Nov 7, 2007
Executives
Jean Philippe Leroy - Department Director Milton Vargas - EVP and IR Officer Samuel Monteiro dos Santos, Jr. - CFO of Bradesco Seguros Insurance
Analysts
Mario Pierry - Deutsche Bank Juan Partida - JP Morgan Daniel Abut - Citigroup Saul Martinez - Bear Stearns
Operator
We would like to welcome everyone to Banco Bradesco 2007 Third Quarter Results Conference Call. This call will be conducted by Mr.
Márcio Artur Laurelli Cypriano, Chief Executive Officer; Mr. Milton Vargas, Executive Vice President and Investor Relations Officer; Mr.
Domingos Figueiredo de Abreu, Managing Director; Mr. Samuel Monteiro dos 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 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 and 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 statement. Now I will turn the conference over to Mr.
Jean Philippe Leroy, Department Director. Mr.
Leroy, you may proceed.
Jean Philippe Leroy - Department Director
Thank you. Good morning and good afternoon to all and welcome to our third quarter earnings conference call.
Let me now transfer the floor to Mr. Milton Vargas, Bradesco's CFO and Investor Relations Officer.
Milton?
Milton Vargas - Executive Vice President and Investor Relations Officer
Good morning and welcome to our conference call. This quarter was marked by strong turbulence in international market leading to much volatility and uncertainty regarding the backdrop of subprime market crisis in United States and indirectly in the rest of the world.
In this scenario Brazil has lifted in a relatively comfortable way. In addition of the statements, and upgrade in its rating by Moody's which put us just one notch below the investment grade, which we expect Brazil to reach next year by at least one of the three leading rating agencies.
According to our forecast, the Brazil economy should grow by 4.9% in 2007 and by around 4.4% in 2008. We highlight the maintenance of the level of confidence by consumers and families; driven by the favorable conditions in the labor market we have improvement in employment in salaries, in addition to the preservation of the stability of the inflation.
We forecast inflations at 3.7% for this year and something below 4% for 2008. The base rate, basically, should be maintained up to the end of this year moving down to 10.25% at the end of this 2008.
As per the exchange rate, we work with a scenario of relatively stability. We've got of $1.70 reais $1.75 layout there both for the end of 2007 and 2008.
Despite the appreciation of the real, export are actually strong thanks to a remarkable efforts by companies to boost efficiency and productivity. We have found that a growing number of companies from various sector are raising their investment in debt, appetite for the risk had been climbing on a monthly basis.
As far the credit to GDP ratio, we forecast an evolution from the actual 33.1% to 38.1% in 2008. Delinquency add-on control and tenures are following the natural task of gradual level in consistent lengthening, due to the greater predictability of the economy.
With this scenario Bradesco reaches in the first nine months of 2007, a net income of over 5.8 billion reais up 73.6% compared to the same period of 2006. Insurance, pension plan and premium bond contributed in the bottom line with approximately 1.8 billion reais representing 30.5% of Bradesco results.
Revenues reached 15.3 billion reais expanding by 14.6% in the past 12 months, more than the growth of the [indiscernible]. Our combined ratio of 85.8% improved by 6.4 percentage point compared to the same period of 2006.
Bradesco stockholders equity surpassed 29.2 billion reais growing by 34.2% over the last 12 months. The BIS equation reached 14.2%, allowing Bradesco to expand in the future it's loan book by more than 78 billion reais.
We think the concept to... continuing to improve the efficiency.
Our 12-month accumulated efficiency ratio reached around 41.8%, a reasonable improvement as compared to 42.5% in the same period of 2006. Tactical dilutions accounted for 88% of our adjusted net income, reaching 5.1 billion reais.
The average reserve on average of the nine months period analyzed exceeded 32.6%. On the operational front, Bradesco had an excellent performance.
We highlighted the fund growth in the loan portfolio volume by 20.9% in the year and by 26.5% in the last 12 month. This evolution should be compared to the 16.6% and 24.8% in the banking sector, respectively.
It once includes guarantees and a receivable of credit cards. Our 140 billion reais where volume grew by 20.5% in the year, and by 27% over the last 12 months.
Regarding asset quality, in September, AA to C rated operations represented 92.8% of our book compared to 91.5% in the banking sector. In loan, we can affirm that we grew more in volume, in quality than overall markets.
Regarding mortgages, we are able to make more than 2.7 billion reais in operation in 2007, a 57.8% rise compared with the same period of 2006. Our former goal of origination of 3 billion reais for the whole year of 2007 was to test as of October 22.
As a demonstration of the Bradesco strength, in September, we were the leading private bank in mortgaging with 22.6% market share, according to ABECIP, the Brazilian Association of Mortgage and Savings Entities. In capital markets, our investment bank in participate in 60 deals in 2007.
We highlighted the operational agreement in assets management with Banco de Chile, which will enable the offering of the investment product between the two countries. In the trade finance area, we highlighted a solid volume of financing through export training partner, which in the first nine months of the year reached $10.5 billion in exports and $1.3 billion in imports.
The volume in export foreign exchange contract reached 29.1 billion reais dollar, accounting for a 20.5% market share. Regarding import the transacted volume reached 12.2 billion dollars, leading to a market share of 15.8%.
We will also highlight that we had concluded this project to expand our structure for servicing export and import customer. Adding six new foreign exchange platforms which will be located in place with the highest potential for generating new operations.
Until the end of the year, we intend to have 25 servicing points of focus on this product. With the operational improvement and solid investment in training, we intend to provide even better service to meet the growing demand from our clients.
