taking into account the duties performed by them and within its organizational structure. The controls to authorize, monitor, restrict and/or revoke the respective accesses to this environment aim to assure that the accesses and information updates are appropriately performed and by the appropriate professionals, to mitigate the potential risk of fraud or error arising from inappropriate access or change in a system or information, and to ensure the integrity of financial information and accounting records.

 

We consider this area as significant for our audit due to Bradesco's high dependence on its technology systems, the high volume of transactions processed daily, and the importance of access controls and change management in its systems and applications to plan the nature, timing and extent of our audit procedures.

 

How our audit approached this matter

The primary procedures we performed to address the matter significant to our audit is summarized below.

 

With the assistance of our information technology professionals with experience and knowledge in the sector, we performed the following procedures:

 

(i)We tested the design and operational effectiveness of certain key access controls, such as authorizing new users, revoking disconnected users and reviewing active users;

 

(ii)We carry out tests, based on sampling, since we plan to rely on specific information, on information extracted from certain systems, considered relevant for the purposes of preparing the consolidated financial statements;

 

(iii)In areas where, in our judgment, there is a high dependence on information technology, our tests also included the assessment of password policies, security settings and controls on developments and changes in systems and applications;

 

(iv)When we identify key internal controls for the financial reporting process and other relevant processes that are fully automated or with any component dependent on systems and applications, we test the design and operational effectiveness of these controls.

 

The evidence obtained through the procedures summarized above allowed us to consider application controls and general information technology controls to plan the nature, timing and extent of our audit procedures in the context of the consolidated financial statements taken as whole for the year ended December 31, 2020.

 

Responsibilities of management and those in charge with governance for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and internal controls as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement whether due to fraud or error.

 

In preparing the consolidated financial statements, management is responsible for assessing Bradesco’s ability to continue as going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless management either intends to liquidate Bradesco and its subsidiaries or to cease operations, or there has no realistic alternative but to do so.

 

Those charged with governance are those responsible for overseeing Bradesco´s financial reporting process.

 

Bradesco 7

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Independent Auditors’ Report

 

 

Auditor’s responsibilities for the audit of the consolidated financial statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor´s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

As part of an audit in accordance with the Brazilian and International Standards on Auditing, we exercise professional judgment, and maintain professional skepticism throughout the audit. We also:

 

·identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtained audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting material misstatement resulting from fraud is higher than for the one resulting from error, as fraud may involve collusion, forgery, intentional omission or misrepresentations, or the override of internal controls.

 

·obtain an understanding of internal control relevant to the audit to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Bradesco and its subsidiaries internal control.

 

·evaluate the appropriateness of the accounting policies used and the reasonableness of accounting estimates and related disclosures made by Bradesco.

 

·conclude on the appropriateness of management’s use of the going concern basis of accounting, and, based on the audit evidence obtained, whether material uncertainty exists related to events or conditions that may cast significant doubt on Bradesco’s ability to continue as going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements, or if such disclosures are inadequate to modify our opinion. Our conclusions are based on the audit evidences obtained up to the date of our auditor’s report. However, future events or conditions may cause Bradesco and its subsidiaries to cease to continue as a going concern.

 

·evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

·obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provided those charged with governance with a statement that we have complied with the relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear our independence, and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determined those matters that were of most significance in the audit of the consolidated financial statements of the current period, and are therefore

 

8 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Independent Auditors’ Report

 

the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matters, or when, in extremely rare circumstances, we determine a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefit of such communication.

 

 

 

 

Osasco, March 09, 2021

KPMG Auditores Independentes

CRC 2SP-028567/F

 

Original report in Portuguese signed by

 

André Dala Pola

Accountant CRC 1SP214007/O-2

 

Bradesco 9

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Audit Committee Report

 

Bradesco Financial Conglomerate Audit Committee´s Report on financial statements prepared in accordance with International Financial Reporting Standards (IFRS)

In addition to the Audit Committee's Report related to the consolidated financial statements of Banco Bradesco S.A. for the year ended December 31, 2020, issued on February 3, 2021, we have also  analysed the complete set of consolidated statements in accordance with the International Financial Reporting Standards (IFRS) and the pronouncements issued by the International Accounting Standards Board (IASB).

As mentioned in the report referred to above, our analysis has taken into consideration the work carried out by independent auditors and the internal controls systems maintained by the various financial areas of Bradesco financial conglomerate, mainly Internal Audit, Risk Management and Compliance areas.

Management has the responsibility of defining and implementing accounting and management information systems that produce the consolidated financial statements of Bradesco and its subsidiaries, in compliance with Brazilian and international accounting standards.

Management is also responsible for processes, policies and procedures for internal controls that ensure the safeguarding of assets, timely recognition of liabilities and risk management for Bradesco Organization transactions.

Independent Auditors are responsible for auditing the financial statements and for issuing an auditing report on their compliance with applicable accounting principles.

The responsibility of internal auditors is to assess the quality of Bradesco Organization's internal control systems and the regularity of policies and procedures determined by Management, including those used to prepare accounting and financial reports.

The Audit Committee is responsible for evaluating the quality and effectiveness of the internal and independent auditors' work, the effectiveness and adequacy of the internal control systems, and also for analyzing financial statements in order to issue, when applicable, pertinent recommendations.

 

Based on the review and discussions mentioned above, the Audit Committee recommends that the Board of Directors approves the audited financial statements for the year ended December 31, 2020, prepared in accordance with International Financial Reporting Standards.

 

Cidade de Deus, Osasco, SP, March 4, 2021.

 

ALEXANDRE DA SILVA GLÜHER

(Coordinator)

 

PAULO ROBERTO SIMÕES DA CUNHA

(Financial Expert)

 

PAULO RICARDO SATYRO BIANCHINI

 

JOSÉ LUIS ELIAS

10 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Consolidated Statements of Income

 

  R$ thousand
Note Years ended December 31
2020 2019 2018
Interest and similar income   119,743,371 124,417,705 122,053,139
Interest and similar expenses   (48,575,687) (58,617,986) (55,244,669)
Net interest income 6 71,167,684 65,799,719 66,808,470
Fee and commission income 7 24,936,454 25,337,676 23,831,590
Net gains/(losses) on financial assets and liabilities at fair value through profit or loss 8 (18,586,403) (1,090,917) (11,676,573)
Net gains/(losses) on financial assets at fair value through other comprehensive income 9 (1,716,879) 655,832 1,073,563
Net gains/(losses) on foreign currency transactions 10 (1,010,972) 323,774 1,096,826
Net profit from insurance and pension plans 11 7,578,707 8,254,939 7,656,872
- Insurance and pension income   68,410,501 71,191,410 66,270,095
- Insurance and pension expenses   (60,831,794) (62,936,471) (58,613,223)
Other operating income   (13,735,547) 8,143,628 (1,849,312)
Expected loss on loans and advances 23 (18,711,841) (12,532,133) (15,091,975)
Expected loss on other financial assets 21 and 24 (833,434) (1,472,394) (1,172,860)
Personnel expenses 12 (18,965,477) (21,143,568) (17,581,798)
Other administrative expenses 13 (15,484,126) (16,489,578) (16,873,962)
Accumulated depreciation and amortization 14 (5,921,030) (5,865,768) (4,808,255)
Other operating income/(expenses) 15 (18,822,246) (29,597,586) (15,500,258)
Other operating expense   (78,738,154) (87,101,027) (71,029,108)
Income before income taxes and share of profit of associates and joint ventures   3,630,437 12,179,996 17,761,640
Share of profit of associates and joint ventures 26 444,858 1,201,082 1,680,375
Income before income taxes and non-controlling interests   4,075,295 13,381,078 19,442,015
Income taxes 16 11,958,666 7,792,129 (2,693,576)
Net income for the year   16,033,961 21,173,207 16,748,439
         
Attributable to shareholders:        
Shareholders of the parent   15,836,862 21,023,023 16,583,915
Non-controlling interest   197,099 150,184 164,524
         
Basic and diluted earnings per share based on the weighted average number of shares (expressed in R$ per share):        
– Earnings per common share 17 1.71 2.27 1.79
– Earnings per preferred share 17 1.88 2.49 1.97

The Notes are an integral part of the Consolidated Financial Statements.

 

 

Bradesco 11

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Consolidated Statements of Comprehensive Income

 

  Note R$ thousand
Years ended December 31
2020 2019 2018
Net income for the year   16,033,961 21,173,207 16,748,439
         
Items that are or may be reclassified to the Consolidated Statement of Income        
Financial assets at fair value through other comprehensive income        
Unrealized gains/(losses)   (1,529,928) 7,752,853 (473,594)
Gains/(losses) transferred to income 9 (1,720,958) 651,428 1,023,299
Tax effect   1,447,558 (3,609,375) (209,359)
         
Unrealized gains/(losses) on hedge 20      
Cash flow hedge   (335,620) 260,397 (96,760)
Hedge of investment abroad   (187,629) (119,635) (209,300)
Tax effect   235,462 (42,854) 122,424
          
Exchange differences on translations of foreign operations        
Foreign exchange on translations of foreign operations   235,863 73,867 113,198
         
Items that cannot be reclassified to the Consolidated Statement of Income        
Gains/(losses) on equity instruments at fair value through other comprehensive income   3,573,603 1,482,384 (756,042)
Tax effect   (1,464,897) (579,763) 302,417
          
Other   (21,593) (204,538) (92,764)
          
Total other comprehensive income   231,861 5,664,764 (276,481)
Total comprehensive income for the year   16,265,822 26,837,971 16,471,958
         
Attributable to shareholders:        
Shareholders of the parent   16,068,723 26,687,787 16,307,434
Non-controlling interest   197,099 150,184 164,524

The Notes are an integral part of the Consolidated Financial Statements.

 

 

12 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Consolidated Statements of Financial Position

 

  R$ thousand
Note On December 31
2020 2019
Assets       
Cash and balances with banks 18 107,602,594 109,610,999
Financial assets at fair value through profit or loss 19a 275,986,689 249,759,777
Financial assets at fair value through other comprehensive income 21 185,841,975 192,450,010
Financial assets at amortized cost       
- Loans and advances to financial institutions, net of provision for losses 22 191,424,731 59,083,791
- Loans and advances to customers, net of provision for losses 23 473,637,358 423,528,716
- Securities, net of provision for losses 24 179,623,894 166,918,360
- Other financial assets 29 52,416,117 56,101,781
Non-current assets held for sale 25 1,202,488 1,357,026
Investments in associates and joint ventures 26 7,386,840 7,635,612
Premises and equipment, net 27 14,071,129 14,659,222
Intangible assets and goodwill, net 28 14,669,464 14,724,647
Taxes to be offset 16 15,330,420 15,685,801
Deferred income tax assets 16c 76,984,262 59,570,055
Other assets 29 8,475,829 7,441,888
Total assets   1,604,653,790 1,378,527,685
       
Liabilities      
Liabilities at amortized cost      
- Deposits from banks 30 267,280,167 227,819,611
- Deposits from customers 31 545,292,743 366,227,540
- Securities issued 32 144,903,825 170,727,564
- Subordinated debts 33 53,246,232 49,313,508
- Other financial liabilities 37 75,528,047 79,121,127
Financial liabilities at fair value through profit or loss 19c 18,697,682 14,244,083
Provision for Expected Credit Loss       
- Loan Commitments 23 3,859,316 2,318,404
- Financial guarantees 23 2,318,930 1,970,321
Insurance technical provisions and pension plans 34 279,465,384 268,302,691
Other reserves 36 25,582,923 25,239,929
Current income tax liabilities   1,596,284 2,595,277
Deferred income tax assets 16c 1,249,650 1,080,603
Other liabilities 37 39,515,233 34,023,453
Total liabilities   1,458,536,416 1,242,984,111
       
Shareholders’ equity 38    
Capital   79,100,000 75,100,000
Treasury shares   (440,514) (440,514)
Capital reserves   35,973 35,973
Profit reserves   58,985,029 51,986,423
Additional paid-in capital   70,496 70,496
Other comprehensive income   8,103,343 7,871,482
Retained earnings   (234,109) 475,606
Equity attributable to shareholders of the parent   145,620,218 135,099,466
Non-controlling interest   497,156 444,108
Total equity   146,117,374 135,543,574
Total equity and liabilities   1,604,653,790 1,378,527,685

The Notes are an integral part of the Consolidated Financial Statements.

 

Bradesco 13

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Consolidated Statements of Changes in Equity

 

  R$ thousand
Capital Treasury shares Capital reserves Profit reserves Additional paid-in capital Other comprehensive income (1) Retained earnings Equity attributable to  shareholders of the parent Non-controlling interest Total
Legal Statutory
Balance on January 1, 2018 59,100,000 (440,514) 35,973 7,540,016 41,941,211 70,496 2,483,199 4,536,236 115,266,617 289,873 115,556,490
Net income -   -   -   -   -   -   -   16,583,915 16,583,915 164,524 16,748,439
Financial assets at fair value through other comprehensive income -   -   -   -   -   -   (296,915) -   (296,915) -   (296,915)
Foreign currency translation adjustment -   -   -   -   -   -   113,198 -   113,198 -   113,198
Other -   -   -   -   -   -   (92,764) -   (92,764) -   (92,764)
Comprehensive income -   -   -   -   -   -   (276,481) 16,583,915 16,307,434 164,524 16,471,958
Increase of non-controlling shareholders’ interest -   -   -   -   -   -   -   -   -   2,265 2,265
Capital increase with reserves 8,000,000 -   -   -   (8,000,000) -   -   -   -   -   -  
Transfers to reserves -   -   -   954,247 10,832,110 -   -   (11,786,357) -   -   -  
Interest on equity and dividends -   -   -   -   -   -   -   (7,298,596) (7,298,596) (55,997) (7,354,593)
Balance on December 31,  2018 67,100,000 (440,514) 35,973 8,494,263 44,773,321 70,496 2,206,718 2,035,198 124,275,455 400,665 124,676,120
                        
Balance on January 1, 2019 67,100,000 (440,514) 35,973 8,494,263 44,773,321 70,496 2,206,718 2,035,198 124,275,455 400,665 124,676,120
Net income -   -   -   -   -   -   -   21,023,023 21,023,023 150,184 21,173,207
Financial assets at fair value through other comprehensive income -   -   -   -   -   -   5,795,435 -   5,795,435 -   5,795,435
Foreign currency translation adjustment -   -   -   -   -   -   73,867 -   73,867 -   73,867
Other -   -   -   -   -   -   (204,538) -   (204,538) -   (204,538)
Comprehensive income -   -   -   -   -   -   5,664,764 21,023,023 26,687,787 150,184 26,837,971
Increase of non-controlling shareholders’ interest -   -   -   -   -   -   -   -   -   8,750 8,750
Capital increase with reserves 8,000,000 -   -   -   (8,000,000) -   -   -   -   -   -  
Transfers to reserves -   -   -   1,129,131 13,589,708 -   -   (14,718,839) -   -   -  
Interest on equity and dividends -   -   -   -   (8,000,000) -   -   (7,863,776) (15,863,776) (115,491) (15,979,267)
Balance on December 31,  2019 75,100,000 (440,514) 35,973 9,623,394 42,363,029 70,496 7,871,482 475,606 135,099,466 444,108 135,543,574

 

The Notes are an integral part of the Consolidated Financial Statements.

 

14 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Consolidated Statements of Changes in Equity

 

  R$ thousand
Capital Treasury shares Capital reserves Profit reserves Additional paid-in capital Other comprehensive income (1) Retained earnings Equity attributable to  shareholders of the parent Non-controlling interest Total
Legal Statutory
Balance on December 31,  2019 75,100,000 (440,514) 35,973 9,623,394 42,363,029 70,496 7,871,482 475,606 135,099,466 444,108 135,543,574
Net income -   -   -   -   -   -   -   15,836,862 15,836,862 197,099 16,033,961
Financial assets at fair value through other comprehensive income -   -   -   -   -   -   17,591 -   17,591 -   17,591
Foreign currency translation adjustment -   -   -   -   -   -   235,863 -   235,863 -   235,863
Other -   -   -   -   -   -   (21,593) -   (21,593) -   (21,593)
Comprehensive income -   -   -   -   -   -   231,861 15,836,862 16,068,723 197,099 16,265,822
Increase of non-controlling shareholders’ interest -   -   -   -   -   -   -   -   -   (3,598) (3,598)
Capital increase with reserves 4,000,000 -   -   -   (4,000,000) -   -   -   -   -   -  
Transfers to reserves -   -   -   827,328 10,171,278 -   -   (10,998,606) -   -   -  
Interest on equity and dividends -   -   -   -   -   -   -   (5,547,971) (5,547,971) (140,453) (5,688,424)
Balance on December 31,  2020 79,100,000 (440,514) 35,973 10,450,722 48,534,307 70,496 8,103,343 (234,109) 145,620,218 497,156 146,117,374

(1) Mainly composed of financial assets at fair value through other comprehensive income and gains and losses with cash flow hedge and foreign investment.

 

The Notes are an integral part of the Consolidated Financial Statements.

 

Bradesco 15

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Consolidated Statements of Cash Flows

 

  R$ thousand
Years ended December 31
2020 2019 2018
Operating activities      
Income before income taxes and non-controlling interests 4,075,295 13,381,078 19,442,015
Adjustments to reconcile income before income tax to net cash flow from operating activities:      
Expected loss on loans and advances 18,711,841 12,532,133 15,091,975
Changes in the insurance technical provisions and pension plans 29,983,129 32,036,527 29,409,222
(Gains)/Net realized losses on financial assets at fair value through other comprehensive income 1,716,879 (655,832) (1,073,563)
Expenses with provisions and contingent liabilities 3,822,270 9,244,967 4,306,043
Impairment of assets 2,162,468 3,196,683 1,757,981
Depreciation 2,960,106 2,737,383 1,460,013
Amortization of intangible assets 2,960,924 3,128,385 3,348,242
Share of profit of associates and joint ventures (444,858) (1,201,082) (1,680,375)
Losses on disposal of non-current assets held for sale 130,024 277,763 516,713
Net losses from disposal of property and equipment 139,411 17,937 98,182
(Gains)/Losses on the sale of investments in associates (29,829) 48,927 -  
Effect of changes in exchange rates in cash and cash equivalents (2,452,395) (752,829) (751,769)
Changes in assets and liabilities:      
(Increase)/Decrease in reserve requirement - Central Bank 6,864,805 (3,025,422) (20,882,690)
(Increase)/decrease in loans and advances to banks (8,449,903) (2,099,605) 33,357
(Increase)/decrease in loans and advances to customers (125,720,138) (123,571,123) (112,861,770)
(Increase)/Reduction in financial assets at fair value through profit or loss (26,226,912) (3,598,627) (3,625,822)
(Increase)/decrease in other assets (25,168,411) (33,187,183) (31,884,484)
Increase/(decrease) in deposits from banks 53,292,918 (3,555,713) (20,749,542)
Increase/(decrease) in deposits from customers 186,793,206 36,787,089 88,659,514
Increase/(Decrease) in financial liabilities at fair value through profit or loss 4,453,599 (1,908,004) 1,877,088
Increase/(decrease) in insurance technical provisions and pension plans (18,820,436) (15,312,123) (16,920,525)
Increase/(decrease) in other provisions (3,479,276) (3,807,209) (2,994,599)
Increase/(decrease) in other liabilities (4,622,104) 27,988,377 14,167,163
  102,652,613 (51,297,503) (33,257,631)
Interest received on investing financial assets 67,055,576 67,523,213 61,660,260
Interest paid (21,560,365) (27,246,400) (27,813,710)
Income tax and social contribution paid (5,715,233) (8,433,279) (7,086,237)
Net cash provided by/(used in) operating activities 142,432,591 (19,453,969) (6,497,318)
       
Investing activities      
(Acquisitions) of subsidiaries, net of cash and cash equivalents paid (3,173,403) -   (442,122)
(Acquisition) of financial assets at fair value through other comprehensive income (56,013,411) (96,192,725) (103,432,365)
Disposal of financial assets at fair value through other comprehensive income 54,381,559 99,911,819 103,897,609
Maturity of financial assets at amortized cost 53,919,341 17,458,880 21,759,857
(Acquisition) of financial assets at amortized cost (47,169,156) (41,401,367) (70,719,797)
Disposal of non-current assets held for sale 559,661 613,246 688,885
(Acquisitions) of investments in associates (491,438) -   (52,844)
Sale of investments in associates 130,249 17,961 -  
Dividends and interest on shareholders’ equity received 296,323 720,985 1,513,712
(Acquisition) of property and equipment (1,795,410) (2,629,435) (2,389,433)
Sale of premises and equipment 795,560 816,907 361,240
(Acquisition) of intangible assets (2,469,105) (2,696,067) (3,053,156)
Interest received on investing financial assets 21,491,721 8,053,047 17,383,392
Net cash provided by/(used in) investing activities 20,462,491 (15,326,749) (34,485,022)
       
Financing activities      
Funds from securities issued 61,833,816 84,982,152 85,963,195
Payments on securities issued (84,286,467) (60,215,940) (69,747,110)
Issuance of subordinated debt 688,186 -   10,890,606

 

16 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Consolidated Statements of Cash Flows (continued)

 

  R$ thousand
Years ended December 31
2020 2019 2018
Payments on subordinated debts (1,258,049) (3,207,429) (9,181,501)
Leases payment (1,797,408) (1,067,573) -  
Non-controlling interest (144,051) (106,741) 2,265
Interest paid (10,009,878) (16,951,569) (16,986,503)
Interest on equity and dividends paid (1,432,130) (17,751,148) (6,539,193)
Net cash provided by/(used in) financing activities (36,405,981) (14,318,248) (5,598,241)
       
(Decrease)/Increase in cash and cash equivalents 126,489,101 (49,098,966) (46,580,581)
       
Cash and cash equivalents      
At the beginning of the year 61,879,493 110,225,630 156,054,442
Effect of changes in exchange rates in cash and cash equivalents 2,452,395 752,829 751,769
At the end of the year 190,820,989 61,879,493 110,225,630
       
(Decrease)/Increase in cash and cash equivalents 126,489,101 (49,098,966) (46,580,581)
       
Non-cash transactions      
Credit operations transferred to non-current assets held for sale 1,087,055 1,934,762 1,947,924
Dividends and interest on equity declared but not yet paid 3,825,613 126,755 4,876,458
(Gains)/losses on financial assets at fair value through other comprehensive income (17,591) (5,795,435) 296,915

 

The Notes are an integral part of the Consolidated Financial Statements.

