Banco Bradesco's (BBD) Q1 2016 Results - Earnings Call Transcript

| About: Banco Bradesco, (BBD)

Banco Bradesco S/A (NYSE:BBD)

Q1 2016 Earnings Conference Call

April 29, 2016 10:00 AM ET

Executives

Carlos Wagner Firetti - Market Relations Department Director

Luiz Carlos Angelotti - Executive Managing Officer and Investor Relations Officer

Analysts

Mario Pierry - Bank of America Merrill Lynch

Marcelo Telles - Credit Suisse

Thiago Batista - Itau BBA International

Tito Labarta - Deutsche Bank Securities, Inc.

Jorge Kuri - Morgan Stanley

Victor Galliano - Barclays Investment Bank

Carlos Gomez - HSBC

Operator

Good morning, ladies and gentlemen. And thank you for waiting. We’d like to welcome everyone to Banco Bradesco’s First Quarter 2016 Earnings Results Conference Call.

This call is being broadcasted simultaneously through the Internet, in the website, www.bradesco.com.br/ir. In that address, you can also find the presentation available for download. We inform that all participants will only be able to listen to the conference call during the company presentation. After the presentation, there will be a question-and-answer session when further instructions will be given. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco’s management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future.

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

Now, I’ll turn the conference over to Mr. Carlos Firetti, Market Relations Department Director. Mr. Carlos, you may begin your conference.

Carlos Wagner Firetti

Good morning, everybody. Welcome to our conference call for discussing our first Q 2016 results. To start our call, we turn the presentation to Luiz Carlos Angelotti, Executive Director of Banco Bradesco and our Investor Relations Officer. Please.

Luiz Carlos Angelotti

Good morning, everyone. Thank you for joining our Q1 2016 conference call. I will start with Slide 2 with the highlights.

The adjusted net income reached to R$4,113 million, down 3.8% from - when you compare it to the first part of 2016. And the ROE reached actually 17.5%. The NII Interest-earning portion increased 11% as a result of the reflecting in our loan portfolio, the management of the funding cost and the asset liability management during the period.

The fees and commission income increased by 11.5%, as a result of the segmentation process and the IT investments and the digital channels platform and Internet that actually is increasing the offer of products in our countries. The operating expense went up 11.1%. Our goal is to bring this - to drop this expense for the inflation level.

During the year, with the new quarters that you can in the accumulated index, we have a deceleration, when we have expectation that we will have the targets that the inflation level going up the year.

As a result of our performance, in context of the revenue generation, our efficiency ratio reached actually 37.2%, the best ever level. And the operating coverage ratio, which is actually fee, 80.1%. It’s one of the best levels that we had, and the coverage over the fixed costs.

The Tier I ratio reached 12.9% in the quarter, considering the increase actually the phase-in that we have in adjustments from 40% to 60%. Then the impact may be due to the little more dilution.

Assets amounted to R$1.102 trillion. Expanded loan portfolio reached up to R$463 billion. And the delinquency ratio over 90 days reached at 4.2%. We are now in a group of [sequel of] [ph] delinquency ratio over the segmentation that went through at the end of the year. We had deceleration in this site approval and we expect some stabilization during the 2017.

The effective coverage ratio reached actually 220%, and the one for continuing our insurance business that we have diversification in our process of reclassification and we had a very good contribution of R$1.380 billion and it was one-third of our total profit in the company. And we had a very good performance in premiums from insurance fee, with evolution of 11.4% on top of the market standards.

Now, I will turn the call to Carlos Firetti to comment on the next few slides.

Carlos Wagner Firetti

Okay. Thank you, Luiz. So now we’ll go for more details on the results. In Slide 3, we have the reconciliation of our group net income and the adjusted net income. Basically we had a few adjustments, R$90 million after-tax from the sale of Bank CBSS to EloPar. The R$25 million contingent liabilities and R$57 million impairment of assets, mainly shares with the adjusted net income we reported at R$4,113 million.

In Slide 4, the adjusted net income growth. Basically Q-on-Q our results dropped 9.8%, basically due to higher provision expenses for credit recoveries, and mainly affected by one specific provision we made for a specific case of our corporate client in the value of R$836 million. The quarter had growth drivers, good performance in terms of NII growth and also reduction in the operating expenses compared to the last quarter.

Year on year, our results dropped 3.8%, also mainly impacted by provision expenses, also affected by that specific case. On the positive side also we had a very relevant increase in net interest income, also good performance in fees and insurance.

In Slide 5, we have the breakdown of our net income. Basically, it states our very important diversification of results. 34% of our results come from the insurance business. 28% of the results come from fees, 9% securities and others, making 71% of total results coming from non-credit operations. The credit intermediation this quarter was lower, 29% of earnings, mostly due to the provisions we have already mentioned.

In Slide 6, we have assets and return ratios and efficiency. Basically our total assets grew 6.5% in the year or year-on-year. Our return on assets reached 1.5%. Our shareholders’ equity increased 11.2% year-on-year with return on assets reaching 17.5%.

