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Edited Transcript of BBDC4.SA earnings conference call or presentation 30-Apr-20 4:30pm GMT

Q1 2020 Banco Bradesco SA Earnings Call

São Paulo May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Banco Bradesco SA earnings conference call or presentation Thursday, April 30, 2020 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leandro de Miranda Araujo

Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers

* Octavio de Lazari Junior

Banco Bradesco S.A. - CEO & Member of Board of Executive Officers

* Vinicius Jose De Almeida Albernaz

Banco Bradesco S.A. - CEO of Insurance Arm

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Conference Call Participants

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* Daer Labarta

Goldman Sachs Group Inc., Research Division - VP

* Henrique Navarro

Santander Investment Securities Inc., Research Division - Analyst

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Marcelo Fedato A. Telles

Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector

* Mario Lucio Pierry

BofA Merrill Lynch, Research Division - MD

* Thiago Bovolenta Batista

UBS Investment Bank, Research Division - Research and Analysis Team Leader (ED) & LatAm Banks Analyst

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Presentation

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Unidentified Company Representative, [1]

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Hello, everybody. Welcome to our conference call for discussing our first quarter 2020 results. We have today with us, our CEO, Octavio de Lazari Junior; our CFO, Andre Rodrigues Cano; the COO of Bradesco Seguros Group, Vinicius Albernaz; and our Executive Director and IRO, Leandro de Miranda. After the presentation, we will run our question-and-answer session where you're going to be able to pose your questions.

Now I turn the presentation to Leandro.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [2]

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Thank you very much, [Hiraji]. Good morning, everyone. I hope you and your family are well, and I welcome you in our conference call. Today, we'll discuss results from the first quarter of 2020 and once again talk about our position during this rather difficult time.

This quarter has end up quite different from the [areas] taking place at mid-March, and we were performing very strongly in a number of lines, even above our guidance as you may see ahead. The scenario was [wildly created] by the worsening of the COVID crisis in the second half of March. Nonetheless, we highlight that our balance sheet remains very strong. And the moment that the crisis rose to the [degree] that it is today, our priorities have changed completely. We focus on maintaining our services to our customers and keeping the bank fully operational, along with the [widening] of our employees. And we are committed to supporting society in overcoming this crisis. All (inaudible) on each one of them. I'm proud to say that through the efforts of our entire team, the bank adapted quickly above expectation [indeed]. We continue to operate in such extreme conditions while always accounted for the safety of our people and customer are the -- are our primary parameters.

To give you a reference today, more than 90% of our staff that normally work in our offices are now working from home, and 50% of the teams from our branch network, which are -- we consider as an essential service are at home. We are also striving to resolve any critical issues our customers are experiencing by initiating a process for [paying arrears] that is mature for at least 60 days for small companies and individuals and opening a direct line of negotiation with large companies.

We have also been working jointly with other banks and the Central Bank as well as the NBS [on structuring loans] to finance small business areas, and we have discussed about (inaudible) with the Central Bank and [other banks as well].

As mentioned before, Bradesco and all other banks have [been] in reaching this to help customers remove from the very good cost time with the capacity to (inaudible) in June, that are largely (inaudible) facing financial ruin. We also like to mention in our COVID call (inaudible) previous crisis in which the financial sector was the main sponsor for the (inaudible), this part in particular, as our [team] has been telling over and over again. We are an important part of the solution, and we embrace this responsibility.

In view of the uncertainty inherent to any projection at this time, especially considering that (inaudible), for sure, when the shutdown will end and how the state of the resumption will be, we have decided to suspend our guidance for 2020. We will outline the new guidance when we have a sufficient clarity of the situation, and our administration will decide on that. Meanwhile, we should stress that we do not see our ability to generate sustainable returns fundamentally (inaudible), the operations (inaudible). In addition to the return of revenues and revolving loan issues, which will take place to the recovery of the economy and a return to normality, one of the ways to improve our return is through essential adjustment in costs, and we have done it very promptly.

We have performed quite well this quarter, thanks to the initiatives we took at the beginning of this year to control costs throughout 2020 as well as in March due to the effect of the crisis in some lines. Nevertheless, our new experiences in managing the bank during this period should allow us to accelerate cost adjustments with even greater opportunity for adjustments in the branch network through the use of new smaller formats as well as lower costs. The primary focus on conducting business and providing consultation to our -- in providing advisers to our customers, we [sit to the harness and train our] talents in a new way to serve our customer base.

Another key focus during this time was on risk management. In order to provide support to the country at this time and to our society as a whole, [we try] to keep the bank committed and very well capitalized. We headed into the crisis with a strong capital position and elevated improved leverage. We ended the first quarter of 2020, which our revenue reflect the [further] market [trends] with a corporate rate 11.4% Tier 1 ratio. Furthermore, we saw an increase of 6% in the profits from customer funds, a clear attractive quality.