 

 

Bradesco 17

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

1)       General information

 

Banco Bradesco S.A. (“Bradesco”, the “Bank”, the “Company” or the “Organization”) is a publicly-traded company established according to the laws of the Federative Republic of Brazil with headquarters in the city of Osasco, state of São Paulo, Brazil.

 

Bradesco is a bank that provides multiple services within two segments: banking and insurance. The Bank complies with Brazilian banking regulations and operates throughout all of Brazil. The banking segment includes a range of banking activities, serving individual and corporate customers in the following operations: investment banking, national and international banking operations, asset management operations and consortium administration. The insurance segment covers auto, health, life, accident and non-life insurance and pension plans, real estate ventures and capitalization bonds.

 

The retail banking products include demand deposits, savings deposits, time deposits, mutual funds, foreign exchange services and a range of loans and advances, including overdrafts, credit cards and loans with repayments in installments. The services provided to corporate entities include fund management and treasury services, foreign exchange operations, corporate finance and investment banking services, hedge and finance operations including working capital financing, lease and loans with repayments in installments. These services are provided, mainly, in domestic markets, but also include international services on a smaller scale.

 

The Organization was originally listed on the São Paulo Stock Exchange (“B3”) and then subsequently on the New York Stock Exchange (“NYSE”).

 

The consolidated financial statements, in accordance with the IFRS, were approved by the Board of Directors on February 25, 2021.

 

2)       Significant accounting practices

 

These consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements include the consolidated statements of financial position, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows as well as the notes to the consolidated financial statements.

 

The Organization has classified its expenses according to their nature.

 

The consolidated statement of cash flows shows the changes in cash and cash equivalents during the year arising from operating, investing and financing activities. Cash and cash equivalents include highly liquid investments. Note 18 details the accounts of the consolidated statement of financial position that comprise cash and cash equivalents. The consolidated statement of cash flows is prepared using the indirect method. Accordingly, the income before taxes was adjusted by non-cash items such as provisions, depreciation, amortization and Impairment losses on loans and advances. The interest and dividend received and paid are classified as operating, financing or investment cash flows according to the nature of the corresponding assets and liabilities.

 

The preparation of the consolidated financial statements requires the use of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the profit and loss amounts for the year. The consolidated financial statements also reflect various estimates and assumptions, including, but not limited to: adjustments to the provision for expected losses of assets and financial liabilities; estimates of the fair value of financial instruments; depreciation and amortization rates; impairment losses on assets; the useful life of intangible assets; evaluation of the realization of tax assets; assumptions for the calculation of technical provisions for insurance, supplemental pension plans and capitalization bonds; provisions for contingencies and provisions for potential losses arising from fiscal and tax uncertainties. The areas involving a higher degree of judgment or complexity, or areas where assumptions and

 

18 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

The accounting policies listed below were used in all the periods presented and by all the companies of the Organization including the equity method investees.

 

a)Consolidation

 

The consolidated financial statements include the financial statements of Bradesco and those of its direct and indirect subsidiaries, including exclusive mutual funds and special purpose entities.

 

The main subsidiaries included in the consolidated financial statements are as follows:

 

  Activity Shareholding interest
December 31
2020 2019
Financial Sector – Brazil       
Ágora Corretora de Títulos e Valores Mobiliários S.A. Brokerage 100.00% 100.00%
Banco Bradescard S.A. Cards 100.00% 100.00%
Banco Bradesco BBI S.A. (1) Investment bank 100.00% 99.96%
Banco Bradesco BERJ S.A. Banking 100.00% 100.00%
Banco Bradesco Financiamentos S.A. Banking 100.00% 100.00%
Banco Losango S.A. Banking 100.00% 100.00%
Bradesco Administradora de Consórcios Ltda. Consortium management 100.00% 100.00%
Bradesco Leasing S.A. Arrendamento Mercantil Leases 100.00% 100.00%
Bradesco-Kirton Corretora de Câmbio S.A. Exchange Broker 99.97% 99.97%
Bradesco S.A. Corretora de Títulos e Valores Mobiliários Brokerage 100.00% 100.00%
BRAM - Bradesco Asset Management S.A. DTVM Asset management 100.00% 100.00%
Kirton Bank S.A. Banking 100.00% 100.00%
Tempo Serviços Ltda. Services 100.00% 100.00%
Financial Sector – Overseas      
Banco Bradesco Argentina S.A.U. (2) Banking 100.00% 100.00%
Banco Bradesco Europa S.A. (2) Banking 100.00% 100.00%
Banco Bradesco S.A. Grand Cayman Branch (2) (3) Banking 100.00% 100.00%
Banco Bradesco S.A. New York Branch (2) Banking 100.00% 100.00%
Bradesco Securities, Inc. (2) Brokerage 100.00% 100.00%
Bradesco Securities, UK. Limited (2) Brokerage 100.00% 100.00%
Bradesco Securities, Hong Kong Limited (2) Brokerage 100.00% 100.00%
Cidade Capital Markets Ltd. (2) Banking 100.00% 100.00%
Bradescard México, sociedad de Responsabilidad Limitada (4) Cards 100.00% 100.00%
Bac Florida Bank (5) Banking 100.00% -
Insurance, Pension Plan and Capitalization Bond Sector - In Brazil      
Atlântica Companhia de Seguros Insurance 100.00% 100.00%
Bradesco Auto/RE Companhia de Seguros Insurance 100.00% 100.00%
Bradesco Capitalização S.A. Capitalization bonds 100.00% 100.00%
Bradesco Saúde S.A. Insurance/health 100.00% 100.00%
Bradesco Seguros S.A. Insurance 99.96% 99.96%
Bradesco Vida e Previdência S.A. Pension plan/Insurance 100.00% 100.00%
Odontoprev S.A. (6) Dental care 50.01% 50.01%
Insurance - Overseas      
Bradesco Argentina de Seguros S.A. (2) (6) Insurance 99.98% 99.98%
Other Activities - Brazil      
Andorra Holdings S.A. Holding 100.00% 100.00%
Bradseg Participações S.A. Holding 100.00% 100.00%
Bradescor Corretora de Seguros Ltda. Insurance Brokerage 100.00% 100.00%
BSP Empreendimentos Imobiliários S.A. Real estate 100.00% 100.00%
Cia. Securitizadora de Créditos Financeiros Rubi Credit acquisition 100.00% 100.00%

 

Bradesco 19

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

Columbus Holdings S.A. Holding 100.00% 100.00%
Nova Paiol Participações Ltda. Holding 100.00% 100.00%
Other Activities - Overseas      
Bradesco North America LLC (2) Services 100.00% 100.00%
Investment Funds (7)      
Bradesco FI RF Máster II Previdência Investment Fund 100.00% 100.00%
Bradesco FI RF Máster III Previdência Investment Fund 100.00% 100.00%
Bradesco FI Referenciado DI Master Investment Fund 100.00% 100.00%
Bradesco FIC FI RF Athenas PGBL/VGBL Investment Fund 100.00% 100.00%
Bradesco FIC FI RF VGBL - F10 Investment Fund 100.00% 100.00%
Bradesco FI RF Máster Previdência Investment Fund 100.00% 100.00%
Bradesco FI RF Referenciado DI União Investment Fund 99.99% 99.99%
Bradesco FI RF Master Previdência Investment Fund 100.00% 100.00%
Bradesco Private FIC de FI RF PGBL/VGBL Ativo-F 08 C Investment Fund 100.00% 100.00%
Bradesco FIC de FI RF Creta Investment Fund 100.00% 100.00%

 

(1) Acquisition of minority interest in January 2020;

(2) The functional currency of these companies abroad is the Real;

(3) The special purpose entity International Diversified Payment Rights Company is being consolidated. The company is part of a structure set up for the securitization of the future flow of payment orders received overseas;

(4) The functional currency of this company is the Mexican Peso;

(5) Company acquired on October 30, 2020, and its functional currency is the US dollar;

(6) Accounting information used with date lag of up to 60 days; and

(7) The investment funds in which Bradesco assumes or substantially retains the risks and benefits were consolidated.

 

i.Subsidiaries

 

Subsidiaries are all of the companies over which the Organization, has control. The Organization has control over an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The subsidiaries are fully consolidated from the date at which the Organization obtains control over its activities until the date this control ceases.

 

For acquisitions meeting the definition of a business combination, the acquisition method of accounting is used. The cost of acquisition is measured as the fair value of the consideration, including assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the consideration given over the fair value of the Organization’s share of the identifiable net assets and non-controlling interest acquired is recorded as goodwill. Any goodwill arising from business combinations is tested for impairment at least once a year and whenever events or changes in circumstances may indicate the need for an impairment write-down. If the cost of acquisition is less than the fair value of the Organization’s share of the net assets acquired, the difference is recognized directly in the consolidated statement of income.

 

For acquisitions not meeting the definition of a business combination, the Organization allocates the cost between the individual identifiable assets and liabilities. The cost of acquired assets and liabilities is determined by (a) recognizing financial assets and liabilities at their fair value at the acquisition date; and (b) allocating the remaining balance of the cost of purchasing assets and assuming liabilities to individual assets and liabilities, other than financial instruments, based on their relative fair values of these instruments at the acquisition date.

 

20 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

ii.Associates

 

Companies are classified as associates if the Organization has significant influence, but not control, over the operating and financial management policy decisions. Normally significant influence is presumed when the Organization holds in excess of 20%, but no more than 50%, of the voting rights. Even if less than 20% of the voting rights are held, the Organization could still have significant influence through its participation in the management of the investee or representations on its Board of Directors, providing it has executive power; i.e. voting power.

 

Investments in associates are recorded in the Organization’s consolidated financial statements using the equity method and are initially recognized at cost. The investments in associates include goodwill (net of any impairment losses) identified at the time of acquisition.

 

iii.Joint ventures

 

The Organization has contractual agreements in which two or more parties undertake activities subject to joint control. Joint control is the contractual sharing of control over an activity and it exists only if strategic, financial and operating decisions are made on a unanimous basis by the parties. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the arrangement, rather than rights to its assets and obligations for its liabilities. Investments in joint ventures are recorded in the consolidated financial statements of the Organization using the equity method.

 

iv.Structured entities

 

A structured entity is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

 

Structured entities normally have some or all of the following features or characteristics:

 

restricted activities;
a narrow and well-defined objective, such as, to effect a specific structure like a tax efficient lease, to perform research and development activities, or to provide a source of capital or funding to an entity or to provide investment opportunities for investors by passing risks and rewards associated with the assets of the structured entity to investors;
thin capitalization, that is, the proportion of ‘real’ equity is too small to support the structured entity’s overall activities without subordinated financial support; and
financing in the form of multiple contractually linked instruments to investors that create concentrations of credit risk or other risks (tranches).

 

v.Transactions with and interests of non-controlling shareholders

 

The Organization applies a policy of treating transactions with non-controlling interests as transactions with equity owners of the Bank. For purchases of equity from non-controlling interests, the difference between any consideration paid and the share of the carrying value of net assets of the subsidiary acquired is recorded in equity. Gains or losses on sales to non-controlling shareholders are also recorded in equity.

 

Profits or losses attributable to non-controlling interests are presented in the consolidated statements of income under this title.

 

vi.Balances and transactions eliminated in the consolidation

 

Intra-group transactions and balances (except for foreign currency transaction gains and losses) are eliminated in the consolidation process, including any unrealized profits or losses resulting from operations between the companies except when unrealized losses indicate an impairment

 

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Notes to the Consolidated Financial Statements

 

loss of the asset transferred which should be recognized in the consolidated financial statements. Consistent accounting policies as well as similar valuation methods for similar transactions, events and circumstances are used throughout the Organization for the purposes of consolidation.

 

b)Foreign currency translation

 

i.Functional and presentation currency

 

Items included in the financial statements of each of the Organization’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Brazilian Reais (R$), which is the Organization’s presentation currency. The domestic and foreign subsidiaries use the Real as their functional currency, with the exception of the subsidiary in Mexico, which uses the Mexican Peso as its functional currency, and BAC Florida Bank, whose functional currency is the US dollar.

 

ii.Transactions and balances

 

Foreign currency transactions, which are denominated or settled in a foreign currency, are translated into the functional currency using the exchange rates prevailing on the dates of the transactions.

 

Monetary items denominated in foreign currency are translated at the closing exchange rate as at the reporting date. Non-monetary items measured at historical cost denominated in a foreign currency are translated at exchange rate on the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates on the date when the fair value was determined.

 

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at each period exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of income as “Net gains/(losses) of foreign currency transactions”.

 

In the case of changes in the fair value of monetary assets denominated in foreign currency classified as financial assets at fair value through other comprehensive income, a distinction is made between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in the consolidated statement of income, and other changes in the carrying amount, except impairment, are recognized in equity.

 

iii.Foreign operations

 

The results and financial position of all foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

 

·Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the reporting date;

 

·Income and expenses for each consolidated statement of income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rate prevailing on the transaction dates, in which case income and expenses are translated at the rates in effect on the dates of the transactions); and

 

·All resulting exchange differences are recognized in other comprehensive income.

 

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Exchange differences arising from the above process are reported in equity as “Foreign currency translation adjustment”.

 

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to “Other comprehensive income”. If the operation is a non-wholly owned subsidiary, then the relevant proportion of the transaction difference is allocated to the non-controlling interest. When a foreign operation is partially sold or disposed, such exchange differences, which were recognized in equity, are recognized in the consolidated statement of income as part of the gain or loss on sale.

 

c)Cash and cash equivalents

 

Cash and cash equivalents include: cash, bank deposits, unrestricted balances held with the Central Bank of Brazil and other highly liquid short-term investments, with original maturities of three months or less and which are subject to insignificant risk of changes in fair value, used by the Organization to manage its short-term commitments. See Note 18 (b) – “Cash and cash equivalents”.

 

d)Financial assets and liabilities

 

i.Financial assets

 

The Organization classifies and measures financial assets based on the business model for the management of financial assets, as well as on the characteristics of contractual cash flow of the financial asset.

 

The Organization classifies financial assets into three categories: (i) measured at amortized cost; (ii) measured at fair value through other comprehensive income (FVOCI); and (iii) measured at fair value through profit or loss (FVTPL).

 

- Business model: it relates to the way in which the organization manages its financial assets to generate cash flows. The objective (business model) of management in relation to each portfolio is defined as either: (i) to maintain the assets to receive contractual cash flows; (ii) to maintain the assets to receive the contractual cash flows and sales; or (iii) any other model. When the financial assets conform to the business models (i) and (ii) the SPPI test (Solely Payment of Principal and Interest) is applied. Financial assets held under business model (iii) are measured at FVTPL.

 

- SPPI Test: the purpose of this test is to assess the contractual terms of the financial instruments to determine if they give rise to cash flows at specific dates that conform only to the payment of the principal and interest on the principal amount.

 

In this context, the principal refers to the fair value of the financial asset at the initial recognition and interest refers to the consideration for the time value of money, the credit risk associated with the principal amount outstanding for a specific period of time and other risks and borrowing costs. Financial instruments that do not meet the SPPI test are measured at FVTPL, such as derivatives.

 

Measured at fair value through profit or loss

 

All financial assets that do not meet the criteria of measurement at amortized cost or at FVOCI are classified as measured at FVTPL, in addition to those assets that in the initial recognition are irrevocably designated at FVTPL, if this eliminates or significantly reduces asset-liability mismatches.

 

Financial assets measured at FVTPL are initially recorded at fair value with subsequent changes to the fair value recognized immediately in profit or loss.

 

Financial assets are initially recognized in the consolidated statement of financial position at fair value and the transaction costs are recorded directly in the consolidated statement of

 

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Notes to the Consolidated Financial Statements

 

income. Subsequent changes to the fair value are recognized immediately in profit or loss.

 

Gains and losses arising from changes in fair value of non-derivative assets are recognized directly in the consolidated statement of income under “Net gains/(losses) on financial assets and liabilities at fair value through profit or loss”. Interest income on financial assets measured at FVTPL is included in “Interest and similar income”. For the treatment of derivative assets see Note 2(d)(iii).

 

·Measured at fair value through other comprehensive income

 

They are financial assets that meet the criterion of the SPPI test, which are held in a business model whose objective is both to maintain the assets to receive the contractual cash flows as well as for sale.

 

These financial assets are initially recognized at fair value, plus any transaction costs that are directly attributable to their acquisition or their issuance and are, subsequently, measured at fair value with gains and losses being recognized in other comprehensive income, except for impairment losses and foreign exchange gains and losses on debt securities, until the financial asset is derecognized. The expected credit losses are recorded in the consolidated statement of income.

 

Interest income is recognized in the consolidated statement of income using the effective interest method. Dividends on equity instruments are recognized in the consolidated statement of income in ‘Dividend income’, within “Net Gains/(losses) on financial assets at fair value through other comprehensive income” when the Organization’s right to receive payment is established. Gains or losses arising out of exchange variation on investments in debt securities classified as FVOCI are recognized in the consolidated statement of income. See Note 2(d)(viii) for more details of the treatment of the expected credit losses.