Speaking of servicing, we are proud to inform that for 24 consecutive months Bradesco is not including the Brazilian Center of Bank ranking of most complaints by customer. And in order to improve the quality of our client servicing infrastructure even further, we continue to make strong investment in technology.
We are replacing and expanding capacity of our hardware, software and communication network in a process which will be completed by the end of the year. We have completed the construction of the new IT site, which will be occupied by computer, data storage...
data storage systems and other equipments throughout 2008. In February, we will begin processing the first financial transactions.
We would also like to highlight: one, the conclusion the new high speed data communication network between the various buildings housing our business department; two, the progress of the IT improvement project; and three, the investment in security devices for our Internet, ATM and call center users. In line which have become a Bradesco tradition, I would now like to go over some of the quarter's highlight in the corporate social responsibility area.
One, the selection of Bradesco for the second consecutive year to the Dow Jones sustainability award index of the New York Stock Exchange. As a result after fulfilling the requirement of a strict and very in-depth process of analysis, Bradesco manages to guarantee its position amongst a small group of some 300 companies in the world belonging to this index.
And two, the launch of the Bradesco volunteers program developed with the collaboration of representatives from many departments in affiliate companies. Finally, I once again like to thank all our employees for their dedication and commitment to our goals.
Without them we certainly could not have posted these results? After Jean's presentation, we will be available to answer any further questions you may have.
Thank you very much.
Jean Philippe Leroy - Department Director
The idea of this 33 slide PowerPoint presentation is to maintain as much as we can the structure we have been using in the previous quarters in order to facilitate the comparison, and therefore, your analysis. On slide number 3, we are basically seeing the main figures and items already mentioned by Milton in his speech.
Let's move on to slide number 4. The extraordinary event which affected our earnings in this quarter as well as in the other period, are disclosed here.
In the third quarter, we fully amortized the 631 million reais goodwill relative to the acquisition of BMC. We activated 376 million reais of tax credit.
We believe we built in addition provision for our civil lawsuits relative to economic plans in the amount of 126 million reais. These lawsuits were originated in the previous quarter but became knowledgeable to us just in this quarter.
The gain of 75 million reais, disclosed in the press release is reference to our disinvestment in the Bradesco Holding. The amount of 61 million reais refers to the favorable decision in fiscal pending processes relative to the PIF tax.
By saying all of this, Bradesco's net income reached 1.85 billion reais in the third quarter '07 vis-à-vis 1.8 billion posted in the previous quarter. It is worth to mention that all of the ratios and analysis included here in this presentation in the press release and in our MD&A are based in our net earnings adjusted by all of the previously mentioned non-recurring events.
Slide number 5, in this slide we're disclosing the evolution of our quarterly net income as well as the recurring nine months period earnings of 5.3 billion reais in 2007 compared to the 4.7 billion in 2006; a strong evolution and performance. I would like to draw your attention to the slight improvement in the efficiency ratio which moved from 42.4% in September '06 to 31.8% in September '07, representing Bradesco's efforts to find the ideal infrastructure and an example of the importance of information technology investments.
EPS calculated based in the last 12-months period increased by 9% standing at 3.45 reais. Slide number 6; Bradesco's total assets reached 317.6 billion reais, a 30.6% growth on year-over-year and by 69.3% on quarter-over-quarter analysis.
This growth was mainly due to the 24 billion reais loan book jump; and to the 35 billion reais increase in marketable securities including the guarantee in assets of our technical reserves. The adjusted return on average equity stood at 31.4% in the third quarter '07 and at 30% in the nine months period.
Return on average assets reached 2.5% in the quarter and also in the last nine months. Bradesco's current capitalization ratio of 14.2% allows us to increase our loan portfolio by some 78 billion reais [indiscernible].
If we were to use the terms of the Article 9 of the Brazilian Central Bank's circular number 3367, our capital adequacy ratio would have been of 16.9% with 12.4% just in tier 1. Slide number 7, despite the volatility in the market during the third quarter, Bradesco's unrealized gains stood at 4.2 billion reais.
These figures do not consider the appreciation of Bradesco's remaining interest held in the Bradesco Holdings in the amount of 722 million reais, elevating our unrealized gains to close to 5 billion reais. By the way, 178 million reais of these gains were already recognized in October.
We would like to remind everyone that the amount mentioned in this slide were calculated taking into consideration the stock price of the Bradesco Holding in the IPO, if we were to consider the actual stock price, the amount of unrealized gains would be added by around 1 billion reais. Slide number 8, the stabilization of the economy implies in a growth of lending operations and financial services.
And this is transparent in the slide number 8 which is closer to the breakdown of Bradesco's net income. The growth in volume and in the number of customers has generated an increasing participation of fees in this breakdown.
In the quarter, the participation of insurance, pension plans and premium bonds represented 30% of the net income. Slide number 9, here you can see a summary of our income statement, showing the main variations in our results, which we will analyze in more details over the coming slides.
Slide number 10, the nine months net interest margin presented an evolution of 10% vis-à-vis an average Celic [ph] reduction from 15.6% to 12.1%. In the quarter, there was a slight decline of 2.2% due to the reduction in treasury gains and securities income.
On the other hand risk adjusted assets, the grey box, grew by 2.6%. Net interest income grew by 311 million reais based on higher volumes in the quarter which more than offsetting the 183 million reais impact of the reduction in spreads.
