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Banco Bradesco S.A. (NYSE:BBD)

Q1 2013 Earnings Call

April 23, 2013 10:00 am ET

Executives

Paulo Faustino da Costa - Department Officer and Member of the Executive Board

Luiz Carlos Angelotti - Managing Director, Investor Relations Officer and Member of the Executive Board

Analysts

Saul Martinez - JP Morgan Chase & Co, Research Division

Mario Pierry - Deutsche Bank AG, Research Division

Philip Finch - UBS Investment Bank, Research Division

Gustavo Schroden - Espirito Santo Investment Bank, Research Division

Boris Molina - Santander, Equity Research

Mariel X. Santiago - HSBC, Research Division

Marcelo Henriques - Banco BTG Pactual S.A., Research Division

Regina Longo Sanchez - Itaú Corretora de Valores S.A., Research Division

Operator

Good morning, ladies and gentlemen. We would like to welcome everyone to Banco Bradesco's First Quarter 2013 Earnings Results Conference Call. This call is being broadcast simultaneously through the internet in the website www.bradesco.com.br/ir. In that address, you can also find a banner through which the presentation will be available for download. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future.

Investors should understand the general economic conditions, industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I'll turn the conference over to Mr. Paulo Faustino da Costa, Market Relations Department Director.

Paulo Faustino da Costa

Good morning, everyone, and thank you, all, for participating in our first quarter conference call. We are here to provide you with all the information you may need about our numbers. This is in line with our goal of always increasing the transparency of information disclosed to the market. We have here today Mr. Julio de Siqueira Carvalho de Araujo, Executive Vice President; Mr. Luiz Carlos Angelotti, Executive Managing Director and Investor Relations Officer; Mr. Moacir Nachbar Junior, Deputy Officer.

I will now turn to our Executive Managing Director and IRO, Mr. Luiz Carlos Angelotti, who will lead our conference call. After his presentation, we will be open to answer your questions. Mr. Angelotti, please go ahead.

Luiz Carlos Angelotti

Good morning, and thank you for joining us at the first quarter of 2013 conference call. In the first quarter of 2013, there was evidence of economic growth resumption in response to [indiscernible] through sentiments economic stimuli. And the 2, our last risk-adverse global scenario. The normalization of supply increase in manufacturing gave room for a clear recovery of industrial production in the coming periods. Household consumption continues growing at very good pace. In our scenario of low unemployment rates and seasonal real family income growth. It is also important to mention the excellent outlook for domestic agri business, favoring the development of the economies of small- and the medium-size cities in addition to the expected genetics in terms of balance of freight and mitigation of the current concessionary treasury.

Despite these several challenges, the domestic economy has to face in order to reach a higher and sustainable growth rate. But these contains our positive long-term view in relation to the Brazilian economies. In an environment of historically low interest rates and loan volume growth at sustainable rates, thanks to strict risk management. The unique features of our national financial system, which has to deal with [indiscernible] and continuous social mobility process bring extraordinary prospects for the banking and insurance industries in Brazil. This is the microeconomic scenario where Bradesco's results for the first quarter of 2013 are inserted.

Let's start with Slides 2 and 3, which show our highlights for the period. I would particularly like to draw your attention on Slide 2 to our adjusted net income, which reached at BRL 2,943,000,000 in the first quarter of 2013, 3.4% up on the same period of the previous year. As such factor results which came in line with our expectations. Our total assets came to more than BRL 894 billion, 13.3% up in the year while our expanded loan portfolio increased by 11.6% in the same period, totaling BRL 391,700,000,000.

On Slide 3, it's worth noting our assets under management, which ended March 2013 at BRL 1,278,000,000,000, 17.5% increase over March 2012. It is also worth mentioning our 4% delinquency ratio, which contribute our expectation of the [indiscernible] and also our efficiency ratio, which improved 120 basis points compared to the first quarter of 2012.

On Slide 4, we show the reconciliation between our book net income and adjusted net income. In this quarter, the only nonrecurring event was the provision for scheduled contingence in the gross amount of BRL 40 million. Adjusted for this item, our first quarter adjusted net income came to BRL 2,943,000,000. Also on this value, you can see that our adjusted return on average assets came to 19.5%.

Slide 5 shows a historical list of our quarterly net income. Income growth in the first quarter of 2013 was mainly due to: first, our lower operating expense, thanks to the continual effort to control expense. Second, a higher operating income from insurance operations. And third, the reduction in delinquency. In comparison with the first quarter of 2012, adjusted net income increased by BRL 98 million or 3.4%. Thanks to, first, the upturn in the interest earnings portion of the net interest income due to the increased volume of operations. Second, the increase in the customer base, which helped to push our fee income due to the higher volume of transactions. And third, increase in revenues from insurance operations. Our earnings per share in the last 12 months picked up by 3% from BRL 2.69 to BRL 2.77.