 

·Measured at amortized cost

 

Financial assets that meet the criterion of the SPPI test and which are held in a business model whose objective is to maintain the assets to receive the contractual cash flows.

 

These financial assets are recognized initially at fair value including direct and incremental costs, and are subsequently recorded at amortized cost, using the effective interest rate method.

 

Interest is recognized in the consolidated statement of income and presented as “Interest and similar income”. In the case of expected credit loss, it is reported a deduction from the carrying value of the financial asset and is recognized in the consolidated statement of income.

 

ii.Financial liabilities

 

The Organization classifies its financial liabilities as subsequently measured at amortized cost, using the effective interest rate method, except for the following financial instruments.

 

·Measured at fair value through profit and loss

 

These financial liabilities are recorded and measured at fair value and the respective changes in fair value are immediately recognized in the statement of income. These liabilities can be subdivided into two different classifications upon initial recognition: financial liabilities designated at fair value through profit and loss and financial liabilities held for trading. 

 

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-Financial liabilities designated at FVTPL on initial recognition

 

These are liabilities that on initial recognition are irrevocably designated at FVTPL, if this eliminates or significantly reduces asset-liability mismatches.

 

The Organization does not have any financial liability designated at fair value through profit and loss in income.

 

-Financial liabilities held for trading

 

Financial liabilities held for trading recognized by the Organization are derivative financial instruments. For the treatment of derivatives see Note 2(d)(iii).

 

·Financial guarantee contracts and loan commitments

 

Financial guarantees are contracts that require the Organization to make specific payments under the guarantee for a loss incurred when a specific debtor fails to make a payment when due in accordance with the terms of the debt instrument.

 

Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Organization’s obligations under such guarantees are measured by the higher value between (i) the value of the provision for expected losses and (ii) the value initially recognized, minus, if appropriate, the accumulated value of the revenue from the service fee. The fee income earned is recognized on a straight-line basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in the consolidated statement of income within “Other operating income/ (expenses)”.

 

The expected credit losses, referring to loan commitments, are recognized in liabilities and are calculated, as described in Note 3.1.

 

iii.Derivative financial instruments and hedge transactions

 

Derivatives are initially recognized at fair value on the date the respective contract is signed and are, subsequently, re-measured at their fair values with the changes recognized in the statement of income under “Net gains or losses on financial assets at fair value through profit or loss”.

 

Fair values are obtained from quoted market prices in active markets (for example, for exchange-traded options), including recent market transactions, and valuation techniques (for example for swaps and foreign currency transactions), such as discounted cash-flow models and options-pricing models, as appropriate. In the calculation of fair value, the counterparty’s and the entity’s own credit risk are considered.

 

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not recorded at fair value through profit or loss. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognized in the consolidated statement of income.

 

The Organization has structures of cash flow hedges, whose objective is to protect the exposure to variability in cash flows attributable to a specific risk associated with all the assets or liabilities recognized, or a component of it. The details of these structures have been presented in Note 3.3 – Market risk.

 

iv.Recognition

 

Initially, the Organization recognizes deposits, securities issued and subordinated debts and other financial assets and liabilities on the trade date, in accordance with the contractual provisions of the instrument.

 

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v.Derecognition

 

Financial assets are derecognized when there is no reasonable expectation of recovery, when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred. Financial liabilities are derecognized when they have been discharged, paid, redeemed, cancelled or expired. If a renegotiation or modification of terms of an existing financial asset is such that the cash flows of the modified asset are substantially different from those of the original unmodified asset, then the original financial asset is derecognized and the modified financial asset is recognized as a new financial asset and initially measured at fair value.

 

vi.Offsetting financial instruments

 

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when, the Organization has the intention and the legal enforceable right to offset the recognized amounts on a net basis or realize the asset and settle the liability simultaneously.

 

vii.Determination of fair value

 

The determination of the fair value for the majority of financial assets and liabilities is based on the market price or quotes of security dealers for financial instruments traded in an active market. The fair value for other instruments is determined using valuation techniques. The valuation techniques which include use of recent market transactions, discounted cash flow method, comparison with other instruments similar to those for which there are observable market prices and valuation models.

 

For more commonly used instruments, the Organization uses widely accepted valuation models that consider observable market data in order to determine the fair value of financial instruments.

 

For more complex instruments, the Organization uses its own models that are usually developed from standard valuation models. Some of the information included in the models may not be observable in the market and is derived from market prices or rates or may be estimated on the basis of assumptions.

 

The value produced by a model or by a valuation technique is adjusted to reflect various factors, since the valuation techniques do not necessarily reflect all of the factors that market participants take into account during a transaction.

 

The valuations are adjusted to consider the risks of the models, differences between the buy and sell price, credit and liquidity risks, as well as other factors. Management believes that such valuation adjustments are necessary and appropriate for the correct evaluation of the fair value of the financial instruments recorded in the consolidated statement of financial position.

 

More details on the calculation of the fair value of financial instruments are available in Note 3.4.

 

viii.Expected credit losses

 

The Organization calculates the expected credit losses for financial instruments measured at amortized cost and at FVOCI (with the exception of investments in equity instruments), financial guarantees and loan commitments.

 

Expected credit losses on financial instruments are measured as follows:

 

Financial assets: it is the present value of the difference between contractual cash flows and the cash flows that the Organization expects to recover discounted at the effective interest rate of the operation;

 

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Financial guarantees: it is the present value of the difference between the expected payments to reimburse the holder of the guarantee and the values that the Organization expects to recover discounted at a rate that reflects the market conditions; and

 

Loan commitments: it is the present value of the difference between the contractual cash flows that would be due if the commitment was used and the cash flows that the Organization expects to recover discounted at a rate that reflects the market conditions.

 

Expected credit losses are measured on one of the following basis:

 

− Credit losses expected for 12 months, i.e., credit losses as a result of possible events of delinquency within 12 months after the reporting date; and

− Credit Losses expected for the whole of lifecycle, i.e., credit losses that result from all possible events of delinquency throughout the expected lifecycle of a financial instrument.

 

The measurement of expected losses for the whole lifecycle is applied when a financial asset, on the reporting date, has experienced a significant increase in credit risk since its initial recognition and the measurement of expected credit loss for 12 months is applied when the credit risk has not increased significantly since its initial recognition. The Organization assumes that the credit risk of a financial asset has not increased significantly when the asset has a low credit risk on the reporting date.

 

With respect to Brazilian government bonds, the Organization has internally developed a study to assess the credit risk of these securities, which does not expect any loss for the next 12 months, that is, no provision is recorded for credit losses.

 

For loans, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced through provisions and the amount of the loss is recognized in the consolidated statement of income.

 

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral.

 

The methodology and assumptions used for estimating future cash flows are reviewed regularly to mitigate any differences between loss estimates and actual loss experience.

 

Following the recognition of expected credit loss, interest income is recognized using the effective rate of interest which was used to discount the future cash flows, on the accounting value gross of provision, except for assets with problem of credit recovery, in which, the rate stated is applied at the net book value of the provision.

 

The whole or part of a financial asset is written off against the related credit loss expected when there is no reasonable expectation of recovery. Such loans are written off after all the relevant collection procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the consolidated statement of income.

 

The criteria used to calculate the expected credit loss and to determine the significantly increased of the credit risk are detailed in Note 3.1.

 

e)Non-current assets held for sale

 

Under certain circumstances, property is repossessed following foreclosure of loans that are in default. Repossessed properties are measured at the lower of their carrying amount or fair value less the costs to sell – whichever is the lowest – and are included within “Non-current assets held for sale”.

 

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Notes to the Consolidated Financial Statements

 

f)Property and equipment

 

i.Recognition and valuation

 

Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses (see Note 2(i) below), if any. The cost includes expenses directly attributable to the acquisition of an asset.

 

The cost of assets internally produced includes the cost of materials and direct labor, as well as any other costs that can be directly allocated and that are necessary for them to function.

 

When parts of an item have different useful lives, and separate control is practical, they are recorded as separate items (main components) comprising the property and equipment.

 

Useful lives and residual values are reassessed at each reporting date and adjusted, if appropriate.

 

Gains and losses from the sale of property and equipment are determined by comparing proceeds received with the carrying amount of the asset and are recorded in the consolidated statement of income under the heading “Other operating income/(expenses)”.

 

ii.Subsequent costs

 

Expenditure on maintenance and repairs of property and equipment items is recognized as an asset when it is probable that future economic benefits associated with the items will flow to the Organization for more than one year and the cost can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance costs are charged to the consolidated statement of income during the reporting period in which they are incurred.

 

iii.Depreciation

 

Depreciation is recognized in the consolidated statement of income using the straight-line basis and taking into consideration the estimated useful economic life of the assets. The depreciable amount is the gross-carrying amount, less the estimated residual value at the end of the useful economic life. Land is not depreciated. Useful lives and residual values are reassessed at each reporting date and adjusted, if appropriate.

 

g)Intangible assets

 

Intangible assets comprise separately identifiable non-monetary items, without physical substance due to business combinations, such as goodwill and other purchased intangible assets, computer software and other such intangible assets. Intangible assets are recognized at cost. The cost of an intangible asset, acquired in a business combination, is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized over their estimated useful economic life. Intangible assets with an indefinite useful life are not amortized.

 

Generally, the identified intangible assets of the Organization have a definite useful life. At each reporting date, intangible assets are reviewed for indications of impairment or changes in estimated future economic benefits – see Note 2(i) below.

 

i.Goodwill

 

Goodwill (or bargain purchase gain) arises on the acquisition of subsidiaries, associates and joint ventures.

 

Goodwill reflects the excess of the cost of acquisition in relation to the Organization’s share of the fair value of net identifiable assets or liabilities of an acquired subsidiary, associate or joint venture on the date of acquisition. Goodwill originated from the acquisition of subsidiaries is recognized

 

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as “Intangible Assets”, and the goodwill from acquisition of associates and joint ventures is included in the carrying amount of the investment. When the difference between the cost of acquisition and the Organization’s share of the fair value of net identifiable assets or liabilities is negative (bargain purchase gain), it is immediately recognized in the consolidated statement of income as a gain on the acquisition date.

 

Goodwill is tested annually or whenever a trigger event has been observed, for impairment (see Note 2(i) below). Gains and losses realized in the sale of an entity include consideration of the carrying amount of goodwill relating to the entity sold.

 

ii.Software

 

Software acquired by the Organization is recorded at cost, less accumulated amortization and accumulated impairment losses, if any.

 

Internal software-development expenses are recognized as assets when the Organization can demonstrate its intention and ability to complete the development, and use the software in order to generate future economic benefits. The capitalized costs of internally developed software include all costs directly attributable to development and are amortized over their useful lives. Internally developed software is recorded at its capitalized cost less amortization and impairment losses (see Note 2(i) below).

 

Subsequent software expenses are capitalized only when they increase the future economic benefits incorporated in the specific asset to which it relates. All other expenses are recorded as expenses as incurred.

 

Amortization is recognized in the consolidated statement of income using the straight-line method over the estimated useful life of the software, beginning on the date that it becomes available for use. The estimated useful life of software is from two to five years. Useful life and residual values are reviewed at each reporting date and adjusted, if necessary.

 

iii.Other intangible assets

 

Other intangible assets refer basically to the customer portfolio and acquisition of banking service rights. They are recorded at cost less amortization and impairment losses, if any, and are amortized for the period in which the asset is expected to contribute, directly or indirectly, to the future cash flows.

 

These intangible assets are reviewed annually, or whenever events or changes in circumstances occur which could indicate that the carrying amount of the assets cannot be recovered. If necessary, the write-off or impairment (see Note 2(i) below) is immediately recognized in the consolidated statement of income.

 

h)Leasing

 

Until December 31, 2018, the Organization adopted IAS 17 as accounting practice for recording its leasing transactions, as described below. IFRS 16 – Leases is mandatory for the fiscal years beginning after January 1, 2019.

 

Accounting Policy applicable until December 31, 2018

 

The Organization has both operating and finance leases and operates as a lessee and a lessor.

 

Leases in which a significant part of the risks and benefits of the asset is borne by the lessor are classified as operating leases. For leases in which a significant part of the risks and benefits of the asset is borne by the lessee, the leases are classified as financial lease.

 

Leases under the terms of which the Organization assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments.

 

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Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

 

As a lessee, the Organization classifies its leasing operations mainly as operating leases, and the monthly payments are recognized in the financial statements using the straight-line method over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.

 

When an operating lease is terminated before the contract expires, any payment that may be made to the lessor in the form of a penalty is recognized as an expense for the period.

 

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.

 

As a lessor, the Organization has substantial finance lease contracts, in value and total number of contracts.

 

i.Finance Leases

 

Finance lease assets in the consolidated statement of financial position are initially recognized in the “loans and advances to customers” account at an amount equal to the net investment in the lease.

 

The initial direct costs generally incurred by the Organization are included in the initial measurement of the lease receivable and recognized as part of the effective interest rate of the contract, decreasing the amount of income recognized over the lease term. These initial costs include amounts for commissions, legal fees and internal costs. The costs incurred in relation to the negotiation, structuring and sales of leases are excluded from the definition of initial direct costs and therefore are recognized as expenses at the beginning of the lease term.

 

Recognition of financial revenue reflects a constant rate of return on the net investment made by the Organization.

 

The estimated non-guaranteed residual values used in the calculation of the gross investment of the lessor in the lease are reviewed at least annually. If there is a decrease in the estimated non-guaranteed residual value, the income allocated over the period of the lease is also reviewed periodically and any decrease in relation to the accumulated values is immediately recognized in the consolidated statement of income.

 

The lease receivables are subject to the requirements of Write-off and credit Losses expected, described in the topic above, financial assets and liabilities, items v and viii, respectively.

 

ii.Operating leases

 

The assets leased under operating leases, where the Organization acts as lessor, are recognized in the consolidated statement of financial position as property and equipment according to the nature of the item leased.

 

The initial direct costs incurred by the Organization are added to the carrying amount of the leased asset and are recognized as expenses over the period of the lease and on the same basis as the income recognition.

 

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Revenue from lease is recognized using the straight-line method over the term of the lease, even if the payments are not made on the same basis. Costs, including depreciation and maintenance, incurred in the generation of income are recognized as expenses.

 

The depreciation policy for leased assets is the same as the depreciation policy used by the Organization for similar assets.

 

Accounting Policy adopted from January 1, 2019

 

The Organization assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

Bradesco applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Organization recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

At the beginning of a lease, the Organization recognizes a lease liability and a right of use asset. The expenses with interest on the lease liability and expenses of depreciation of the right of use asset are recognized separately.

 

The right of use asset is measured initially at cost value and is subsequently reduced by the accumulated depreciation and any accumulated impairment losses, when applicable. The right of use will also be adjusted in case of re-measurement of the lease liability. The depreciation is calculated in a linear fashion by the term of the leases.

 

The lease term is defined as the non-cancellable term of the lease, together with (i) periods covered by the option to extend the lease, if the lessee is reasonably certain to exercise that option; and (ii) periods covered by the option to terminate the lease, if the lessee is reasonably certain that it will not exercise that option. The Organization has a descriptive policy for the property lease terms, which considers the business plan and management expectations, extension options and local laws and regulations.

 

The lease liability is measured initially at the present value of the future lease payments, discounted by the incremental rate applied to each contract in accordance with the leasing term.

 

The lease payments include fixed payments, less any lease incentives receivable, and variable lease payments that depend on an index or a rate. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.

 

The incremental rate applied by the Organization takes into account the funding rate free of risk adjusted by the credit spread.

 

Subsequently, the lease liability is adjusted to reflect the interest levied on the payment flows, re-measured to reflect any revaluation or modifications of leasing and reduced to reflect the payments made.

 

Financial charges are recognized as a “Interest and similar expenses” and are adjusted in accordance with the term of the contracts, considering the incremental rate.

 

The contracts and leases of properties with an indefinite period were not considered in the scope of IFRS 16 because they are leases in which the contract can be terminated at any time without a significant penalty. In this way, the rental contract was not considered as executable.

 

Short-term leases and leases of low-value assets

 

The Organization applies the short-term lease recognition exemption to its short-term leases (leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that

 

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are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense over the lease term.

 

i) Impairment losses on non-financial assets (except for deferred tax assets)

 

Assets that have an indefinite useful life such as goodwill are not subject to amortization and are tested, at least, annually to verify the existence of impairment.

 

Assets, which are subject to amortization or depreciation, are reviewed to verify impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized based on the excess the carrying amount of the asset or the cash generating unit (CGU) over its estimated recoverable amount. The recoverable amount of an asset or CGU is the greater of its fair value, less costs to sell, and its value in use.

 

For the purpose of impairment testing, the assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to a ceiling of the operating segments, for the purpose of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to CGU or groups of CGUs that are expected to benefit from the synergies of the combination.

 

When assessing the value in use, future profitability based on business plans and budgets are used, and the estimated future cash flows are discounted to their present value using a discount rate that reflects the current market conditions of the time value of money and the specific risks of the asset or CGU.

 

The Organization’s corporate assets do not generate separate cash inflows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

 

Impairment losses are recognized in the consolidated Statement of Income. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (or group of CGUs) on a pro rata basis.

 

An impairment of goodwill cannot be reversed. With regard to other assets, an impairment loss recognized in previous periods is reassessed at each reporting date for any indications that the impairment has decreased or no longer exists. An impairment loss will be reversed if there has been a change in the estimates used to determine the recoverable amount or to the extent that the carrying amount of the asset does not exceed the carrying amount that would have been determined, net of depreciation and amortization, if no impairment had been recognized.

 

j) Provisions, contingent assets and liabilities and legal obligations

 

A provision is recognized when, as a result of a past event, the Organization has a present legal or constructive obligation that can be reliably estimated and it is probable that an outflow of resources will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

 

Provisions were established by Management whenever it considers that there is a probable loss taking into account the opinion of their legal advisors; the nature of the actions; the similarity to previous suits; the complexity and the positioning of the Courts.

 

Contingent liabilities are not recognized, since their existence will only be confirmed by the occurrence or not of one or more future and uncertain events that are not totally under the control of

 

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the Management. Contingent liabilities do not meet the criteria for recognition, since they are considered as possible losses and are disclosed in explanatory notes, when relevant. Obligations classified as remote are neither provisioned nor disclosed.

 

Contingent assets are recognized only when there are actual guarantees or definitive favorable court rulings, over which there are no more resources, characterizing the gain as practically certain. Contingent assets, whose expectation of success is probable, are only disclosed in the financial statements, when relevant.

 

Legal obligations arise from legal proceedings, the object of which is its legality or constitutionality, which, independently of the assessment of the likelihood of success, have their amounts fully recognized in the financial statements.

 

k)Classification of insurance contracts and investments

 

An insurance contract is a contract in which the Organization accepts a significant insurance risk from the policy holder by agreeing to compensate the policyholder if a specific, uncertain, future event adversely affects the policy holder. Reinsurance contracts are also treated as insurance contracts because they transfer significant insurance risk. Contracts in the Insurance segment classified as investment contracts are related to our capitalization bonds, which do not transfer significant insurance risk and are accounted for as financial liabilities in accordance with IFRS 9 – Financial Instruments.

 

l)Technical provisions for non-life, life, health and pension insurance

 

i.Non-life insurance

 

Non-life insurance contracts include mainly auto insurance, residential/business insurance and liability insurance whose main objective is to protect the insured's assets through the payment of an indemnity in the event of an accident, subject to the contractual conditions of each contract.

 

The Provision for Unearned Premiums (PPNG) is calculated on a daily pro-rata basis using premiums net of coinsurance premiums, including amounts ceded through reinsurance operations, and the value registered in the consolidated statement of financial position corresponds to the unexpired risk period of the insurance contracts. The portion of these reserves corresponding to the estimate for risks in effect but not yet issued is designated PPNG-RVNE.