Our operating coverage ratio that is fee divided by costs reached at 80.1%, with that level ever, and our efficiency ratio also reached our best level ever at 37.2%, results of our efforts in terms of controlling costs and also investment in technology that has been giving us equating our credit.

In Page 7, we have our margin, our net interest income analysis, basically our NII grew year-on-year for the quarter a 11%, that is slightly above our guidance that growth between 6% and 10%. Our NIM remained for the last - considering the last 12-months period, remained stable at 7.5%. Our non-interest margin that is basically, what we call treasury was R$158 million slight increasing compared to the last quarter.

In the Slide 8, we have a better analysis on our interest earnings NII, basically as I said, it’s grew 11% year-on-year, it’s credit intermediation portion that makes roughly 80% of total margin grew 12% year-on-year. The driver there the repricing of our loan book, considering the increase in strategy had over the past quarters. And also improvements in our cost of funding, that has been helping out also to improve the margin, yes.

So I think the insurance basically, we had an increase year-on-year of 3.9%, this lower increase is mostly due to the stronger base of comparison we had in the first quarter were we had some specific gains from the inflation, but it’s the loan portfolio linked to the inflation. And finally, securities and others, we have an increase of 10.1% that is mostly the result of our assets liability management that allowed us a good performance this quarter.

Going to Slide 9, basically we have the analysis of our credit intermediation margin. Our credit intermediation margin reached 12% in the quarter, growing that 30 bps compared to the fourth quarter. Basically as I mentioned due to the repricing of our portfolio and benefits from the cost of funding. The NII from credit is 12.1% year-on-year. The margins meet on credit cards drop quarter at a rate of 9.4% year-on-year, mostly impacted by higher credits provisions and specifically as it had a specific case up R$836 million, as we discuss for the - in the coming slides.

In Slide 10, we have our Basel Ratio, our Capital Ratios basically we had this quarter in Brazil, we’re facing higher deductions from our capital, basically the deductions increased from 40% to 60%. Basically that factors our capital ratio by 1%. In the quarter, evenly that considering the accumulated the earnings net of dividends, also gains from market-to-market and the reduction on the risk-weighted assets to sell. We end up having 20-bps increase in our capital ratio in the quarter placing us in a very comfortable position. Considering our fully loaded ratio we have a 11% BIS ratio fully loaded, that compared to 10.3% in the 4Q 2015. So we have a 70 bps increase of the fully loaded BIS, mostly due to accumulation of earnings, retained net earnings and also the other element I have already mentioned.

In Slide 11, basically you have our strength of loan book, which was affected this quarter by the appreciation of the real. The stronger real basically fractured especially in the corporate loan book. So basically we spend the loan book that are all were flat year on year and dropped 2.3% quarter-on-quarter. In the quarterly segment we have the 1.8% block year-on-year but either dropped from the SME portfolio 10.2% drop where we see basically lower demand and the impact of the weaker economy on the segment.

Individuals as a whole grew 4% year-on-year with the main driver standing from payroll loans growing 12.7%, credit cards 12.1% and especially real estate financing, mortgage that we only have 27% year-on-year in this segment its really below the longer where you see a more robust demand at the moment. We have guidance for loan growth between 1% and 5%. We still think that for the full year this guidance is feasible.

Starting in Slide 12, we discussed credit quality indicators, so delinquency ratio our 90 days delinquency ratio increased 16 bps in the quarter that is in line with the soft drivers we have gained giving that 40 year, we expect between 10 to 20 bps per quarter for the remaining portion of the year. So it’s in line with that the segments where we have what pleasure if the SME segment, where we have an increase of 68 bps this segment is suffering more with the economic environment, but also suffering due to the fact that the SME portfolio is dropping more than any other.

Individuals portfolio have showed a drop in delinquency of 5 bps, we have said that - probably we have some anticipation in delinquency in the fourth quarter and they did in the first quarter. We didn’t have a smart increase that materialize in the first quarter, which was 5 bps drop. And in the corporate portfolio, basically we had 9 bps dropped, mostly due to the impact of natural write-offs, normal write-offs that concentrated particularly this quarter.

We did a simple simulation there, where we consider the portfolio of the end of 2015 at the base for calculation of NPLs only trying to show that actually the drop in volumes is magnifying the increasing NPLs. With that basically we show that in the case of SMEs the increasing NPLs in the quarter would be 25 bps the portfolio was not dropping as much as is actually is. In terms of short-term delinquency 15 to 19 days basically there’s unseasonable increase, the short-term delinquency very frequently, we had those increase now. We believe it might be seasonal again it normally happens.

In terms of NPL Creation, we have 90 days NPL Creation will appear really flat. In 1Q at R$5 billion, our total provisions among the R$6 billion, including R$836 million of that specification. I mentioned, that is on corporate clients that we decided to make provisions this quarter, it was previously already considered in our addition provisions but we decided on a concept [now that stands] [ph] to make this provisions actually flow through the P&L.

Basically this quarter, we also had higher than - higher charge-offs, write-offs, due to a concentration of write-offs, of some cases at the same time during the normal process of rating evolutions at write-offs, probably next quarter write-offs will be significantly lower than this quarter.