Our expanding loan portfolio had a strong growth, posting an increase of 5.1% over the quarter and 17% for the last 12 months. Part of this expansion can be explained by the effect of exchange rates and part of this [effect] is due to a strong improving demand, mainly from our companies at the beginning of the crisis. Our delinquency grew by 40 bps. We believe that we are preparing ourselves quite well in terms of [credit provisions] to face the impact of the [deferral] that will be chosen by the clients. We have increased our access provision this quarter, posting a provision of BRL 5.1 billion in our balance sheet to face the consequence of the pandemic on the credit. Our objective is to preserve our balance sheet with similar measures taken by other global banks, especially the largest U.S. and European banks as ourselves.

As for our first quarter results, we posted an income of BRL 3.8 billion, a decrease of nearly 40% over the 12 months and 45% in the quarter, with a return on average equity in the quarter of 11.7%. Income and return for the quarter was adversely impacted by the excess loan loss provision that we made this quarter, along with other effects related to market conditions.

Now we turn to Slide 4, related to the suspension of our guidance for the year. Although it's not usual in order to be more transparent, we included in the [table account] with our performance in the month of January and February. I'd like to remind you that in the first 2 months of the year, we even have our full capacity as 50% of our general managers, account managers, investment advisers, bankers are on vacation. You can see that we have very strong numbers, even better than the guidance except for the insurance business, mainly due to the financial results. Until February, the credit portfolio was growing 14.4%; NII, 11.7%; fees by 3.6%. Cost on the other hand was roughly 0.1%, and we had a good performance in loan loss provisions. We decided to suspend the guidance without presenting a new one because pretty much we don't have clarity and a vision of all the effects that this virus may have over the economy. The outlook remains rather uncertain, and there is no clear [precise definition] any sign of recovery for the economy. We established a new guidance, and we have a better capacity to provide an outlook on our administration [so and so].

Moving ahead, following through Slide 5, regarding the provision and credit risk. You can see the [credit] scenario is becoming [stark], especially in the second half of March. We [boarded] several areas of the bank in [paring out] an [investor] of the possible and uncertain future scenarios, as it was clear that the recent effect growth, which slowed down and the delinquency [stood up] and in fact increasing numerator and decreasing the denominator. [True enough will perform] when composed by the present [recover teams] and the other one by the risk and economic teams. They both (inaudible) submitting the future impacts in the (inaudible) and revenues, both in retail and corporate credit. Despite of using different methodologies, the results were pretty much the same, and it targeted in our provisioning models, we say the (inaudible) clients.

Now turning to Slide 6. We [map] the behavior of the mass market [credit NPL] in the global crisis of 2008 and the Brazilian crisis of 2016, and we projected a very (inaudible) which affects our sectors in different [stage]. Our perception that booking additional tax provisions to face future debt loss was necessary also as confirmed by the other banks that we use their earnings, especially in (inaudible) Europe.

Now turning to Slide 7, regarding to the provisions that we took in order to deal with this adverse economic scenario. In light of this study, we have a right set of an excess provision of 4.9% -- BRL 4.9 billion, a total of BRL 5.1 billion to cope with the effect of the pandemic on our credit portfolio, and we shall use it through the crisis. We believe this provision [should be sensible] at this particular time and reflects the information we have at this moment. We'll continually be evaluating the need (inaudible), monitor the evolution of the economy as a whole and especially the health issues that we have here. The provision includes a BRL 2.4 billion related to what we refer to (inaudible) the provision for an adverse economic situation, which is part of our [supplementary division] and will be used to other clients. New supplementary provisions for an adverse economic situation of BRL 2.5 billion made historically and BRL 200 million of required provisions payout this quarter due to the effect of the crisis.

Moving on the next slide, Slide 8. You can see that we rapidly provided our customers, individuals and small business with access to quite new channels to do their extensions through our digital channels, call centers and PR managers. We use all of our network to help our clients. We also use -- because we were also the first bank to provide access to (inaudible) 24 hours lines. We have already expanded more than 1 million transactions with instruments in the amount of BRL 1.4 billion. We are currently have been constantly evaluating the financial situation of our customers and offering the best solutions for each one of them, either a debt extension or a restructuring of the entire debt. It's worth to highlight that among the measures announced by the Central Bank, we had BRL 24.1 billion of reserve requirements release. But although the number of BRL 24.1 billion, we are able to originate BRL 57 billion in new loans between March 16 and April 23, almost double -- more than double than we had in reserve requirement released.

