Aug 7, 2007
TRANSCRIPT SPONSOR
Executives
Jean Philippe Leroy - Department Director Milton Vargas - EVP and IR Officer Samuel Monteiro de Santos Jr. - CFO
Analysts
Maria Laura Pessoa - Fator-Doria Atherino Mario Pierry - Deutsche Bank Daniel Abut - Citibank Saul Martinez - Bear Stearns Victor Galliano - HSBC
Operator
Good morning ladies and gentlemen. We would like to welcome everyone to Banco Bradesco's 2007 Second Quarter Results Conference Call.
This call will be conducted by Mr. Marcio Artur Laurelli Cypriano, Chief Executive Officer; Mr.
Milton Vargas, Executive Vice President and Investor Relations Officer; Mr. Domingos Figueriredo de Abreu; Managing Director; Mr.
Samuel Monteiro de Santos Jr., Chief Financial Officer of Bradesco Seguros Insurance and Mr. Jean Philippe Leroy, Department Director.
This call is being broadcasted 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.
We inform that all participants will only be able to listen to the conference call during the company's presentation. After the presentation, there will be a question-and-answer session.
At that time, further instructions will be given. [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 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 will turn the conference over to Mr.
Jean Leroy, Department Director. Mr.
Leroy, you may proceed with your statements.
Jean Philippe Leroy - Department Director
Thank you again. Good morning everyone and welcome to our conference call.
First of all, let me say that we are sorry for the delay in this call as we were receiving a lot of questions in the other conference call where the local community was attending. And let me now transfer the floor to Milton Vargas, our CFO and IRO for his comments and Bradesco's highlights, one can follow on slide no.
3 of the PowerPoint presentation. Thank you.
Milton Vargas - Executive Vice President and Investor Relations Officer
Good Morning and welcome to our conference call. In the first half of 2007, the Brazilian economy had recorded a substantial recovery in terms of business activity and investments.
And we see no sign that this trend will be changing in the second half of the year. Despite our lack of infrastructure economic outlook is very strong given that the public accounts are well managed in and the investments are rising and becoming more and more diversified across sectors.
Our forecast for the year points to a 4.9% of GDP growth and 3.5% CPI and on the top of that unemployment is expected to be the lowest for the past six years falling to 9.6%. The reserves in foreign core currency are already close to the impact of some up to $150 billion due to a solid inflow of the CDI and our very strong [Indiscernible].
We expected a 1.8 real per dollar FX rate at the year-end. Card operations has been evolving in a significant manner due to interest rate decrease and the expansion of internal, belong to this deterioration is expanding now at 32.3% and should continue to speed up to year-end to 34.3% impacted by some non-recurring events that will recover in representation but [indiscernible] our focused effort has net income of more than 4 billion reais, 28% higher than in the same period of 2006.
Insurance, pension plans and savings bonds continue to be one of our major pillars of contribution to pass 1.2 billion reais net income in the first half keeping the leadership in premiums both in Brazil and Latin America. The insurance group closed the first half with 62 billion reais in finance assets and 53 billion reais in the technical provision.
But this causes continued improving efficiency. Our 12 month efficiency ratio stood at 40.2% in this semester showing a gradual improvement in efficiency ratios.
Taxes and contribution reached 3.6 billion reais equivalent to 93% of Bradesco's net income. The reported return on average assets reached 36.3%.
On the operational front, Bradesco performed very well. In the first six months of 2007, the loan book grew by 12.6%.
92.4% of our operations are related from [indiscernible], to speed. In other words, we are expanding our loan portfolio and achieving better credit quality.
As our sound growth of Bradesco is reflected to the Brazilian economy, we are leading the ranking of larger investment of BNDES Onlendings operations for the 5th consecutive year. In markets, Bradesco originated 1.5 billion reais in operations, financing margin in 13,000 homes in the first half of 2007.
On a year-over-year comparison, we grew 70% in volume and 120% growth in number of homes. Repeating the same performance as of the previous years, Bradesco impresses our middle market oriented platform.
Platform grew by 60% its assets in the first half of the year. Highlighting the following guidelines, wasn't that so foreign exchange, BNDES Onlendings markets [ph].
Bradesco corporate, our larger corporate oriented platform following the trend of the past years was fully dedicated in the originates of the structure deals. To speak about our investment bank, Bradesco BBI, we haven been experiencing a strong evolution in this market, structuring IPOs, insurance, bad debt and M&As, issuance of debt in M&As, offering quality service to foster the capital market growth, it is worth to highlight that we became leaders in the local market of qualified, cost us just average, with asset under management of more than 290 billion reais.
In trade finance, the volume of transactions was very strong, recording $10.5 billion in exports and $3.9 billion in imports. We will also like to mention the structuring of the $500 million, 7 year term deal of securitization of international receivables.
This operation was rated with investment grade at a 55 point over LIBOR spread and unprecedented low level for the Brazilian corporate issue. In the second half with the approval by Brazilian Central Bank, we expected to integrate BMC platform into Bradesco, increasing our focus on pay of all deductible loans.
We will also continue to pursue aggressively our client base growth, increasing the number of our account holders, [indiscernible] the elements in the customer loyalty. We are engaged it to opening 2.5 million checking accounts in 2007.