Slide number 11, here we present the margin dripping out treasury gains and the affect of the mark-to-market over longer period of time, making it easier to show the consistency of the net interest income growth, even though interest rates have been steadily moving down. In percentage terms, in the blue line we can observe the downwards trend which we believe is normal as we are growing asset faster based on higher demands, especially of repos.
Although to facilitate the analysis of the net interest margin, we are excluding repo and non-remunerated assets, the permanent assets. We were five in the-first line in grade, the very stable behavior, which we believe is adequate.
Slide number 12, in the breakdown of the net interest margin, you can notice that loan operations are assuming a greater participation in the margin quarter-after-quarter. Between September'06 and '07 it moved from almost 60% to 67% and stood at 68% in the third quarter '07.
Slide number 13, this chart gives a summary of our performance in loans, including, in the blue line, the evolution of the gross margin calculated based on revenues in loans deducted by the profit opportunity of the Celic [ph]. We can clearly observe that the increase of the loan book has been compensating the reduction in interest rates, as previously mentioned.
In the red line, we see the evolution of provisioning and discounts net of recovery. The net margin, which means the second line, has been growing consistently presenting an evolution of 18.4% in the accumulated 2007 numbers vis-à-vis the year of 2006.
Slide number 14, Bradesco's loan portfolio increased by 7.1% in the quarter, higher than the 6.8% growth presented by the Brazilian financial system, as a whole, totaling 140 billion reais. In line with our estimate, this growth was boosted by small and medium-sized businesses plus 10.3% and individuals plus 9.1%, segment which we have wider margin.
Our year-over-year evolution of 27% in the loan portfolio is in line with our guidance provided to the market. Slide number 15 and 16, here we show a breakdown of our main loan operations divided between individuals and corporate.
Regarding corporate, we would like to draw your attention, in particular, to the growth in leasing and mortgage of 19.4% and 14.2%, respectively, in the third quarter '07 and of 50% and 87.1% over the last 12 months. Agricultural loans which is, by definition, a seasonal product, recorded substantial growth during this quarter, both, in the corporate and individual segment.
Relative to individuals, payroll deductible loans and mortgage grew more than the total portfolio, 24.9% and 13.3% in the third quarter '07 and 41.7% and 40.1% over the last 12 months, respectively. Although in this quarter the demand for individual loans was higher than for corporate, over the last 12 months the evolution is very similar with 26.1% growth for companies and a 28.5% growth for individuals.
Slide number 17; in this graph we demonstrate our asset quality evolution and the adequacy of our provisioning policy. Bradesco has excess of provisions of 1.1 billion reais if one compares the first and second line.
However, if we analyze the third curve... which corresponds to the proportion of loans overdue by more than 14 days, classified between the E and H ratings and the last line which represents the effective level of losses more than one year overdue and written off...
we can conclude that losses tend to represent the volume of past dues classified between the E and H ratings one year before. This makes us assume that in one year from now our effective losses will stand close to 4.3% and if this is the case then our effective excess of provision are accounted at 2.4 billion reais.
Slide number 18, on this slide you can see that delinquencies of more than 90 days in individual segment increased up to the first half of 2007 and fell slightly in the third quarter of '07. It is worth noting that delinquencies related to small and medium-sized businesses have been falling consistently down since the first quarter '07, reaching one of their lowest level in the third quarter '07 which is the lowest level over the last couple of years.
Bradesco is very dedicated to monitor delinquencies through several specialized areas, that's the credit, recovery and risk management department. Slide number 19, in relation to the payroll deductible loans, we would like to inform that after the approval by the Brazilian Central Bank of this acquisition, we began to fully consolidate BMC's operation in this quarter.
We believe that BMC's expertise and the possibility to use the 7,000 specialized agents will be a strong competitive advantage regarding this kind of product. Currently Bradesco is focusing on generating its own payroll deductible loan portfolio.
This is the reason why there is a slight decline in the acquired portfolio over the last 12 months. Slide number 20, there is no doubt that the acquisition of BMC is an important step in increasing our payroll deductible loan portfolio.
This graph confirms our bet, after Bradesco acquired BMC, its monthly origination of operations more than doubled in a short period of time, it is also worth to highlight the change in the mix of the portfolio, so that other agreements are grown more than the agreement with the Brazilian Social Security Retirement Program, the INFF, therefore, reducing its dependence vis-à-vis retiring. We would also like to inform that the Government's decision to suspend payroll deductible loans to Federal civil servants for 90 days will not affect BMC, as BMC has never operated with this type of public service.
The reduction in the origination in September was expected, as most of the retirees received their 13 salary in this quarter, and therefore reduced their demand for loans. Slide number 21, this slide shows our performance in mortgage improving by a better economy and the improvement in the foreclosure law.
In terms of origination, one can see the higher volume of operations of 77% with builders; this is a natural process as after the construction, we will be financing the individuals. As you can see, the number of financed properties almost doubled compared to the same period of last year.
In September, 92% of Bradesco's 3 billion reais target of origination for the whole year have been reached, a 50% year-over-year growth. On October 22nd, Bradesco surpassed the formal goal.
In 2008, Bradesco is planning to grant 4 billion reais in mortgage. Bradesco is very interested in the mortgage industry, and in September '07, we have launched a website dedicated to faster mortgage providing formation to help home buyers and intended to strengthening partnership with builders, developers and real estate companies.
Slide number 22, we continue to focus growth in fees, and based on that our intention is to increase our accounts quarter base by more than 2.5 million in 2007. As we believe that this is the best way to increase customer loyalty.