Now turning to Slide 9. We have already spoken about our priorities at the beginning of the crisis, taking care of our people, keeping our services (inaudible), assisting to overcome the crisis and managing the risk that the new stakeholders have imposed on us and keeping the bank capitalized and liquid. We can say that we have been successful in 1 of the 2 pillars of this initiatives, and we continue to work hard (inaudible) continue to be successful in our [missions]. We have set up a team in our operation in order to carry out our business into a primary [home of] based activity. We have a small [storage] structure in place, but we are able to [exploit] it very, very quickly.

Today, as I stated before, more than 90% of our employees that did [not] work at our branches are now working from home. We have to thank all of the teams involved in this process, our senior management and especially our technology and system staff, on (inaudible) teams to continue to serve our customers in the potential to (inaudible) situation.

Now moving to the financial results, they're found here on Page 11, to discuss the figures of the quarter, in which we have already experienced a major impact from the unfortunate events in March as well as the society as a whole worldwide. Our net income was BRL 2.8 billion, a decrease of 39.8% over the last 12 months. Some of the factors that contributed to the drop included a supplementary provision for loan losses of BRL 2.5 billion to address (inaudible), BRL 200 million of required provision due to the crisis, a reduction of our margin with the market due to the effects of the price in the market and the mark-to-market [caps], a decrease in the performance of our insurance company primarily due to the lower financial results, [consequence acquisitions] in (inaudible) and the mid-March of inflation in the index situation, namely IPCA and IGPM, among others; lower tax benefits due to a reduced provision for interest and capital in this quarter.

Now turning to Slide 12. Our ROAE [in this process] had a significant deduction, suffering a 11.7% as a result of everything that we have just presented to you, and the same fact can be seen in our ROAA. Our shareholders' equity was reduced by 3.1% in the quarter due to the negative impact of mark-to-market of assets. So as the climate evolves in the market that less we'll acquire, which now has also [recover] of the shareholder equity due to the mark-to-market of the assets.

Now turning to Slide 13. The loan portfolio (inaudible) expected growth of 17% year-on-year and 5.1% in the quarter, with 2.6% in individuals, 7.6% in large companies and 4.4% in SMEs. Part of this growth can be explained by the effect of exchange rate fluctuations on the [local portion] in dollars, meaning the large company's portfolio. Excluding the effects of exchange rate variations, our portfolios have grown by 3.4%. In addition, there was a strong increase in demand for loan by large companies in March, notably in the second half. Companies start to set up a [liquid better] at the time that the situation has returned to normal. In the (inaudible), the growth in the quarter largely reflects the strong performance we have been posting up to February. We expected a low slowdown in growth in the coming quarters, but it's still very difficult to (inaudible) to first see the size of the [logistic] demand for long.

On Slide 14, you can see that the total NII decreased by 6%. The [portion] increased by 2.9% year-on-year. The reduction of the portion related to the performance of the margin with the market. The margin with clients increased by 8.4% over 12 months, primarily as a result of the increasing loan volume, which more than offset the negative impact, the regulatory cap and [other gross] unit interest rates. The margin of the market decreased 37%, especially due to the impact of market volatility and in the full year our return to market of our trading portfolio.

Turning to Slide 15. We have an increasing NPL creation this quarter, already reflecting impact of the pandemic on the loan portfolio and in the end of March in specific places in our [profit] segment as well as the growth of the loan portfolio, the shift in the mix. It's worth mentioning that the NPL creation in the third and fourth quarter were widely affected by a large [pocket] credit that became due and was later renegotiated for which we are (inaudible) much easier to make a comparison if you make those adjustments.

Our expanded loan provision amounted to BRL 6.7 billion, including the impact of the supplementary provisions of BRL 2.5 billion from the required provisions of BRL 200 million. We were pretty much done with the reset of the (inaudible). The provision in relation to the portfolio that we refer as cost of risk, which stood at 4.1%.

Moving to Slide 16, regarding to the delinquency ratio we announced today, the market [has improved] by 12 bps. The reasons are the same as the one we did for the progression of the NPL creation.

On the following slide, you can see that the 90-day NPL coverage ratio was 228% in the quarter. As we mentioned before, we had a provision of BRL 5.1 billion for the adverse economic scenario. We shall consume these provisions throughout the crisis that may reduce our coverage ratio in the following quarters. In addition to the consumption of the provisional (inaudible), we will constantly adjust our (inaudible) to evaluate effectively of new provisions.