 

Provision for Claims Incurred But Not Reported (IBNR) is constituted based on the claims incurred and not yet paid (IBNP), subtracting the balance of the Provision for Claims to be Settled (PSL) at the reporting date. To calculate the IBNP, the final estimate of claims that have not yet been paid based on semiannual run-off triangles, which consider the historical development of the claims paid in the last 10 six-month periods for the product group of non-life, in order to establish a future projection by period of occurrence and also considers the estimate of Claims Incurred But Not Enough Reported (IBNER), reflecting the expectation of alteration of the provisioned amount throughout the settlement process.

 

The Provision for Claims to be Settled (PSL) is determined based on the indemnity payment estimates, considering all administrative and judicial claims existing at the reporting date, adjusted for inflation or other index, if applicable, net of salvage and payments expected to be received.

 

The Provision for Related Expenses (PDR) is constituted to cover the expected expenses related to claims incurred and, for some contract types, yet to occur.

 

The Complementary Provision for Coverage (PCC) shall be established when there is insufficiency of the technical provisions required under the legislation, as determined in the Liability Adequacy Test (see Note 2(v) below). At the reporting date management did not identify the need for PCC on non-life contracts.

 

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ii.Life insurance

 

Life insurance contracts include individual and group contracts that aim to guarantee the payment of an indemnity to the insured or its beneficiaries, subject to the contractual conditions and the contracted guarantees.

 

The Provision for Unearned Premiums (PPNG) is calculated on a pro rata basis, based on the net premium for the assignment of coinsurance, corresponding to the period of risk not arising from insurance contracts. The portion of this provision corresponding to the estimate for Risks in Effect but Not Issued is recorded in the PPNG-RVNE.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) is calculated by the difference between the current value of future benefits and the current value of future premiums, corresponding to future obligations assumed.

 

The Provision for Redemptions and other Amounts to be Settled (PVR) comprises amounts related to redemptions to settle, premium refunds owed and portability (transfer-outs) requested but not yet transferred to the recipient insurer.

 

The Provision for Claims Incurred But Not Reported (IBNR) is calculated based on semiannual run-off triangles, which consider the historical development of claims paid and outstanding in the last 10 six-month periods, to establish a future projection per period of occurrence. A residual tail study is carried out to forecast the claims reported after 10 six-month periods of the date of occurrence.

 

The Provision for Claims to be Settled (PSL) considers the expected amounts to be settled from all claim notifications received up to the end of the reporting period. The provision covers administrative and judicial claims indexed to inflation and with interest in the event of judicial claims.

 

The Complementary Provision for Coverage (PCC) refers to the amount necessary to complement technical reserves, as calculated through the liability adequacy test (LAT). LAT is prepared using statistical and actuarial methods based on realistic considerations, taking into account the biometric table BR-EMS of both genders, adjusted by longevity development criteria compatible with the latest published versions (improvement), claims, administrative and operating expenses and using a risk free forward interest rate structures (ETTJ) which was prepared by Fenaprevi and approved by SUSEP. The improvement rate is calculated from automatic updates of the biometric table, considering the expected increase in future life expectancy.

 

The Technical Surplus Provision (PET) corresponds to the difference between the value of the expected cost and the actual cost of claims that occurred during the period for contracts of individual life insurance with rights to participate in technical surplus.

 

The Provision for Related Expenses (PDR) is constituted to cover the expected expenses related to claims incurred and, for some contract types, yet to occur.

 

iii.Health Insurance

 

The health insurance contracts include individual and group contracts that aim to guarantee the insured and beneficiaries medical care, outpatient services in a referenced network or care according to the choice of the insured, subject to the contractual conditions.

 

The Unearned Premium/Payments Reserve (PPCNG) is calculated on the currently effective contracts on a daily pro-rata basis based on the portion of health insurance premiums corresponding to the remaining period of coverage.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) is calculated by the difference between the present value of the future benefits and the present value of the future contributions,

 

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corresponding to the assumed obligations.

 

For health insurance, the Mathematical Provision for Benefits to be Granted (PMBaC) is calculated accounting for a discount rate of 3.6% per annum (3.9% on December 31, 2019), the period over which holders are expected to remain in the plan up to their death, and the projected costs of the five-year-period cover in which no premiums will be received.

 

For health insurance, the Mathematical Provision for Benefits Granted (PMBC) is constituted by the obligations arising from the contractual clauses of remission of installments in cash, regarding the coverage of health assistance and by the premiums through payment of insured persons participating in the Bradesco Saúde insurance – “GBS Plan”, and considering a discount rate of 3.6% per annum (3.9% on December 31, 2019).

 

The Provision for Claims Incurred but Not Reported (IBNR) is calculated from the final estimate of claims that have already occurred and have not yet been reported, based on monthly run-off triangles that consider the historical development of claims reported in the last 12 or 18 months for health insurance, to establish a future projection by occurrence period.

 

For health insurance, the reserve for events incurred but not reported in SUS (PEONA-SUS) is calculated from the estimate of the amount of events/claims originating in the Unified Health System (SUS), which have occurred and which have not been forewarned. The amount is calculated and reported monthly on the institutional website of the National Agency of Supplementary Health (ANS), its form of accounting being supported by the Normative Resolution No. 442/18 in force.

 

The Provision for Claims to be Settled (PSL) for health insurance, considers all claims received up to the reporting date, including all judicial claims and related costs adjusted for inflation.

 

The other technical provisions (OTP) for the individual health portfolio are constituted to cover differences between the expected present value of claims and related future costs and the expected present value of future premiums, considering a discount rate of 3.6% per annum (3.9% on December 31, 2019).

 

iv.Pension plans

 

Pension plans mainly include VGBL and PGBL (linked fund products with options to convert into annuities at maturity) and traditional plans (guaranteed return investments with options to convert to annuities at maturity).

 

The Provision for Unearned Premiums (PPNG) is calculated on a daily pro-rata basis, using net premiums and is comprised of the portion corresponding to the remaining period of coverage. The portion of these reserves corresponding to the estimate for risks in effect but not yet issued is designated PPNG-RVNE.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) is constituted to the participants who have not yet received any benefit. In defined benefit pension plans, the provision represents the difference between the present value of future benefits and the present value of future contributions, corresponding to obligations assumed in the form of retirement, disability, pension and annuity plans. The provision is calculated using methodologies and assumptions set forth in the actuarial technical notes.

 

In pension plans with variable contribution characteristic, the Mathematical reserve for unvested benefits (PMBAC) represents the contributions received from participants, net of costs and other contractual charges, plus the financial return generated through the investment of these amounts in units of specially constituted investment funds (FIE).

 

The Provision for Redemptions and other Amounts to be Settled (PVR) comprises amounts related to redemptions to settle, premium refunds owed and portability (transfer-outs) requested but not yet transferred to the recipient insurer.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

The Mathematical Provision for Benefits Granted (PMBC) is recognized for participants already receiving benefits and corresponds to the present value of future obligations related to the payment of those on-going benefits.

 

The Complementary Provision for Coverage (PCC) refers to the amount necessary to complement technical reserves, as calculated through the Liability Adequacy Test (see Note 2(v)). LAT is prepared using statistical and actuarial methods based on realistic considerations, taking into account the biometric table BR-EMS of both genders, adjusted by longevity development criteria compatible with the latest published versions (improvement), claims, administrative and operating expenses and using a risk free forward interest rate structures (ETTJ) which was prepared by Fenaprevi and approved by SUSEP. The improvement rate is calculated from automatic updates of the biometric table, considering the expected increase in future life expectancy.

 

The Provision for Related Expenses (PDR) is constituted to cover the expected expenses related to claims incurred and, for some contract types, yet to occur. The projections are performed through the liability adequacy test (LAT).

 

The Provision for Financial Surplus (PEF) corresponds to the financial result which exceeds the guaranteed minimum profitability transferred to contracts with a financial surplus participation clause.

 

The Provision for Claims Incurred but Not Reported (IBNR) is calculated based on semiannual run-off triangles, which consider the historical development of claims paid and outstanding in the last 16 six-month periods to establish a future projection by period of occurrence.

 

The Provision for Claims to be Settled (PSL) considers the expected amounts to be settled from all claim notifications received up to the end of the reporting period. The provision covers administrative and judicial claims indexed to inflation and with interest in the event of judicial claims.

 

The provision “Other technical provisions (OPT)” comprises part of the mathematical provisions of benefits to be granted and benefits granted transferred to this accounting line, as required by SUSEP. This amount refers to the difference between the calculation of mathematical provisions, carried out with realistic premises at the time, approved by the autarchy in 2004, and the calculation with the technical bases defined in the technical notes of the product.

 

The financial charges credited to technical provisions, and the recording and/or reversal of the financial surplus, are classified as financial expenses, and are presented under “Net income from insurance and pension plans”.

 

v.Liability Adequacy Test (LAT)

 

The Organization conducted the liability adequacy test for all the contracts that meet the definition of an insurance contract according to IFRS 4 – Insurance Contracts and which are in force on the date of execution of the test. This test is conducted every six months and the liability of insurance contracts, gross of reinsurance, is calculated as the sum of the carrying amount, deducting the deferred acquisition costs and the related intangibles. This is compared to the expected cash flows arising from the obligations under commercialized contracts and certificates.

 

The test considerers projections of claims and benefits that have occurred and are to occur, administrative expenses, allocable expenses related to the claims, intrinsic options and financial surpluses, salvage and recoveries and other income and expense directly related to the insurance contracts.

 

To calculate the present value of projected cash flows, the Organization used the risk free forward (ETTJ) rate which was prepared by SUSEP (Danos) and Fenaprevi (Vida e Previdência) both approved by SUSEP.

 

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Notes to the Consolidated Financial Statements

 

Life Insurance and Pension Plans

 

The contracts are grouped based on similar risks or when the insurance risk is managed jointly by the Management. The projections follow the methodology and assumptions described in the preceding paragraphs of this section.

 

The result of the liability adequacy test (LAT) presented an insufficiency which was recognized in the Complementary Provision for Coverage (PCC), see Note 34.

 

Non-Life Insurance

 

The expected present value of cash flows relating to claims incurred – primarily claims costs and salvage recoveries – was compared to the technical provisions for claims incurred – PSL and IBNR.

 

The expected present value of cash flows relating to claims to be incurred on the policies in force, plus any administrative expenses and other expenses relating to products in run-off, was compared to the sum of the related technical provisions – PPNG and PPNG-RVNE.

 

The average projected loss ratio was 44.11% and the average reinsurance projected in the study, calculated based on the reported claims, was 7.05%.

 

The result of the liability adequacy test, for non-life insurance contracts, did not present insufficiency and, consequently, no additional PCC provisions were recorded.

 

m)Reinsurance contracts

 

Reinsurance contracts are used in the normal course of operations with the purpose of limiting potential losses, by spreading risks. Liabilities relating to contracts that have been reinsured are presented gross of their respective recoveries, which are booked as assets since the existence of the reinsurance contract does not nullify the Organization’s obligations with the insured parties.

 

As required by the regulators, reinsurance companies with headquarters abroad must have a minimum rating, assessed by a credit rating agency, to operate in the country, whereby all other reinsurance operations must be performed with local reinsurers. In this way, impairment risks are reduced. If there are indications that the amounts recorded will not be realized by its carrying amount, these assets will be adjusted for impairment.

 

n)Deferred acquisition costs

 

These comprise deferred acquisition costs including commissions and brokers’ fees related to the sale of insurance policies. Deferred commissions are recognized in the consolidated statement of income over the life of the respective policies and pension plan contracts or over an average period of 12 months. Expenses relating to insurance agency operations relating to the sale of health plans are amortized over a 24 month period.

 

It also includes the deferred acquisition costs relating to the exclusivity agreement with the retail network, for the marketing of extended warranty insurance for the initial period of 12 years, with the extension of more than 4 years of contract, totaling 16 years.

 

o)Employee benefits

 

Bradesco recognizes, prospectively the surplus or deficit of its defined benefit plans and post-retirement plans as an asset or an obligation in its consolidated statement of financial position, and recognizes the changes in the financial condition during the year in which the changes occurred, in profit or loss.

 

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Notes to the Consolidated Financial Statements

 

i.Defined contribution plan

 

Bradesco and its subsidiaries sponsor pension plans for their employees and Management. Contribution obligations for defined contribution pension plans are recognized as expenses in profit or loss as incurred. Once the contributions are paid, Bradesco, in the capacity of employer, has no obligation to make any additional payment.

 

ii.Defined benefit plans

 

The Organization’s net obligation, in relation to the defined benefit plans, refers exclusively to institutions acquired and is calculated separately for each plan, estimating the future defined benefit that the employees will be entitled to after leaving the Organization or at the time of retirement.

 

Bradesco’s net obligation for defined benefit plans is calculated on the basis of an estimate of the value of future benefits that employees receive in return for services rendered in the current and prior periods. This value is discounted at its current value and is presented net of the fair value of any plan assets.

 

The calculation of the obligation of the defined benefit plan is performed annually by a qualified actuary, using the projected unit credit method, as required by accounting rule.

 

Remeasurement of the net obligation, which include: actuarial gains and losses, the return of the assets of the plan other than the expectation (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income.

 

Net interest and other expenses related to defined benefit plans are recognized in the statement of income.

 

iii.Termination benefits

 

Severance benefits are accrued when the employment relationship is terminated by the Organization before the employee’s normal date of retirement or whenever the employee accepts voluntary redundancy in return for such benefits.

 

Benefits which are payable 12 months or more after the reporting date are discounted to their present value.

 

iv.Short-term benefits

 

Benefits such as wages, salaries, social security contributions, paid annual leave and paid sick leave, profit sharing and bonuses (if payable within 12 months of the reporting date) and non-monetary benefits such as health care, etc. are recorded as expenses in the consolidated statement of income, without any discount to present value, if the Organization has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee and the obligation can be reliably estimated.

 

p)Capitalization bonds

 

The liability for capitalization bonds is registered in the line “Other liabilities”. Financial liabilities and revenues from capitalization bonds are recognized at the time bonds are issued.

 

The bonds are issued according to the types of payments, monthly or in a single payment. Each bond has a nominal value, which is capitalized monthly by the Referential Rate index - TR and by interest rates defined in the plan until the redemption or cancellation of the bond. Amounts payable are recognized in the item “Other Liabilities – Capitalizations Bonds”.

 

Capitalization bond beneficiaries are eligible for a prize draw. At the end of a certain period that is

 

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determined at the time the capitalization bond is issued, a beneficiary may redeem the nominal value paid plus the referential rate (TR), even if they have not won in the draw. These products are regulated by the insurance regulator in Brazil; however, they do not meet the definition of an insurance contract in accordance with IFRS 4 and, therefore, are classified as financial liabilities.

 

Unclaimed amounts from “capitalization plans” are derecognized when the obligation legally expires.

 

Expenses for placement of “capitalization plans”, are recognized as they are incurred.

 

q)Interest

 

Income from financial assets measured at amortized cost and at FVOCI, except instruments of equity and interest costs from liabilities classified at amortized cost are recognized on an accrual basis in the consolidated statement of income using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash payments and receipts throughout the expected life of the financial asset or liability (or, when appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective rate, the Organization estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

 

The calculation of the effective interest rate includes all commissions, transaction costs, discounts or bonuses which are an integral part of such rate. Transaction costs are incremental costs directly attributable to the acquisition, issuance or disposal of a financial asset or liability.

 

r)Fees and commissions

 

Fees and commission income and expense which are part of and are directly allocable to the effective interest rate on a financial asset or liability are included in the calculation of the effective interest rate.

 

Other fee and commission income, substantially composed by account service fees, asset management fees, credit card annual charges, and collection and consortium fees are recognized, according to the requirements of IFRS 15 - Revenue from Contracts with Customers, to the extent that the obligations of performance are fulfilled. The price is allocated to the provision of the monthly service, and the revenue is recognized in the result in the same manner. When a loan commitment is not expected to result in the drawdown of a loan, the related commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commissions expense relate mainly to transaction as the services are received.

 

s)Net insurance income

 

Insurance and coinsurance premiums, net of premiums transferred through coinsurance and reinsurance and related commissions are recognized as income upon issuance of the respective policies/certificates/endorsements and invoices or at the beginning of the risk period for cases in which the cover begins before issue date, and accounted for on a straight-line basis, over the duration of the policies, through the upfront recognition and subsequent reversal of the provision for unearned premiums and the deferred acquisition costs. Income from premiums and the acquisition costs related to risks already assumed whose respective policies have not yet been issued are recognized in the consolidated statement of income at the start of the risk coverage period on an estimated basis.

 

The health insurance premiums are recorded in the premium account (result) or Unearned Premium or Contribution Provision (PPCNG), according to the coverage period of the contracts in effect at the balance sheet date.

 

Revenues and expenses related to “DPVAT” insurance operations are recorded on the basis of information received from the Seguradora Líder dos Consórcios do Seguro DPVAT S.A.

 

Accepted co-insurance contracts and retrocession operations are recorded on the basis of information received from the lead co-insurer and IRB – Brasil Resseguros S.A. (IRB), respectively.

 

Reinsurance operations are recorded based on the provision of accounts, which are subject to review

 

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Notes to the Consolidated Financial Statements

 

by reinsurers. The deferral of these operations is carried out in a manner consistent with the related insurance premium and/or reinsurance contract.

 

The acquisition costs relating to the commission of insurance are deferred and adapted to the result in proportion to the recognition of the earned premium.

 

The receipts from insurance agency operations are deferred and recognized in income linearly, for a period of 24 months in health insurance operations and by the term of 12 months in the other operations.

 

Contributions to pension plans and life insurance premiums with survivor coverage are recognized in income upon their effective receipt.

 

The management fee income is appropriated to the income on an accrual basis, according to contractually established rates.

 

Financial revenues include interest income on assets of the funds invested (including financial assets available for sale), income from dividends, gains from the disposal of financial assets available for sale, changes in the fair value of financial assets measured at fair value through profit or loss, accrued income in the calculation of the cost value of securities held to maturity and reclassifications of gains previously recognized in other comprehensive income. The income from interest is recognized in the results through the effective interest method.

 

Financial expenses cover losses in the disposal of assets available for sale, changes in the fair value of financial assets measured at fair value through profit or loss, losses by impairment recognized in the financial assets (except receivables).

 

t)Income tax and social contribution

 

Income taxes in Brazil consist of Company Income Tax (IRPJ) and Social Contribution on Profit (CSLL).

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. For financial companies, financial company equivalent and of the insurance industry, the social contribution on profit was calculated until August 2015, considering the rate of 15%. For the period between September 2015 and December 2018, the rate was changed to 20%, according to Law No. 13,169/15, and returned to the rate of 15% as from January 2019. In November 2019 the Constitutional Amendment No. 103 was promulgated, which establishes in article 32, the increase in the rate of the social contribution on profit of “Banks” from 15% to 20%, with effect from March 2020. For the other companies, the social contribution is calculated considering the rate of 9%.

 

Income tax and social contribution expense comprises current and deferred tax. Current and deferred tax are recorded in the consolidated statement of income except when the result of a transaction is recognized directly in equity, in which case the related tax effect is also recorded in equity or in other comprehensive income.

 

Current tax assets are amounts of taxes to be recovered through restitution or offset with taxes due from excess of taxes paid in relation to the current and/or previous period.

 

Current tax expenses are the expected amounts payable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

 

Income tax and social contribution deferred tax assets, calculated on carry-forward income tax losses, carry-forward social contribution losses and temporary differences, are recorded in “Assets – Deferred Taxes” and the deferred tax liabilities on tax differences in lease depreciation (applicable only for income tax), fair value adjustments on securities, restatement of judicial deposits, among others, are recorded in “Liabilities – Deferred Taxes”. All deferred tax liabilities are recognized.