On Slide 6, I would especially like to draw your attention to the 12-month efficiency ratio. The red line remains stable in comparison with the previous quarter reaching 41.5% in the first quarter of 2013. The first quarter ratio improved by 106 basis points over the previous quarter. This important performance was mainly due to our continuous efforts to control expense. The blue line shows the efficiency ratio adjusted to risk, which improved by 10 basis points over the previous quarter due to the reduction in delinquency.

Moving on to Slide 7, as we have already seen, total assets came to BRL 894 billion, a BRL 104 billion or 13% up on March 2012. The return on average assets stood at 1.2% while the adjusted return on average equity stood at 19.5%. The Basel ratio closed the quarter at 15.6% and the increase was due to, first, the increase in mark-risked rates assets. And second, the negative mark-to-mark adjustments of our fixed income securities registered as available-for-sale.

Slide 8 shows the relative share of our main operations in net income. In the quarterly comparison, the drop in the relative share of securities was due to lower add trust gains. In the annual comparison, the highlight was the increasing the relative share of fees mainly due to the increase in the customer base and as a result, the upturn in transaction volumes. The annual reduction in funding was essentially due to the decrease in the securities.

On Slide 9, we see that unrealized gains totaled BRL 20.3 billion in the first quarter, BRL 4.5 billion down on the quarter before this due to the negative mark-to-market adjustments of our fixed income securities, which have low effects on our results. These do not include the potential goodwill from our profits in the total amounts of BRL 3.7 billion.

On Slide 7, we show our net interest income from both a noninterest and interest earning operations. The quarterly decrease in total net interest income came from both the interest earning portion and the noninterest earning portion. Reflecting the decline in spreads and lower arbitage gains, with decrease of over BRL 200 million. In the annual comparison, it is worth noting the 3% upturn in the interest earning portion, which was mainly due to the higher average business volume especially in loans, insurance and securities operations.

Let's look at Slide 11. As we expected, the annualized net interest margin narrowed by 10 basis points to 7.2% in the period primarily due to the reduction in the average spread margin, mainly impacted by the new interest rate funds for the credit card segment combined with the change in the portfolio mix. There's another effect on some portfolios because this quarter has fewer calendar and business days. We expect our gradual decline for the net interest margin, which should end the year up to 7%.

Slide 12 gives a breakdown of the interest-earning portion of the net interest income. For this quarter, which as I have already mentioned, was impacted by the lower results from the loans segment. This lower results were basically due to the new interest rate policy for the credit card segment combined with the change in the portfolio mix. However, the effects of this new interest rate policy shall be offset by a higher credit card transaction volume in the next quarters. An additional effect is that the first quarter has fewer calendar and business days, which reduced the accrual in some loan products such as overdraft facilities for individuals and companies, working capital and personal loans. The annual realized were the loans, insurance and the securities margins, thanks to the increase in volume of operations. The reduction in the trending margins was due to the decline in the selling rate.

On Slide 13, we'd like to emphasize that the red area of the chart, the provision for loan loss decreased over fourth quarter of 2012 as expected due to the reduction in delinquency. Thus representing a smaller share of the credit margin. The gross credit margin, the gray area, show resumed growth as a result of expecting higher volumes of credit card related transactions. Now, with more attractive interest rates and also because the coming quarters has more business and calendar days.

Moving on Slide 14, our expanded loan portfolio totaled BRL 392 billion in March 2013, 1.6% up in the quarter and 11.6% up in the annual comparison. This increase were mainly due to higher loans to large corporates, which moved up by 1.8% to -- in the quarter and 15.6% ended in 12 months. Excluding the portfolios of vehicles for individuals and the acquired payroll deductible loans, the growth for the quarter would be 2.2% and for the year 14.7%.

Confirming our expectations and on Slide 15, shows a reduction in the delinquency ratio to a 4% level due to a drop of 20 basis points in the individual segment. The blue line is in a unfavorable period for this segment because the concentration of spending. For the coming quarters, we still expect a gradual decline in the delinquency ratio as a result of favorable people scenario which should lower interest and unemployment rates.

Slide 16 shows that our provisioning ratios remain solid, so much so that they exceeded Central Bank requirements by BRL 4 billion. Assuming they maintains of the 12 months gross and net loss ratios as of March 2012, we have a booked provision of BRL 7.7 billion, more than expected gross losses in the next 12 months. The dotted parts of the blue line are even BRL 10.9 billion more than loss net of recovers. The dotted part of purple line also for the next 12 months.