And we are very proud not to be the in the leads of the Central Bank of banks with more complaints but less 60 months in a row. Bradesco has never before in infrastructure opening new bank, fostering ATM, sharing agreements and ensuring that our IT is equipped with the best possible hardware, software and communication network.
We have very strong expectations in the benefits of the IT improvement project. Starting 2003 this project is coming to a tipping point, preparing Bradesco for the next decade to projects and it initially improved our business technology to 1.3 billion reais of the investment.
Our technological upgrade as we already started in our branch network. We have recently acquired 50,000 PCs, 9,500 printers and 15,000 LCD monitors.
Total investments will be of... from 270 million reais, thanks to operational investment and solid investment in staff training.
We intend provide a value attendance for the growth... for the growing demand for our customers.
In line with Bradesco tradition, I would now like to go over some of the quarter's highlights in corporate social responsibility. One, the distribution in association with Fundação, Mata Atlântica of 200,000 nature tree seeds on International Environment Day.
Second, the renovation of our third Bradesco supplier in Mitchi [ph] allowing us to engage all of our stakeholders in discussion on how to create a better world; and third, the partnership we signed with a special firm for the treatment of water, urban and industrial liquid effluents, labor [ph], financing acquisition to more efficient bid to sanitation technology. As for the coming years, we are preparing ourselves for the stronger growth in mortgage, credit card, insurance, housing consumer finance.
Our branch network is a strong competitive advantage but we intend to enlarge it even more opening 150 new branch for the year over the next three years. The credit card market is changing with an increased base of baskets and becoming our financing instruments.
Therefore we adopted [Indiscernible] and combine the organic growth partnership and acquisition of companies which lead particular segments in the market. Finally, I would once again like to thank all our employees for their dedication and commitment to our goals.
Without them, we certainly could not have achieved these results. After this presentation, we will available to answer any questions you may have.
Thank you very much.
Jean Philippe Leroy - Department Director
Slide number 4, we will be highlighting the slides, the nominal growth of our quarterly net income which reached 2.3 billion reais in the second quarter of '07, 1.8 billion if adjusted by extraordinary items, a quarter-over-quarter of 5.6% increase. Over the last 12 months EPS stood at 3.62 reais or 3.37 if adjusted.
With no particular attention to our efficiency ratio of 42%, this is the 9th consecutive quarter that it has been standing below the 50% mark. We believe this ratio can be improved even more over the coming quarters through the constant optimization of our productivity.
Slide number 5, on this slide we show this quarter's extraordinary items. The gains related to the disinvestments in Serasa and Arcelor were partially offset by the goodwill amortization of Lojas Colombo and the constitution of legal provisions relative to previous economic plans.
As a result, we recommend a comparison between our adjusted net income, which is what we will be doing in this presentation. Slide number 6, our annualized first half returns totaled 2.5% considering average assets and 31.5% gains in average equity.
For this calculation, we are excluding securities classified as available for sale which formed 1.9 billion reais and are marked it actually against equity. By the way this is the 11th consecutive quarter, our annualized average return on equity surpasses the 30% mark.
Our capital adequacy ratio indicates plenty room for future growth. To give an idea, the current ratio allows Bradesco to expand its loan book by approximately 108 billion reais considering the same equity.
We have also included in this slide a simulation of our DIs ratio considering the changes promoted by the Brazilian Central Bank Circular number 3,353 which increased from 50% to 100% of foreign exchange position in the PIS calculation and it changed effective as of July 2, 2007. So after our first half 2007 closing period balance sheet.
Slide number 7, this graph shows the strong performance of our unrealized gains which is represented by the difference between market and book values of our assets and liabilities. As you can see, it has raised from 1.6 billion reais in 2005 to 4.5 billion reais in June '07 even though we realized in this quarter 354 million reais relative to our after loss phase.
In the last quarter, the unrealized gain jump has been increased mainly due to the mark-to-market effect on divestment and its subsidiaries, marketable securities position. Slide number 8, here you can see the origin of our net income calculated in a consistent way along the periods, allocating on the managerial ways, our direct and overhead count.
Compared with previous year we see a slight decrease in the contribution of loans and fees as a consequence of higher business activity and client base growth. It is also worth to mention once again the success of the acquisition of American Express Brazilian operations by Bradesco as well as the out-performance of the several private label partnerships.
In the quarter, we also highlighted a strong participation of securities which were positively impacted by higher treasury gains. Slide number 9, here we have a perspective of the variation of our results.
On the following slide we will analyze in more details those variations. Slide number 10, on this slide you can see that comparing both quarters, the net interest income grew by 14% despite the increase of the average Selic from 12.5 up to 11.9%.
As for our interest earning assets in general [ph], our concerns one can see that the expansion volumes of 283 million reais more than compensated the impact of the interest rate reduction of 61 million. Therefore there is no occurrences.
We have to increase volumes of operations with quality and this is exactly what we have been doing. On the top of that this growth must be followed not only by banking activities but also insurance, pension plans and savings plans operations.
The part of non-interest can be followed by you in that line. The variation between periods differs to higher gains obtaining securities and treasuries.