Our net provisions grew 52% year-on-year. Basically, we are keeping our guidance for provision expenses, this guidance grow between R$16.5 billion and R$18.5 billion. As I said, we didn’t consider the specification, we mentioned in this guidance, but even including it, as we did now, we think that the top of this guidance is it still feasible that’s why we are keeping it.

Page 13, we have our expanded loan book mix, basically we’d like to see the SME portfolio is reducing in terms of participation in the total loans, now it’s only 22.3%. The individuals portfolio represents 31.9% of our loan book. And in this individuals portfolio, lower risk operations like payroll loans and mortgage already represent 40% of the total loan book. This is one of the reasons we always franchise [ph] that allow us to have relatively good performance in terms of credit cards considering the current environment.

In Page 14, we have our the slide for provisioning, coverage ratio and renegotiation, basically our total provisions represent right now 8.6% of our total portfolio that includes additional provisions on top of the minimal required by our central bank of R$6.4 billion. And comparing on provisions with our expected losses from our loan book, basically we have execution of about R$16.7 billion. The effective coverage ratio as we call it, it’s 220%.

In terms of coverage ratio on 90 days and 60 days NPLs, it is 204% for 90 days and 162% for 60 days. In terms of renegotiate that portfolio, this portfolio basically considering renegotiation of loans that became late mostly. We had an increase in renegotiations like 18% year-on-year. This portfolio already carries 6% for divisions and the NPL on this loans that basically re-defaulted [ph] after renegotiate that is 27.5%.

Going to Page 16, we have the performance in terms of fees and commission, it’s very positive the highlight for Bradesco at this moment. We are growing fees 11.5% year-on-year. The main driver for this growth in fees is the checking account lines that is affected by the segmentation of our base of clients.

As we have been saying we are segmenting our retail base of clients with creation of a new segment called the Exclusive. We had been migrating clients to it since mid-2014. And after sometime if they accepted the service we charge, that is driving the growth in checking accounts fees to 27.2% year-on-year.

We are also doing well in cards, 9.6% growth year-on-year, asset management and other lines. Our guidance for this line is a growth between 7% and 11%. In terms of operating expenses, our total expenses increased 11.1% year-on-year. Basically, personnel will be 9% year-on-year, administrative expenses 13.1% year-on-year, highlighting the total expenses dropped actually 6.5% quarter-on-quarter.

This higher improved year-on-year is due to the fact that the base of comparison in the fourth quarter 2015 is much lower. Remember, we had a high inflation last year 10.5% roughly and complex [ph] where we adjusted throughout the year considering the inflation. And plan - considering the two year, we are confident that our total expenses will converge to the centre of our guidance that is around 7%.

I highlight here to the fact that our structural personnel expenses is growing only 7.5%, that is also a result from the fact that our base of employees due to its natural turnover is gradually decreasing.

Finally Page 17, we have numbers for our insurance operation. Our total premiums for insurance is growing at 11.4% year-on-year; the main drivers there, Life and Pensions growing at 13.6% year-on-year, Health growing at 16.8% year-on-year. The guidance in terms of premiums that compared to the 11% growth is 8% to 12%. We are very well in that segment Bradesco security is growing more in the market in insurance premiums.

Our net income grew 7.6% year-on-year with the ROE of the insurance operation at 24.9%. And the last slide, Slide 18, our technical reserves grew 16.3% year-on-year, financial assets 17.4%. And we had improvements in our combined ratio that reached 86.1% in the first Q.

I turn now the presentation to Luiz Angelotti for his final remarks.

Luiz Carlos Angelotti

My opinion, we had a good performance in the quarter. We had been doing well in terms of revenues. The NII interest earnings, the fees, and we still have benefits coming from the future [ph] internal process improvements, as we finish off the IT investments and the new IT system that will be implemented. And we have to reduce the cost. As a consequence of this, we reached our best efficiency ratio ever. Then, we only think that’s going to be something that’s positive point to having some evolution, but couldn’t go sharp on the delinquency ratios.

Our expectation is that before we restructure the - the accelerating into - of the end of the year becoming for the reasonably stable during 2017 and probably we start to get easily around 2018.

I’d like to remind you about our insurance deal that is very important and it has a very strong contribution to our net income. Our loan portfolio net income came from this. Then this risk diversification helped us to reduce the volatility in our part.

About the guidance, we ended some that - we don’t need now to modify any guidance that we gave in the last quarter, they now brought up the lines is following our expectations. Then probably I still feel that we continue according the number that we gave you in the guidance.

Then thank you for participating in our conference call. And now, we are ready for your questions to answer your queries.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now initiate the question-and-answer session. [Operator Instructions] Our first question is coming from Mario Pierry of Bank of America. Mario, you may proceed.

Mario, you may proceed.

Mario Pierry

Sorry about that. Can you hear me?

Luiz Carlos Angelotti

Yes.