 

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Deferred tax assets on temporary differences are realized when the difference between the accounting treatment and the tax treatment reverses. Deferred tax assets on carry-forward income tax and social contribution losses are realizable when taxable income is generated, up to the 30% limit of the taxable profit for the period. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date based on current expectations of realization considering technical studies and analyses carried out by Management and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amount used for taxation purposes. Deferred tax is not recognized for:

 

·temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

 

·temporary differences related to investments in subsidiaries, associates and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

 

·taxable temporary differences arising on the initial recognition of goodwill.

 

Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

 

The Organization assesses its uncertain tax positions and considers whether it is probable that additional taxes and interest may be due. The Organization believes that its provisions for tax liabilities are adequate for all open fiscal years, based on its assessment of several factors, including interpretations of tax legislation and previous experience. This assessment are based on estimates and assumptions and may involve judgments about future events. New information may be made available that will lead the Organization to change its judgment regarding the adequacy of existing tax obligations, such changes in tax obligations will impact tax expense in the period in which such determination is made.

 

Deferred tax assets and liabilities are offset, if there is a legal right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same entity subject to taxation or on different tax entities, but they intend to settle current tax assets and liabilities on a net basis or their assets and liabilities will be realized simultaneously.

 

A deferred income tax and social contribution asset is recognized for unused tax losses, tax credits and deductible temporary differences when it is probable that future taxable profits will be available and against which they will be used. Deferred income tax and social contribution assets are reviewed at each reporting date and are reduced to the extent that their realization is no longer probable.

 

u)Segment reporting

 

Information for operating segments is consistent with the internal reports provided to the Executive Officers (being the Chief Operating Decision Makers), which are comprised by the Chief Executive Officer, Executive Vice-Presidents, Managing Officers and Deputy Officers. The Organization operates mainly in the banking and insurance segments. The banking operations include operations in retail, middle market and corporate activities, lease, international bank operations, investment banking and private banking. The Organization’s banking activities are performed through its own branches located throughout the country, in branches abroad and through subsidiaries, as well as by means of our shareholding interest in other companies. The insurance segment consists of insurance operations, supplementary pension plans and capitalization plans which are undertaken through a subsidiary, Bradesco Seguros S.A., and its subsidiaries.

 

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Notes to the Consolidated Financial Statements

 

v)Shareholders’ Equity

 

Preferred shares have no voting rights, but have priority over common shares in reimbursement of capital, in the event of liquidation, up to the amount of the capital represented by such preferred shares, and the right to receive a minimum dividend per share that is ten percent (10%) higher than the dividend distributed per share to the holders of common shares.

 

i.Share issue costs

 

Incremental costs directly attributable to the issuance of shares are shown net of taxes in shareholders’ equity, thus reducing the initial share value.

 

ii.Earnings per share

 

The Organization presents basic and diluted earnings per share data. Basic earnings per share is calculated by allocating the net income attributable to shareholders between that attributable to common shareholders and that attributable to preferred shareholders and dividing this by the weighted average number of common and preferred shares, respectively, outstanding during the year, excluding the average number of shares purchased by the Organization and held as treasury shares. Diluted earnings per share are the same as basic earnings per share, as there are no potentially dilutive instruments.

 

iii.Dividends payable

 

Dividends on shares are paid and provisioned during the year. In the Shareholders’ Meeting are approved at least the equivalent of 30% of the annual adjusted net income, in accordance with the Company’s Bylaws. Dividends approved and declared after the reporting date of the financial statements, are disclosed in the notes as subsequent events.

 

iv.Capital transactions

 

Capital transactions are transactions between shareholders. These transactions modify the equity held by the controlling shareholder in a subsidiary. If there is no loss of control, the difference between the amount paid and the fair value of the transaction is recognized directly in the shareholders’ equity.

 

3)       Risk Management

 

The risk management activity is highly strategic due to the increasing complexity of products and services and the globalization of the Organization's business. The dynamism of the markets leads the Organization to constantly seek to improve this activity.

 

Covid-19 Pandemic

 

Bradesco, due to the serious pandemic scenario caused by Covid-19, which brought several adverse effects on people's lives and business, remains focused on supporting its customers and employees. Despite this adverse scenario, some learnings were incorporated into our operations, for example, how to relate to our supplier customers and the intensification of the Organization's home office. With these advances, Bradesco, through the Collective Labor Agreement carried out with the Banking Union Movement at the national level, was the first large bank to assume the commitment to adopt remote work after the pandemic.

 

Bradesco's Crisis Committee, formed by the Chief Executive Officer, all Vice-Presidents and the CRO (Chief Risk Officer), is evaluating the scenario of pandemic and reporting to the Board of Directors about the assessments of the evolution of the pandemic and its impact on our operations and society. In addition, we have a Risk Committee, which plays an important role in verifying various points and the scope of these actions in the Organization. The Organization has triggered the Business Continuity Plan (PCN), intensified internal and external actions, adopted the rotation of employees from the branch

 

42 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

network and throughout the pandemic period, optimization opportunities were identified due to the migration to remote work, prevailing a mentality focused on the digital environment in a consistent and timely manner, with the aim of minimizing the impacts involved.

 

The Organization adjusted Bradesco's governance and policies to the current situation.

 

Credit Policies: In relation to Bradesco’s credit policies, the main focus prevails in supporting the customers, with the assessment of the risks assumed. The Organization mapped the exposure to the most fragile sectors and companies and maintains a constant line of communication with companies throughout the relationship. The Organization maintained active credit recovery teams and focused on finding solutions for customers who need them. The Organization have incorporated new risk variables into the credit models in the current scenario, in order to correctly assess the situation;

Capital and Liquidity: The Organization maintained its regulatory capital above the required amounts and a margin of adequate liquidity to meet customer needs, as well as business sustainability. In addition, the measures implemented by the Central Bank in 2020 (mainly in the second and third quarters) further favored the system's liquidity and solvency;

Risk Governance: The Organization has constantly monitored and adjusted the operational limits and risk appetite, promoting the review and timely adaptation of scenarios in the current context. In addition to the internal monitoring activities, a follow-up with the Organization's relevant suppliers was implemented to ensure that the continuity strategy adopted by the companies, in fact, corresponded to the needs of the processes, to maintain the deliveries to customers.

 

Scope of Risk Management

 

The Organization risk management scope works with a wide view of the Economic Financial Consolidated risks. The Corporate Process of Risk Management, based on those guidelines, develop its activities, whose approach is based on three lines of defense:

 

·First line of defense, represented by the business areas and areas of support, responsible for identifying, assessing, reporting and managing the inherent risks as part of the day-to-day activities. In addition, they are responsible for the execution of controls, in response to the risks, and/or for the definition and implementation of action plans to ensure the effectiveness of the internal control environment, while keeping risks within acceptable levels;
·Second line of defense, represented by the areas of supervision, responsible for establishing policies and procedures of risk management and compliance for the development and/or monitoring of controls in the first line of defense. In this line, we highlight the Departments of Integrated Risk Control, Compliance, Conduct and Ethics, Legal, and Corporate Security, among others;
·Third line of defense, represented by the General Inspectorate Department (Internal Audit), which is responsible for assessing independently the effectiveness of the risk management and internal controls, including the form by which the first and second lines of defense accomplish their goals, reporting the results of their work to the Board of Directors, the Audit Committee, Fiscal Council and senior management.

 

Risk Appetite Statement (RAS)

The risk appetite refers to the types and levels of risks that the Organization is willing to accept in the conduct of its business and purposes. The Risk Appetite Statement – RAS is an important instrument that summarizes the risk culture of the Organization.

 

At the same time, RAS emphasizes the existence of an efficient process of assignments in the operational risk management and in the performance of control functions, as well as for mitigation and disciplinary actions and processes of scheduling and reporting to Senior Management upon breach of the risk limits or control processes established.

 

The Risk Appetite Statement is reviewed on annual basis1, or whenever necessary, by the Board of

 


1 The Risk Committee, in relation to the RAS, has the following attributions: to assess the risk appetite levels set out in the Risk Appetite Statement (RAS) and the strategies for its management, taking risks into account individually and in an integrated manner; and b) to supervise compliance, by the institution’s Board of Executive Officers, with the terms of the RAS.

 

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Notes to the Consolidated Financial Statements

 

Directors and permanently monitored by forums of the Senior Management and business and control areas.

 

RAS reinforces the dissemination of the risk culture by disclosing the main aspects of risk appetite of the Organization to all its members.

 

For the many types of risks, whether measurable or not, the Organization established control approaches, observing the main global dimensions:

 

Capital: the Organization seeks to maintain, permanently, a solid capital base to support the development of activities and cope with the risks incurred (in normal situations or of stress), as well as to support any losses arising from non-measurable risks and make possible strategic acquisitions. To meet this goal, capital buffers were established, which are part of the framework of risk appetite, which are defined and approved by the Board of Directors.

The Organization has established that the Indexes of Basel, Level I, of Common Equity and Leverage Ratio should correspond at least to the regulatory cap, plus the current Equity buffer. In the same sense, Grupo Bradesco Seguros (GBS) must maintain the minimum Solvency Index above the regulatory framework, in the consolidated view, according to the buffers defined.

 

Liquidity: the Organization aims to effectively comply with its obligations through diversified and low cost sources of funding to provide a cash structure compatible with the size of its obligations; thus, ensuring survival even in adverse scenarios without affecting its daily operations and incurring significant losses.

 

For this dimension, indicators were established for short- and long-term monitoring. The Short-Term Liquidity Coverage Ratio (LCR) corresponds to the ratio between the stock of High-Quality Liquidity Assets (HQLA) and the total number of outflows of cash, calculated according to the standardized stress by the Central Bank of Brazil. Now the Indicator of Long-Term Liquidity – NSFR (Net Stable Funding Ratio) corresponds to the ratio between the stable funding available and the stable funding necessary. For Grupo Bradesco Seguros, the control of liquidity risk consists in the sizing of the Minimum Reserve of Liquidity (RML), represented by the amount of resources needed to settle the obligations in situations of stress during the period of turbulence (30 days) and their relation with the Cash Available, which is composed predominantly by high-quality net assets.

Profitability: the Organization prioritizes diligence for the sustainable growth of its business and results and for the adequate remuneration of its equity, seeking to cover the remuneration expectation of its shareholders in relation to the risks assumed in their business.

 

The Organization periodically monitors key performance indicators of the results by line of business, segments and products. On the basis of these monitoring, analyses, projections and studies are made in order to inform the business areas and Senior Management about the individual and consolidated results, thus allowing conscious decision making and strategic reviews.

 

Loan: the Organization focus on domestic customers, on diversified and dispersed manner, in terms of products and segments, aiming at the security and quality of the portfolio, with guarantees consistent with the risks assumed, considering the amounts, purposes and terms of loans granted, maintaining proper levels of provisions and concentrations.

 

The monitoring of credit risk is accomplished through continuous monitoring of portfolios and exhibitions, with assessment of the evolution of their volumes, delinquency, provisioning, studies of harvests, and equity, among others. Additionally, the Organization has a structured process of governance of limits of liability for approval of credit operations and recovery.

 

In relation to the risk appetite, metrics were defined to monitor the concentration limits of operations for the Economic Group, Sector and Transfer (concentration per country). In addition to the indicators of concentration, a specific indicator was established for the level of delinquencies above 90 days for Individuals (PF), an indicator of Margin of Economic Capital of Credit Risk, in order to monitor and track the capital in the economic and regulatory visions, and an indicator of the percentage of Troubled Assets.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Market: the Organization aims to align the exposures to the strategic guidelines, with specific limits established on independent basis and with risks mapped, measured and classified as to the probability and magnitude.

 

The Organization monitors and controls the possibility of financial losses due to fluctuating prices and interest rates of the financial instruments, as its asset and liability portfolios may have mismatched maturities, currencies and indexes. Considering the dynamics of this type of risk and the characteristics of each investment portfolio, various limits of risks and results were established.

 

For the Trading portfolio the indicators of Value at Risk (VaR), Stress Scenarios for a month and of Monthly and Quarterly Result are part of the risk appetite. For the Banking portfolio, the DEVE Internal Model, DEVE Outlier Test, DNII Internal Model and the Evolution of the Positions Evaluated at Market Value are monitored. Now for Grupo Bradesco Seguros, the indicators are the VaR for variable income and the interest rate risk (EVE).

 

Operational: the Organization aims to provide assurance with regard to appropriately carrying out its business in accordance with laws regulations and policies, ensuring that processes are covered by efficient controls.

 

In view of the wide range of products and services offered, as well as the significant volume of activities and operations made, the Organization can incur operating losses resulting from flaws, deficiency or inadequacy of internal processes, people and systems, or from external events.

 

In this sense, in the context of the Prudential Conglomerate, the Organization established limits of appetite and tolerance for operating losses, which are monitored on a monthly basis. Additionally, an indicator for monitoring the availability of the main channels of customer service and systems has been defined, aiming to provide continuous readiness in the customer service.

 

Reputation: the Organization monitors its reputation as perceived by customers, employees, regulatory authority, investors and the market in general, aiming to ensure the timely identification and assessment of potential sources of this risk and act preventively to mitigate them.

 

The control of reputation risk aims to ensure that the Organization evaluates and monitors the perception of various stakeholders in order to identify potential sources of risk in reputation and act in a timely manner to mitigate it.

 

The control of this risk is performed by means of a Consolidated Index of Reputation, which is subdivided into dimensions under which it is possible to determine the reputation of the Organization as perceived by customers, employees, regulatory authority, investors and the market in general.

 

Model: the Organization uses models to support the decision-making, preparation of financial reports and regulations, and to provide predictive information in several areas of the business. In this context, the Organization recognizes the existence of the risk associated with the use of the models and importance of its management process.

 

The Organization carries out the management and control of the model risk by means of assessment, inventory and classification of relevance and model risk, backed by processes of governance.

 

Qualitative Risk: in addition to the risks described above, the Organization is exposed to the risks of Third Party, Strategy, Socio-environmental, Underwriting, Cyber and Compliance. These risks are managed by means of processes and a governance structure that is composed of Departmental Committees, executive committees and Senior Management. The management of these risks has the backing of policies, standards and procedures that contribute to their proper management and control.

 

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Notes to the Consolidated Financial Statements

 

Risk and Capital Management Structures

 

Risk and capital management structures also comprise various committees, commissions and departments that support the Board of Directors, the Chief Executive Officer, the Chief Risk Officer and the Board of Executive Officers of the Organization in decision-making.

 

The Organization has the Integrated Risk and Capital Allocation Management Committee – COGIRAC, whose duty is advise the Board of Directors in performing its duties, related to the management policy and to the risk exposure limits policy, and assure, within the scope of the Organization, the fulfillment of the processes, policies, related rules, and regulations and laws applicable to the Organization.

 

COGIRAC are supported by the following executive committees: a) Risk Monitoring, b) Risk Management, c) PLDFT/Sanctions and Information Security/Cyber Executive Committee and d) Risk Management, Actuarial Control and Compliance of Bradesco Seguros. In addition, it also is supported by the Products and Services Executive Committee and the executive committees in business areas, which, among other duties, suggest exposure thresholds for their respective risks and prepare mitigation plans to be submitted to COGIRAC and to the Board of Directors.

 

In the governance structure it is also notable the Risk Committee, whose main purpose is to assess the structure of the Organization’s risk management and occasionally propose improvements.

 

COGIRAC and the Risk Committee advise the Board of Directors in the performance of its assignments related to the management and control of risks, capital, internal controls and compliance.

In this structure, the Integrated Risk Control Department (DCIR), whose mission is to promote and to implement risk control and capital allocation through robust practices and certification of existence, execution and effectiveness of controls which assure acceptable risk levels in the Organization’s processes, independently, consistently, on a transparent and integrated manner stands out. This Department is also responsible for complying with the Central Bank of Brazil rules for risk management activities.

 

Stress Test Program

 

The risk management structure has a stress test program defined as a coordinated set of processes and routines, containing own methodologies, documentation and governance, whose principal purpose is to identify potential vulnerabilities of the institution. Stress tests are exercises of prospective evaluation of the potential impacts of adverse events and circumstances on capital, on liquidity or on the value of a portfolio of the Organization.

 

In the Program of Stress Tests, the scenarios are designed by the Department of Research and Economic Studies – DEPEC and discussed with the Business areas, DCIR, Department of Controllership, among other areas. Stress testing results are discussed and approved in a specific Departmental Commission. Subsequently, they are submitted to the COGIRAC and Board of Directors, that, in addition to the scenarios and results of stress tests are also responsible for the approval of the program and guidelines to be followed.

 

Stress tests are used as a tool for managing risks: in its identification, measurement, evaluation, monitoring, control and mitigation of risks of the institution. The results of stress tests are used for evaluation of capital and liquidity levels of the institution, for preparation of the respective contingency plans, for evaluation of the capital adequacy and for the recovery plan. Similarly, the results are considered in the decisions related to strategic guidelines, definition of the levels and limits of risk appetite applied to the management of risks and capital, as well as in the definition of governance actions aimed at mitigation of risks identified by aligning them to the risk appetite of the Organization.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

3.1.Capital Management

 

Capital Management Corporate Process

 

The Capital Management provides the conditions required to meet the Organization’s strategic goals to support the risks inherent to its activities. In this way, it adopts a forward-looking stance when elaborating its capital plan, anticipating the need for capital for the next three (3) years, as well as establishing procedures and contingency actions to be considered in adverse scenarios.

 

The Organization manages capital in line with the strategic guidelines, involving the control and business areas, in accordance with the guidelines of the Board of Executive Officers and Board of Directors. The structure of Capital Management Governance, Internal Capital Adequacy Assessment Process (ICAAP) and Recovery Plan is composed by Commissions, Committees and its highest-level body is the Board of Directors.

 

The Controllership Department ensures compliance with the stipulations of the Central Bank of Brazil pertaining to capital management activities and assistance to the Senior Management by providing analyses and projections of capital requirements and availability, identifying threats and opportunities that help plan the sufficiency and optimization of capital levels.

 

The Organization also has a Recovery Plan, delivered to the Central Bank of Brazil in December of each year and approved by the Board of Directors in accordance with CMN Resolution No. 4,502, of June 30, 2016, establishing procedures for the preparation of recovery plans, in order to maintain adequate levels of capital and liquidity in situations of severe stress in financial institutions considered systemically important.

 

Reference Equity Adequacy

 

The Reference Equity (RE) adequacy is verified daily to ensure that the Organization maintains a solid capital base in normal situations or in extreme market conditions and complying with regulatory requirements.

 

The objective of the Central Bank of Brazil is that the financial institutions permanently maintain capital and additional Reference Equity Tier I (Conservation, Systemic and Countercyclical) compatible with the risks from their activities. The risks are represented by Risk-Weighted Assets (RWA), which is calculated based on, at least, the sum of credit, market and operational risk components.

Additionally, the Organization must maintain enough RE to meet the interest rate risk from operations not included in the trading portfolio (Banking Portfolio’s interest rate risk).

 

Capital Sufficiency

 

The capital management process is aligned with the strategic planning and is forward looking, anticipating any changes in the economic and commercial environment conditions in which the Organization operates.

 

The Organization’s capital management aims at permanently ensuring a sound capital composition to support the development of its activities and to ensure adequate coverage of risks incurred. The Organization maintains a managerial capital margin (buffer), which is added to the minimum regulatory requirements.

 

The management buffer is defined according to the market practices and the regulatory requirements, observing aspects such as additional impacts generated by stress scenarios, qualitative risks and risks not captured by the regulatory model.

 

The Organization’s regulatory capital sufficiency is monitored by periodically calculating the Basel Ratio, Tier I Ratio and Common Equity Ratio.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

Capital Forecast

 

The capital management area is responsible for making simulations and projections of the Organization’s capital, in accordance with the strategic guidelines, the impacts arising from variations and trends of the economic and business environment as well as regulatory changes. The results from the projections are submitted to the Senior Management, pursuant to the governance established.