Concerning average assets, the total annualized net interest margin moved from 7.5 to 8.2%. Considering that the portion of non-interest is more volatile, we will be disclosing the behavior of the margin of interest generating operations in the next two slides.
Slide number 11, we can see consistent nominal increase of the net interest margin due to volume growth. The decrease in terms of percentage is in line with our expectations because of the reduction of both interest rate and spread over the last quarter.
Slide number 12, adjusted net interest margin, breaking down our net interest margin you can see the relevance of loan operations with 66% which showed an evolution of 5.2% vis-à-vis to loan growth. The insurance margin also increased by 14.6% in the quarter.
Slide number 13, this chart gives the summary of our loan operations clearly showing the performance of our revenues, opportunity cost and delinquency. The top curve shows that our gross credit margin revenues against the cost of opportunity of the Selic have recorded consistent loss thanks to the increase in loan volume which offset the impact of the lower interest rate.
The bottom curve shows our allowance for loan losses added with discounts minus recoveries, and here you can see a slight upturn of these numbers in this quarter. Actually we believe that the first quarter of 2007 out-performed our expectations.
The curve in the middle shows the net margin, which was a little higher number than the previous quarter. In terms of the period-over-period evolution the net margin moved by 19.2%.
Slide number 14, the loan portfolio which is one of the main pillars of our results increased by 6.9% in the quarter vis-à-vis 5.5% for the Brazilian financial industry as a whole reaching 130.8 billion reais. This growth was fueled by SMEs with a 9.4% change and by individuals with a 7.5% increase.
Those two segments have wider margins which is very beneficial for us. Our aim is to attend our customers by providing loans in a responsible manner in order to keep delinquency in perpetual [ph].
I should point out that Bradesco was heavily invested... has been heavily investing in statistical tools of analysis, confession and risk management instruments in order to meet the challenge of credit demand flows.
Slide number 15 and 16, here we show a breakdown of our main credit lines divided between individuals and corporates. We would like to draw your attention particular to the growth in mortgage, 20.7% for corporates and the 8.6% for individuals.
Also bear in mind that Bradesco leads BNDES Onlendings operations which grew by 13.3% for corporates, mostly for SMEs. With individuals we noticed a 13.8% growth income.
Slide number 17, for the correct analysis of our asset quality and the needs of provisioning, we believe this slide is key. The top line shows the representativeness of total provisions compared to the total loan portfolio.
The second line shows the required provisions by the Central Bank's criteria in accordance to clients rating and past due operations. Here we can immediately see that Bradesco has an excess provisions of 1.1 billion reais.
The third line which flows the second quarter '07 at 4.4% corresponds to the proportion of loans overdue by more than 14 days classified between E and H ratings and the last line shows charge-offs compared to the portfolio one year before. We can see that there is a strong correlation between effective losses and the volume of overdue E to H operations.
This means that in one year from now, our effective losses should stand close to 4.4%. This being said we conclude that our effective excess of provisions is actually 2.3 billion reais which is the difference between the first and the third line.
Slide number 18, this new slide shows delinquency per segment, the biggest challenge in granting loans is unquestionably... for instance unquestionably measuring appropriately [ph] risk, to do its credit granting process, recovery and risk management areas, Bradesco has fine-tuned its delinquency risk pricing models, underlining our constant concern over this matter.
The senior managements through several committees follow very closely the asset quality which permits us to take corrective measures very fast. In this context we can see the corporate delinquency it is maintaining a level below its historical levels.
The top curve which represents the individuals segment shows a growing trend last year followed by a flattish behavior in the first half of 2007. We have been experiencing similar behavior in SMEs.
Our conclusion for this slide that we are expecting a delinquency rate reduction over the coming period. Bradesco, on slide number 19, has been focusing this product and has even invested strongly in creating an internal structure fully equipped to meet the needs of both real estate developers and individual home builders.
Bradesco is fully aware of the importance of these loans so much that we were pioneers in offering fixed rate of 0.98% per month for 25 years tender [ph] operation. This product now accounts for 28% of individual mortgage operation.
In this quarter we have originated 872 million reais of operation corresponding to 7300 homes of which 24.6% were designated to final borrowers. Slide number 20, the Brazilian auto industry has been recently recording strong growth and we expect it to continue over the next couple of years.
Bradesco and especially its subsidiary, Finasa have adopted the strategy of forming operational agreement with leading car, truck and motor cycle manufacturers as well as a series of auto dealers. Bradesco has 25.9% market share and we intend to increase our share even more.
We have been investing and forming specialized teams and creating specific products geared towards auto financing particularly to brand new high valued vehicles. In addition, BMC's auto sales force will be selling Finasa products in the short run.
Our delinquency ratio of more than 90 days is in line with the market average which stands at 3.5%, 3.2% for cars and 4.7% for motorcycles. Losses from these operations which have collateral upright in such in a way as to preserve the desired strength.
Slide number 21, between 2004 and '06 we also adopted strategies to establish operational agreements with banks in the payroll lending market. Since the second semester of 2006, we began to act on our own and we brought at the 12 month 44.2% growth in the portfolio.