Mario Pierry

Sorry about that. I was on mute. So basically let me ask you two questions, one is more specific. It’s in regards to these corporate clients that you had a problem. If you can tell us, what percentage of the loan is provision? And if you think that you are going to need to increase provisions to this client in the future. Also related to this, how come you decided not to use your excess reserves this quarter?

I understand, maybe there is no need for this should reflect a fear that there are more delinquencies in the future and you rather stay conservative. If you answer this question, then I will ask the second question later.

Luiz Carlos Angelotti

About this corporate client, we in the - risk that we had now, the exposure, we disposition around 70%. Don’t know this is the number that you have now. For the - could be that in the future, we don’t have now. For the - we continue analyzing the risks, which we understand that will be risks that would be our new business, we will do.

The decision to use or not the additional provisions, with the - at the moment, there is one option that we have, because we maintain this growth for some stress movement or some - example that we had with this some corporate clients more significant. But the decision will be at the moment. Now, we just have to preserve the number that we have in the balance sheet, because we understand that thing was something that more prudential for the moment.

Mario Pierry

Okay. So if everything goes according to plan, then should we expect provisions then to be down at least close to R$900 million in the next quarter?

Luiz Carlos Angelotti

Yes.

Mario Pierry

Okay, perfect. Second question is related to your much more of a macro. You are expecting GDP to recover 1.5% in 2017. I think this is the same type of growth you had at beginning of the year. But given all of the changes happening in Brazil, I was wondering first, how comfortable you feel about your GDP forecast, if you can get some upside? When do you expect the economy to start to recover?

And finally, what type of loan growth do you expect in such environment? What type of growth should we expect from Bradesco or basically what would make you more optimistic to start lending again?

Luiz Carlos Angelotti

Thank you. There is this one point for 2017, according to our economy department, the GDP calculation, considering the environment that we had in this first quarter they understand that we have now come to reach a discussion. But one solution we had, the things which continue, then probably during the second-half of the year some measures which should be adopted to solve some fiscal problems we got comes up the quarter. And we see the recovery in the economy, more in the end of the year, that the GDP probably will start to be positive.

One part of this negative GDP seemed to carry over from the last year we had really some impact of the Laperjat [ph] effect. Then the things will be solved during the year. And we see this one point, probably that’s possible for 2017. According the provincial situation, if we had some modification or not, we can review this number and it could be some R$500 million better if we had some ways or not.

Then I think it’s where we reasonable - I think the market consensus. So what they think is little less than 1% is - the opinion of the risk is 1.5% but the market consensus is around 1%, then which is very reasonable possibly to have the GDP positive in 2017.

Carlos Wagner Firetti

The recovering loan growth is going to be gradual. It’s kind of a mix of economy improving and more demand for loans. Basically, it’s going to be a gradual recovery next year so that right maybe to the part of our guidance may be 18 - closer to double-digits, something like that. But it’s very pre-mature. It’s going to be a gradual recovery.

Mario Pierry

Also, just to be clear, then you want this 1.5% GDP growth in 2017. You think that loan growth in 2017 is only close to 5%?

Luiz Carlos Angelotti

Probably yes, we’ll be more in the high level of our guidance for this year, close to 5% or 6%, considering the information we have right now, yes. And the deposition I think only in 2018 or 2019.

Mario Pierry

Okay. And how do you see - so in 2017 with a 5% loan growth, how do you see the market share between private sector banks and public sector banks?

Luiz Carlos Angelotti

I think now we have more normal competition. Then there is no actual modification in the situation but we have in this quarter that one represent what - how the banks are attracting more and more stress then I think that private banks, it can have some space to look over. But over the - being a more gradual, this process, with respect to any stress movements to - now it is easy, we’ll go what is possible to grow each quarter, this is our philosophy. Then it is really conductive, the demand that you have is a very good strategy. You will watch us what we do.

Mario Pierry

Okay. Thank you.

Operator

Our next question is coming from Mr. Marcelo Telles of Credit Suisse. Mr. Marcelo, you may proceed.

Marcelo Telles

Hi, good morning, everyone. Thanks for the time. I’ll limit my questions to only two, not to take a lot of your time. The first question I have is a specific question, I’m referring to Slide #8. We saw a big increase, almost 50% growth in the securities NII. And it looks like two-thirds of the growth that you had in the overall NII from the fourth quarter to the first quarter was actually explained by the securities NII rate, which was up R$230 million.

How sustainable is that NII growth? I understand the yield curve shifted downwards. And I believe that part of that might not be recurring that will not be able to sustain that level in the quarters to come, is that correct?

And the second point is regarding your provisions. I mean, clearly that is one of the main negative of the quarter. You had a - pretty much running at above the high-end of the range if you analyze the provisions you have in the quarter. Even if it excludes the R$800 million, you’re already running at the high-end, right? And your calculations already pointing to R$20 billion underlies NPL Creation, which already give you above the high-end of the guidance.

So my question here, how should we think about provisions for this year, considering that you are expecting delinquency to improve only in 2018? How should expect your provision expenses to evolve, let’s say, in 2017 and 2018? I know it’s a long-shot, but does that mean you should not see declining provision in 2017, given that you only expect in 2018, to show some sort of improvement? Thank you.