On Slide 17, underlining what's mentioned in regard to the previous slides, this shows recovery ratios of the allowance for loan loss in relation to the credits overdue by more than 90 and 60 days, which have remained at very comfortable levels. It's worth noting the slight increase in the coverage ratio for loans overdue by more than 90 days reflecting the period reduction in delinquency.

We can see on Slide 18 that in the first quarter of 2013, fee income totaled BRL 4,599,000,000, 1.6% lower than the previous quarter, mainly due to the excellent performance achieved in fees from underwriting and financial advisors service in the first quarter of 2012. In the comparison with the first quarter of the previous years, the highlights relates to income from cards, which moved up by 20%; consortiums 16%; and checking accounts 11.4%. It is worth to mention the investments in organic growth such as the extension and the modernization of selective channels, which has led to an extension of our customer base, in turn leading to a continuous upturn in transactions volumes and, consequently, in fee income.

Looking at Slide 19. In this quarter, operating expense fell by 5.6% over the fourth quarter of 2012. This reduction was basically due to: First, lower personnel expenses impacted by higher concentration of occasions, which is a fiscal of the first quarter every year; and second, the seasonal effect of administrative expense, which affect many advertising expense in the previous quarter. In comparison with the first quarter of the previous year, our operating expenses grew by 3.7%. Once again, underlying our strong cost controls supported by an important contribution of our efficient committee. The upturn in personal expense was mainly caused by salary increase in line with the collective bargaining agreements.

On Slide 20, we see that the 8% decrease in the first quarter administrative expense was basically due to the seasonal effect of the fourth quarter of 2012, which affected advertising expense and the volume of business and service. In the comparison with the same period the year before, the slightly increase of 1.6% reflects the result of our continued efforts towards the control of this expense, which mitigates the effects of higher expense on the upturn in business and service volumes and the addition of service points.

Slide 21 shows revenues from our insurances, pension plan and capitalization bond activities, which decreased by 17.1% over the previous quarter, primarily due to the concentration of pension plan contributions, which historically takes place in the last quarter of each year. In the annual comparison, there was a 16.3% increase led by life and pension plan, health and capitalization bonds, which recorded double-digit growth. First quarter net income fell by 3.5% mainly due to lower revenues. The 2.8% annual upturn in net income was basically due to: First, the 16.3% increase in revenues; second, the decline in delinquency ratio; and the third, the greater administrative efficiency.

Slide 22 shows some of the main things from our insurance activities. The combined ratio came to 86% in the first quarter of 2013, falling by 60 basis points over the previous quarter. Financial assets totaled BRL 142 billion while technical provisions stood at BRL 130 billion, BRL 110 billion of which from life insurance and the pension plans problem.

In conclusion, we believe our results in the first quarter of 2013 were satisfactory and in line with our expectation, given the stage of economic activity in the future, which already show signs of faster recovery. In this quarter, we highlighted: First, once again the activities of our Efficiency Committee, which has been continuously working to control expenses; and second, the decline in delinquency combined with our high provision in levels showing that the parts of our loan portfolio is supported by policy of appropriate and consistent process, guarantees and assessment instruments.

Finally, Bradesco rated its positive expectations for Brazil in the long-term, which are underlined by its strategy of growing investments, with organic and consistent focus.

Thank you very much for your attention and we are now available to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Saul Martinez with JP Morgan.

Saul Martinez - JP Morgan Chase & Co, Research Division

I have a few questions related to your net interest income and net interest margin in the quarter and the outlook. First of all, a clarification. I may have misheard, but I thought you mentioned in your prepared remarks that you could see NII growth of up to 7%, and I believe your official guidance is 7% to 11%. I just want to make sure I didn't misunderstand what you said and make sure you didn't essentially change your guidance that 7% -- my understanding 7% is the minimum, and amount of NII growth and the way I heard it, it sounded like that was the maximum of growth for 2013. And then, more important perhaps though, can you talk a little bit about the impact of the reduced rates in your card portfolio. How should we see this? Should this be viewed as sort of a one-off impact that impacted the yields on your existing balances with account holders. And from that from here on out, not only because of growth but just because of that being one-off impact, we should see your net interest income grow from this space in your card portfolio and if also you can also comment on whether you can provide a specific estimate as to what the numerical impact of that reduction was. How much did it impact your NII in terms of numbers, in terms of the impact on net interest income in the quarter?

Luiz Carlos Angelotti

Okay, the number 7% is related to the NIM. When I talk about the...

Saul Martinez - JP Morgan Chase & Co, Research Division

7% is the NIM by fourth quarter, okay.