We reinforced use of strategy through the acquisition of BMC which is specialized in this business. We would like to inform that last week the Brazilian Central Bank approved the BMC's acquisition deal.
Slide 22, credit cards are becoming increasingly popular as a means of payments for various types of transactions, including consumer finance. The market has recorded average annual growth of 22% over the last 5 years, Bradesco at the market share of 18.6% in this segment.
Our credit card base from private 22.2 million pounds [ph], 15.4 million of which are Visa, American Express and MasterCard brands. We have issued 6.8 million private label cards as a result of several partnerships with various segments, notably retailers, super markets, closing outlets and drug stores.
In the first half of the year, we reached an agreement with a cosmetic firm, O Boticário. Bradesco believes in strong credit card growth in the niche of lower income individuals.
We have debt for accelerated the closing of operational agreements with retailers and created specific progress oriented for and to tackle customer and we launched in this quarter. For example number one, the fixed cost and which is the cost for reduced interest rate and allows clients to plan their spending by knowing in advance how much they will pay as balance every month.
And number two, the credit mice INFS [ph] have caused which is geared towards social security lead time pension nears and meets criteria established by the INFS [ph] and also reduced financing rates as well. Slide number 23, Bradesco has invested heavily in technology, training and the opening of new front in order to conquer in your businesses and clients.
The consolidation of our segmentation process has greatly improved the quality of our customer relation. All this has been reflected in increased business volumes in turn improving our fee generation which grew by 2% in the quarter.
It is particularly worth drawing attention to the strong upturn in card fees triggered by the acquisition of American Express. Brokerage fees which have been growing thanks to the efforts of our investment bank and on one hand we noticed that disinvestment in Serasa influenced negatively other fees, the line called other fees.
But on the other hand, we increased, in the quarter-over-quarter analysis, fees generated by long consortium and custody. Last as Milton said in his speech, we have reached the leadership in Brazil.
Slide 24, our expenses are kept under constant control by management. In fact, Bradesco is fully a cost oriented.
It is important to note that the decreasing ratio comparing cost to total assets is one more indicator showing that we are very committed to this positive policy of rationalizing expenses. The increase in structural cost of 8.2% is based on the seasonal effect of the concentration of vacation of our employees which occurs every year in the first quarter plus a increase in a tax on payroll.
So leaving out those two factors for the concentration of vacation and this increase in tax on payroll, we actually have an increase in structural cost by 3.4%. Slide number 25, our improved operating efficiency is depicted in this graph.
Without compromising quality and despite the acquisitions we have made over the last five years, our expenses have grown by 54% vis-à-vis almost 170% of fee income growth. As a result, our coverage ratio had moved from 45.8% in 2002 to almost 80% in this quarter.
Our aim is to surpass a 100% in the next four years. Slide number 26, we would like to point out that demand deposits grew by 4.2% in the quarter and by 29.8% in the finance with a decline in interest rate and the maintenance of transaction taxes for example the CPMF and VIOF, there is a tendency to increase in this type of funding, which a cheaper funding for us even though only 20% of this deposit is free for the banks to invest.
On the asset management side, we noticed a higher demand for equity products which posted a 31.5% growth in the quarter and a 104% growth year-over-year. Slide 27, on this slide we have a summary of our income statement.
The insurance group posted a 696 million reais in net income 31.6% higher than in the previous quarters and includes 142 million reais relative to the Arcelor disinvestments. Slide number 28, premiums and revenues moved up by 5.2% quarter-over-quarter with pension plans and life insurance product accounting for 54.6% of the total.
Bradesco leads the insurance segment in terms of premiums with a 24.5% market share. Our share in pension plans and vis-à-vis our product stands at solid 38.2% as of May '07.
The number of Bradesco Vida e Previdência clients increased by 16.2% in the same period surpassing the 1.8 million mark for pension plans and 401(k) products and we count with the client base of 10.1 million people in life and property and casualty products. In this quarter the average annualized returns of stockholders' equity to that 44%.
Slide 29 and 30, owned financial assets and technical reserves exceeded the 61 billion mark. It is worth remembering that 48 billion reais of this amount for it to pension plans and VGBL investment portfolio.
Our market share in May '07 for provisions reached 41.5%, notice the consistent growth in technical reserves. Slide 31, our new strategic cost clearly demonstrates the improved operational efficiency of the insurance group which is upfront on the next slide showing our combined ratios.
Slide 32, to better analyze our real performance we recommend you to exclude the non-recurring events as demonstrated here. We have been improving a lot our ratios by changing the underwriting policy and by adopting the profile for auto insurers.
Additionally we have focused corporate house insurance plans in detriment of individual health insurance. In this slide we show both the national or local and international criteria for combined ratios.
Slide 33, on this slide you can see the macro scenario outlook for 2007 and 2008, prepared by our economic team showing the main indicators of GDP, interest rates, inflation and FX. We are projecting a 10.75% Selic rate at year end considering occurrence a rate of 11.5% and we believe that the major impact on the Selic decline was already absorbed in our results.
I am referring to the 18% ratio rate we have in December 2005 and to the 13.25% rate as of December 2006. The drop tends to be lower as well as the impact in our own results.
Slide number 34, in this slide we are including the previous and new guidance for 2007. We will be happy to comment in our Q&A session.