Luiz Carlos Angelotti

Okay. About the sustainability to - for our NII, the growth, we are very comfortable with the guidance that we give, 6 to 10. Probably it would be finishing the year around the middle of the guidance for the total NII. That’s earning portion. This specific goal that we have in the securities and others, here we have the asset liability management. One part of this goal is - as I reach up to our pre-fixed portfolio, that now start to improve a little more the contribution, because the stability of the Selic rate that we have and the movement of pricing our pre-fixed portfolio continue. Then the average spread in this - average rate in this portfolio now start to have a very good stat when you compare with Selic.

This movement probably will continue contributing for the next quarters and for the - during 2017. Then this is one part of the fact that you have in this line. But we have another line deal when the credit negation, the repricing of the spread, that for this year we have this one part of our portfolio in the focus of repricing. Next year, we see now stabilization in the effect but in a more high-level. Then for the next year some growth in the portfolio you contribute for the improvements in the margin.

Let me talk about insurance fee, normally insurance maintain a very good contribution of the year. Then we see some sustainability in the goal. We don’t have now the guidance for 2017. But we are very comfortable for this year. And for next year we see this positive point that some possibility to have growth in the loan portfolio. And the pre-fixed portfolio will maintain the contribution in a very good level.

When we talk about the NPL, the guidance is about expense is, considering this effect that you have in the first quarter, the strategically with you can consider that we finish the year in top of the guidance.

And that we don’t need now to modify the guidance here. We mainly talk about expense, which probably through the end of the year some deceleration in the growth of the expense. Then probably you have the guidance in scenario, we are reasonably comfortable. For 2017, then we talk about the - then for the - it could be reasonable similar to this year, it could be little more. But we don’t see a higher growth comparing with the level of this year.

Then, now, it’s essential to maintain the guidance we gave and we understand that is very reasonable to maintain.

Carlos Wagner Firetti

Marcelo, only to complement regarding NPL creation, this quarter we had a very high level of write-offs. It was due to a specific situation. There was - it was a normal process that we do a concentration of write-offs much higher than the normal. Write-offs next quarter will meaningfully go down. And considering that, the 10 to 20 bps increase in NPLs, we have been talking about maintains, you can get NPL creation drops next quarter.

Luiz Carlos Angelotti

We follow the Central Bank, we’ve already note, and we didn’t have any additional check [ph].

Marcelo Telles

Thank you.

Operator

Our next question is coming from Thiago Batista of Itau BBA. Thiago, you may proceed.

Thiago Batista

Yes. Hi, guys. Thanks for the opportunity. I have two questions. The first one, it’s related to your Slide 14, where you show your expectation of 12 months net loss. We note that your expectation for losses increased by 40 to 50 bps end of the quarter, when I compare with the last number you provided in the 4Q numbers…

Carlos Wagner Firetti

Thiago, sorry, can you repeat? Sorry, I - we cannot understand.

Thiago Batista

On the Slide 12 - sorry, on Slide 14.

Carlos Wagner Firetti

Okay.

Thiago Batista

You’ve given the chart in the top, in the left side, the 12 months net losses, your expectations, the purple line. Comparing those numbers with the numbers you provided in the 4Q, we saw some increase in those figures between 40 to 50 bps in the quarters in June, September and December for instance.

Could you comment about this increase in your expectation of net losses?

And then my second question is about credit card loans. And then on the Slide 12 - sorry, in Slide 11, you showed the expansion of credit card loans and your year-over year-growth was achieved 12% more or less. And when I compare with the Central Bank figures, the expansion of credit card was much stronger than the Central Bank figures. So if you could comment your strategy in the credit card segment?

Luiz Carlos Angelotti

Okay. The first question about the efficiency ratio that we had, when you talk about the delinquency ratio is, the modification is because we had the actualization according the solution [ph] of the green line. The green line is the equity ratings, the types. Then we had an increase in the volume of this type. Then we modified the expectation. Then the expectations following the more actual solution, that we have in our portfolio. Then the write-off that we had is transferred for the real loss. Okay. In this breath we put in the top most our goal in the March of 2015. Okay. The number 3.3 is a write-off that you had in this quarter.

So the means that we had over the quarters, in fact that’s one year ago is the rationale. And in the future, we to exceed the green line and the lower line that is efficiency loss that we have. We have a very good collaboration. Then business-wise, we use the green line to trying to anticipate the expectations for the future loss. Then this I think for all results the best way that we have to specify the expectation.

Thiago Batista

Okay. Just one point there, Angelotti. I could not find that your specific client was the main cause of your increase in the green line. So consequently this only was the main cause of the increase in the net loss expectations?

Luiz Carlos Angelotti

Yes. This is the rationale that we have for the expectation. This is why we say that for this year will stand up what we will continue growing the delinquency ratio and the provisions will be higher.

Thiago Batista

That’s okay.