Now on the Slide 18, we refer to the fee income that we have in our different lines of business. As you can see, the fees decreased in the quarter by 6.2%, an increase over the 12 months [and increased] by 2.6%. We have expected negative impacts on card income, which reduced by 7.1% quarter-over-quarter and 2.4% year-on-year, mainly impacted by CLO and interchange fees. We also had negative impact in the lines of asset management and loan operations. The checking accounts, on the other hand, performed very well, growing 7% year-on-year, mainly due to the increase of customer base. Custody and brokerage services was positively impacted by the growth in volume in both institutional, trading as well as the individual trading to Agora, our investment house. We'd like to highlight the evaluation we had in Agora, the (inaudible) investment house, which has a complete portfolio of projects with a (inaudible) platform, which is very (inaudible) of the best investment products in the market to each kind of investor profile. In addition, customers have access to specialized investment advisers, content providers by Agora research teams and now the largest JV (inaudible) financial coverage with a [group] study, for the investor channel announcing recommendation by market [analysts] with support taken by decisions and investment. By the end of first quarter 2020, we reached 516,000 clients, a growth of 13.4% compared to the last quarter but a strong growth of more than 246% in production volume in the same period.

If you turn on the following slide, Slide 19, you can see that we operate very, very well in terms of operating expenses with a reduction of 0.4% over the last 12 months. As our CEO has repeated -- repeatedly said, we are aimed at having a 0% growth in 2020 as far as operating expenses are concerned. We saw a sharp slowdown and [normal] growth related to administrative and in personnel expenses and strong reductions in both lines for the quarter. This performance is mainly due to the measures we have taken to reduce costs at the beginning of the year. Although our guidance for 2020 is from 0% to 4% our goal, as I mentioned, was 0 growth. Additionally, the reduction of operation volumes in March has already had an impact on (inaudible) our administrative expenses. We reduced [7 to 8] branches in the first quarter. We expect closing of [nearly] 200 branches in 2020 and a reduction in the number of employees due to the (inaudible) program. As we mentioned earlier, we have [lived] in the environment of the COVID crisis such as home office, [base] in the year that self-serve by customers and remote customer serve have opened a space for a profound restructuring of the way we operate. We [continue] to expedite the conversion of branches into customer (inaudible) and cut back on traditional branches. For our staff that does not work in the branches is an opportunity to continue using home office and reducing the amount of [occupied] space.

Now finally, moving to insurance, pension plans and capitalization bonds in our last slide here. You can see that there was a major impact on the financial performance due to the result of market volatility on the portfolios, especially on equity portfolio and (inaudible) investment funds. In addition, we had the effect of the lower (inaudible) and negative impact of the mismatch of our GPM that collect [our business PTA] that collect part of our [growth] basket, which should affect our PLM. On the [right side], we know that the financial results will be a challenge. On the other side, we continue to see an important improvement in terms of operating performance, with a reduction in the loss ratio compared to fourth quarter 2019, which resulted in the improvement of the combined ratio.

The insurance group has been monitoring the economy, and this is, in fact, caused by the new organic effects. We understand that the importance of our product as an instrument to help and support the redemption of the families that are going to be victimized. Several actions were taken to ensure that the [best service] institution and adjusted to the [real] event. Through (inaudible), adjustment of the [duration] of the primary care units that since the beginning of the pandemic have been operating at expanded hours and even in the weekends from Sunday to Sunday. So this initiative also serves to relieve the demand for emergency [pool] coming August. In the beginning of the [instruction modules disparity] (inaudible). Changes in the behavior of results. And (inaudible), for example, if on the one hand, there was a stark reduction in the (inaudible) consumers. On the other hand, it was possible to see a broader growth in emergency and hospitalizations due to the new virus. It's worth mentioning that this elective procedure should be reserved ahead. (inaudible). Although it's premature to make any kind of projection at this time regarding the future of the [events], we estimated that growth will return to (inaudible) growth in the coming periods. And we were cautious to make provisions on that. And now to ensure the decrease in order circulation caused the monetary change in the (inaudible) notice, motivated by the closing of repair workshop as well as the beginning of the drop in the sale of years, reflecting the (inaudible) insurance, directing the (inaudible) policies.

Having said that, we open for the Q&A session, and we will may update (inaudible). Thank you for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mr. Mario Pierry with Bank of America.

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Mario Lucio Pierry, BofA Merrill Lynch, Research Division - MD [2]

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Let me ask 2 questions. Leandro, you mentioned that you expect, I think, in the Portuguese call that you guys expect the NPLs in this cycle to be higher than in the 2016 cycle. At the same time, the amount of provisions that you took this quarter, BRL 2.5 billion, we think that's enough to cover some of this expected increase. But I'm just trying to put in perspective, this BRL 2.5 billion is [right], because it doesn't seem like that much given the size of the crisis. And if you are trying to anticipate some of the losses, why not take a bigger provision this quarter? So that's my first question. Now is this BRL 2.5 billion enough? And why don't you take more?

