Jan 30, 2010
Executives
Luiz Carlos Trabuco Cappi – CEO Domingos Figueiredo de Abreu – EVP and IR Officer
Analysts
Jorge Kuri – Morgan Stanley Peter Irblad – Deutsche Bank Daniel Abut – Citi David Vaamonde – Fidentiis Victor Galliano – HSBC Jason Mollin – Goldman Sachs Flavimontodu [ph] – BlackRock
Operator
Good morning, ladies and gentlemen. We would like to welcome everyone to Banco Bradesco’s fourth quarter 2009 earnings results conference call.
This call would be conducted by Mr. Luiz Carlos Trabuco Cappi, Chief Executive Officer; Mr.
Domingos Figueiredo de Abreu; Executive Vice President and Investor Relations Officer; Mr. Marco Antonio Rossi, Chief Executive Officer of Bradesco Seguros e Previdencia (Insurance); Mr.
Samuel Monteiro dos Santos Junior, Executive Vice President and Chief Financial Officer of Bradesco Seguros e Previdencia (Insurance); Mr. Luiz Carlos Angelotti, Department Officer of Accounting Department.
This call is being broadcasted simultaneously through the internet in the Web site, www.bradesco.com.br/ir. In the 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, 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. Luiz Carlos Trabuco Cappi, Chief Executive Officer.
Mr. Trabuco, you may proceed.
Luiz Carlos Trabuco Cappi
Thank you. Good morning, everyone.
Welcome to our conference call. First of all I would like to thank you all for accepting our invitation to take part in this conference at which we will present the 2009 results.
The 2009 yearly conference, in the first semester, we had an adverse economic climate and a negative feeling, but we decided to maintain liquidity and credit lines to our client. In the second semester, we saw a recession of the positive expectation for 2010 with the arrival of our new class of the consumers as a result of the social mobility, social inclusion and the popular asset to the banking system by the CDs and the elite classes.
Despite this, Bradesco is maintaining its investments. During these two semesters, we continued to expand our advanced network and investments.
We opened 441 branches and the sub branches and ended at 2009 with 6015 attendance points. We set up 4,139 Bradesco Expresso units, bringing our network of 10,200 correspondent banking postal.
This was also a year marketed by national integration during which Bradesco consolidated its presence in a 100% of 5,564 Brazilian municipalities. We also opened the first floating banking branch in the world on about on the River Solimões or Amazonas.
In terms of the results, we are presenting net income of the R$8.012 billion, 66% of this income came from the financial sector and 34% from the insurance sector. Assets totaled 506.2 billion.
Shareholders' equity ended the period at R$41.7 billion. The complete statement will be presented in statement by our colleague, Abreu.
In terms of the loan portfolio, we ended this year with volume of R$228 billion. We granted new loans amounted to R$243.2 billion and the average turnover period for the credit was 247 days.
In terms of our IT model, we continued to believe that technology brings commercial benefit. The pillars of the new architecture of the systems are flexibility, agility and simplifying profit.
In terms of our organization model, we are reinforcing the qualitative management, style directly at the convergence of the business segment bringing gains of the synergy. At the same time we have an advanced development program for our executives.
Our business model involves operating by segment. The retail segment ended last year at 20.9 million account holder client and 800,000 new accounts.
We opened 1.9 million saving accounts. For 2010, we foresee the inauguration of the 250 branches which will lead to an increase in sales and efficiency.
The prime segment reserved special attention and now has national coverage with 277 branches in 25 Brazilian states. The middle segment will add an extra third branches to its current network of the 69 point and will continue to operate within the production chance concept.
The corporate segment attained the 1,200 largest Brazilian economics growth. It’s operated in complete synergy with the investment bank.
Our investment banking took part in the main capital market operation carried out in Brazil. We are second in the ranking of the fixed income operation with 25 operations and a 19% of the market share.
The investment banking is in 5th position in the variable income ranking with a 10% market share. Looking at the order size decline, the insurance group presented this net income of R$2.723 billion with an impressive return on equity of 27.90%.