 

The projections for the next three years have adequate levels of Capital Ratios, considering the incorporation of net income and the evolution of the need for capital.

 

Analysis of Reference Equity (RE), Capital Ratios and Liquidity

 

The following table presents the main metrics established by prudential regulation, such as regulatory capital, leverage ratio and liquidity indicators:

 

Calculation basis - Basel Ratio R$ thousand
Basel III
On December 31
2020 2019
Prudential
Regulatory capital - values    
Common equity 108,982,064 91,271,701
Level I 118,281,835 100,831,668
Reference Equity - RE 135,723,674 125,275,405
Excess of resources invested in permanent assets -   -  
RE Highlight -   -  
Risk-weighted assets (RWA) - amounts    
Total RWA 858,692,912 759,051,325
Regulatory capital as a proportion of RWA    
Index of Common equity - ICP 12.7% 12.0%
Level 1 Index 13.8% 13.3%
Basel Ratio 15.8% 16.5%
Additional Principal Capital (ACP) as a proportion of RWA    
Additional Principal Capital Conservation - ACPConservation (1) 1.25% 2.50%
Additional Contracyclic Principal Capital - ACPContracyclic 0.00% 0.00%
Additional Systemic Importance of Principal Capital - Systemic ACPS 1.00% 1.00%
Total ACP 2.25% 3.50%
Excess Margin of Principal Capital 5.94% 4.02%
Leverage Ratio (AR)    
Total exposure 1,436,809,012 1,228,715,207
AR 8.2% 8.2%
Short Term Liquidity Indicator (LCR)    
Total High Quality Liquid Assets (HQLA) 244,827,538 112,872,809
Total net cash outflow 137,247,662 78,493,191
LCR 178.4% 143.8%
Long Term Liquidity Indicator (NSFR)    
Available stable funding (ASF) 744,316,530 635,623,931
Stable resources required (RSF) 618,540,418 551,731,471
NSFR 120.3% 115.2%

(1) CMN Resolution No. 4,783/20, from April 2020, establishes the reduction of the Common Equity Additional for Conservation (ACPConservação) from 2.5% to 1.25%, for the term of one year and after this period, the requirement will gradually be restored until March 31, 2022 to the level of 2.5%.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Breakdown of Risk-Weighted Assets (RWA)

 

The following table presents information on the amount of RWA used to determine the minimum RE requirement, as established in art. 4 of CMN Resolution No. 4,193/13:

 

RWA R$ thousand  
RWA Minimum RE requirement (3)  
On December 31, 2020 On December 31, 2019 On December 31, 2020 On December 31, 2019  
 
Credit Risk - treatment using a standardized approach 779,588,539 680,907,696 62,367,083 54,472,614  
Credit risk in the strict sense (1) 642,582,738 596,741,812 51,406,619 47,739,345  
Counterparty credit risk (CCR) 35,625,687 24,919,371 2,850,055 1,993,549  
- Of which: through standardized approach to counterparty credit risk (SA-CCR) 23,851,517 15,295,904 1,908,121 1,223,672  
- Of which: using the EMC approach -   -   -   -    
- Of which: using other approaches 11,774,170 9,623,467 941,934 769,877  
Increase related to the adjustment associated with the variation in the value of derivatives due to the variation in the credit quality of the counterparty (CVA) 14,687,826 6,519,630 1,175,026 521,570  
Unconsolidated fund shares - underlying assets identified 3,960,234 5,217,631 316,819 417,410  
Unconsolidated fund shares - underlying assets inferred according to fund regulations -   -   -   -    
Unconsolidated fund shares - unidentified underlying assets -   3,989,766 -   319,181  
Securitization exposures - requirement calculated using standardized approach 2,791,550 2,173,417 223,324 173,873  
Values referring to exposures not deducted in the calculation of PR (2) 79,940,504 41,346,069 6,395,240 3,307,686  
Market Risk (3) 14,690,553 13,571,488 1,175,244 1,085,719  
- Of which: requirement calculated using standardized approach (RWAMPAD) 8,805,006 16,029,113 704,400 1,282,329  
- Of which: requirement calculated using internal model (RWAMINT) 14,690,553 13,571,488 1,175,244 1,085,719  
Operational Risk 64,413,820 64,572,141 5,153,106 5,165,771  
Total 858,692,912 759,051,325 68,695,433 60,724,104  

(1) It does not include Counterparty Credit Risk operations;

(2) As defined in Resolution No. 4,192/13, 3, art. 4; and

(3) Composed of a maximum of 80% of the standardized model (RWAMPAD) and internal model (RWAMINT), according to Circular No. 3,646 and No. 3,674.

 

3.2.Credit risk

 

Credit risk refers to the possibility of losses associated with the borrower’s or counterparty’s failure to comply with their financial obligations under the terms agreed, as well as the fall in value of loan agreements resulting from deterioration in the borrower’s risk rating, the reduction in gains or remunerations, benefits granted to borrowers in renegotiations, recovery costs and other costs related to the counterparty’s noncompliance with the financial obligations. Additionally, it includes the concentration risk and the country/transfer risk.

 

Credit risk management in the Organization is a continuous and evolving process of mapping, development, assessment and diagnosis through the use of models, instruments and procedures that require a high degree of discipline and control during the analysis of transactions in order to preserve the integrity and autonomy of the processes.

 

The Organization controls the exposure to credit risk which comprises mainly loans and advances, loan commitments, financial guarantees provided, securities and derivatives.

 

With the objective of not compromising the quality of the portfolio, all aspects inherent to credit concession, concentration, guarantee requirements and terms, among others, are observed.

 

The Organization continuously maps all the activities that could possibly generate exposure to credit risk, classifying them by their probability and magnitude, identifying their managers and mitigation plans.

 

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Notes to the Consolidated Financial Statements

 

Counterparty Credit Risk

 

The counterparty credit risk to which the Organization is exposed includes the possibility of losses due to the non-compliance by counterparties with their obligations relating to the settlement of financial asset trades, including the settlement of derivative financial instruments. Counterparty credit risk also includes the risk related to a downgrade in the counterparty’s credit standing.

 

The Organization exercises complete control over its net position (the difference between purchase and sale agreements) and potential future exposures from operations where there is counterparty risk. Each counterparty’s exposure to risk is treated in the same way and is part of general credit limits granted by the Organization’s to its customers.

 

In short, the Counterparty Credit Risk management covers the modeling and monitoring (i) of the consumption of the credit limit of the counterparties, (ii) of the portion of the adjustment at fair value of the portfolio of credit derivatives (CTF – Credit Value Adjustment) and (iii) of the respective regulatory and economic capital. The methodology adopted by the Organization establishes that the credit exposure of the portfolio to certain counterparty can be calculated based on the Replacement Cost (RC) of its operations in different scenarios of the financial market, which is possible through the Monte Carlo simulation process.

 

In the context of risk management, the Organization performs the calculation of economic capital for credit risk, in order to contemplate the portfolio of derivatives that is consolidated by the counterpart both for the definition of the EAD (Exposure At Default) and the CVA (Credit Value Adjustment).

 

Also in this context, the Organization conducts studies of projection of capital, for example of the Stress Test of the ICAAP (Evaluation of Capital Adequacy) and TEBU (Bottom-Up Stress Test). These are multidisciplinary programs involving minimally the areas of Business and Economic Departments, of Budget/Result and Risk.

 

Regarding the forms of mitigating the counterparty credit risk that the Organization is exposed to, the most usual is the composition of guarantees as margin deposits and disposal of public securities, which are made by the counterparty with the Organization or with other trustees, whose counterparty’s risks are also appropriately evaluated.

 

Additionally, from June 2019, the calculation of the value of the exposure relating to credit risk of the counterpart arising from operations with derivative instruments subject to the calculation of the capital requirement through the standardized approach (RWACPAD) has been updated following the Central Bank of Brazil’s Circular No. 3,904/18.

 

Credit-Risk Management Process

 

The credit risk management process is conducted in a corporation-wide manner. This process involves several areas with specific duties, ensuring an efficient structure. Credit risk measurement and control are conducted in a centralized and independent manner.

 

Both the governance process and limits are validated by the Integrated Risk and Capital Allocation Management Committee, submitted for approval by the Board of Directors, and reviewed at least once a year.

 

The structure of credit risk management is part of the second line of defense of the Organization, several areas actively participate in improving the client risk rating models.

 

This structure continuously reviews the internal processes, including the roles and responsibilities and it training and requirements, as well as conducts periodical reviews of risk evaluation processes to incorporate new practices and methodologies.

 

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Credit Concession

 

The variety of business models allows direct and convenient channels customer services in the various regions of Brazil. The segments strategies corroborate, both for Individuals and Companies, to a good customer relationship and to the assertive offer of products and services.

 

The Organization’ strategy is to maintain a wide client base and a diversified credit portfolio, both in terms of products and segments, commensurate with the risks undertaken and appropriate levels of provisioning and concentration.

 

Under the responsibility of the Credit Department, lending procedures are based on the Organization’s credit policy emphasizing the security, quality and liquidity of the lending. The process is guided by the risk management governance and complies with the rules of the Central Bank of Brazil.

 

The methodologies adopted value business agility and profitability, with targeted and appropriate procedures oriented to the granting of credit transactions and establishment of operating limits.

 

In the evaluation and classification of customers or economic groups, the quantitative (economic and financial indicators) and qualitative (personal data and behaviors) aspects associated with the customers capacity to honor their obligations are considered.

 

All business proposals are subject to operational limits, which are included in the Loan Guidelines and Procedures. At branches, the delegation of power to grant a loan depends on its size, the total exposure to the Organization, the guarantees offered, the level of restriction and their credit risk score/rating. Business proposals with risks beyond these limits are subject to technical analysis and approval of by the Credit Department.

 

In its turn, the Executive Credit Committee was created to decide, within its authority, on queries about the granting of limits or loans proposed by business areas, previously analyzed and with opinion from the Credit Department. According to the size of the operations/limits proposed, this Committee, may then submit the proposal for approval by the Board of Directors, depending on the values involved.

 

Loan proposals pass through an automated system with parameters set to provide important information for the analysis, granting and subsequent monitoring of loans, minimizing the risks inherent in the operations.

 

There are exclusive Credit and Behavior Scoring systems for the assignment of high volume, low principal loans in the Retail segment, meant to provide speed and reliability, while standardizing the procedures for loan analysis and approval.

 

Business is diversified wide-spread and aimed at individuals and legal entities with a proven payment capacity and solvency, seeking to support them with guarantees that are adequate to the risk assumed, considering the amounts, objectives and the maturities of loan granted.

 

Credit Risk Rating

 

The Organization has a process of Governance practices and follow-ups. Practices include the Governance of Concession Limits and Credit Recovery, which, depending on the size of the operation or of the total exposure of the counterpart, require approval at the level of the Board of Directors. In addition, follow-ups are made frequently of the portfolio, with evaluations as to their evolution, delinquency, provisions, vintage studies, and capital, among others.

 

In addition to the process and governance of limits for approval of credit and recovery, in the risk appetite defined by the Organization, the concentration limits of operations for the Economic Group, Sector and Transfer (concentration per countries) are monitored. In addition to the indicators of concentration, a specific indicator was established for the level of delinquencies above 90 days for Individuals (PF), the indicator of problem asset and an indicator of Margin of Economic Capital of Credit Risk, in order to monitor and track the capital in the economic and regulatory visions.

 

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Notes to the Consolidated Financial Statements

 

The credit risk assessment methodology, in addition to providing data to establish the minimum parameters for lending and risk management, also enables the definition of Special Credit Rules and Procedures according to customer characteristics and size. Thus, the methodology provides the basis not only for the correct pricing of operations, but also for defining the appropriate guarantees.

 

The methodology used also follows the requirements established by the Resolution No. 4,327 of the National Monetary Council and includes analysis of social and environmental risk in projects, aimed at evaluating customers’ compliance with related laws and the Equator Principles, a set of rules that establish the minimum social and environmental criteria which must be met for lending.

 

In accordance with its commitment to the continuous improvement of methodologies, the credit risk rating of operations contracted by the Organization’s economic groups/ customers (Rating Operação Final – ROF) is distributed on a graduation scale in levels. This ensures greater adherence to the requirements set forth in the Basel Capital Accord and preserves the criteria established by Resolution No. 2,682 of the National Monetary Council for the constitution of the applicable provisions.

 

In a simplified manner, the risk classifications of the operations are determined on the basis of the credit quality of economic groups/ customers defined by the Customer Rating, warranties relating to the contract, modality of the credit product, behavior of delinquencies in the payment and value of credit contracted.

 

Customer Rating for economic groups (legal entities) are based on standardized statistical and judgmental procedures, and on quantitative and qualitative information. Classifications are carried out by economic group and periodically monitored in order to preserve the quality of the loan portfolio.

 

For individuals, in general, Customer Rating are based on personal data variables, such as income, assets, restrictions and indebtedness, in addition to the history of their relationship with the Organization, and statistical credit evaluation models.

 

Customer rating is used in the analysis for granting and/or renewing operations and credit limits, as well as for the monitoring of the economic-financial situation of a company and its capacity to repay the loans contracted.

 

Control and Monitoring

 

The credit risk of the Organization has its control and corporate follow-up performed in the Credit Risk area of the Integrated Risk Control Department – DCIR. The Department advises the Executive Committee on Risk Management, where methodologies for measuring credit risk are discussed and formalized. Significant issues discussed in this Committee are reported to the Integrated Risk and Capital Allocation Management Committee, which is subordinate to the Board of Directors.

 

In addition to committee meetings, the area holds monthly meetings with all product and segment executives and officers, with a view to inform them about the evolution of the loan portfolio, delinquency, credit recoveries, gross and net losses, limits and concentrations of portfolios, allocation of economic and regulatory capital, among others. This information is also reported to the Audit Committee on a monthly basis.

 

The area also monitors any internal or external event that may cause a significant impact on the Organization’s credit risk, such as spin-offs, bankruptcies and crop failures, in addition to monitoring economic activity in the sectors to which the company has significant risk exposures.

 

Internal Report

 

Credit risk is monitored on a daily basis in order to maintain the risk levels within the limits established by the Organization. Managerial reports on risk control are provided to all levels of business, from branches to Senior Management.

 

52 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

With the objective of highlighting the risk situations that could result in the customers’ inability to honor its obligations as contracted, the credit risk monitoring area provides daily reports, to the branches, business segments, as well as the lending and loan recovery areas. This system provides timely information about the loan portfolios and credit bureau information of customers, in addition to enabling comparison of past and current information, highlighting points requiring a more in-depth analysis by managers, such as assets by segment, product, region, risk classification, delinquency and expected and unexpected losses, among others, providing both a macro-level and detailed view of the information, and also enabling a specific loan operation to be viewed.

 

The information is viewed and delivered via dashboards, allowing queries at several levels such as business segment, divisions, managers, regions, products, employees and customers, and under several aspects (asset, delinquency, provision, write-off, restriction levels, guarantees, portfolio quality by rating, among others).

 

Measurement of Credit Risk

 

Periodically, the Organization evaluates the expected credit losses from financial assets by means of quantitative models, considering the historical experience of credit losses of the different types of portfolio (which can vary from 2 to 7 years), the current quality and characteristics of customers, operations, and mitigating factors, according to processes and internal governance.

 

The actual loss experience has been adjusted to reflect the differences between the economic conditions during the period in which the historical data was collected, current conditions and the vision of the Organization about future economic conditions, which are incorporated into the measurement by means of econometric models that capture the current and future effects of estimates of expected losses. The main macroeconomic variables used in this process are the Brazilian interest rates, unemployment rates, inflation rates and economic activity indexes.

 

The estimate of expected loss of financial assets is divided into three categories (stages):

·Stage 1: Financial assets with no significant increase in credit risks;
·Stage 2: Financial assets with significant increase in credit risks; and
·Stage 3: Financial assets that are credit impaired.

 

The significant increase of credit risk is evaluated based on different indicators for classification in stages according to the customers’ profile, the product type and the current payment status, as shown below:

 

Retail Portfolio:

 

·Stage 1: Financial assets whose obligations are current or less than 30 days past due and which have a low internal credit risk rating;
·Stage 2 (Significant increase in credit risk): Financial assets that are overdue obligations between 31 and 90 days or whose internal credit risk rating migrated from low risk to medium or high risk;
·Stage 3 (Defaulted or “impaired”): Financial assets whose obligations are overdue for more than 90 days or that present bankruptcy events, judicial recovery and restructuring of debt;
·Re-categorization from stage 3 to stage 2: Financial assets that bring current the values overdue and whose internal ratings migrated to medium risk; and
·Re-categorization from stage 2 to stage 1: Financial assets that bring current the values overdue and whose internal ratings migrated to low risk.

 

Wholesale Portfolio:

 

·Stage 1: Financial assets whose obligations are current or less than 30 days past due and which have a low internal credit risk rating;
·Stage 2 (Significant increase in credit risk): Financial assets whose obligations are overdue between 31 and 90 days or whose internal rating of customers migrated from low risk to medium or high risk;
·Stage 3 (Defaulted or impaired): Financial assets whose relevant obligations are overdue by up to 90 days or that present bankruptcy events, judicial recovery, restructuring of debt or need for execution of guarantees;

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

·Re-categorization from stage 3 to stage 2: Financial assets that no longer have any of the stage 3 criteria and whose internal ratings migrated to medium risk; and
·Re-categorization from stage 2 to stage 1: Financial assets that bring current the values overdue and whose internal ratings migrated to low risk.

 

The expected losses are based on the multiplication of credit risk parameters: Probability of default (PD), Loss due to default (LGD) and Exposure at default (EAD).

 

The PD parameter refers to the probability of default perceived by the Organization regarding the customer, according to the internal models of evaluation, which, in retail, use statistical methodologies based on the characteristics of the customer, such as the internal rating and business segment, and the operation, such as product and guarantee and, in the case of wholesale, they use specialist models based on financial information and qualitative analyses.

 

The LGD refers to the percentage of loss in relation to exposure in case of default, considering all the efforts of recovery, according to the internal model of evaluation that uses statistical methodologies based on the characteristics of the operation, such as product and guarantee. Customers with significant exposure have estimates based on individual analyses, which are based on the structure of the operation and expert knowledge, aiming to capture the complexity and the specifics of each operation.

 

EAD is the exposure (gross book value) of the customer in relation to the Organization at the time of estimation of the expected loss. In the case of commitments or financial guarantees provided, the EAD will have the addition of the expected value of the commitments or financial guarantees provided that they will be converted into credit in case of default of the loan or credit rather than the customer.

 

Credit Risk Exposure

 

We present below the credit risk exposure of the financial instruments:

 

  R$ thousand
On December 31, 2020 On December 31, 2019
  Gross value Expected credit loss Gross value Expected credit loss
Financial assets        
Cash and balances with banks (Note 18) 107,602,594 - 109,610,999 -
Financial assets at fair value through profit or loss (Note 19) 275,986,689 - 249,759,777 -
Financial assets at fair value through other comprehensive income (Note 21) (1) 185,841,975 - 192,450,010 -
Loans and advances to banks (Note 22) 191,425,663 (932) 59,083,791 (44,465)
Loans and advances to customers (Note 23) 513,216,763 (39,579,405) 457,392,375 (33,863,659)
Securities at amortized cost (Note 24) 185,179,363 (5,555,469) 171,551,837 (4,633,477)
Other financial assets (Note 29) 52,416,117 - 56,101,781 -
Provision for Expected Credit Loss         
Loan commitments (Notes 23 and 40) 255,953,637 (3,859,316) 249,866,767 (2,318,404)
Financial guarantees (Notes 23 and 40) 80,236,602 (2,318,930) 78,231,145 (1,970,321)
Total risk exposure 1,847,859,403 (51,314,052) 1,624,048,482 (42,830,326)

(1) Financial assets measured at fair value through other comprehensive income are not reduced by the allowance for losses.