Luiz Carlos Angelotti

And the second about the guidance portfolio, the growth, here normally you have a seasonal, when you compare with the quarter, last quarter 2016, okay, normally the last quarter you’ll have a huge volume of cards. That we have in the operations. But we started 2016, if we compare with one-year ago with a very good growth really have here some effect, the migration of the tax that continues growing. In fact, to use these cards and they are using less cash in the transaction.

In the volume of transaction in the market, you have normally one go, one normal go, then one part of this. We are doing agreements and improving the tax basis in privately to all new cardholders. Then this movement that we - here we have this movement that maintain normal - the normal growth in the average for this portfolio between 10% to 15%, in the last three years this is the average of the growth.

Operator

Our next question is coming from Mr. Tito Labarta of Deutsche Bank. Tito, you may proceed.

Tito Labarta

Hi, good morning. Thanks for the call. Couple of questions also - sorry, to go back to provisioning levels. But just so I understand why you wouldn’t change your guidance. I understand you had the additional provisions this quarter and large write-offs that could potentially come down next quarter.

It’s still - you still need to assume that there is no more negative surprises going forward, right? I mean I think even though you had the additional provisions of R$800 million this quarter, you could say that probably [indiscernible] million spent to some extent.

So what makes you comfortable going forward given that you don’t leave your recovery, best case, second-half of this year, but there won’t be any more surprises going forward. And I guess along with that, what point would you say comfortable maybe using some of your excess reserves?

And then, second question in terms of, what you said with HSBC and integration of that, and if you can give us an update on that? And if you still expect that to be neutral for earnings this year and next year? Thank you.

Carlos Wagner Firetti

We did not change the guidance. Basically as we said, we still think it’s feasible. We have a kind of a good view of what’s going on in our portfolio, the trend we expect and basically we still think that top of the guidance is feasible. That’s the only reason basically.

Luiz Carlos Angelotti

About the HSBC, we are waiting the approval of the regulator guys [ph]. Then after the approval, I think we end up do deciding and conclude the acquisition in 15 days, 20 days. Then our objective is to - after three or four months to migrate it for our yield platform in the bank. Then the benefits of synergies, you can start come probably in the first moment in the use of team-force with reduction in some case like several data process or transport, communication cost.

Then this will be probably the first benefit. And during 2017, we expect to receive some of the benefits about the structure that Bradesco has a bank [ph] which suits, then probably with the normal turnover in the bank. We will accommodate the cost of the HSBC. Then the benefits on the personnel and the ability of the cost will be higher. And our expectation is that with the synergy, in two years we’ll have the minimum 30% of the synergies. And with our opportunity in the other side in the revenues when you compare product sales, cards and the checking accounts. We had been conducting - we have more options again to increase the revenues and insurance fee, products.

We understand that you had with the portfolio for the two office for the HSBC clients. Then we understand that we - once we talk about the Bradesco for stability, this year we don’t expect to - any effect will be made to effect the acquisition. But after 2017 or in 2018 we incurred some benefits to start to gain from the synergies and we have there to improve the profitability. I think you need to understand that when you analyze that today, we’ll be ahead of the prices R$18 billion or $5.2 billion.

Then with the hedge effect, we don’t have more the remuneration in the cash of reals that was basically 13%, 14%. And we had the remuneration in the dollar R$5.2 billion, 2% higher. Then the effects of the reimbursements, we had both the good benefit that was stability and synergies who came with the acquisition. Then we’re very optimistic and we understand that was of one very good opportunity for Bradesco to increase the participation in the market.

Tito Labarta

Okay. So you say you expect minimum 30% of synergies, was that in two years or three years?

Luiz Carlos Angelotti

In three years, gradually, probably, I think in 2017 we will have a very good evolution. We say three years, 30% is I think conservatively we probably we could identify little more opportunity and it could be more higher. Now, when you talk about efficiency ratio today Bradesco is running 37.2%. When we join HSBC, together in the first moment, the efficiency ratio will be 45, around 45.

In three years, the efficiency ratio when you consider together for us and HSBC is actually to bring for the - close up to a level that we have to be. 38 - then these benefits on synergy and revenues is that will change. We will operate to change the profitability.

Tito Labarta

Okay. And when do you expect to be able to consolidate that and will that be next quarter or maybe third quarter?

Luiz Carlos Angelotti

We need to take a decision of coverage. After the decision we’ll be very particularly concluding, May probably, and during June we’ll have how to conclude the provision then we’ll start with the process. But we need to wait the release.

Tito Labarta

Okay. Thank you.

Luiz Carlos Angelotti

Thank you.

Operator

Our next question is from Jorge Kuri of Morgan Stanley. Jorge, you may proceed.

Jorge Kuri

Hi, good morning, everyone.

Luiz Carlos Angelotti

Good morning.

Jorge Kuri

I may - the first on asset sensitivity. I see that in your macro forecast you’re expecting a considerable cost to Selic rates to 12.5% in this year and 10.25% end of 2017 versus 14.25% now. Can you walk us through your balance sheet assets sensitivity? Obviously, we saw that partially solve that over the last 24 months with NIM expansion as Selic rates went up. All else equal and I know there is a lot of moving point, but all else equal, 100 basis point caught in Selic rates, what does that mean for your loss in NII revenues?