We also are planning to open a 150 new branches per year up to 2010. Finally, although the credit card business has already recorded substantial growth, we believe there is enormous potential ahead based on the good prospectus of the American Express deal and the success in the insurance of private label co-branded cards.
Slide 23, we are disclosing the behaviors of our expenses. Even with the expansion of salaries, as we finalize the yearly negotiation of wage increase, personal expenses fell.
The effect of the collective bargaining agreement added 60 million reais to our third quarter '07 expenses, but our personal costs slightly decreased by about 0.5%, and as we reduced the provisions for severance by 27 reais million and in profit sharing by 19 million reais. In addition, it is important to mention that the ratio comparing operating expenses and total assets continuous to fall.
Slide number 24, in a retail bank fees, depend a lot on investment in infrastructure and in the opening of more distribution which effect administrative and personnel cost. This graph shows that cost control and revenue expansion are constant concern of Bradesco in its drive for improving its performance.
The coverage ratio is standing up 80%, a strong improvement vis-à-vis the 68% ratio as of September '05. Our coverage ratio has grown continuously for more than five years in a row.
And we expect to continue over the coming quarters. Slide 25, in this slide we are presenting our funding sources.
Demands and savings deposits increased by 27.6% and 18.9% year-on-year, respectively. With the decline in interest rates and the maintenance of the tax burden, we expect to see important inflows in the core in these core deposits, especially demand and saving deposits.
Bradesco is a leading private bank in this types of funding and should have a competitive advantage. As those fundings are going to grow.
On the top of that we should benefit even more than the market with the trend of lower reserve requirements in the long run which should happen steadily over the coming years. As it already is the reality in more developed economies.
In asset management, investment in equities recorded a growth of 23.9% in the quarter and 146.4% over the last 12 months. Total funds under management increased by 3.9% in the quarter and by 19.5% over the last 12 months, closing the period with a 14% market share.
Slide 26; to facilitate the understanding of Bradesco's insurance operations we are here disclosing a summarized income statement. The third quarter was affected by volatility in equities and increase of the IGPM index which corrects part of the liabilities.
Although this affects impacted the quarter, if we strip out the profit from the sales of our participation held in asseloc [ph] in the second quarter of '07, the net income remains flat vis-à-vis the previous quarter. In the next slide, we will show the main members and ratios of our insurance operation.
Slide 27, total insurance premiums and revenues increased by 7.8% in the quarter-over-quarter analysis with pension plans and life insurance accounting for 54.4% of total premium. Please notice that this segment has been steadily increasing its share on the total, and it contributed with 51.6% as of September 2006.
Bradesco's market share regarding premiums stood at 25.2%. On the other hand in reference to pension plans and VGBL revenues, VGBL is kind of 401k product, Bradesco holds a 37.7% market share insuring a total of more than 12.7 million lives.
Premiums in auto, property and casualty, recorded a strong growth of 23.4% during the quarter vis-à-vis the 6.5% growth in the market. Thanks to improvement in processes implemented by Bradesco Seguros as the adoption of the profile, for example, and the company focus on this type of product.
ROE in the quarter and in the year-to-date numbers stood at the 33%. Slide number 28 and 29, financial assets and guaranteeing assets of technical reserves totaled 64.6 billion reais, representing a 42% market share.
It is worth remembering that 76% of these assets correspond to the pension plan and VGBL investment portfolios. Technical reserves have also recorded consistent growth of 4.6% in the quarter-over-quarter and of 21% in the year-over-year announcement.
Bradesco Seguros market share regarding technical reserves stands at 36.1%. We would draw your attention further volume of technical reserve for health segment.
Slightly above 3 billion reais of which 1.2 billion reais have been constituted build in the last 12 months. Slide 30.
This slide shows that personnel and administrative expenses remain stable over the previous quarter and showed an operating improvement, if compared to a longer period of 12 months. Slide 31, this index shows the re-operating efficiency of the insurance group in the claims controlled and the correct pricing of premiums, the underwriting policy.
We point out the improvement of these indicator in the quarter and also in the year-to-date period. Slide 32.
This slides shows our economic areas forecast for 2007and 2008 regarding GDP, base rates, inflation and the Fx rate. We expect the Celic [ph] rate of 10.25% ending the quarter at the end of 2008, we emphasize that the greatest impact of the Celic [ph] reduction has already been absorbed into our reserves.
I refer to, for instance, the reduction from 18% in December 2005 of the Celic to the current 11 in the quarter. From now on the reduction should be lower and the impact on our results will be to correspondingly smaller.
Slide number 33; we ratify the growth forecast for 2007 informed in the previous quarters. The projections for 2008 will be provided in the beginning of next year.
Slide 34, finally, we would like to invite all of you for our Second Annual Bradesco Day held on the New York Stock Exchange on November 15th. During this luncheon, we're going to have presentation of Mr.
Marcio Cypriano our CEO; Mr. Milton Vargas our CFO and Investor Relations Officer; and Mr.
Luiz Carlos Trabbuco Cappi, Executive Vice President who is in charge for our insurance activity. After that Bradesco's management team will be open for questions in the Q&A session.
Thank you all for your attention and let us now move to the Q&A session. Thank you.
Question And Answer
Operator
Thank you. Ladies and gentlemen we will now begin the question-and-answer session.
[Operator Instructions]. Excuse me our first question comes from Mr.
Mario Pierry with Deutsche Bank.
Jean Philippe Leroy - Department Director
Mario, ask your question please.