 

The Organization’s maximum credit risk exposure was R$1,847,859,403 thousand in 2020, which was an increase of 13.8% compared to 2019.

 

Of this exposure, R$107,602,594 thousand, or 5.8% is related to cash and bank deposits composed mainly of funds deposited with the Central Bank of Brazil that are assessed to have low credit risk.

 

Financial assets at fair value through profit or loss (14.9% of total exposure) are mostly low credit risk, composed mainly of Brazilian government securities at fair value and also include derivative financial instruments.

 

54 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Financial assets at fair value through other comprehensive income amounted to R$185,841,975 thousand (10.1% of total exposure), are recorded at fair value with changes in ECL recognized in profit or loss and are represented mostly by Brazilian government securities, for details of these assets, see Note 21.

 

Loans and advances to financial institutions, which are 10.4% of the total, consist basically of reverse repurchase agreements which have a low credit risk.

 

Loans and advances to customers represent 27.8% of the total exposure, for details of these assets and the expected loss, see Note 23 for details.

 

Financial assets at amortized cost represent 10.0% of the total, for details of these assets, see Note 24.

 

Operations classified as “Other financial assets” represent 2.8% of the total and are basically comprised of foreign exchange operations and escrow deposits.

 

In 2020, items not recorded in the consolidated balance sheet regarding loan commitments and financial guarantees (recorded in memorandum accounts) totaled R$336,190,239 thousand, representing 18.2% of total exposure.

 

Loans and advances to customers

 

Concentration of credit risk

 

  On December 31
2020 2019
Largest borrower 2.1% 1.9%
10 largest borrowers 7.5% 7.7%
20 largest borrowers 10.9% 11.3%
50 largest borrowers 15.7% 16.7%
100 largest borrowers 19.2% 20.1%

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

By Economic Activity Sector

 

The credit-risk concentration analysis presented below is based on the economic activity sector in which the counterparty operates.

 

  On December 31 - R$ thousand
2020 % 2019 %
Public sector 11,810,973 2.3 8,899,863 1.9
Oil, derivatives and aggregate activities 10,661,873 2.1 8,870,762 1.9
Production and distribution of electricity 1,074,867 0.2 3,032 -  
Other industries 74,233 -   26,069 -  
Private sector 501,405,790 97.7 448,492,512 98.1
Companies 244,976,110 47.7 218,076,522 47.7
Real estate and construction activities 20,092,249 3.9 21,695,592 4.7
Retail 36,498,461 7.1 35,521,621 7.8
Services 30,108,475 5.9 20,136,089 4.4
Transportation and concession 23,662,184 4.6 20,807,687 4.5
Automotive 15,625,309 3.0 12,723,830 2.8
Food products 13,378,255 2.6 11,067,069 2.4
Wholesale 16,479,704 3.2 14,327,816 3.1
Production and distribution of electricity 6,979,203 1.4 2,868,563 0.6
Siderurgy and metallurgy 10,036,586 2.0 9,022,956 2.0
Sugar and alcohol 6,878,558 1.3 6,191,961 1.4
Other industries 65,237,126 12.7 63,713,338 13.9
Individuals 256,429,680 50.0 230,415,990 50.4
Total portfolio 513,216,763 100.0 457,392,375 100.0
Impairment of loans and advances (39,579,405)   (33,863,659)  
Total of net loans and advances to customers 473,637,358   423,528,716  

 

Credit Risk Mitigation

 

Potential credit losses are mitigated by the use of a variety of types of collateral formally stipulated through legal instruments, such as conditional sales, liens and mortgages, by guarantees such as third-party sureties or guarantees, and also by financial instruments such as credit derivatives. The efficiency of these instruments is evaluated considering the time to recover and realize an asset given as collateral, its market value, the guarantors’ counterparty risk and the legal safety of the agreements. The main types of collateral include: term deposits; financial investments and securities; residential and commercial properties; movable properties such as vehicles, aircraft. Additionally, collateral may include commercial bonds such as invoices, checks and credit card bills. Sureties and guarantees may also include bank guarantees.

 

Credit derivatives are bilateral contracts in which one counterparty hedges credit risk on a financial instrument – its risk is transferred to the counterparty selling the hedge. Normally, the latter is remunerated throughout the period of the transaction. In the case default by the borrower, the buying party will receive a payment intended to compensate for the loss in the financial instrument. In this case, the seller receives the underlying asset in exchange for said payment.

 

56 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

The table below shows the fair value of guarantees of loans and advances to customers.

 

  R$ thousand
2020 2019
Book value (1) Fair Value Guarantees Book value (1) Fair Value Guarantees
Companies 256,810,316 89,481,169 230,415,990 139,878,361
Stage 1 217,561,123 75,882,476 199,384,194 127,231,341
Stage 2 13,960,366 5,035,349 19,594,716 10,277,550
Stage 3 25,288,827 8,563,344 11,437,080 2,369,470
         
Individuals 256,406,447 150,298,522 226,976,385 90,693,689
Stage 1 195,239,164 126,281,157 195,924,808 77,930,093
Stage 2 38,023,532 18,408,513 13,106,024 6,546,880
Stage 3 23,143,751 5,608,852 17,945,553 6,216,716
Total 513,216,763 239,779,691 457,392,375 230,572,050

(1) Of the total balance of loan operations, R$354,814,000 (2019 – R$311,522,000 thousand) refers to operations without guarantees.

 

3.3.Market risk

 

Market risk is represented by the possibility of financial loss due to fluctuating prices and market interest rates of the Organization’s financial instruments, such as our asset and liability transactions that may have mismatched amounts, maturities, currencies and indexes.

 

Market risk is identified, measured, mitigated, controlled and reported. The Organization’s exposure to market risk profile is in line with the guidelines established by the governance process, with limits monitored on a timely basis independently of the business areas.

 

All transactions that expose the Organization to market risk are mapped, measured and classified according to probability and magnitude, and the whole process is approved by the governance structure.

 

In compliance with the best Corporate Governance practices, to preserve and strengthen our Management of market risk of the Organization, as well as to meet the requirements of Resolution No. 4,557, of the National Monetary Council, the Board of Directors approved the Market and Liquidity Risk Management Policy, which is reviewed at least annually by the relevant Committees and by the Board of Directors itself, and provides the main guidelines for acceptance, control and management of market risk.

 

In addition to the policy, the Organization has specific rules to regulate the market risk management process, as follows:

 

·Classification of Operations;
·Reclassification of Operations;
·Trading of Public or Private Securities;
·Use of Derivatives; and
·Hedging.

 

Market Risk Management Process

 

The market risk management process is a corporation wide process, comprising from business areas to the Board of Directors; it involves various areas, each with specific duties in the process, thereby ensuring an efficient structure. The measurement and control of market risk is conducted in a centralized and independent manner. This process permits that the Organization be the first financial institution in the country authorized by the Central Bank of Brazil to use its internal market risk models to calculate regulatory capital requirements since January 2013. This process is also revised at least once a year by the Committees and approved the Board of Directors itself.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

Determination of Limits

 

Proposed market-risk limits are validated by specific Committees and submitted for approval by the Integrated Risk and Capital Allocation Management Committee, and then for approval by the Board of Directors. Based on the business’ characteristics, they are segregated into the following Portfolios:

 

Trading Portfolio: it comprises all operations involving financial instruments, held-for-trading, including derivatives, or used to hedge other instruments in the Trading Portfolio, which have no trading restrictions. Held-for-trading operations are those intended for resale, to obtain benefits from actual or expected price variations, or for arbitrage.

 

The Trading Portfolio is monitored with the following limits:

 

·Value at Risk (VaR);
·Stress Analysis (measurement of negative impact of extreme events, based on historical and prospective scenarios);
·Income; and
·Financial Exposure/Concentration.

 

Banking Portfolio: it comprises operations not classified in the Trading Portfolio, arising from Organization’s other businesses and their respective hedges. Portfolio risks in these cases are monitored by:

 

·Variation of economic value due to the variation in the interest rate – ∆EVE (Economic Value of Equity); and
·Variation of the net revenue of interest due to the variation in the rate of interest – ∆NII (Net Interest Income).

 

Market-Risk Measurement Models

 

Market risk is measured and controlled using Stress, Value at Risk (VaR), Economic Value Equity (EVE), Net Interest Income (NII) and Sensitivity Analysis methodologies, as well as limits for the Management of Results and Financial Exposure. Using several methodologies to measure and evaluate risks is of great importance, because they can complement each other and their combination allows for analysis of different scenarios and situations.

 

Trading and Regulatory Portfolio

 

Trading Portfolio risks are mainly controlled by the Stress and VaR methodologies. The Stress methodology quantifies the negative impact of extreme economic shocks and events that are financially unfavorable to the Organization’s positions. The analysis uses stress scenarios prepared by the Market Risk area and the Organization’s economists based on historical and prospective data for the risk factors in which the Organization portfolio.

 

The methodology adopted to calculate VaR is the Delta-Normal, with a confidence level of 99% and considering the number of days necessary to unwind the existing exposures. The methodology is applied to the Trading and Regulatory Portfolio (Trading Portfolio positions plus Banking Portfolio foreign currency and commodities exposures). It should be noted that for the measurement of all the risk factors of the portfolio of options are applied the historical simulation models and Delta-Gamma-Vega, prevailing the most conservative between the two. A minimum 252-business-day period is adopted to calculate volatilities, correlations and historical returns.

 

For regulatory purposes, the capital requirements relating to shares held in the Banking Portfolio of Prudential Conglomerate are determined on a credit risk basis, as per Central Bank of Brazil resolution, i.e., are not included in the market risk calculation.

 

58 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Risk of Interest Rate in the Banking Portfolio

 

The measurement and control of the interest-rate risk in the Banking Portfolio area is mainly based on the Economic Value of Equity (EVE) and Net Interest Income (NII) methodologies, which measure the economic impact on the positions and the impact in the Organization’s income, respectively, according to scenarios prepared by the Organization’s economists. These scenarios determine the positive and negative movements of interest rate curves that may affect Organization’s investments and capital-raising.

 

The EVE methodology consists of repricing the portfolio exposed to interest rate risk, taking into account the scenarios of increases or decreases of rates, by calculating the impact on present value and total term of assets and liabilities. The economic value of the portfolio is estimated on the basis of market interest rates on the analysis date and of scenarios projected. Therefore, the difference between the values obtained for the portfolio will be the Delta EVE.

 

In the case of the NII – Interest Earning Portion, the methodology intends to calculate the Organization’s variation in the net revenue interest (gross margin) due to eventual variations in the interest rate level, that is, the difference between the calculated NII in the base scenario and the calculated NII in the scenarios of increase or decrease of the interest rate will be Delta NII.

 

For the measurement of interest rate risk in the Banking Portfolio, behavioral premises of the customers are used whenever necessary. As a reference, in the case of deposits and savings, which have no maturity defined, studies for the verification of historical behaviors are carried out as well as the possibility of their maintenance. Through these studies, the stable amount (core portion) as well as the criterion of allocation over the years are calculated.

 

Financial Instrument Pricing

 

To adopt the best market prices related to the assessment of financial instruments’ fair value, the Mark-to-Market Commission (CMM), which is responsible for approving or submitting mark-to-market models to the Market and Liquidity Risk Commission was established. CMM is composed of business, back-office and risk representatives. The risk area is responsible for the coordination of the Commission and for the submission the matters to the Executive Committee for Risk Management for reporting or approval, whichever is the case.

 

Whenever possible, the Bank uses prices and quotes from by the securities, commodities and futures exchange and the secondary markets. Failing to find such market references, prices made available by other sources (such as Bloomberg, Reuters and Brokerage Firms) are used. As a last resort, proprietary models are used to price the instruments, which also follow the same CMM approval procedure and are submitted to the Organization’s validation and assessment processes.

Mark-to-market criteria are periodically reviewed, according to the governance process, and may vary due to changes in market conditions, creation of new classes of instruments, establishment of new sources of data or development of models considered more appropriate.

 

The financial instruments to be included in the Trading Portfolio must be approved by the Treasury Executive Committee or the Product and Service Executive Committee and their pricing criteria must be defined by the CMM.

 

The following principles for the fair value process are adopted by the Organization:

·Commitment: the Organization is committed to ensuring that the prices used reflect the market value of the operations. Should information not be found, the Organization uses its best efforts to estimate the market value of the financial instruments;
·Frequency: the formalized mark-to-market criteria are applied on a daily basis;
·Formality: the CMM is responsible for ensuring the methodological quality and the formalization of the mark-to-market criteria;
·Consistency: the process to gather and apply prices should be carried out consistently, to guarantee equal prices for the same instrument within the Organization; and
·Transparency: the methodology must be accessible by the Internal and External Audit, Independent Model Validation Areas – AVIM and by Regulatory Agencies.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

In December 2014, the National Monetary Council published Resolution No. 4,389, which amended Resolution No. 4,277. These resolutions set forth the basic procedures that entities must follow in pricing financial instruments valued at market value and guidelines for the application of prudential adjustments for such instruments. The Organization aligned with these resolutions’ guidelines, including applying due prudential adjustments required by the regulation.

 

Control and Follow-Up

 

Market risk is controlled and monitored by an independent area, the DCIR, which, on a daily basis, measures the risk of outstanding positions, consolidates results and prepares reports required by the existing governance process.

 

In addition to daily reports, Trading Portfolio positions are discussed once every fifteen days by the Treasury Executive Committee, while Banking Portfolio positions and liquidity reports are examined by the Asset and Liability Management Treasury Executive Committee.

 

At both meetings, results and risks are assessed and strategies are discussed. Both the governance process and the existing thresholds are ratified by the Integrated Risk Management and Capital Allocation Management Committee and submitted to approval of the Board of Directors, which are revised at least once a year.

 

Should any threshold controlled by the DCIR be exceeded, the head of the business area responsible for the position is informed that threshold was reached, and the Integrated Risk and Capital Allocation Management Committee is called in timely fashion to make a decision. If the Committee decides to raise the threshold and/or maintain the positions, the Board of Directors is called to approve the new threshold or revise the position strategy.

 

Internal Communication

 

The market risk department provides daily managerial control reports on the positions to the business areas and Senior Management, in addition to weekly reports and periodic presentations to the Board of Directors.

 

Reporting is conducted through an alert system, which determines the addressees of risk reports as previously determined risk threshold percentage is reached; therefore, the higher the risk threshold consumption, more Senior Management members receive the reports.

 

Hedging and Use of Derivatives

 

In order to standardize the use of financial instruments as hedges of transactions and the use of derivatives by the Treasury Department, the Organization created specific procedures that were approved by the competent Committees.

 

The hedge transactions executed by Bradesco’s Treasury Department must necessarily cancel or mitigate risks related to unmatched quantities, terms, currencies or indexes of the positions in the Treasury books, and must use assets and derivatives authorized to be traded in each of their books to:

 

·control and classify the transactions, respecting the exposure and risk limits in effect;

 

·alter, modify or revert positions due to changes in the market and to operational strategies; and
·reduce or mitigate exposures to transactions in inactive markets, in conditions of stress or of low liquidity.

 

For derivatives classified in the “hedge accounting” category, there is a monitoring of: (i) strategy effectiveness, through prospective and retrospective effectiveness tests, and (ii) mark-to-market of hedge instruments.

 

60 IFRS – International Financial Reporting Standards – 2020

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Cash flow Hedge

 

On December 31, 2020, Bradesco maintained cash flow hedges. See more details in Note 20.

 

Standardized and “Continuous Use” Derivatives

 

Organization’s Treasury Department may use standardized (traded on an exchange) and “continuous use” (traded over-the-counter) derivatives for the purpose of obtaining income or as hedges. The derivatives classified as “continuous use” are those habitually traded over-the-counter, such as vanilla swaps (interest rates, currencies, CDS – Credit Default Swap, among others), forward operations (currencies, for example) and vanilla options (currency, Bovespa Index), among others. Non-standardized derivatives that are not classified as “continuous use” or structured operations cannot be traded without the authorization of the applicable Committee.

 

Evolution of Exposures

 

In this section are presented the evolution of financial exposure, the VaR calculated using the internal model and its backtesting and the Stress Analysis.

 

Financial Exposure – Trading Portfolio (Fair Value)

 

Risk factors R$ thousand
On December 31
2020 2019
Assets Liabilities Assets Liabilities
Fixed rates 20,597,165 18,949,022 15,619,889 12,954,739
IGP-M (General Index of market pricing) / IPCA (Consumer price index) 5,151,508 2,598,754 889,026 1,476,167
Exchange coupon 348,315 336,868 221,069 1,135,449
Foreign Currency 485,660 402,441 759,320 1,437,774
Equities 801,588 794,455 461,860 427,778
Sovereign/Eurobonds and Treasuries 7,373,381 3,973,859 3,783,134 5,007,199
Other 449,161 186,396 384,269 25,793
Total 35,206,778 27,241,795 22,118,567 22,464,899

 

 

VaR Internal Model – Trading Portfolio

 

The 1-day VaR of Trading Portfolio net of tax effects was R$12,207 thousand in the end of 2020, with Equities as the largest risk factor participation of the portfolio.

 

Risk factors R$ thousand
On December 31
2020 2019
Fixed rates 5,014 1,614
IGPM/IPCA 3,645 2,774
Exchange coupon 342 415
Foreign Currency 4,704 5,327
Sovereign/Eurobonds and Treasuries 7,477 3,834
Equities 2,422 707
Other 154 2,122
Correlation/diversification effect (11,551) (6,820)
VaR at the end of the year 12,207 9,973
      
Average VaR in the year 38,522 10,263
Minimum VaR in the year 8,140 6,469
Maximum VaR in the year 104,811 15,309

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

VaR Internal Model – Regulatory Portfolio

 

The capital is calculated by the normal delta VaR model based in Regulatory Portfolio, composed by Trading Portfolio and the Foreign Exchange Exposures and the Commodities Exposure of the Banking Portfolio. In addition, the historical simulation and the Delta–Gamma–Vega models of risk are applied to measure all risk factors to an options portfolio, whichever is the most conservative, whereby this risk of options is added to the VaR of the portfolio. In this model, risk value is extrapolated to the regulatory horizon2 (the highest between 10 days and the horizon of the portfolio) by the ‘square root of time’ method. VaR and Stressed VaR shown below refer to a ten-day horizon and are net of tax effects.

 

Risk factors R$ thousand
On December 31
2019 2018
VaR Stressed VaR Stressed
Interest rate 14.662 58.629 8.131 47.851
Exchange rate 34.638 104.429 5.666 20.959
Commodity price (Commodities) 465 1.637 8.194 14.704
Equities 2.766 3.772 3.355 4.844
Correlation/diversification effect (9.959) (29.875) (7.569) 33.180
VaR at the end of the year 42.572 138.592 17.777 121.538
          
Average VaR in the year 43.294 106.636 69.852 117.946
Minimum VaR in the year 16.606 34.838 17.777 57.523
Maximum VaR in the year 122.507 298.703 252.797 231.080

Note: Ten-day horizon VaR net of tax effects.

 

To calculate regulatory capital requirement according to the internal model, it is necessary to take into consideration the rules described by Central Bank Circular Letters No. 3,646/13 and No. 3,674/13, such as the use of VaR and Stressed VaR net of tax effects, the average in the last 60 days and its multiplier.

 

VaR Internal Model – Backtesting

 

The risk methodology applied is continuously assessed using backtesting techniques, which compare the one-day period VaR with the hypothetical P&L, obtained from the same positions used in the VaR calculation, and with the effective P&L, also considering the intraday operations for which VaR was estimated.