Luiz Carlos Angelotti

It’s something around the 1% that we have in Selic. It’s something around - for R$100 million, R$200 million with respect to before tax. Then we are not to - in one year, full year. Then we are not to a higher sensitivity. When you talk about, what about the side-effects in the remuneration topics [ph] what we - when we talk about the provision, particularly you have some benefits on the asset - pre-fixed portfolio that we have - that for this we start to generate more revenues in the future. Then we understand that the decrease Selic will be positive for our balance sheet considering the positions that we have on the total effect.

Jorge Kuri

Sorry. I didn’t understand that. So you said that there is a negative impact of R$400 million that is on the revenues at one quarter. Can you just - I’m sorry, it’s just very hard to listen to the call. Can you explain that again a bit more clearly?

Luiz Carlos Angelotti

If you consider our office [ph] exactly we have - that you have remuneration with Selic. The effect R$ 200 million negative that we - the effect that we have in the balance sheet. When you talk about only assets that have the remuneration, it’s Selic. But considering other assets that we have with other remunerations, we have the pre-fixed portfolio that brings some contribution above Selic that will improve the profitability.

Then on the Selic asset sensitivity that we can say all the, say, assets that we have Selic remuneration is near neutral effect for us, the Selic during the year.

Carlos Wagner Firetti

Just to add basically we are - in this moment we are breaking down the assets. The part that is linked to Selic, but we also have fixed rate assets. We are - the R$200 refers only to the impact of the lowest Selic on what is floating rate. There is another part of the fact that we don’t disclose, yes. [Multiple Speakers]

Jorge Kuri

I’m very sorry. I am not trying to be difficult. You have an asset sensitive balance sheet as all banks in Latin America do. The rates go up significantly when Selic goes up as we saw for the last two years. And they come down, as we saw in 2012, when Selic comes down. So would you mind just helping us understand your sensitivity for Selic? So all else equal, if Selic rates go down 100 basis points, what is the negative…?

Luiz Carlos Angelotti

See, if you join everything we will be positive for us if Selic go down. But we don’t get the number. Okay.

Jorge Kuri

It will be positive…

Luiz Carlos Angelotti

[Multiple Speakers] our assets and the liabilities, for us Selic go down it’s positive, but we don’t give the number.

Jorge Kuri

Right, so you’re asset sensitive when rates go up and then liability sensitive when rates go down.

Luiz Carlos Angelotti

Yes.

Jorge Kuri

That’s great for assets.

Luiz Carlos Angelotti

Yes.

Jorge Kuri

Congrats. Let me ask my second question then. On your provision guidance, sorry, I know every single line item I transaction about this. Let me ask this in a different manner. So if I understand, your view is that you are not changing your guidance and you feel comfortable that you will be able to get to the provision guidance, because you have a good view on what’s going on in the portfolio, et cetera.

So let’s go back a year ago, in the first quarter of last year you guys said, NPLs are going to be flat 360 - 3.6, sorry. And if you felt that, for the most part you had a little bit of risk on the corporate sector, SMEs are going to be okay, the consumer was going to be, okay.

As we now, the NPL ratio was 4.2%, that’s 65 basis points deterioration. If you look at renegotiated loans, which you had a record year in terms of renegotiated loans, in reality your delinquency went up 120 basis points, which is very different from your view of flat a year ago. So, what gives us and you confidence now that here we are in the first quarter of the year your run rate of provisions is already of the high-end of your guidance?

The amount of bad debt formation is way above actually what was mentioned. Your provisions this quarter were up 50% versus a year ago. So what gives you confident that, we’re basically seeing the worst, right, because you’re assuming that your provisions are going to - have to be flat from here vis-à-vis they turn out to be much worse last 12 months?

Luiz Carlos Angelotti

Okay. When you - if you go back to one year ago, when we gave the guidance, our expectations for GDP, I think it was negative, but 0.5% or 1%. Then the situation in the market we finish the year, which is 3 points - close to 4%. Then when we gave the guidance - consider one scenario that had available, any modification in the scenario, okay, we need to apply our guidance, example.

Now we don’t see any need to modify the guidance, because the scenario that we have very similar that we had one quarter ago that when we gave the numbers. Then this is why we only conduct - we can maintain the turnout for this guidance of loan loss expense. Then if we have some modifications scenario for negatively or positively, for this, if we will revise the numbers then we came probably crystallize our expectations.

But now the scenario is very similar that we had one quarter ago when we did our calculations, when we - internal calculations for to give you the numbers, right. We are comfortable with the guidance that we gave in our lines and to be used guidance for loan loss expense.

Jorge Kuri

All right, so just so I understand your answer. You’re expecting 3.5% contraction in GDP. So if the GDP is down 4%, which is I think roughly will concern…

Luiz Carlos Angelotti

Yes.

Jorge Kuri

…some individuals. Some of the forecasts actually have minus 4.5%. So if you end up being wrong and it is of 3.5%, it’s 4% or 4.5%, what does that mean for any provisions?