Total revenues came to R$26.3 billion, an increase of 14% over 2008. We reiterated our vocation for a specialization with the (inaudible) of our Dental royalty operation with the OdontoPrev, the leading company in dental brand sector.
We carried out other important business deals with the acquisition of a bank with Brazil. We are also taking advantage of the opportunity presented by Ibi Mexico.
We carry out this business by showing respect and admiration for our partners, the C&A retail store network. We are continuing expanding our co-operation with the National Institute of Social Security incorporated by payment of 100,000 new beneficiaries amounted for January.
In this moment, I would like to take this opportunity to inform you that apart all our commitment to fostering the professional development of our executive based on and most disciplinary concept and in order to strengthen our business area, our much respected Jean Philippe Leroy, who was our Investor Relation Officer for 10 years will become Bradesco Luxembourg, where he will develop activities in the international, private banking and asset management area in continental Europe. Among this many contribution to our organization, I would particularly like to mention the creation of the Investor Relation area in 2000 and six months later the marketing relations department.
Jean was responsible for taking Bradesco’s investment method to investors and shareholders in Brazil and abroad and for the pioneering initiative of uniting the IR and the social and environmental responsibility area. He will be replaced by our esteemed Paulo Costa [ph], who possess more than 10 years experience in both the broker-dealer area and who are responsible for implementing Bradesco Securities, international operations in the United States and United Kingdom, where he was our CEO, he along should coordinate the approval or financial of the company to start this for Bradesco in USA.
Paulo will bring all this international experience to bear on the IR and social and environmental responsibility area. Paulo and Ivan [ph] together we will be in-charge to coordinate the investor relation area.
They are available to attend any demand from you. In conclusion, our aim for 2010 is to focus on increasing our market share and the quality of our services.
We are well-positioned to grow organically where we will have greater possibility within our own organization. Finally, we stress the investment in 2010 view total for R$0.2 billion and go towards to the expansion of the technological structure, purchase of the equipment and expansion of branch network.
The aim will be to strengthen the condition for consistent long-term organically growth. Please Mr.
Abreu explains our position.
Domingos Figueiredo de Abreu
Thank you. Good morning, everyone.
On Slide #2 and #3, we show some of our highlights. I would like to draw your attention to our net income in the fourth quarter of 2009 of around R$2.2 billion, totaling an annual net income of more than R$8 billion in 2009, 5% up on 2008.
The assets managed reached more than R$700 billion, growing by 70.5% over December of 2008. Slide #4; on this slide, we gave a summary of all those events we consider as non-recurring and which affect our results in the respective fields.
The less line in red therefore shows our results, which we call as adjusted net income or recurring net income. This quarter, our results were benefited from non-recurring events, especially the net gain of R$388 million resulted from the payment of certain taxes pursuant through Law 11,941, it's called a REFIS.
This was chiefly due to our decision to drop certain thesis in which we have been competent in the course of the legality of these taxes. As a result, part of the provision made for this proposal was reversed.
The remaining non-recurring items are shown in this chart or underneath in default footnotes. In an event, we may offer additional explanation during the Q&A section.
On this slide, I would also like to draw your attention to our fourth quarter and our returns on average equity, both in terms of reported and adjusted net income which stood at around 20%. Slide #five, before moving to the slides in the order it lies I would just like to make clear that the data numbers and indicators we will be dealing with from now on had not been adjusted for the non-recurring events shown on the previous slide since we have maintained the same reporting procedures as of now press release and economic analysis report.
However, whenever we consider any of these events to be important, we will certainly mention this fact during the presentation. Going now to Slide #five, we highlighted our operational efficiency ratio, which closed 2009 at 41%, presenting a substantial improvement over the previous year, chiefly due to the increase in our fee income and net interest income.
Slide #six; total assets reached R$506 billion, 11% up on December 2008. The return on assets stood at 1.7% and return on average equity at 21.4% in the period, excellent ratios given the economic scenario during the year.
The Basel ratio also grew reaching 70.8% in December 2009. This ratio will allow us to double our loan portfolio, leaving us in a very comfortable position to sustain expected growth in the coming years.