And then my second question is related to your slides on Page 26. We see that NPL creation in the SME segment more than doubled in 1 quarter. So I wanted to understand why are we seeing such an increase in NPL creation before the crisis even hit and if there are any specific sectors or regions where you're seeing this big pickup in NPL creation in the SME segment.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [3]

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Okay. Mario, first of all, the provision that we consider is not BRL 2.5 billion but BRL 5.1 billion because we had previous provisions that we were [able to boost]. Otherwise, we have increased even more. We believe that with the new crisis, we have never experienced anything like that. And so in this sense, we have been discussing to analysts and to our clients as a whole. And there is a common stance that no one knows when it's going to be managed, when it's going to be finished and what would be the total effects of that in the economy because we do not know when the recover -- the full recover shall happen. If we have the clear scenario that it would be even worse than 2008, we should be exactly what we have said.

And on the other hand, a point to the information that we have today, according to the (inaudible) [canceling] that's about to happen, we believe that BRL 5.1 billion is adequate at this point in time. That's the reason why the Portuguese (inaudible) is CEO, Mr. Octavio said that we are prepared to continue to provision. We get more information on the outlook of the clients if it's necessary.

Regarding to SME NPL criteria creation in which you have seen a stronger growth in the West, a couple of things to point out. First of all, we still haven't seen a full program for all the (inaudible) that we have seen in the past. We have taken care of (inaudible) individuals. We have made the refinancing of all of our clients for 60 days. But the SMEs did have less liquidity than the large companies, and that's the reason why you see a faster NPL creation here. (inaudible)

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [4]

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Yes. Just on the NPL creation for SME, I'm going to reiterate what I said in the Portuguese call, basically, this quarter, we had about BRL 500 million in new NPL in the large SMEs. We have the -- in the exact [same] portfolio [estimate] up to BRL 30 million. That is the retail part of the business that basically is running smoothly. But in the other part that goes up to BRL 500 million in annual -- in revenue, basically, we had 3 cases, one of them amounting BRL 300 million that moved to 90- day delinquent, all of them fully provisioned. And this is basically the main reason for this jump. The fourth quarter actually was lower, mostly given the realization of some SME loans at the quarter. So the base is low. Probably the fair day for this SME portfolio is more like the third quarter and before. So basically the answer is this: The jump is mostly related to the BRL 500 million and also reflects what Leandro said.

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Mario Lucio Pierry, BofA Merrill Lynch, Research Division - MD [5]

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Okay. Let me -- just one follow-up then. When we look at the provisioning level, right, your amount of provisions, they were lower than the NPL creation. And I get it, you had some previous NPLs that you had already provisioned for. They were not officially NPL, I get it. But if we look at your reserve coverage today of about 229%, if you go back to the 2015, '16 crisis in Brazil, your coverage ratio was running at about 190%. Is that the level that you think should be appropriate in the cycle to maintain a coverage ratio of 190%? Or given that this is a worst cycle that you'll be more prudent to be more conservative and maintain the coverage ratio well above 200%?

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [6]

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Mario, as we always say, in your question, there is (inaudible) assumption that we manage the coverage ratio. The coverage ratio is much more enough proof of our provision in (inaudible). So basically, we're not going to do anything different because the coverage ratio moved to a level. That said, in the cycles, basically, you have a 1-year consumption of coverage in the sense that in the normal process of provisioning, you end up writing off part of your provisions. And in that process, the phase, the output of coverage tends to get lower.

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Operator [7]

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Our next question comes from Mr. Tito Labarta with Goldman Sachs.

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Daer Labarta, Goldman Sachs Group Inc., Research Division - VP [8]

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A couple of questions also. Following up just on the NPLs. Just to drill down a little bit more, given first quarter was really just the last 2 weeks of March that were impacted by the crisis. So is it fair to assume that this increase in NPLs should be even worse as you see more of the impact of the crisis? Just to understand sort of the magnitude [believes] or the one-offs that you mentioned and the increase in NPLS? I mean is it fair that that's going to continue to deteriorate, that sort of a similar pace or even higher? I guess that's the first question.

And then my second question is on capital. We saw a significant reduction in Core Tier 1. I know part of it would affect the mark-to-market and the growth in the portfolio. But if you can help us just think about that. I mean your capital is okay now. But if you have another 200 basis points reduction in the Core Tier 1, then it's maybe a different conversation. So given the level of growth that we saw in the quarter, the level of ROE, if you can just help us think about how you're thinking about your capital base, given all these moving parts.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [9]

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Okay. Tito, let me start in here and then I would like to give you a [few] sense. Well, first of all, it's very unusual to make comments on the second quarter that is [risk], and we have a crisis that we all over the world we have never experienced before. So it's really difficult to tell you how we see the behavior from now on. But the good part of the second quarter is that we shall start seeing the cancelation of the lockdown by several states, and we start to see some clients that invest to the game again. So that will be the most appropriate time to understand how we shall see the behavior of the NPL creation from now on. So we are not in a position to give a very good and clear answer regarding how it's going to be the behavior of the NPL creation from this point on, okay?