Mario Pierry - Deutsche Bank
Sorry, yes, I had the phone on mute, sorry about that. I have two questions, the first one is related to your health insurance reserve as you mentioned it already, above 3 billion reais; should we expect a provision that you are making to ran by the end of this year, or what level of reserve would you feel comfortable with?
And second question is more related to the recent merger sometime there in Banco Real in Brazil. How do you see that impacting the operating environment for the bank?
Thanks.
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Gentlemen, here is Samuel Monteiro speaking. That gives you...
about your questions related to the technical provisions... technical provisions for health.
I think for you... according to our calculations made by our clericals [ph] would be end in this year the complete provisions, rate difference between the premiums at a price approved by the Government and the price would be...
was mandatory related to the inflation of the medical staff cost. These would be in the end of this year, is completing cover...
and we feel completely comfortable with this.
Mario Pierry - Deutsche Bank
Okay, just to be clear then, it implies that you wouldn't need to make any more provisions next year?
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
About this type [ph] of provision, no.
Mario Pierry - Deutsche Bank
Thank you.
Jean Philippe Leroy - Department Director
In terms of your question, Santander Banespa was and is a strong competitor; Banco ABN Real was and is a strong competitor. Together, they will be and continue to be very strong competitors.
We believe that we have actually a good potential of expansioning our operation. We have been investing a lot over the last years in terms of CRM, in terms of systems to be fought in more and more operations with our existing client base.
So, at the end of the day although those two banks merge we believe that Bradesco continuous to be and will always be a strong competitor in Brazil knowing very well the market and developing more and more operations which... with its client base.
Mario Pierry - Deutsche Bank
Okay. This one is follow-up.
With the new size of Santander, does it put any pressure on Bradesco to grow and look for an acquisition, or do you feel comfortable with your current market share of about 13% of bank assets in Brazil?
Jean Philippe Leroy - Department Director
In terms of banking assets we might have a participation of 13%, but in terms of the CPMF collection we have closed to 20% market share. So, we believe that we have already a very strong size, and we believe that most of the assets will be to be fight the operations growing organically.
Mario Pierry - Deutsche Bank
Okay. Thanks a lot.
Jean Philippe Leroy - Department Director
You're welcome, Mike.
Operator
Our next question comes from Juan Partida from JP Morgan. Please go ahead.
Juan Partida - JP Morgan
Hi, good morning. I have two questions.
The first one is if you could help us calculate the actual growth in the payroll and overall consumer credit, if we adjust for the EMC merger this quarter, and the second question is what do you think would be a sustainable level of combined ratio for the insurance company in 2008, now that you won't have the dispositions? Thank you.
Jean Philippe Leroy - Department Director
You would like to know about the combined ratio, the trend for 2008?
Juan Partida - JP Morgan
Yes, is the 84 that you show in your presentation adjusted for extraordinary health insurance expenses are... is sustainable.
Is that something that we should be looking forward to seeing in '08?
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Samuel Monteiro speaking. About the combinization...
just a moment please... about the combinization, if you are looking at the nine year advances of this year, is for a midline insurance business which includes everything, health, BMC, life; you have 85.8 at the end of September.
This combinization is not affected by the... a special provision made by health.
This provision may not repeat in the next year. I live...
and it goes out same [ph] to you, that we would maintain a suitable, the 85.80 is, would be repeating the next year.
Juan Partida - JP Morgan
Okay. Thank you.
Jean Philippe Leroy - Department Director
The question relative to payroll deductible loans. Basically, in the second quarter and in the third quarter, BMC was included in the books but on different ways.
It is difficult for us to split out the effect because of that. We were in a pilot project, you can see on the slide number 20, that after Bradesco began to be integrated and BMC integrated with Bradesco in the payroll deductible loans, the origination of operations already doubled.
And we believe that there is potential growth in the range of some 50% per year in this type of product. This product is more focused on retirees and the public servants, but in the future it might also grow in other types of niche, for example, the private employees as well.
A lot of potential, this was the reason why we decided to acquire BMC because of its expertise. And as Milton told, about the 7,000 agents that are key for reaching the customers.
Juan Partida - JP Morgan
Thanks very much.
Operator
Thank you. Our next question comes from Alex Canterini from Merrill Lynch.
Please go ahead.
Unidentified Analyst
Hello. Good morning.
I have actually two questions on loan growth. First, with respect to credit as a percentage of GDP, I would like to know if you figure for 2008 includes any impacts coming from the credit reporting reform, mainly in Kadastro Processos [ph]?
And two, what's your expectation for loan portfolio growth in 2008? Thank you.
Jean Philippe Leroy - Department Director
In terms of the loans to GDP ratio, we should be moving from the 33%, 34% to 38%, as of next year, and this does not include other positive impact, for example, the creation of the Positive Credit Bureau. So the definitely the potential growth is even higher than that.
As Milton said in his speech, we are not opening the guidance for 2008, but that we should be opening in the beginning of next year, after we close the budget, but you can at least assume unofficially 20% to 25% loan growth for next year.
Unidentified Analyst
All right. Thank you very much.
Operator
Thank you our next question comes form Daniel Abut form Citi. Please go ahead.
Daniel Abut - Citigroup
Good morning. Jean, just on your, the recon of your guidance for '07, or what remains of '07, I notice that you are giving the same range that you gave the last couple of quarters on fee income and operation expenses.
Your fee income 18 to 23 for operation expense is 12 to 16, yet, if I look at the slide on pages 22 and 23, it is clear that for the nine months of the year, we really have nine months in, you are at the very low-end of the range for expenses 12% growth year-on-year, and in fee income very close to high-end of 22%. Any reason why the fourth quarter should make the number for more in the middle or in the low end of the range as apposed to being at the high end for fee and at the low-end for operation expenses, in other words, why after nine months you are so comfortable moving that guidance to something more realistic consistent with what we have seen in the nine months?