Luiz Carlos Angelotti

We start the year with 7.3%. This quarter, we are with 7.2% and we expect that the NIM we will finish the year around 7%. It's only about the NIM. About the credit card interest rates policy, when we announced the movement that we decide to change the rates, we talked about what we expect of the effects for the year. That is around 2% or 3% of the final profits of the year. We are considering the whole year, this is the effect that we consider the new policy. Only talk about the margin, we are now in the first quarter that we have the complete effect of this new policy. Then this is one of the cause that we have decreasing in this quarter in our margin. But we expect that during the year, the clients will use more this product because the new interest rate is more attractive and the additional volumes will give you the compensation for the spreads that we reduced. Then during the year, we expect that the additional volume will give you the compensation. We have talked about today the numbers only, about what we expect for the complete year is that something around 2% or 3% of our total profits that we are -- will be the negative impact across the new policy, this is the number that I can't tell you. Saul, you heard me?

Operator

Our next question comes from Mario Pierry with Deutsche Bank.

Mario Pierry - Deutsche Bank AG, Research Division

Let me ask you 2 questions then; one still is on the outlook for net interest margin. When you mentioned that you expect your margin to contract about 20 basis points through the end of the year, I was wondering, what is your outlook for interest rates in Brazil and what would be the impact if interest rates actually rose 100 basis points this year. The second question is related to your delinquency ratio and provisions. We saw the delinquency in the consumer portfolio improved by 20 basis points while in corporates, it remains stable. So I was trying to understand, first, is on your consumer improvement, if you could highlight which sectors or which types of loans are showing a bigger improvement? And then on the consumer -- on the corporate side, I wanted to understand from you how comfortable do you feel about your exposure to the X companies in Brazil? Some local press here has reported that your exposure to Eike Batista's companies could total close to BRL 5 billion. So I just wanted to understand, if part of these loans already provisioned or how comfortable do you feel that exposure?

Luiz Carlos Angelotti

Talking about the mean, the effects of the Selic rates, you see we have a 100% of increasing. Our economic department, they changed the expectation for this year. They expect that probably Selic rates will finish the year around 8 1/4%. If we have this improvement in this Selic rates, the effect will be positive in the margins because in the funding, we have some gains that will improve our revenues on the margin. Then, if we have an increase it will be positive for the margins. Talking about the delinquent, in this quarter we have a declining in the individual segment, considering that it wasn't a good moment or wasn't a special quarter for to have this movement because of the concentration of payments for individual there. We understand they're positive for us. Some products that helps this decrease, that is better performance is the credit cards and personal loans that have this movement. But in the corporate delinquency ratio, if you analyze our graph, you can see that we have start positive movement in the quarter before, in the SMEs portfolio that we have the decrease in the last quarter of 2012. We understand that the delinquency ratio during the year 2013, we'll continue to have a decrease in a gradual way. Probably, we expect to finish the year around the better ratio that we have in 2011, something around the 3.7%. That is the level that we have in 2011. About the growth X, we -- because the rules that we have here in Brazil, we cannot comment about the positions or numbers that we -- or relations that we have with our clients. Then we need to respect these rules. What we can say is that the -- because the position that Bradesco has in the Brazilian financial system, we -- is normal we have the relation with the biggest corporate companies here in Brazil, but we cannot comment about the individual position of our clients.

Mario Pierry - Deutsche Bank AG, Research Division

Let me then ask you 2 follow-up questions here. On the net interest margin, you said that your economics team expects Selic at 8 1/4% by the end of the year. Is that what you have already in your forecast, when you're guiding for net interest margins of 7% by the end of the year, is that what you're assuming also, Selic of 8 1/4% or are you assuming a lower Selic?

Luiz Carlos Angelotti

We consider that could have this increase but I'm talking about these numbers, 7%, before that we have this new provision. Then these numbers, 7%, we'll not consider this number, 8, this increase in the Selic rate.

Mario Pierry - Deutsche Bank AG, Research Division

What Selic rate are you considering when you're guiding for 7%...

Luiz Carlos Angelotti

There's wasn't Selic rate stable during our year, without any improvement in the Selic rates.

Mario Pierry - Deutsche Bank AG, Research Division

So the fact that the Selic rates already increased 25 basis points, does that mean that the 7% that you are guiding could be too conservative?

Luiz Carlos Angelotti

Yes.

Mario Pierry - Deutsche Bank AG, Research Division

I think in the past, you have talked about 100 basis points increase in Selic could impact your revenues by roughly BRL 400 million; is that still the case?

Luiz Carlos Angelotti

If 1% increase or decrease in Selic rate represents around BRL 400 million in Forex.