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [10]

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So just to complement, basically, we believe these trials, the only trials (inaudible), basically, we believe this crisis may be in terms of NPL worse than the 2016, '15 crisis. That implies actually that the -- to reach that NPL unit will continue to improve for some more time. Basically, the NPL, what I'm saying about the specific cases, there is this BRL 500 million already provisioned in SMEs. There is also something around BRL 500 million also fully provisioned that moves through NPL this quarter in Core 3. So we have about BRL 1 billion for which we already have provisions. And as you know, we have built provisions even in the fourth quarter last year. So this is the kind of change -- made the acceleration in NPLs faster this quarter, probably than it would be the normal pace otherwise. But probably the NPL at the end of the cycle should really be higher.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [11]

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On the second part of your question regarding our debt structure and shareholders' equity. It's important to highlight that a significant part of this reduction in the shareholders' equity was due to mark-to-market impacts on the strategies that we have. So all you got a broader environment for (inaudible), we shall see a recovery there as well. We do not plan to make any sort of capital increase. We do not plan to make any sort of capital shares buyback. So we believe that as the normal business get back, we shall not depreciate composition of added tax in the previous levels as we are profitable. And we just are about to distribute the minimum dividends according to the Central Bank provisions, and we shall keep it for quite a while.

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [12]

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Yes. On top of that, we also should consume the tax credit from the hedging generated this quarter, as frankly pointed, we have profitability from that. And also, the loan growth should build up. Basically, the size of loan growth we had this quarter is a mix of the good performance that we were presenting until February in terms of loan growth, plus the extra demand we brought from corporate. This level of growth certainly is going to be lower for the rest of the year as we have a correction in loan demand.

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Daer Labarta, Goldman Sachs Group Inc., Research Division - VP [13]

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Great. No, that's very helpful. And then just one follow-up, I guess, on the first one. I understand the uncertainty in trying to predict where the sales will end up. But you have another month now since the end of the first quarter. So I guess I was also thinking in terms of the evolution from the last 2 weeks of March and into April and how the inventory affirmation mix (inaudible) at this point, how that may have evolved exactly, worse or maybe rolled off at some point?

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [14]

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Yes. At this point, we prefer to not comment on the more recent trends. It's basically, it is -- again, you know we have the renegotiations of loans of 60 days. This is providing a relief on the delinquent, given that you only devised -- they don't go to NPLs. We also are working on all clients to provide them the best solution possible to be able to meet their obligations. And so I think it's an ongoing process that somehow mitigates the evolution of NPLs. But I think it's still to open to step-up.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [15]

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But people also have (inaudible). If clients need, we are open to support in providing additional review of 60 days or even to restructure that in a way that we can preserve their health and have a long-term relationship with our clients. So this is something that we are wide open to help clients and society as a whole.

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Operator [16]

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Our next question is coming from Mr. Jason Mollin with Scotiabank.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [17]

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My question is somewhat of a follow-up on the provisioning levels made in the quarter. When you show on Page 7 of your presentation that you had BRL 2.4 billion in preexisting provisions for adverse economic scenarios, that you created BRL 200 million in provisions that would be required under traditional regulations. And my understanding is that the regulator would have allowed you not to make those because of restructuring in the quarter plus this BRL 2.5 billion that you've been discussing in new supplementary provisions. Now I guess I'm trying to understand the decision-making process here. I understand it's not, as you've said many times, about reserve coverage, et cetera. But can you talk about making this decision? What are the implications for taxes, creating deferred tax assets, implications for dividend payments? Obviously, you reported a much lower bottom line. But in my view, this is a prudent conservative approach going into a crisis where we don't really know the real losses, what they're going to be. And what are the implications for just reversing these going forward?