Jean Philippe Leroy - Department Director
Look, Daniel, when we basically prepared the guidance for 2007, it was at the beginning of 2007, and what we felt comfortable to change last quarter was the growth in the loan book expectation and loan portfolio for corporate, because of corporate and SME, in particular, growing more, we decided to increase more the loan portfolio. We...
every quarter we talk to the planning and control department in order to fine tune the guidance for the coming quarter, and the rest of the year. And naturally we felt that we should be, basically, keeping this type of guidance.
Although there is nothing particular that we see neither in terms of the fee income growth nor in terms of the operational expenses which made us decide to change. We basically have a guidance which we believe is very trustful and we decided just to keep it, but there is no particular explanation or positive or negative expectation for the last quarter which normally is the best quarter of every year, which made us decide to change our guidance for the year of 2007.
Daniel Abut - Citigroup
Okay, Jean, but just to make sure I understand. What you know now, it wouldn't, there is nothing that would make...
that would make the fourth quarter be too different, on fee income trend and operation expense trend from what we've seen our revenue in the first nine months?
Jean Philippe Leroy - Department Director
No, nothing that drives our attention. In terms of fees we are basically growing every quarter, and in terms of expenses, we are doing the best we can to rationalize our cost base.
So, nothing annulled for the last quarter.
Daniel Abut - Citigroup
Thank you.
Jean Philippe Leroy - Department Director
You're welcome.
Operator
Thank you. Our next question comes from Saul Martinez from Bear Stearns.
Please go ahead.
Saul Martinez - Bear Stearns
Hi, good morning gentlemen. A couple of questions; first, a follow-up on the health insurance business.
In the past, you have indicated that you felt comfortable with your provisioning levels, and then had to take up premium deficiency reserves again because of the actuaries. Is there any risk that tilling house or the actuarial consultants when they look at your books at yearend, they're going to disagree with you and make you take...
and make you continue to build reserves for your individual health insurance business?
Jean Philippe Leroy - Department Director
I don't think so. I don't think the actuaries would be...
find new reasons to make additional provisions. I don't think so.
Saul Martinez - Bear Stearns
Okay. How much can the health insurance business contribute their earnings, individual and corporate?
Jean Philippe Leroy - Department Director
Corporate represents about 75% or 76% of the portfolio.
Saul Martinez - Bear Stearns
5 or... I am sorry, 5 or 6% --
Jean Philippe Leroy - Department Director
76% is the corporate --
Saul Martinez - Bear Stearns
Okay --
Jean Philippe Leroy - Department Director
And 24% is individual.
Saul Martinez - Bear Stearns
Got it. But if you are not...
if you are no longer taking premium, building premium deficiency reserves, how much can the health insurance business generate in earnings, because it's my understanding that it is not been contributing to earnings --?
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Today, I would say, in our members in 2007 is around, excluding the 40,000... pardon me --
Saul Martinez - Bear Stearns
Okay.
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Okay.
Saul Martinez - Bear Stearns
I am sorry, I missed that. Could you --
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
The results of the corporate, when you look only to corporate's business the results is 40 million --
Saul Martinez - Bear Stearns
40 million for the... 40 million quarterly?
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Hopefully --
Jean Philippe Leroy - Department Director
Per month.
Saul Martinez - Bear Stearns
40 million per month. Okay.
So does that mean in... if you're no longer posting losses in the individual business?
Does that mean the health insurance business as a whole can add to earnings by $500 million, $600 million in 2008?
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Yes --
Jean Philippe Leroy - Department Director
Exactly.
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
Exactly.
Saul Martinez - Bear Stearns
Okay. Got it.
Secondly, any update on plans to... any plans to IPO VISANET?
Jean Philippe Leroy - Department Director
Actually we're one of the shareholders of VISANET, and the shareholders are having discussions about having or not having dispute, but if we have something that we believe could be relevant to the market, obviously, we're going to disclose that to each and every one.
Saul Martinez - Bear Stearns
Okay. Got it.
Then just one final question on your BIS ratio, why wouldn't you choose the option available to you under the circular 3367 that would've given you a 17% BIS ratio? And do you expect to choose that option in the future?
Jean Philippe Leroy - Department Director
Actually, it's more a question of pointing we have a flexibility, let's say that we have a 14.2% BIS ratio which actually in apple-to-apple basis compared with the previous quarter would be 16.9%. At anytime we can write a letter to the Central Bank and we have the possibility to raise that to 16.9.
So, because of wanting to keep this flexibility to choose whether being calculated at 14% but being allowed to be calculated at 16%, we basically are preferring to leave it this way.
Saul Martinez - Bear Stearns
So, if we look at your capital strength, really, the more relevant number in your capital flexibility, the more relevant number is 17%?
Jean Philippe Leroy - Department Director
Exactly this would be a fair comparison with the other period.
Saul Martinez - Bear Stearns
Okay. Thanks a lot.
Jean Philippe Leroy - Department Director
You're welcome.
Operator
[Operator Instructions].
Jean Philippe Leroy - Department Director
Let me maybe respond to question... one question that we received through the Internet from Mr.
Alexander Coelho [ph] from Plus-Capital. The question would be in a scenario of Brazilian investment grade and economic stabilization, what is the level of BIS to that Bradesco can reach in the medium and the long term?