I would like to highlight just the changes that we have basically in the lines relative to the loan book growth and to premium in general. Thank you for your attention and let's move to the question-and-answer period.
Thank you. Question And Answer
Operator
Thank you.[Operator Instructions]
Jean Philippe Leroy - Department Director
And just using the first question received from Internet, Mr. Hofei [ph], you are asking about the possible IPO of Visanet and what are the numbers, the figures relative to Bradesco in this operation?
Basically, we are shareholder of Visanet. We have almost 40% base and actually it's the largest company, in fact the largest acquirer altogether with the other shareholders, we are always analyzing studies to seek what to do in terms of increasing the most shareholder value.
There is no definition as if we are going to have an IPO of the company. But obviously if this occurs we will be very quick and proactive to inform the market on what we will be doing.
Operator
Excuse me. Our first question comes from Ms.
Maria Laura Pessoa with Fator-Doria Atherino.
Maria Laura Pessoa - Fator-Doria Atherino
Hi all, I had a couple of questions. The first one is regarding the provision expenses over average loans that you expect for the end of this year.
Also I wonder if you could comment on the small increase in the current account fees in this quarter. Is this something related to the impact of salary accounts creation or is it just punctual, I wonder if you could make your comments on this.
Thank you.
Jean Philippe Leroy - Department Director
And the increase of provisioning as a percentage of the loan book.
Maria Laura Pessoa - Fator-Doria Atherino
Yes. Provision expenses over average loan book.
Jean Philippe Leroy - Department Director
Okay. Actually you can see in the slides that we have been having a very good performance over the last period and actually the number has been moving down.
And we see over the last three quarters a decrease 4.6, 4.5. 4.4, it is very difficult to project exactly to which level we are going to move.
But at least the trends of in percentage term having an improvement in terms of, this ratio is something that we continue to believe. So it's difficult to tell you if it is closer to 4 or 4.2, but we are actually seeing in all the different portfolios for individuals and companies, a very good behavior also in terms of the effective allowance between 14 and 60 bps.
So the trends for this number which is in this slide of longer period is actually to continue to move down at least to be relatively stable, over the next year. If we look at fees, actually what we have is basically a growth in the number of account holders.
So, you see that basically we have the growth in the quarter but you can see the counterpart which is the growth in the number of checking account. Mr.
Marcio Cypriano, our CEO established the goal to increase by 2.5 million unit number of checking accounts in this year, and we are ready this year to grow by approximately 1.1 million. So, actually this is already a benefit that we have seen in fees because of the number of growth of account holders.
Maria Laura Pessoa - Fator-Doria Atherino
Thank you.
Milton Vargas - Executive Vice President and Investor Relations Officer
I would like to respond to Raffle Vermillion [ph], the second question made by him about the... the question relates to insurance provision estimate, what's the bank...
you can give me that expectations? I would like to ask you Raffle our expectation is 2007 and through December, there will be only one adjustment in our technical provisions relates to the health, it's the only thing we made it until next December.
Other provisions would be made by... it appears, there's written a lot, there is no adjustment there until December of 2007.
Operator
Our next question is from Jason Mullen [ph] with Goldman Sachs.
Unidentified Analyst
Hello everyone. My question is just a general question based on the guidance for 2007 and then the changes you've highlighted there that raising the expected growth in the insurance premiums to make the 10% to 12 to 14 and raising slightly the loan portfolio growth on the back of greater growth in corporates, how should we interpret that?
We have these which seem to be positive events when we are not looking at that, moving to your guidance for an increased net income. We have your guidance for net income going from 4% to 10%...
staying flat at 4% to 10%. Should we just assume that there is going to be offsetting factors to this improved outlook?
Milton Vargas - Executive Vice President and Investor Relations Officer
We choose a little bit of our expectations... somewhere we are speaking, we change our expectation about increasing instantaneous because there is pulls over the market and in VGBL basically and the recent increase in our auto premium and because you know they are de minimus [ph] in profile in auto and has very good performance fee and individual risk and commercial risk would be made to change our expectations in terms of increasing insurance payments, is the only reason because the results until the first semesters would be very, very good in related to all our expectations.
Jean Philippe Leroy - Department Director
And the second question was relative to the guidance. Actually we raised our loan portfolio expectations for '07 based on the very solid performance that we saw in corporates and even more with SMEs.
Actually we didn't change the guidance for net income, net interest income. Because basically what we are seeing is the continuity of our numbers inside to this range.
But obviously before allowance [ph] maybe closer to the lower end of this range and now we are closer to the higher end of this range. But we feel comfortable to change the guidance for the loan book but not to change the guidance for the net interest income.
Unidentified Analyst
Just to confirm then I think I actually probably assumed that but that line net... it should net interest income, not net income, is that going 4 to 10%, is that correct?
Jean Philippe Leroy - Department Director
Yes, you're correct.
Unidentified Analyst
Okay. You're not giving us guidance for net income then.
Jean Philippe Leroy - Department Director
No.
Unidentified Analyst
Okay, thank you.
Operator
Our next question is from Mario Pierry, Deutsche Bank.