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [18]

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Thank you very much for your question, Jason. I guess we share your view regarding the behavior in [apprises] like that. We do have to be conservative to preserve our cash flow in order to serve our clients adequately. And there is a change event here saying that the banks are not allowed to distribute dividends higher than the minimum amount required. The law is such that the minimum amount required (inaudible). And we'll keep up. [It's behaving, stopping the regulation]. So we shall not expect a dividend higher than 10%. We have no internal discussions on reducing the dividends. We believe that we shall have to leave this new environment, this new scenario, to make adjustments in our provision of the case will be the cash flow in short term is extreme, is very, very strong. We remain confident that we can help our clients to get back to the liquidity levels they need, to get back to their activities.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [19]

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I mean maybe I can ask -- I mean, again, it's not a metric. I know this is not how you make provisions or any bank does, but it's an interesting reflection of what's going on. If you look at the loan loss provisions created in the quarter, I think it was something like 46% of the way I calculate the NII, net interest income, [provisioned with mix]. You had been running at around 25%. I looked in my model, and I think at the peak levels that I've seen probably in the last 15 years was something like 55% in 1 quarter, but that really doesn't get much above where you provisioned this quarter. So is this kind of a limit when you look at -- of course, it's based on what happens in the economy and the ability, the likelihood of your clients paying and their payment performance. But does this seem like -- when you look at that kind of metric, that this is just -- this is extraordinary? And the level of...

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [20]

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Well, first of all, you have to consider that we have established last quarter a provision for adverse market conditions. We did not expect to meet it so soon. But fortunately, we were with a very good protection for that. So the way that it seems that we do have to take into account the whole BRL 5.1 billion package because that was -- some of the protections that we face, all the delinquencies and losses that we may have from now on. But of course, this amount was, as you have pointed out, the result of the analysis that should be continued here, the credit. And we believe our economic teams that have put together with our senior management, we decided that this is the other case provision at this time according to the information and vision that we have over the economy as a whole. So we do not take into a measure specifically the way that the aspiration in the last -- first month because it's extremely soon to say that. But if you prove to be right with (inaudible), if we have to be even stronger in terms of capital management and provisions, we are prepared to do so. But keep in mind that we have previously provisions for adverse market conditions such as this.

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Operator [21]

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Our next question comes from Mr. Thiago Batista with UBS.

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Thiago Bovolenta Batista, UBS Investment Bank, Research Division - Research and Analysis Team Leader (ED) & LatAm Banks Analyst [22]

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I had just one follow-up question about the capital position of the bank. It's not wrong for the bank was targeting in the past a 2:1 ratio close to 13% or something around this level. It's sad to say that they continue with this (inaudible) around 15%. And if the bank, if you start to see that the bank cost ratio will be close to (inaudible) in the capital return to this level.

Second question is very small one. Can you comment a little bit, how challenging is nowadays for Bradesco to sell insurance in the branch and also to sell fees? So how important are the flow of the [branch] that's for sure, right now that we don't have these (inaudible)?

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [23]

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Maybe you can start with the second and then answer the -- we want to invite the (inaudible), but one regarding (inaudible) to answer the second one.

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Vinicius Jose De Almeida Albernaz, Banco Bradesco S.A. - CEO of Insurance Arm [24]

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Vinicius here. The branches are importantly -- very important mostly for the sale of pension-related products, capitalization products in life, okay? They are very important. We have, of course, for life and for auto insurance, the credit of our insurance brokers in our branches. And what we've been seeing, I mean, in March, we didn't see because we have a few months of normal operation. We have gradual decrease in business in the end of March. But what we did -- been going through right now, is to be able to give our branch managers, salespeople, financial advisers as well as our insurance brokers, all the things necessary for them to operate fully on home office spaces, okay? So we do see this gradual improvement in sales of our sales force of our digital channel from home office, okay? But there is a considerable investment right now in digital, in CRM tools in order to do support to these sales force.

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [25]

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Thiago, regarding your first question on capital, basically, I think the level of capital is constantly being evaluated by the bank. As you know, the regulator reduced, recently, the minimum capital requirement by 125 bps. Any consideration regarding what is the optimal capital surely takes into account the level for the requirements in terms of minimum capital. On top of that, we have to consider that we are getting to a factor where actually loan growth should be, for some time, much weaker than it was so far. So it allowed us, actually, we should use less capital going forward. And on top of that, we do believe we're going to consume relatively quickly the tax credits we have generated and are one of the main negative impacts in our capital this quarter. And also, we believe that part of the market-to-market should be reversed. So in that situation, we let, in that scenario, we think we are in a very good position in terms of capital. We don't have project targets on capital. They haven't been discussed in those terms for some time. But again, I think given what I said, we are in our view in a very, very good position.

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Operator [26]

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Our next question is coming from Mr. Marcelo Telles with Credit Suisse.

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Marcelo Fedato A. Telles, Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector [27]

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Most of my questions have been answered, but I want to understand a little more. What is the risk that you see in the large corporate sector at the start? I know you've been focusing a lot on the SME and individuals. And also what other products that you [discussed] that the Central Bank published yesterday, and which was you need to call, if you compare to others, in terms of the results, right, that Central Bank did. In your case, I mean I wonder if you could share -- if you have done any stress test in this situation, if you could share with us what your capital position will be in a very, let's say, harsh environment that will be impacted by your cost interest, that will be helpful.