Internationally this level is around 4% in tier 1 and 8% adding tier 1 and tier 2. Does Bradesco consider it's possible to reach those levels, therefore, liberating excess capital to its shareholders?
So basically the response is that we have in Brazil a minimum ratio of 11%, and for the tier 2 its 50% of what you have in tier 1. We are working for a long period of time with people dedicated from the risk management department in order to analyze the Basel II implications, although, some of the implications are still pending from the side of the legislature.
But in general term we believe... we don't believe that we would be as the question is maybe, proposing that we should have an 8% Basel ratio through the Basel II calculation.
We are right now analyzing, as we have been doing for long period of time and we feel comfortable with the level of capital. Looking at the scenario, obviously, looking at that calculations, there is a possibility of having excess of capital, but we have...
we are planning on some issues, some information from the legislature that will be making us calculate more in-depth the real excess of capital that we might have. Maybe some other question please?
Operator
Excuse me. Our next question comes from Mr.
Mario Pierry with Deutsche Bank.
Mario Pierry - Deutsche Bank
Yes. Let me ask you a question with regard to your cost structure, as you mentioned, you plan on opening a 150 branches per year through 2010.
Can you first tell us the expenses associated with this branch expansion, where do you plan on opening these branches? Are you going to be focusing on the Southeast of Brazil?
And third does this mean or is this in anyway in anticipation of the bank might losing the contract of the postal office, is that why you are doing this or is it just because of you see the strong growth in Brazil when you feel the need to increase your distribution network.
Jean Philippe Leroy - Department Director
Mario, we basically have a average cost for opening a branch of some 700,000 reais, so you can basically, on average, multiply that by 150. We are extremely well attended in Brazil because we have more than 5,500, 6,600 branches and mini-branches.
And we should be opening the branches, actually, in more largest cities; cities that we see have more potential for the return of this investment. We continue to be fostering and to benefit from the agreement of the postal service, nothing changed.
And actually this is kind of an additional network because postal bank is much more focused on the lower income classes and the branches that we are opening are more in regions that we believe have potential for us to have the return.
Mario Pierry - Deutsche Bank
Okay. But does it mean...
like, are you focusing San Paulo and Rio or do you plan on opening some more branches in Northeast?
Jean Philippe Leroy - Department Director
Basically Rio, San Paulo and the largest and wealthiest cities of Brazil. So not only San Paulo and Rio but, obviously, Porto Alegre and Belo Horizonte, the Manaus Jarad [ph] state and other places that we believe have the potential for maximization of the return of the shareholders.
Obviously, in the assumption that Brazil is on a very good trend in terms of economy and the people are making more money, unemployment rate is moving down and the companies are also developing more and more their businesses.
Mario Pierry - Deutsche Bank
Okay. Also if I can follow up, you talked about 700,000 reais per branch.
What is the breakeven of the branch? How long does it take for you to breakeven?
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
The breakeven would be around 7 months and the return on investment, the payback would be of around two years. Hello?
Mario Pierry - Deutsche Bank
Okay. Thank you very much.
Samuel Monteiro dos Santos, Jr. - Chief Financial Officer of Bradesco Seguros Insurance
You are welcome.
Operator
Thank you. Our next question comes from Ishwan Colar [ph] from [indiscernible] Capital.
Please go ahead.
Unidentified Analyst
Good morning gentlemen. Just wanted to ask you a little bit about your projections on the mortgage loans in 2008, you said it's increasing about 33%.
Why don't you get an understanding of what's the portfolio mix would be between individuals and builders in 2008. What's your thoughts over there?
And then understand a little bit about the profitability dynamics between loans made to builders, loans made to individuals?
Jean Philippe Leroy - Department Director
Okay. Basically we are in the phases...
very positive phases of mortgage development in Brazil, and because of that we see a lot of new buildings, a lot of construction, and if you look at the presentation that we show. You can see that there is a clear contemplation in loans for builders, because in the new origination 77.7%.
As you can see on slide 21, please. 77% would be directed to builders and just 22.3% to individuals.
We are in the phases of very strong growth in the number of building. This is the reason why most of the origination is directed for the constructer, for the builder.
But over time, we believe that this ratio will be more going into the direction of the 50:50 split as we see in the portfolio mix that we have here on slide 21. It's very difficult to precise, exactly the percentages because Brazil never pass through such a positive environment for mortgage.
With very good legislations, interest rates moving down and the expansion of the tenure of the operations, to give you an idea, we are offering 25 years of fixed rates for our customers at 12.5% a year. So, we definitely believe that this is a major plus and that in the future we will be more able to respond more precisely the separation because we never pass through this...
such a positive scenario for mortgage growth in Brazil.
Unidentified Analyst
So, if I may just follow up; your loans to builders are basically project financing loans and working capital loans, or...?
Jean Philippe Leroy - Department Director
Yeah. We're financing the construction of the building.
And we basically grant the money to the builders depending on the agenda of the construction of the building. So for example when we look at the origination of 1.2 billion reais in the quarter, it doesn't mean that the loan book grew on the same way.
We originated the operations and after time with the agenda of the building being shown to us, we begin to finance more and more the project, the building itself.
Unidentified Analyst
And one last follow-up, are you seeing? What is the average ticket size of your mortgage loans through individuals?
And are you seeing a trend shift in anyway? Hello?
Jean Philippe Leroy - Department Director
Yeah. Just a second, please.
In general terms the average value is around a 100,000 reais for the home, and we are financing, actually, 80%. You have a down-payment of approximately 20% of the building.