Mario Pierry - Deutsche Bank
Hi. Good Morning.
I have a couple of questions. First is on the insurance business.
We saw a big increase in claims, the claim ratio I think went from 73% to 79% this quarter. If you could be more specific where you're seeing this increase in claims, what lines in particular.
Also related to this increased guidance for the insurance premiums, do you now expect growth of 12 to 14%, is this driven primarily by lower prices or is this... you would expect to maintain prices fairly stable where you've just seen a better market?
And then my second question is related to Banco BMC as you said you received the approval to complete the acquisition last week. Can you just remind us what is the goodwill associated with this acquisition?
Thank you.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Samuel speaking. I would like to respond to the insurance questions made by you.
In terms of claim ratio, claim ratios would be passed from that 79, 70.5, 79. There is only one justification about this, it relates to the health, individual health provisions which made by us, approved by the insurance department.
So, it just stands between the price requested by us and the price approved by the government since 1997 and until 2005... until 2004.
That's the reason why we have to make this provisions, delaying of this provision correcting, technical correcting is premium provision for premium note issued by the company. This is the reason why the claim ratio increased much more than we would like for the first semester of 2006.
If you do not consider that, that provision, our claims ratio goes down to 74 instead of 79.21 [ph]. The second question relates to the premium, increase in premiums for the second semester.
I would like to clarify to you, we plan to increase so much of our premiums for the second semester but not related to the reduction of the price. We plan to maintain the price and in our perspective we do no plan to reduce premiums for the second semester.
Mario Pierry - Deutsche Bank
If I can follow up and sorry before you answer the question on BMC. Yes we do notice that your healthcare provisions have remained higher on the 200 million real per quarter but it seems like you already have a very comfortable level of reserves.
So I was just wondering why is there the need to continue the provision or to maintain this healthcare provision high into the end of the year? And then on the pricing also like looking at one of your competitors' results recently it seems like in auto insurance we have seen some pressuring prices and if you could be more specific about you expectations for prices in the auto insurance?
Samuel Monteiro de Santos Jr. - Chief Financial Officer
I'd try to especially the second, about the auto insurance, really we have... our experience in profile underwriting is now completely, goes two years, 3-4 months in terms of the insurance industry is a corrective rationalization for, to try to make the correct pricing flowing your portfolio.
This is a reason why our pricing some kind of cars in some regions in brazil, we do sell in our bids [ph] related to the past. But this reduction is, real is not affected, our combined ratio and our claims ratio because it is a correct experience there is a underwriting for a basic on profile.
For the first in terms of health, the health, I am reluctant to... remember, the health, individual health, the pricing is driven by the growth since 1997.
When the government achieved the loss, they lost shares. You have to cover all diseases independent of your policy, independent of your contract needs or insured by the insurer.
What happens? Every year the pricing request by insurance industries, they go to leaps [ph] until the yield requires this and this...
what happens in this case? You don't have the correct premium to face the risk if you're insured and this reason is the reason why we have to make the provision to cover this part of the premium not insured by us.
We plan to close or we plan to close this provision, this specific provision until the end of this year. Of course if you need 2008 to get booked, we will emphasize and we will end up with this deal, or then we have to completely provision in 2008, 2009 independent of the price approved by the government in request by us.
Jean Philippe Leroy - Department Director
The question relative to BMC basically the goodwill should be of around 600 million reais and we will be fully offset, so, fully amortized in the third quarter because it was approved right now. But it will not affect the bottom line of the bank and on the top of that just reminding you that we are going to raise of around 800 million reais the capital of the bank in order to make this transaction.
Mario Pierry - Deutsche Bank
Thank you.
Operator
Our next question is from Daniel Abut, Citibank.
Daniel Abut - Citibank
Hi, good morning. You were showing in slide 4 I believe the improvement in the efficiency ratio of about 2 percentage points over the last 12 months or so.
And I think Jean you indicated that you expect further improvement, plenty room for improvement going forward. I wanted to ask you is, do have any specific target, how low this number can get over the next, by the end of the year, by the end of next year?
And related to this I wanted to ask you is the integration of American Express operations which you call the success in your remarks. Have you identified any specific cost savings associated with that operations?
And if so, have they really been factored in or a big part of that is still to come later on and how much that could be a reason for further improvement in this efficiency ratio?
Jean Philippe Leroy - Department Director
Okay. Daniel just to give you an idea, the cost income ratio for Bradesco 42% has a space to improve.
Maybe over the next 6 to 12 months we should be achieving 40% ratio. And over the long run, over the next years we will be able to reduce it to around 37%.
This is based on our own calculation. I didn't get the second question that you asked.
Daniel Abut - Citibank
I wanted to know related to this even that you expect further improvement of 2 percentage points over the next 6 to 12 months in spite of that it's coming from cost savings related to American Express operations. I wanted to know is that integration which you call it success, realized gross savings or those gross savings are still to come?
Jean Philippe Leroy - Department Director
Actually when we talk about the cost income ratio it's looking at revenues and costs if not specifically because of American Express. We always to try to incorporate structures and we still have a potential to incorporate more costs from other companies that we have but also because that, we're expanding the revenues, revenues, and margin and the revenues and fees as well.