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [28]

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Marcelo, really, I'm not sure I understood quite well your question, given that your voice was not very clear. But I understand you asked about the health of the corporate loan book, and the stress test that the Central Bank have run on the financial stability part we have to do. Were those the questions?

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Marcelo Fedato A. Telles, Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector [29]

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Yes. And my question related to the stress test is that whether you have conducted a stress test as well, and could it be possible to share with us what the results would be in terms of your capital position, what (inaudible) in provisions or anything like that?

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [30]

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Yes. Unfortunately, we have -- we constantly run our stress tests, not only in crisis environment, but basically constantly. But we don't share that. What I can say is our view that we are in a very comfortable position regarding our capital position is related to our stress test. We see, for sure. And at this moment, when we don't know when the economy will be up and running again, it's always hard. But basically, our base case stress test really show that we are in a positive position. In terms of corporate, I don't know if we like it.

In terms of corporate, we see the corporate book in a much better position at this time. What we saw was a run from liquidity in the beginning of the crisis. But companies were -- are mostly held with a leverage. They haven't been investing too much. Some of them surely will face difficult in terms of having their results or revenues cut. But in here, I would say, companies with the appropriate amount of liquidity are going to be able to make it through the process. And basically, even the most complicated cases, from (inaudible) actually have already been fully provisioned. Most of them we have even written off from our books. Of course, it's always possible we find some cases more -- in a more difficult situation during the period of the crisis. But I would say it's -- this time it's not going to be a large number as in the other parts. In that sense, we are prepared to help them to renegotiate, to try to improve our position in terms of quarters. I think it's fair to say that the most (inaudible) at this time doesn't seem to be the appropriate time.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [31]

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And in terms to (inaudible), it's much more like due to for us as basically the corporate cost being financed by the capital markets. And therefore, we saw as an opportunity because we are able to charge over spreads and to rebalance our portfolio as a whole.

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Operator [32]

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Our next question is coming from Mr. Henrique Navarro with Santander.

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Henrique Navarro, Santander Investment Securities Inc., Research Division - Analyst [33]

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My question is on fees and commission. Regarding the line directly related to the sale of the banking products in both traditional channels and the digital channels. So I would like to hear how the number of branches that are closed right now, when do you expect to reopen the branches? From February to March, how has the impact in sales of banking products on traditional channels? And what was the positive impact on higher sales on digital channels? So anything you could shed a light and help us to understand the impact of the coronavirus on this 6% decline in the commissions on the first quarter. And then maybe you can try to understand what could be the impact for the next quarter.

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [34]

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In terms of branches, actually, we didn't close and branches. We are -- as you know, during the coronavirus crisis. We -- only the branches in the malls are the ones that we closed. And we kept all of them open and in the places we could. So we operate with different -- with half of the people in the branches in terms of staff and replace this staff every week.

In terms of reduction in numbers of branches, in the first quarter, we closed 78 branches that actually will be definitely closed. We expect to close this year more than 300 branches.

In terms of digital channels, in our case, we had already a very high level of penetration of digital channels. I think we had about 17 million clients that were clients either of mobile or internet bank. And with a very high level of usage. Due to the characteristics of the crisis with the economy really slowing down, we noticed actually that even though we see more client in fact is using the digital channels, and usually Internet or mobile, number of transactions actually reduced. Basically, people are buying less and people have transferred less money in business and payments, et cetera. So that's kind of the trend we are seeing. I don't know. I may have lost part of your question.

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Henrique Navarro, Santander Investment Securities Inc., Research Division - Analyst [35]

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No, that's great. Just -- my question, the 6% decline in fees and commission income quarter-over-quarter, how much of that, you believe, is related to the coronavirus?

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Octavio de Lazari Junior, Banco Bradesco S.A. - CEO & Member of Board of Executive Officers [36]

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I would say the reduction in credit card is pretty much related to coronavirus. It is the impact of the lower retail sales on (inaudible) in our exchange, in our interchange revenue. That is basically based on sales. The consortium operation may have some impact. Investment bank, we were expecting a good quarter. Actually, there was -- the performance was not as good as expected, even though it was better than last year. So maybe more clearly on credit cards and maybe investment bank. Maybe a little bit also on asset management.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [37]

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Well, thank you all for your participation. I guess we finish the Q&A session.

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Operator [38]

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Seems there are no further questions. I would like to invite the speakers for the closing remarks.

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Leandro de Miranda Araujo, Banco Bradesco S.A. - Deputy Executive Director, IR Officer & Member of Board of Executive Officers [39]

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Okay. Thank you all for your participation in our Q&A session, and for making the time to join us in our conference for the first quarter. Have a great day.

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Operator [40]

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That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a good day.