Mario Pierry - Deutsche Bank AG, Research Division

Perfect. And then this second question of a follow-up on the asset quality, we have seen that the provisions have come down, provision charges have come down for 3 consecutive quarters. And given your outlook for better asset quality, should we continue to expect our provision charges to continue to decline throughout the year?

Luiz Carlos Angelotti

We expect -- we don't have a guidance quarter-by-quarter, but consider that we expect to grow in our portfolio and we expect that this delinquency ratio will continue decreasing. What we say is that the -- considering our year, we expect that our total expense will be similar the level that we have in 2012. The number in 2012, net of recoveries, was BRL 13 billion. Then probably in 2013, we expect to have a similar number.

Operator

Our next question comes from Saul Martinez with JPMorgan.

Saul Martinez - JP Morgan Chase & Co, Research Division

Sorry guys, I did not hear the response to the questions. I think there was an interruption in the call, at least for me, there was. I just wanted to follow-up on one specific question about the impact of the new interest rate policy on credit cards. Should we view this as sort of a one-off impact in 1Q and then see the impact wear off in growth over the course of the year, and also if you can quantify the impact. If you already addressed it, however, and I missed it, I'm happy to go over the numbers off-line. I'd hate for you to repeat yourselves on the call.

Luiz Carlos Angelotti

Okay. When we decided to start with the new policy of the interest rates in the last quarter of 2012, when we announced the new policy, we've talked about the effect that we expect for 2013 that it is around the 2% or 3% of our total profit. This is the number that we expect for the whole year effect. In this first quarter, we started -- we had the total effect in the quarter of the new -- because of the new policy, but we don't have the additional volumes that we expected that will give us compensation during the year. This additional volume, that we expect that people will use more the new product, will come during the year and will give us this compensation that we expected. We cannot say that the number, that is the effect that we have only this quarter. But considering the whole year, we expect that this new policy will give us a negative impact of around 2% or 3% of the total profit for the year. But if you think about 2014, 2015, probably, in 2014, we will be, next year, a neutral effect because the additional volume of this portfolio of these new products, will be higher and will give us compensation of the spread that we are losing this year.

Saul Martinez - JP Morgan Chase & Co, Research Division

Just a follow-up, can you remind me when exactly the new rates went into effect? I believe it was November, but if you can clarify that. And secondly, are you seeing any evidence of volume pickups in credit cards due to the new policy?

Luiz Carlos Angelotti

We changed the new policy in the last quarter, and the effect that we have started in November through December. In December, it was a complete launch, but in November, it was a partial launch. Then the second -- last quarter of 2012, it was partial. And this quarter, the first quarter, is the first quarter that we have the full impact of the new policy. And the additional volumes that we expect, people start to use more of the credit card products, internally, we create some new products there. We create an option for our clients to pay the dues of credit card in payments with better interest rates, and we are now improving this portfolio. People start to use more of this portfolio. And these additional volumes started to grow, same as we expected and is according to our expectations when we compare it with the effect that we gave you when we announced the new policy. Then the growth that we are having now in the product is according to our expectation, and we expect to, for the year, the total year, this effect around 2% or 3% of our profits.

Operator

Our next question comes from Mr. Philip Finch with UBS.

Philip Finch - UBS Investment Bank, Research Division

I have a couple of questions, please. First one on your cost where you show very good cost control in the first quarter. Many congratulations on that. Given that you haven't changed your guidance for cost growth this year, what are the areas you are expecting cost to pickup in the remaining of the year, second quarter, second half? And my second question is regarding your capital, where we saw a slight fall in your shareholders funds in the first quarter. So what was the key driver for that? And could you also let us know what the core equity Tier 1 ratio is currently under the new Basel III rules?

Luiz Carlos Angelotti

Okay. About the cost control, we are working hard to maintain this control. We are looking for opportunities for reduced cost, revising internal process, revising the complex, and we expect to have this higher control more in administrative costs, and we are working to reducing all lines: transport, communication, third-party services. And we expect reduced costs in our lines. Then this is why we are very committed -- or we are working harder, and we expect to maintain our guidance. We don't expect change in our guidance because we are starting the year, and it's early to change any guidance. But we are very committed with -- to reaching this guidance that we gave for cost. About capital, the Tier 1 ratio that we expect for Basel III, now we have the final rules here in Brazil. And the new rules that we have here, if you really consider 100% of the rules, that will impact now considering the last quarter -- or the first quarter of 2013, the effect will be something around -- the decrease will be something around 1% of previews. The final ratio will be around, I think, in 90.8% [ph] is the simulation that we did. Then the effect or the -- considering the new rules, the decline will be small. And we understand that we have to implement the Basel III rules in a complete way. Here in Brazil, the implementation of Basel III will be until 2019. And we understand that we won't have any kind of limitation in continuous work with our clients and doing business with them.