So altogether it's combined and expected to have cost ratio improvement.
Daniel Abut - Citibank
No, that I understand Jean that the ratios, not overall ratio, I wanted to know though if you have done any analysis in relation to American Express, pertaining to the realization of cost savings, after that integration or you have not done that?
Jean Philippe Leroy - Department Director
No, we already have been incorporating cost of American Express, but some of them for example we have the structure of call center and we keep it separated, because they have a specific understanding of the type of customers and there is an American Express customers. So some costs we may be integrating, some others we try to have fabricated.
It's the same for example when you talk about BMC, some costs would be integrated but the structure will continue to be managed by BMC for example because they have the expertise to understand the business.
Daniel Abut - Citibank
Understood. Just quick one last question on the goodwill amortization of BMC.
I think you indicated 600 million that's a gross amount right? Or next, of that the strength which would stay held [ph] much hitting your driven quarter numbers.
Jean Philippe Leroy - Department Director
That is around 400 million reais and just to correct myself, actually the dividend of the shareholders will not be impacted by that. But the bottom line could be because of the amount that we are amortizing and it will be in the first quarter.
Daniel Abut - Citibank
Thank you very much.
Operator
Our next question is from Warren Partida [ph], JP Morgan.
Unidentified Analyst
Hi. Good morning.
My question has to do with slide 12 statistically the insurance line. I saw...
we see that there's an interesting increase in revenue from... in financial revenue from the insurance company despite the falling rate.
Is that due to an increase in volumes or what would be the driver behind that? And though my second question is we saw in the quarter a very important growth in private level cards of close to a million cards.
Could you explain where that came from? Thanks very much.
Operator
Our next question is from Saul Martinez, Bear Stearns.
Milton Vargas - Executive Vice President and Investor Relations Officer
Just a second please, just a second please.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Samuel Speaking. About the insurance revenues, financing the reason why the amount of the revenue insurance...
financial insurance revenues is related to the loan [ph] because that VGBL is a very big amount of the reserves that we have. They are increasing so much or in terms of VGBL we increased more than 26% related to the last year.
This is the reason why we are having more, more reserves throughout life and the reserves of loan [ph] increases so much related the last semester, is the reason why we have been increasing more insurance, financial revenues.
Jean Philippe Leroy - Department Director
In terms of the question relative to credit card you are mentioning slide number 22, I believe and actually we see two components, low ultimately though, the card coming from the lower income classes use our private label agreement. I could not specify exactly right now what is the...
which one has been more beneficial to this 1 million growth? And the second part would be in the number of credit cards but then I can say that American Express has begun a major component of growth in base cards to give an idea.
When we acquired the American Express they had 1.2 million cards and now they have 1.7 million cards. The number of issuance of American Express has been very strong based on the effects of the agreement and the base of the product line and it's fortunately has been gaining to the American Express customers.
Unidentified Analyst
Jean If I could quickly follow up the American Express growth is not really reflected in the credit card launch, right it's mostly charge card?
Jean Philippe Leroy - Department Director
Exactly... are you talking about slide 22?
Unidentified Analyst
Yes but now I am talking about loans that we saw good loan, strong growth in credit cards this quarter but it's not related to AmEx, right?
Jean Philippe Leroy - Department Director
Right, in terms of the line of fees you are mentioning, fees or loan growth?
Unidentified Analyst
Loans.
Jean Philippe Leroy - Department Director
We have in terms of the growth of loans as we are saying credit cards are becoming more and more a way of financing. So we actually have been seeing a growth in the number of people using the credit card as a way of financing.
And normally the American Express opt charge card. You are correct but it's more because of people using more credit cards to finance their acquisitions.
Unidentified Analyst
Thank you very much.
Jean Philippe Leroy - Department Director
You are welcome.
Operator
Our next question is from Saul Martinez, Bear Stearns.
Saul Martinez - Bear Stearns
Hi. Good morning.
I have a couple of follow-up questions for Samuel on the insurance business. First on slide 32 you give your combined ratio both as reported and excluding non-recurring events.
Can you just the discrepancy is pretty meaningful. Can you just remind us what those non-recurring events are?
I assume part of it is related to the premium deficiency reserves that you mentioned in the individual health business but is there anything else in there? And why should we be confident in that going forward some of those non-recurring events will actually be non-recurring and not impact the combined ratio?
And I have a follow-up as well.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
The only thing [ph], there is no recurring, and we... exception in already combined ratio, it's only related to the health, individual health only.
Saul Martinez - Bear Stearns
And that explains for example in Q2 '07, you have a 94.7% combined ratio...
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Yes.
Saul Martinez - Bear Stearns
Excluding that, that's 14 percentage points, is that... that's right?
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Yes.
Saul Martinez - Bear Stearns
So we should expect that, we should expect going into '08 the combined ratio would actually be 14 percentage points lower than or around 13 to 14 percentage points lower than what it's actually been tracking?
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Our expectation, when you say go forward, we see forward until December, right?
Saul Martinez - Bear Stearns
Okay. Yes, yes right after you catch up with those provisions in the individual health business?
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Yes, if you see... if you look for...
and through December I would say to you that the combined ratio would be the same as in the first semester.