Even considering ongoing regulatory change, if you remove those surplus allowance for loan losses from our current capital basis, which will occur as of next April, our bad debt ratio would reduce to 60.9% which is a level that we still believe to be exceptionally comfortable. Slide #7, this quarter, 62% of our net income came from financial activity, and 38% from insurance business.
This higher share from insurance business was due to the fact that quarter is now recovering, events had a bigger relative impact on these business results. If you consider just net income in this population, the insurance contribution would fall back to 33%, very close to the historic average level.
In the financial area, we can see that the results from loan portfolio increased its share over total net income this quarter, essentially due to reduced provision needs in the annual comparison. However, virtually the share over net income was reduced due to higher provisioning needs because of increased abilities.
While the relative increase in the share of the security line was largely due to the good performance of our treasury. Slide #8; realized gains stood at $R10 billion in December 2009 virtually flat over the previous quarter.
It’s worth mentioning the inclusion of the investments in OdontoPrev, Laboratories Fleury and Cetip. Those joint goodwill totaled more than R$900 million, offsetting the reduction of our stake in Cielo in certain fixed income securities without any question these number exemplify the strength of our balance sheet.
This should emphasize that these numbers do not include the potential gain from our own properties of almost R$2 billion and neither the tax spread of R$830 million from the social contribution rate interest. Slide #9; as you can see in this slide the non-interest earnings portion did exceptionally well in 2009, increasing by R$2.3 billion over last year.
In the quarterly comparison, however, it fell back to what we consider as a reasonable level given that the price of most financial asset has a rate of return to pre-crisis levels. It shows worth noting that income from interest earning operation also increased by substantial 18.7% in 2009, mainly due to higher average volume.
We will be dealing with this in more detail in the coming slides. Slide #10; regarding the net interest margin, I would like to highlight it’s risen to 7.8% in the quarter and is significantly improving in 2009.
The performance of our net interest margin reflects improvement in our margins in turn caused by better condition and improved demands with an increase in the higher margin portfolios especially individual loans. However, we believe the rise of this integrated during the year can be considered atypical.
In our opinion it will fall gradually in the mid-to-long-term as it did in June 2008 due to the increase in lower margin operations and their consequent relative share gain. Slide #11, this slide gives a breakdown of net interest income and there are no comparisons.
The highlight is the performance of interest income from loans, which increased by 24%, primarily due as we just mentioned through the growth of the loan portfolio and changed its mix. The reduction in funding line reflects a decrease in interest rates during the period partially offset by the increase in the funding volume.
In the quarterly comparison the 22% increase in the insurance line was chiefly due to higher gains from security index through the EPCR [ph] consumer price index and reduced expense from the restatement of reserves inline with the GPM [ph] general market index. Slide #12, the highlights on this slide is the 19% improvement in the net margin for loan operations in this quarter, the blue parts of this graph, which is the best out of the series, due to the growth of the gross margin and the reduction in provisioning expense.
In the annual comparison, however, the net margin fell by almost 7%, indicating that gross margin growth was insufficient to absorb the increase in provisions. It was emphasized that for the purpose of this slide were not included in non-recurring provisions made in 2008 and 2009.
As we had already mentioned the exceptional optimist outlook for Brazil’s economy as well as the trend of our delinquency indicator, reinforce our belief that the worst is over in terms of provisioning needs and we expect a continuous improvement in the net margins in the coming quarter. Slide #13, this shows the portfolio with R$228 billion at the end of 2009, moving at 5.8% in the quarter.
These indicators were influenced by Incorporation of Banco Ibi’s operations in the total amount of R$4 billion. If we ignore this factor, loan operations still recorded growth, chiefly leading by loans to individuals which increased by 3.7%, and the loans to SMEs, which moved out by 7.2%.