Operator

Our next question comes from Gustavo Schroden with Espirito Santo Investment Bank.

Gustavo Schroden - Espirito Santo Investment Bank, Research Division

My question is more related to macro environment. It's clear for me that the growth -- the guidance of growth in margins of the bank for this year are relative around the economic activities recovering, you have 3% of GDP growth for this year. And my question is, what are the main factors that make you optimistic with recovering local economic activity? And if you have a kind of plan B to overcome another year of disappointment in terms of economic activity. I mean, do we have an alternative forecast considering another year of economic activity frustration? And if you can share with us what kinds of factors you could reduce the exposure considering some frustration in economic activity this year. My question is because the beginning of the year, we have not seen some good figures in terms of recovering economic activity like Brazilian Central Bank figures, from IBCBR [ph] for example. I think that it could be important to share and leave us your thoughts in this case.

Luiz Carlos Angelotti

Our economic department, Mr. Octavio de Barros, he expect that for this year, the Brazilian economy, the GDP growth will be around the 3%. Why we understand that probably we'll have this growth, if you analyze, this year, we don't have any -- if you compare with 2012, we started the year in 2012 with the international crisis in Europe. U.S. was trying to recover in the economy. China was with some problems with their growth. And during the year of 2012 and in the first half, we have here in Brazil some movement or some things that was same as a perfect storm that if together affect the growth of the economy. Some examples, we have a problem with corruption in the niche. The niche is in pursuit of department of Brazil, stop the investments in pursuit of some periods. Petrobras had some delay in their investments. We have some problem with Argentina that started to cause some delay for our exportations. We had some -- we had a dry in South and the Northeast that affected the agriculture products. Then during the year 2012, we have this, the economic business grew, and only the last part of the year, we had a positive growth. And this positive growth that we had in the last part of 2012, we have to carryover for 2013. And as we start the year, we don't have this year the international crisis. Europe have some problems but it's not something new that could affect the economy. U.S. is in now a better position, recovering their economy. Then we understand that we have now in Brazil, this next quarter, probably the economy will continue growing a little better than we had this quarter, the first quarter. And probably, we will finish the year in this level, around 3%. Considering this expectation that we have for GDP growth, we have this, the guidance, that is to grow around the 13% to 17%. If the economy doesn't grow 3%, grow less, probably we'll be reaching the lowest level of the guidance. But if you're talking about the plan B, we don't expect that in Brazil economy, we'll have a better growth. But if we analyze Bradesco, we have an example, the insurance business, that is a more stable business, then probably if the economy doesn't grow, the insurance business will maintain this similar profitability. The insurance business is around 1/3 of our profit. We have other effects, the fees, last year, we had to grow around 15%. And this year, our guidance is 8 to 12 -- 9% to 13%. Probably, these revenues do have affect lower GDP growth. Delinquency ratio probably will continue decreasing in a more slowed movement, but we will have some additional gains in reducing cost with the delinquency ratio. Then we understand that we have some compensation, if we have -- we don't have the growth that we expect for the economy this year. Then we understand that this guidance that we gave, we cannot -- we don't need to change anything. Probably, if the economy doesn't grow 3%, grow 2.5% or 2%, probably we will be more on the lowest level of the guidance.

Gustavo Schroden - Espirito Santo Investment Bank, Research Division

Okay, very clear, fair enough. My second question is the reduction in net interest margin that you mentioned, that it may reach 7% by the end of this year, can you share with us, if you have, what percentage of this reduction could come from low interest rates and what percent of this reduction could come from the change in the mix of your loan portfolio? Do you have some flavor related to this breakdown of the reduction in the net interest margin?

Luiz Carlos Angelotti

We -- normally, we don't comment to this breakdown. When we talk about our expectations, we're considering the environment, the total effects. We don't have -- we don't comment about the breakdown.

Operator

Our next question comes from Boris Molina with Santander.

Boris Molina - Santander, Equity Research

I have a follow-up question regarding your guidance for provision. When we see the evolution of nonperforming loans and your guidance operation, it appears that you still expect a relatively high level of write-offs throughout the year. Could you please comment a little bit about how you expect this guidance ratio to evolve or whether the guidance is more driven by increases in the coverage ratio, maybe you're wishing to build up your excess provisions or your coverage on nonperforming loans throughout the year. I mean the message here is that we are having some hard time going -- arriving at the stable level of provision charge for the year net of recoveries given the expected evolution of nonperforming loans for the year.