Luiz Carlos Angelotti

Oh, that is no change. It wouldn’t change our guidance.

Jorge Kuri

All right, so even if the economy contracts 4.5%, you’re certain that you’re going to meet your provision then?

Luiz Carlos Angelotti

Yes, so we had reasonable modification in the same ROE, we revise the number, but the small modification we only say that is early to more decide something.

Jorge Kuri

Great. Thank you very much.

Luiz Carlos Angelotti

Thank you.

Operator

Our next question is coming from Mr. Victor Galliano of Barclays. Victor, you may proceed.

Victor Galliano

Thank you. A couple of questions for me, just so if I can - sorry, to feel like fogging a bit, but also just a quick delinquency provisioning side of things, I just want to check that, E-H ratio that you brought in that Slide 14, going from 4.7% to 4.9%. Was that - and this question might have been asked already but I just want to clarify this. Is that problem, corporate loan, was that already within the E-H bucket at year-end 2015, so just on the 2015 or did it actually join…?

Luiz Carlos Angelotti

Victor, sorry, can you repeat? I cannot hear you very well.

Victor Galliano

Can you hear me now?

Luiz Carlos Angelotti

Yes, better. Shoot.

Victor Galliano

Okay. Sorry, yes, just focusing on the E-H portfolio. That big corporate provision you made and the problem loan you have there, was that loan already included in the E-H bucket at 4Q 2015 or did it join in the first quarter? That’s my first question.

Luiz Carlos Angelotti

It was not in the E-H or in the portfolio.

Victor Galliano

I’m sorry, what was that, could you repeat?

Luiz Carlos Angelotti

It was not in E-H. One part of this goal is it sits fine in the quarter that’s…

Victor Galliano

Sorry, it’s a really bad line. I didn’t get that. It was not in E-H at year-end?

Luiz Carlos Angelotti

It was not.

Victor Galliano

It was not. Thank you. The other question is really about HSBC. And I noticed that you now actually make that the capital absorption is going to be over 200 basis points as opposed to 190 you had before. Obviously, you have a bigger capital buffer now, but can you just explain a little bit what happened there in terms of the increase in 20 basis points of the capital absorption?

Luiz Carlos Angelotti

Yes, basically, we just changed the calculation for the base of the year-end 2016. The previous calculations were based on financials of year-end 2014.

Victor Galliano

Okay. Okay. And you’re saying, you’re still waiting to hear from Carjay [ph] on this, in terms of getting a final sign off from them. But you already have to sign-off from the Central Bank, is that correct?

Luiz Carlos Angelotti

That’s correct, yes.

Victor Galliano

Okay. Thank you.

Luiz Carlos Angelotti

Thank you.

Operator

Our next question is coming from Mr. Carlos Gomez of HSBC, New York. Carlos, you may begin.

Carlos Gomez

Thank you and good morning. Let me not ask about asset quality. On the [indiscernible] it was 35.7%.

Luiz Carlos Angelotti

Feel comfortable.

Carlos Gomez

It was 35.7% according to our calculation. Can you give us your indication for the year and tell us what you’re assuming in terms of interest on capital? I mean, what level of TJLP you are thinking that you will be enjoying. And if you [indiscernible] refer to the risk-weighted assets, when you look at the Page, I think, 75, where you show the credit risk, operating risk and market risk. Market risk declines a lot from R$19 billion to R$14 billion this quarter.

I know it is volatile, but I’m just wondering if there was anything in specific for it to be that low. Thank you very much.

Luiz Carlos Angelotti

Okay. About the TJLP, we didn’t give the total benefits in this quarter, because there are some limitations for calling this. The total profit and we did the calculation about the minimum dividend, then specific according the means of dividend that you have. Then we had some space to have some additional benefits on the TJLP in the next quarters.

About the market risk, the big drop, I say, the position that we are revising our strategy department, then this actually will reduce some provisions and this one when we do the calculation we have the EBITDA [ph]. We have– we can say less reaching the positions in the first.

Carlos Gomez

If I jump off after the first question, and so what is your guidance for the tax rate for the year? As I say, my number is 35.7%. I don’t know if you have a slightly different one. Where would you expect to be in the overall year?

Luiz Carlos Angelotti

We could be running between 36%, 35% of the rate, and through the end of the year. There you have closely - around 35% is more reasonable thing, but…

Carlos Gomez

And again we - okay.

Luiz Carlos Angelotti

What?

Carlos Gomez

And, again, that is with the current deflation and with no cap on the usage of interest non-capital as was the proposal here, but so it will be using the 7.5% that you work today or possibly higher looking on it?

Luiz Carlos Angelotti

That is a little more in the future, because these benefits that we didn’t use it. So it will be [real helpful for] [ph] use in the future. But then consider it’s reasonable.

Carlos Gomez

Okay. Thank you very much.

Luiz Carlos Angelotti

Thank you.

Operator

Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for the closing remarks.

Carlos Wagner Firetti

Okay. And thank you, everybody, for participating on our call. We are available for answering any other questions you may have. Just contact the Investor and the Market Relations Department. Thank you, all. Bye-bye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!