Saul Martinez - Bear Stearns
Okay. And after 2008, after fourth quarter of this year into 2008 we should expect the combined ratio to be 14 percentage points, 13 percentage points lower than what it's been, is that correct?
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Excluding this adjustment in health I would say to you is this combined ratio is absolutely comfortable for us.
Saul Martinez - Bear Stearns
Okay. So, something close on an international combined basis something close to 80, 85, 86, 87% does that...
that's what we should look for it?
Samuel Monteiro de Santos Jr. - Chief Financial Officer
I would say to you that in terms of international combined ratio, is calculated by almost 99% of the accountants. So I would say to you 87.7 or 85 as you know is a very good combined ratio for our most line business as you know.
Saul Martinez - Bear Stearns
Understood but that's but okay. And that's, so that's...
that should be a pretty pickup in your results going into 2008 insurance business.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Yes, yes.
Saul Martinez - Bear Stearns
Okay. Second question is a kind of a follow up to one, I wasn't really clear in your response on why the financial results increased so much from the first to second quarter with 906 million versus 636 million in the first quarter, I am looking at slide 27.
It's hard for me to believe that VGBL volume growth counted for 42% rise quarter-over-quarter. Was there anything else in that results?
Did you have any equity gains in there that, that impacted that because it seems like a pretty big number relative to the results you have been posting in previous quarters.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Relates to the, as it's probably in earnings release [ph] financial results, I would like to clarify to you, that's the increase just supplied by Philippines.
Saul Martinez - Bear Stearns
Okay.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Next one is the total reserves increased so much; the second we invested a little bit more in stock in the equities, in the stock market would be particularly the results we can get very good results.
Saul Martinez - Bear Stearns
Okay.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
But this... we sold the share for Arcelor which represents...
Saul Martinez - Bear Stearns
Okay.
Samuel Monteiro de Santos Jr. - Chief Financial Officer
Results in terms of its financial results.
Saul Martinez - Bear Stearns
Okay, okay. Great, that's very helpful?
Thank you.
Operator
Our next question is from Victor Galliano, HSBC.
Victor Galliano - HSBC
Yes, my main question has been answered but just to follow up on what I think Jean was mentioning about IT investment. And you were talking about 270 million reais being invested in IT.
Is that something that's already been accounted for or is that something that's going forward you will be accounting for expenses in the latter part of the year?
Jean Philippe Leroy - Department Director
Victor, IT investment of 270 million reais that was mentioned in the speech, part of that was already spent and part of that will be deferred over maybe some three years.
Victor Galliano - HSBC
Okay. So that's going to be...
it's going to be a fairly small impact on expenses going forward?
Jean Philippe Leroy - Department Director
Yes, but based on... compared with the overall numbers of that, this was a very small impact, very relevant impact.
Victor Galliano - HSBC
Okay. Thank you.
Operator
Our next question is from Mr. Alcir Freitas from Itaú Toyota [ph].
Unidentified Analyst
Good morning. In slide number 7, you disclosed the total amount of unrealized gains.
I'd like to know how much of that total is related to available for sale securities? And the second question is this quarter you've increased significantly...
Milton Vargas - Executive Vice President and Investor Relations Officer
Can you just speak a little bit louder please?
Unidentified Analyst
In this quarter you increased significantly the amount of trading gains. I'd like to know if I could infer that these higher gains are related with the sale of AFS securities?
Jean Philippe Leroy - Department Director
The impact of available for sale would be of around 2.9 million reais vis-à-vis this number you are seeing on slide number 7. And this affects the equity directly.
And the net Visa [ph], would be representing 1.9 billion reais approximately.
Unidentified Analyst
Okay. And about the trading gains that were required by in this quarter.
Jean Philippe Leroy - Department Director
Actually this increase in trading gains should be expanding two different ways. The first one is that we had a very good quarter but the second answer is that the first quarter was a little lower of the first, of behavior of the trading gains.
And just to give you an idea, when you compare these numbers semester vis-à-vis semester actually the numbers are very close. They are almost the same, a very slight decrease.
So basically a better core, second quarter was a little bit better, first quarter was a little bit lower. So when you compare those, a higher change but in the six months comparison of '06 and '07 they were quite comparable.
Unidentified Analyst
Okay. Thank you.
Jean Philippe Leroy - Department Director
You're welcome. Let me respond to a question which was asked by the Internet, about the possible IPO of Bradesco Seguros and if we think that Bradesco Seguros is correctly priced by the market, actually no, we don't intend to make an IPO of Bradesco Seguros.
And no, we don't believe that Bradesco Seguros is correctly priced. Actually when we see and compare Bradesco with other companies and also looking at perspectives of other insurance companies that might be proceeding into a IPO we believe that the market does not price correctly Bradesco Seguros.
So at the end of the day that it's not priced correctly but [indiscernible] as we think. And because of the event of timing we would like to end the conference call.
We will be available in our department, if you want to send follow-up questions or by phone of e-mail please feel free and thank you once again for the patience and sorry for the beginning being a little bit later of this call. Thank you very much.
Bye.
Operator
That does conclude our Banco Bradesco's audio conference call for today. Thank you very much for your participation and have a good day.