Luiz Carlos Angelotti

Okay. Well, our -- we expect that our delinquency ratio will decrease in a gradual way during the year. We are now at 4%, and probably, we expect that we will finish the year around the best moment that we have in 2011, around 3.7%. The write-offs that we have now, they represented the operation that we have, we start to have an increasing dividend expense ratio in the beginning of 2012. We followed the Central Bank rules, we don't have any additional effect, or we don't sell perhaps or we don't do securitization. Only what we are doing is follow the Central Bank rules. Then increasing the write-offs is because operation that we have an increasing delinquency ratio in the beginning of 2012. Then this is the effect that we have in the write-offs. The coverage ratio that we have now probably will be stable considering our expectation that we have for the decrease of the delinquency ratio. Now probably for the next quarter, the coverage ratio will be more stable. If we have to factor the decrease in the delinquency ratio, we could have an increase in the coverage ratio, but probably, will be more stable is what we expect. And for expenses, for the year, we expect that for the total year of 2013, the number, the expense with the loan loss provisions net of recovers will be a similar number that we have in 2012, around BRL 13 billion is the number that we have.

Boris Molina - Santander, Equity Research

So according to this, given that your peak E-to-H loans happened in the second quarter of last year, then we would expect another increase in the write-offs in the second quarter of this year, given the 1 year left?

Luiz Carlos Angelotti

Probably we will have some increasing in the write-offs. And the only danger of this year is we could start to have a decrease in the write-offs because our decline of delinquency ratio in 2012 started in the third quarter and probably for the year, we will start to have the decrease in the write-offs.

Boris Molina - Santander, Equity Research

Wonderful, wonderful. Excellent, excellent. And then I have a follow-up question regarding capital in your insurance operations and your capital ratios. The number that you mentioned of quarter 1 under Basel III does not deduct the deferred tax assets as for the new regulation in Brazil. But how big is the impact from the minimum capital requirement deduction for insurance? Do you expect that this deduction from insurance should grow over time if capital requirement for insurance operation increases, as it appears to be the case in Brazil? The question that I have is how could we model the deduction from insurance or what is the impact of the deduction from insurance that you're actually pulling? Are you deducting the BRL 5 billion right now, BRL 3 billion, what is the minimum capital that you have in your insurance operations?

Luiz Carlos Angelotti

Now the final rules that we have now for the Basel III here in Brazil, we consider for the insurance business the minimum capital, the minimum required capital. And for the insurance business that we have, around BRL 5 billion is the number. Then we will do a consolidation in the balance sheet. We will -- the insurance company will be consolidated, and we will do an adjustment, around BRL 5 billion is the number that we will deduct for the insurance business.

Operator

Our next question comes from Mariel Santiago with HSBC.

Mariel X. Santiago - HSBC, Research Division

Most of my questions have been answered, but if I can just do a follow-up on loan growth, specifically for consumers. The individual loan growth is now running at around 8.8%. What makes you think that you should -- you could reach a loan growth of 13% -- between 13% and 17% for this year, and when we should see this line recovering?

Luiz Carlos Angelotti

Okay. Talk about the individuals. We have some products that have very good growth for individuals. One example is mortgage operations. The growth that we have in the last 12 months is around a little more than 30%. Payroll deductible loans, the owned portfolio that we have, the growth is 51% in the last 12 months. We have only 2 portfolio that we don't expect to have this huge growth. One is the auto loan operations for individuals, that we have a decrease of 7% in the last 12 months; and the payroll operations, that's acquired operations, that we stopped to buy payroll loan operations from the other banks. Then, if you exclude these 2 portfolios, our total loan growth is around the 14.7%, if we consider the expanded portfolio. Then we are very optimistic with the individuals segment. Considering the mortgage operations, payroll allowance, credit card operations, that we expect to grow this more this year because of the new interest rate policy. This is the main product that we expect to grow, and personal loan is something very important for us that we expect to continue to grow.

Operator

Our next question comes from Marcelo Henriques with BTG Pactual.

Marcelo Henriques - Banco BTG Pactual S.A., Research Division

Another question more related to the noninterest income, which is more related to the treasury and also unrealized gains. When I see your capital allocated to market risk in this quarter, it reached almost BRL 11 billion, which is like 15% of the minimum capital requirement according to the Central Bank, and this is like way above when comparing to your main peer, your main competitor. So actually I'm just wondering if -- and not to mention the value-at-risk is also lower this quarter, I'm just wondering if the combination of both, if you choose not to reduce risk, would make your shareholders' equity and maybe your treasury results a little bit more volatile going forward? So feasibility on those 2 lines could be a little bit lost. Just wondering how you guys are, in terms of risk assessment, how comfortable are you with these levels, and if this is something that you're going to cut back in the next quarters or you're seeing this as appropriate level to -- because clearly it is much higher than -- when comparing to your main competitor?