The products for individual segment that lead the growth were, (inaudible) with a growth of 15.4%, payroll-deductible loans with 11.8% and mortgage with 6.2%. It's worth noting that the lower large corporate loan growth was partially due to depreciations of the real currency against the U.S.
dollar with impact on dollar index loan which accounts for around 22% of total loans in this segment. We believe that demands for (inaudible) will increase in 2010.
Thanks to the improved economy, consequently we expect our total loan portfolio to grow by between 21% and 25%. We'll go into more detail on this later.
New borrowers in 2009 were people or companies who had no loans with Bradesco in December 2008, accounted for around R$22 billion of the loan portfolio, underlining the fact that we had grown with quality while diversifying risk. Slide #14, as we expect the delinquency ratio for loans overdue by more than 90 days record a reduction in this quarter, rating 4.9%, excluding the incorporation of Banco Ibi's portfolio in order to give a more accurate comparison with the previous years.
The ratio would have been even less just 4.7%. Note that, in the individual delinquency ratio has already returned to the same level as in the beginning of the year, which shows that delinquency peak is definitely behind us.
We expect these ratios to improve even further in 2010. Slide #15, on this slide we show the behavior of early stage delinquency of between 61 days and 90 days.
Note that the individual delinquency ratio continues to fall. It reaches its lowest level at the year in December 2009, very close to its pre-guidance level.
The corporate ratio has recorded a continuous decline since August 2009 and giving the promised economic outlook for 2010. We believe it will be also withdrawn to its pre-crisis level shortly.
Slide #16, this quarter we had also included a non-recurring represented write off net of recoveries. The last curve in this slide, which gives us another dimension to our provision levels.
If you look at historical figures for the allowance for loan losses and the effective losses over the subsequent 12-month period, we can see that written-off losses were also net of recovery has historically a strong correlation with nonperforming loans right from E through H. This historical trend allow us to assume that our effective losses a year from now will be close to 5.8%, indicating a surplus provision of around 2.7% of the credit portfolio, equivalent to R$5.2 billion.
Using the write-off net of recovery concept, we would have losses of around 5.1% with a surplus of close to 3.4% equivalent to $R6.5 billion. Without questions, whichever concept we look at, we have an ample portion to cover any possible difficulties that may arise.
Slide 17; reinforce our comments on the previous slide. This one shows recovery ratio of the allowance for loans losses to loans overdue by 90 days and 60 days.
As you can see, this quarter we recorded our highest ever recovery ratios under both concepts. As a result, we believe that there is no need to make additional provision in the future.
On the other hand, we believe we will not have to use the additional provisions we had already made. Since, as we have mentioned, we expect delinquency to improve from now on.
Slide #18, considering that once we was incorporating November 2009 for a better comparison mainly with third quarter numbers, we had (inaudible) in this and the next two slides, in which we report fourth quarter's revenues and expense with no impacts from (inaudible). Income increased by a substantial 6.7% this quarter, chiefly driven by taxes due to seasonality, followed by brokerage and the royalty income, reflecting the improvement in the capital market.
For 2010, we expect capital market to remain strong and we believe our investment Banco Ibi has a condition to generate important revenue. Slide #19, operational expenses increased by 8% in this quarter.
Personnel expenses fell by 3.3% and reduced especially due to the non-structural portion, giving lower expenses from the withdrawal [ph] of sharing plan for employees and executives. The annual comparison reflects the management’s efforts to be consequent increased expenses by only 7.5% in spite of 2008 and 2009 Collective Bargains Agreement and investments on organic growth during this period.
Slide #20, administrative expenses were strongly impacted by advertising expense in the last quarter as seasonally happened in this period of the year. The other expenses lines were 5.3% up in the quarter, which is compatible to higher business volume in this period.
The annual growth was 30.1% is in line with our coverage network increased 17% and the consequent higher business volumes. Slide #21, this slide shows our revenue from insurance, insurance premiums, pension plans and semi bonds, which increased by 20.3% in the quarter, reaching R$80 billion.
In line with the seasonal trends in the last quarter of the year, life insurance and private pension plan products recorded a substantial growth of 33% in the quarter. First quarter net income moved up by around 36%, reaching R$828 million, chiefly due to reduced grants, the improving financial results and the non-recurring impacts mentioned earlier, mainly from REFIS.