 

The main purpose of backtesting is to monitor, validate and assess the adherence of the VaR model, and the number of exceptions that occurred must be compatible with the number of exception accepted by the statistical tests conducted and the confidence level established. Another objective is to improve the models used by the Organization, through analyses carried out with different observation periods and confidence levels, both for Total VaR and for each risk factor.

 

The daily results corresponding to the last 250 business days, in the hypothetical and effective views, exceeded the respective VaR with a 99% confidence level five times in 2020 and, in 2019 the daily results corresponding to the last 250 business days did not exceed their VaR with a 99% confidence level.

 

According to the document published by the Basel Committee on Banking Supervision,3 exceptions are classified as being due to “either bad luck or the markets did not behave as expected by the model”, i.e. volatility was significantly higher than expected and, in certain situations, the correlations differed from those forecast by the model.

 


2 The maximum amount between the book’s holding period and ten days, which is the minimum regulatory horizon required by Central Bank of Brazil, is adopted.

3 The Basel Committee on Banking Supervision is an organization that brings together banking supervisory authorities in order to strengthen the soundness of financial systems.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Stress Analysis – Trading Portfolio

 

The Organization also assesses on a daily basis, the possible impacts on positions in stress scenarios for the next 20 business days, with limits established in the governance process. Thus, considering the effect of diversification between the risk factors and the tax effects, the average of the possible loss estimates in a stress situation would be R$187,519 thousand in 2020 (2019 – R$160,661 thousand), and the maximum estimated loss in the year of 2020 would be R$380,446 thousand (2019 – R$286,273 thousand).

 

  R$ thousand
On December 31
2020 2019
At the end of the year 90,071 103,444
Average in the year 187,519 160,661
Minimum in the year 56,369 67,675
Maximum in the year 380,446 286,273

Note: Values net of tax effects.

 

 

Sensitivity Analysis

 

The Trading Portfolio is also monitored daily by sensitivity analyses that measure the effect of movements of market and price curves on our positions. Furthermore, a sensitivity analysis of the Organization’s financial exposures (Trading and Banking Portfolios) is performed on a quarterly basis, in compliance with CVM Rule No. 475/08.

 

The sensitivity analyses were carried out based on the scenarios prepared for the respective dates, always taking into consideration market inputs available at the time and scenarios that would adversely impact our positions, in accordance with the scenarios below:

 

Scenario 1: Based on market information (B3, Anbima, etc.), stresses were applied for 1 basis point on the interest rate and 1.0% variation on prices. For example: for a Real/US dollar exchange rate of R$5.18 a scenario of R$5.23 was used, while for a 1-year fixed interest rate of 2.86%, a scenario of 2.87% was applied;

 

Scenario 2: 25.0% stresses were determined based on market information. For example: for a Real/US dollar exchange rate of R$5.18 a scenario of R$6.47 was used, while for a 1-year fixed interest rate of 2.86%, a 3.57% scenario was applied. The scenarios for other risk factors also accounted for 25.0% stresses in the respective curves or prices; and

 

Scenario 3: 50.0% stresses were determined based on market information. For example: for a Real/US dollar quote of R$5.18 a scenario of R$7.77 was used, while for a 1-year fixed interest rate of 2.86%, a 4.29% scenario was applied. The scenarios for other risk factors also account for 50.0% stresses in the respective curves or prices.

 

The results show the impact for each scenario on a static portfolio position. The dynamism of the market and portfolios means that these positions change continuously and do not necessarily reflect the position demonstrated here. In addition, the Organization has a continuous market risk management process, which is always searching for ways to mitigate the associated risks, according to the strategy determined by Management. Therefore, in cases of deterioration indicators in a certain position, proactive measures are taken to minimize any potential negative impact, aimed at maximizing the risk/return ratio for the Organization.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

Sensitivity Analysis – Trading Portfolio

 

  R$ thousand
Trading Portfolio (1)
On December 31
2020 2019
Scenarios Scenarios
1 2 3 1 2 3
Interest rate in Reais Exposure subject to variations in fixed interest rates and interest rate coupons (105) (11,776) (23,317) (97) (14,128) (27,256)
Price indexes Exposure subject to variations in price index coupon rates (1,788) (41,702) (84,093) (904) (29,440) (56,245)
Exchange coupon Exposure subject to variations in foreign currency coupon rates (32) (3,256) (6,485) (10) (689) (1,373)
Foreign currency Exposure subject to exchange rate variations (1,597) (39,926) (79,852) (2,772) (74,695) (149,390)
Equities Exposure subject to variation in stock prices (354) (8,856) (17,712) (228) (5,710) (11,420)
Sovereign/Eurobonds and Treasuries Exposure subject to variations in the interest rate of securities traded on the international market (167) (11,955) (23,430) (699) (29,099) (56,736)
Other Exposure not classified in other definitions -   (41) (82) -   (26) (52)
Total excluding correlation of risk factors (4,043) (117,512) (234,971) (4,710) (153,787) (302,472)
Total including correlation of risk factors (2,647) (73,605) (147,689) (2,617) (72,476) (145,411)

(1) Values net of taxes.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

Presented below, the Sensitivity Analysis – Trading and Banking Portfolios.

 

Sensitivity Analysis – Trading and Banking Portfolios

 

  R$ thousand
Trading and Banking Portfolios (1)
On December 31
2020 2019
Scenarios Scenarios
1 2 3 1 2 3
Interest rate in Reais Exposure subject to variations in fixed interest rates and interest rate coupons (12,180) (1,553,493) (2,974,461) (14,670) (1,895,973) (3,775,039)
Price indexes Exposure subject to variations in price index coupon rates (27,143) (2,227,123) (4,031,341) (16,840) (1,312,832) (2,397,962)
Exchange coupon Exposure subject to variations in foreign currency coupon rates (2,277) (71,852) (141,860) (1,035) (71,631) (139,560)
Foreign currency Exposure subject to exchange rate variations (2,202) (65,746) (131,493) (3,136) (71,103) (142,206)
Equities Exposure subject to variation in stock prices (43,353) (1,083,824) (2,167,648) (28,808) (720,192) (1,440,384)
Sovereign/Eurobonds and Treasuries Exposure subject to variations in the interest rate of securities traded on the international market (1,339) (14,019) (27,608) (1,399) (52,962) (104,190)
Other Exposure not classified in other definitions (30) (748) (1,496) (66) (1,660) (3,320)
Total excluding correlation of risk factors (88,524) (5,016,805) (9,475,907) (65,954) (4,126,353) (8,002,661)
Total including correlation of risk factors (73,350) (4,168,903) (7,883,903) (42,209) (3,038,149) (5,919,579)

(1) Values net of taxes.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

3.4.Liquidity risk

 

The Liquidity Risk is represented by the possibility of the institution not being able to efficiently meet its obligations, without affecting its daily operations and incurring significant losses, as well as the possibility of the institution to fail to trade a position at market price, due to its larger size as compared to the volume usually traded or in view of any market interruption.

 

The understanding and monitoring of this risk are crucial to enable the Organization to settle operations in a timely manner.

 

Liquidity Risk Management Process

 

The liquidity risk management is executed by the Organization at the corporate level and permeates all layers of governance. The following are the responsibilities of the departments responsible for the management and control of liquidity risk:

 

Treasury Department Perform the day-to-day management of cash and liquidity;
Propose limits for the indicators of control of the liquidity risk, as well as the levels for the flagging alerts;
Meet the strategic and operational limits established;
Report on matters related to the management of liquidity of the Asset and Liability Management Treasury Executive Committee;
Integrated Risk Control Department Propose the metrics of control of liquidity and concentration, considering its appropriate approval in the process of governance established;
Calculate and disclose the indicators for monitoring and control of liquidity periodically;
Provide tools for simulation of the main indicators implemented;
Report on matters related to the control and monitoring of the liquidity risk in the committees and executive committees where the theme is addressed;

Support Areas

(Shares and Custody Department, International and Foreign Exchange Department and Department of Controllership)

Execute the projection of cash flows for the monitoring of liquidity, including intraday;
Prepare the cash flows provided up to the horizon of 12 months and refer to the areas of interest;
Check and ensure consistency, integrity and completeness of the database available daily to managers and controllers of the liquidity risk;
Provide management information on the cash flow to the Treasury Department, as well as any significant changes in the levels of reserves of the Banks of the Conglomerate;
Provide management information on the mismatch mapping of the Treasury Department.

 

Policies and Standards

 

The process of managing the liquidity risk is composed of policies and standards that establish criteria related to our diversification of funding sources of the Organization.

 

The Liquidity Risk Management Policy ensures that there are rules, procedures and controls that ensure to the Organization the appropriate level of liquidity and diversification of its funding.

 

In turn, the Liquidity Risk Standard for the Prudential Conglomerate describes procedures and controls of the Organization for the liquidity risk, among them, the control of concentration of raising

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

funds by product and counterpart.

 

In the executive committees of the Organization concentrations of funding from product, counterpart and deadlines are reported.

 

Control and Monitoring

 

The liquidity risk management of the Organization is performed using tools developed on platforms and validated by independent areas of the Organization. Among the key metrics and indicators considered in the framework of liquidity risk, are:

 

·Information on the Liquidity Coverage Ratio (LCR): A measure of the sufficiency of liquid instruments to honor the cash outflows of the Organization within the next thirty days in a scenario of stress;
·Net Stable Funding Ratio (NSFR): A measure of the sufficiency of structural funding to finance long-term assets in the balance sheet of the Organization;
·Loss of deposits to different time horizons;
·Maps of concentration of funding in different visions (product, term and counterpart); and
·Integrated stress exercises where different dimensions of risk are addressed.

 

Limits were established for the main metrics, which can be strategic (approved up to the level of the Board of Directors) or operational (approved by the Treasury Executive Committee for Asset and Liability Management), based on flags, which trigger different levels of governance according to the percentage of use (consumption) of their respective limits.

 

Liquidity Risk Mitigation

 

The governance established for the liquidity risk management includes a series of recommendations to mitigate the risk of liquidity, among the main strategies, are:

 

·Diversification of funding as to the counterpart, product and term;
·Adoption of managerial limits of liquidity, in addition to those required by the regulator;
·Prior analysis of products which may affect the liquidity before their implementation; and
·Simulations of stress of liquidity of the portfolio.

 

Stress Tests

 

Due to the dynamics and criticality of this theme, the management and control of liquidity risk should happen every day and be based on stress scenarios. In this way, the main metric used for the monitoring of the liquidity risk of the Prudential Conglomerate is the Short-term Liquidity Coverage Ratio (LCR), which measures the adequacy of liquid resources to honor the commitments in the next thirty days considering a scenario of stress. Therefore, the daily management is performed through the stress test.

 

In addition to the LCR and other metrics of monitoring, simulations of stress scenarios in the long-term are performed, within the integrated stress test program (ICAAP for example), also to evaluate a possible deterioration of liquidity indicators for different time horizons.

 

Contingency Plan

 

According to Article 38, paragraph II of Central Bank of Brazil’s Resolution No. 4,557 of February 23, 2017, all institutions should have a liquidity contingency plan. The liquidity contingency plan of the Organization covers the following points:

 

·Group of crisis management;
·Key responsibilities of the group of crisis management;
·Indicators for monitoring;
·Actions to mitigate the crisis; and
·Frequency of revision of the plan.

 

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Notes to the Consolidated Financial Statements

 

Internal communication

 

Internal communication about liquidity risk, both between departments and between the different layers of internal governance is done through internal reports and committees involving both areas (Treasury and DCIR) and the Organization's senior management.

 

Additionally, reports are distributed daily to the areas involved in management and control, as well as to senior management. Several analysis instruments are part of this process and are used to monitor liquidity, such as:

 

• Daily distribution of liquidity control instruments;

• Automatic intraday update of liquidity reports for the proper management of the Treasury Department;

• Preparation of reports with past and future movements, based on scenarios;

• Daily verification of compliance with the minimum liquidity level;

• Preparation of complementary reports in which the concentration of funding is presented by type of product, term and counterparty; and

• Weekly reports to senior management with behavior and expectations regarding the liquidity situation.

 

The liquidity risk management process has an alert system, which determines the appropriate level of reporting of risk reports according to the percentage of use of the established limits. Thus, the lower the liquidity ratios, the higher levels of the Organization receive the reports.

 

LCR – Liquidity Coverage Ratio

 

The Liquidity Coverage Ratio (LCR) is designed to ensure that the Organization maintains a sufficient level of liquid assets to cover liquidity needs in an eventual stress scenario. The LCR is the ratio between the stock of High Quality Liquid Assets (HQLA) and total net cash outflow, calculated based on a generic stress scenario. The formula shows the main components of the indicator as follows:

 

 

 

In accordance with the LCR implantation schedule defined by Basel, the level of the ratio between High Quality Liquid Assets and total net cash outflows must comply with the following schedule:

 

Year 2016 2017 2018 As of 2019
% Required 70% 80% 90% 100%

 

The stress scenarios parameterization was conducted by the Regulator to capture idiosyncratic and market shocks, considering the period of 30 days. The items below show some of the shocks included in the methodology:

 

·The partial loss of retail and uncollateralized wholesale funding, as well as short-term funding capacity;
·The additional outflow of funds, contractually foreseen, due to the downgrading of the institution’s credit rating by up to three levels, including eventual additional collateral requirements;
·An increase in the volatility of factors that impact collateral quality or the potential future exposure of derivative positions, resulting in the application of larger collateral discounts or a call for additional collateral or in other liquidity requirements;
·Withdrawals of higher than expected amounts from credit/liquidity lines granted; and
·The potential need to repurchase debt or honor non-contractual obligations in order to mitigate reputational risk.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

  

Notes to the Consolidated Financial Statements

 

High Quality Liquid Assets (HQLA)

 

HQLA are assets that maintain their market liquidity in periods of stress and that meet the minimum requirements established by the Central Bank of Brazil, such as, among others, being free of any legal impediment or restriction; suffering little or no loss in market value when converted into cash; having a low credit risk; easy and accurate pricing; and being traded in an active and important market, with little difference between the purchase and sale price, high traded volume and a large number of participants. These assets are subject to weighting factors which may reduce their value, for example, in accordance with the risk rating of their issuer or the historic variation in their market price, among other requirements.

 

Cash Outflows and Inflows

 

Cash outflows are the result of a reduction in deposits and funding; the maturity of securities issued; scheduled contractual obligations for the next 30 days; margin adjustments and calls in derivative operations; the utilization/withdrawal of credit and liquidity lines granted by the Bank; and contingent cash outflows.

 

Cash inflows for the next 30 days correspond to the expected receipt of loans and financings; deposits; securities; and margin adjustments and easing in derivative operations.

 

The following table shows information of the Short-term Liquidity Coverage Ratio – LCR, relating to the cash inflows and outflows, as well as stock of High Quality Liquid Assets (HQLA), according to definitions and calculation methodology set out in Circular No. 3,749/15.

 

R$ thousand
Information on the Liquidity Coverage Ratio (LCR)
 Number of Lines   On December 31 (1) On December 31 (2)
2020 2019
Average Amount (3) Weighted Average Amount (4) Average Amount (3) Weighted Average Amount (4)
  High Quality Liquid Assets (HQLA)        
1 Total High Quality Liquid Assets (HQLA)   244,827,538   112,872,809
  Cash Outlows        
2 Retail funding: 325,354,419 29,651,389 239,379,478 21,636,196
3 Stable funding 170,521,207 8,526,060 129,085,762 6,454,288
4 Less stable funding 154,833,212 21,125,329 110,293,716 15,181,908
5 Non-collateralized wholesale funding: 235,478,141 97,681,458 132,504,666 53,070,146
6 Operating deposits (all counterparties) and affiliated cooperative deposits 12,635,960 631,798 9,638,912 481,946
7 Non-operating deposits (all counterparties) 220,227,439 94,434,918 121,673,837 51,396,283
8 Other non-collateralized wholesale funding 2,614,742 2,614,742 1,191,917 1,191,917
9 Collateralized wholesale funding -   4,581,792 -   3,828,662
10 Additional requirements: 109,487,520 14,836,353 113,180,204 14,729,075
11 Related to exposure to derivatives and other collateral requirements 11,778,909 6,330,665 14,457,167 6,617,026
12 Related to funding losses through the issue of debt instruments 1,085,406 1,085,406 765,093 765,093
13 Related to lines of credit and liquidity 96,623,205 7,420,282 97,957,944 7,346,956
14 Other contractual obligations 36,339,264 34,400,518 37,020,644 35,080,897
15 Other contingent obligations 131,523,849 5,164,538 132,713,942 5,420,129
16 Total cash outflows -   186,316,048 -   133,765,105
  Cash Inflows        
17 Collateralized loans 201,944,617 1,425,648 65,979,377 896,126
18 Outstanding loans whose payments are fully up-to-date 28,197,590 16,599,016 32,730,607 20,645,466
19 Other cash inflows 38,376,788 31,043,722 41,453,133 33,730,321
20 Total cash inflows 268,518,995 49,068,386 140,163,117 55,271,913

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
  

Notes to the Consolidated Financial Statements

 

R$ thousand
      Total Adjusted Amount (5)   Total Adjusted Amount (5)
21 Total HQLA   244,827,538   112,872,809
22 Total net cash outflow   137,247,662   78,493,191
23 LCR (%) (5)   178.4%   143.8%

(1) Calculated based on the simple daily average of the months that compose the fourth quarter (63 observations);

(2) Calculated based on the simple daily average of the months that compose the fourth quarter (61 observations);

(3) Corresponds to the total balance related to the item of cash inflows or outflows;

(4) Corresponds to the value after application of the weighting factors; and

(5) Corresponds to the calculated value after the application of weighting factors and limits.

 

The amount of net assets (HQLA) resulted in an average of R$244.8 billion in the fourth quarter of 2020, compared to an average of R$112.9 billion in the fourth quarter of 2019.

 

Related to the cash outflows, based on the regulatory stress scenario (line 16), about 68.3% are redemptions and non-renewals of retail and wholesale funding without collateral (unsecured), as shown on lines 2 and 5 of the table.

 

Another relevant group is the item “Other contractual obligations” (line 14), which mainly includes the output streams of onlending operations, credit cards and trade finance.

 

Regarding cash inflows, corresponding to an average of R$49.1 billion in the fourth quarter of 2020, most significant are the receipts of loans operations (partial renewal), the inflows of Trade Finance operations, cash and cash equivalents and redemptions of securities in addition to the inflow of transfer and credit card operations.

 

Net Stable Funding Ratio

 

The Net Stable Funding Ratio (NSFR) aims to assess if the Organization is financing its activities (assets) from more stable sources of funding (liabilities). The NSFR corresponds to the ratio between the Available Stable Funding (ASF) and the Required Stable Funding (RSF), which are defined according to the structures of assets and liabilities of the institution that are weighted according to the definitions of the Regulator.

 

The following figure shows the main components of the indicator:

 


 

Available Stable Funding (ASF)

 

The available stable funding is represented by the Liabilities and Shareholders’ Equity, which are weighted according to their stability, in which the resources considered as more stable are determined mainly by behavioral aspects of the customers, also considering their relationship with the institution, legal aspects and other variables implied.

 

Required Stable Funding (RSF)

 

The required stable funding is determined according to the assets in the balance sheet and other financial instruments, for example, credit limits provided and guarantees given, which are weighted by aspects related to the type of operation, maturity, and counterparty, among others.

 

The following table provides information regarding the Net Stable Funding Ratio (NSFR) and its components, as set forth in Circular No. 3,869/17:

 

 

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Notes to the Consolidated Financial Statements

 

R$ thousand
Information on the Long-term Indicator (NSFR)
Number of Lines   On December 31, 2020 (1) Weighted Average (2)
Amount per effective term of residual maturity
Without expiration Less than 6 months