Luiz Carlos Angelotti

Okay. In our treasury bonds, our strategy, we don't have any kind of modification in our policy. Then we maintained the same strategy that we finished in 2012. We didn't have any kind of modification in our strategy. This increase in market risk is only probably because of the volatility in the market and considering our position, probably we have an increase but it's only a picture after the end of the quarter. Then we didn't have any kind of modification in our strategy. Then what we expect for the treasury gains is similar level that we have in the end of the quarters before, around the BRL 200 million, BRL 400 million is the average that we have, probably is what you expect for the next quarters. Then this is the average that we could maintain the last quarters, and this is what we expect for the future. Then we didn't have any kind of modification in our strategy for the treasury positions.

Marcelo Henriques - Banco BTG Pactual S.A., Research Division

Okay. I was just actually wondering how volatile could be this line and the shareholders' equity, which actually declined this quarter because of the market-to-market.

Luiz Carlos Angelotti

The effect that we have in the shareholders' equity is only because of available for sale bonds that we have, the market bonds, mark-to-market that we have. And considering the volatility of the market in the quarter, we have a decrease in the position. But this decrease that we have in there, it doesn't affect the results. Then in the past, when we have an increase in it, we didn't have it affecting our profitability. And now the effect you've seen is only in the equity not in the results.

Marcelo Henriques - Banco BTG Pactual S.A., Research Division

I understand. I'm just saying that given the market risk, how high is your balance sheet exposure to variation in interest rates, to both ways, either up or down. Last year, we saw your book value growing quite fast because of this unrealized gain, and I'm just wondering that it is something that you feel comfortable and manage the balance sheet like this. Because you could have volatility also when interest rates shift upwards, which happened in the first quarter. So -- but I understand that nothing is about to change and...

Luiz Carlos Angelotti

We are comfortable with our position with respect to our -- with the strategy of our treasury department, then we are comfortable with this level, that we are in this position. This doesn't change the strategy. We are comfortable with the expectations of the treasury position.

Operator

Our next question comes from Regina Sanchez with Itaú BBA.

Regina Longo Sanchez - Itaú Corretora de Valores S.A., Research Division

I have 2 questions, I mean, one is related to the efficiency improvement that we like a lot to see. That this effort, this efficient committee is actually acting in favor of the bank results. I would like to know -- I mean, you mentioned already on the administrative expenses, as you're looking across the board. But in terms of personnel expenses, I mean, do you expect to see even further reduction in the number of employees of the bank? I'm not implying that you're going to lay off people but rather mean maybe reducing the total number of employees just by the natural turnover. And then my second question is actually a follow-up on the exposure to large corporate groups. I know you do not comment on specific exposures. But my question, I would like to understand how you think about rating the economic group internally. I know that the Resolution 2682 of the Central Bank requires rating based on the number of days of delay of payment but also on assigning ratings for corporate exposures. And do you -- in the case that you have exposure to a larger group in which the companies, they have also listed stocks, if these stocks depreciate a lot, I mean, you have these stocks as collateral of a loan, would it be the case of downgrading the rating of these companies and increasing provision, is this the way the policies inside Bradesco works? If you could give more color of the general provisioning rule and credit policy, I would appreciate.

Luiz Carlos Angelotti

Thank you, Regina, for your questions. Talk about efficiency. We are doing many efforts to control the administrative costs. Then we, the Efficiency Committee, is working hard for to -- looking for opportunities to reduce administrative costs, reducing -- revising process or revising contracts. The main gains that we expect with the cost control probably came from the administrative costs. Talking about the personnel costs, we expect, probably, if we continue, it will be the normal turnover of the bank and some efficiency gains that we don't have any kind of policy for to reduce the employees, the number of employees. If we have some decrease, it probably will be more because of turnover -- the normal turnover of the company. Talking about the large corporate, the ratings, we follow the Central Bank's rules. We are comfortable with the ratios -- or the rates that they have. We understand that we don't have any kind -- or we don't need to do any kind of adjustment considering our policy. We review constantly this process. According to the rules, we need to review it constantly. And as we show during the presentation, we have the additional provision for Brazilian reais. We are very comfortable with the level of provision that we have in Brazil. We understand that we don't need now to do adjustment. We do -- our policy is to review constantly the position of our clients and the risk that we have in our portfolio.

Operator

Ladies and gentlemen, since there are no further questions, I would like to invite Mr. Paulo Faustino da Costa to proceed.

Paulo Faustino da Costa

Thank you, all, for participating in this conference call. I would like to take this opportunity to remind you that our Market Relations department and our IR team are at your disposal and that all the contents of our first quarter 2013 and further information concerning Bradesco is in our website. Thank you.

Operator

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

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