So, the people are coming with 20% and 80% would be financed. And the tenure is close to 15 but it's moving up as we have a lot of inflow of operations, close to 25 years, but still most of it is closer to 15 years.
Unidentified Analyst
And do you see the average size, the original percentage with the average size of that 110,000 shifting in any directions, either up or down?
Jean Philippe Leroy - Department Director
Actually it's moving relatively flat. We see...
because most of the demand comes from... most of the customers that have, relatively speaking, the same type of wealth, so we can finance them up to a certain degree.
So, the tenure is extending but the average cost of the apartment or the house is not changing so much right now.
Unidentified Analyst
Thank you very much.
Jean Philippe Leroy - Department Director
You are welcome.
Operator
Thank you. Our next question comes from Saul Martinez from Bear Stearns.
Please go ahead.
Saul Martinez - Bear Stearns
I just have a follow-up to something you indicated earlier, Jean, you said the impact of declining Celic [ph] should become, should lessen over time; and my question is does that mean that we should think of... we should think the net interest income growth should be closer to your average interest earning asset growth which I would expect to be closer to 15% to 20%.
Because this would imply that net interest income growth is going to speed up from what you have been generally... at least you are indicating 2007 net interest income growth should be up 4% to 10%.
So, the question really is, does this imply that net interest income growth... we should think of net interest income growth as closer to what you expect your interest earnings assets growth to be at in the coming years?
Jean Philippe Leroy - Department Director
Yeah, I believe in general terms, yes. But obviously when you look at the net interest income evolution, as we have more and more stable and strong economy, the trend for treasury gains and volatility, they decline in the future; the interest part more relative to loans growing.
And actually we have been looking at some reports and some people talk about the net interest income behavior, and actually what we try to do in the presentation is always to show, including and striking out the treasury gains and the impact of the mark-to-market. As you can see on the slide number 11, for people having a better understating of what happens.
Obviously, in the third quarter there was more volatility in the market, and this on one way or the other affected the treasury gain, but in general terms that we see is that the trend... if you can, please, look at the slide number 11...
is that the trend in grade being kind of stable over the last three quarters, even though the volatility as quite strong in the third quarter. So, yes you are correct about your question.
And actually we are working with net interest margin for the whole bank over the next three years being relatively close to 7.5% for the bank as a whole including the treasury gains as well.
Saul Martinez - Bear Stearns
So... but that would imply that if we're looking at interest earning asset growth, just to be clear, of, I don't know, 15% to 20% and loan growth, obviously, higher than that, does that mean that the non-treasury component of net interest income should be growing at something closer to 15% to 20% in the coming years?
Jean Philippe Leroy - Department Director
No, actually what we are seeing is that the treasury portion and the mark-to-market should be relatively more stable as the volatility is declining and should be declining as we continue to believe about preservating the investment grade as of next year, this definitely should be a major positive and as more volatility declines, at least, in our understanding, obviously, we don't know what is going to happen with all the variables like the international markets, but what Brazil is concerned and what Bradesco is concerned, in general terms, we are expecting net interest income to grow more and more in line of the risk weighted assets than the treasury portion.
Saul Martinez - Bear Stearns
Okay. And what would you think risk weighted assets could grow in the next...
on a normalized basis in the coming years?
Jean Philippe Leroy - Department Director
We are working for loan book growth of three to four times the GDP. This would be the evolution, in the long run, for the growth in loans.
I don't have precisely now for the risk weighted assets, but for the loan, three to four times the GDP.
Saul Martinez - Bear Stearns
Got it. Great.
Thank you.
Jean Philippe Leroy - Department Director
You're welcome.
Operator
[Operator Instructions]. Since there are no further questions.
I would like to invite Mr. Jean Philippe Leroy to proceed with his statements.
Please go ahead.
Jean Philippe Leroy - Department Director
Okay, basically I would like just to read the last question which also came from the Internet, and from Mr. JC.
Given your increase in individual loan delinquency over two years, 3% to 6% and decrease in corporate loan delinquencies, what are your goals for the spread between the two? As individual loans have increased 28.8% year-over-year, 9.1% quarter-over-quarter versus your increase in corporate loans 20.8% to 2.1%.
Looking at the slide number 18, actually the growth was not of 3% to 6% but more from 4.1% to 6.1%. These would be for the individuals, the top line in blue.
Even though this growth in... that we have been seeing in delinquencies, we are continuing to grant loans to this type of customer, as you can see on slide number 13, with a strong growth.
And actually... just a second.
What you can see is that when we look at the slide number 13, we believe it's one of the most important slides to analyze, how our strategy for loan book growth is; if it is correct or not? But we see that basically we have been growing more and more our exposure to SMEs and to individuals, and which normally has a higher risk.
But at the end of the day the black line, in the middle, shows that our loan book growth, even though being in some part more directed to clients with a higher risk than large corporate, for example, that are using more capital markets, we are earning more money. So, we believe that the best for you to question, and to follow if our strategy for loan book growth is correct, is by looking at the slide number 13 quarter-after-quarter and asking us questions about them.
So, in general terms we are growing... to continue to grow loan book through individuals and SMEs but the spread is higher and it more than compensates with the higher risk.
I would definitely like to thank each and everyone for joining this conference call. And once again invite everyone for our Bradesco Day on the New York Stock Exchange on November the 15th.
Thank you very much and hope to see you in New York. Bye.
Operator
That does conclude the Banco Bradesco's audio conference call for today. Thank you very much for your participation and have a good day.