Based on the latest figures from Susep and the ANS, Bradesco’s Insurance Group maintained its leadership with the 23.7% market share in terms of revenues. Slide #22, this slide represents some of main numbers from the insurance activity.
Beginning with the combining ratio, the improvement in this quarter was primarily due to reduced client claims since the previous quarter was impacted by swine flu and to the higher revenues in this quarter which as we saw increased 20%. Our all financial assets and those with guaranteed taken for reserves totaled R$83.7 billion.
Second, the provision stood at R$75.6 billion, of which R$65.7 billion were related to life and pension products. Here as we like to emphasize that we worked with actuarial assumptions that leave us very comfortable in relation to our future commitment with the beneficiaries of our insurance and pension plans.
Actuarial tables, we use is the eight exceeds 2000 with an improvement of 1.5% per year. In addition, in terms of expected interest rates for our assets, we have adjusted our provision to more conservative levels by adopting a real rate of 4% per year, this year versus a 4.3% at the end of 2008, which demanded more than R$500 million of new provisions.
Slide #23, you can see here our economic department projection for 2010 and 2011 regarding GDP, interest rate, inflation and the U.S. dollar exchange rate.
Given the current economic performance and stated favorable projection, we expected 2010 GDP growth of 6%. If it is confirmed, it will be well above the average growth for the last 30 years and one of the highest rates in the world.
As economic reform becomes stronger, reflects on our inflationary increase demand the response from (inaudible). We therefore believe that if Selic base rates will increase in 2010, our base with no adverse impact on economic growth.
Slide #24, here we show our 2009 guidance and the actual numbers side-by-side. In the case of loan operations, we were below our forecasts, chiefly due to the large corporate volumes shrinkage, partially due to the foreign exchange rate valuation and partially to the remuneration of sum of this spread to capital market operations.
On Slide #25, for 2010 we expect a loan portfolio growth of around 21% to 25%, driven by credits for the corporate segment and by certain specific lines for the individual segment, especially payroll deductible loan. In mortgage, we expect to originate around R$6.5 billion in new operations, representing a growth of approximately 50% over 2009.
Finally, confirming what we have been stating, we would like to underline that the fact that 2009 really was a year of major challenges. However, given the solid results we achieved we can say that Bradesco overcame them efficiently.
I say that’s not only because of the profit reported, but also because we had managed to improve even further our provisional laterals for both spread and technical reserve in the insurance field. Another important achievement was the balance of our realized gain which improved during the year from over R$600 million to over R$10 billion.
And now (inaudible) was chiefly without losing sight of our organic and sustainable growth maintaining our positive and constructive vision for our company. During the year, we expand our presence, expanding our customer service network, our own and certified by more than 6,400 service points, consolidating our presence in 100% of Brazil’s municipalities.
Moreover, we kept expanding our client base and business volumes. We also have invested heavily in technology, on training and at optimizing our resources and possibly improving our operational efficiency.
Thank you all for your attention and we are now available to answer any questions you may have.
Operator
Excuse me. Ladies and gentlemen, we will now begin the question-and-answer session.
(Operator instructions.) Our first question comes from Mr.
Jorge Kuri with Morgan Stanley.
Jorge Kuri – Morgan Stanley
Hi, good morning everyone, and congratulations to Jean for his new (inaudible). I have three questions if I may really quickly on your guidance.
The first one is can you explain why your guidance for individuals portfolio growth is 16% to 20%, which is lower than the guidance for total loan growth of 21% to 25%? I guess over the last many years we’ve seen you and most of the banks being able to grow consumer lending much faster than the overall portfolio.
That’s the first question. Second, your guidance for financial margin growth of 14% to 18%, can you clarify if that includes trading gains or this is excluding trading?
And second, what type of margin contraction is implied in this; what year-on-year basis point reduction are you assuming? And the final question on the guidance is can you help us a little bit with the outlook for provisions?
Provisions were around 6.5% of total loans in 2009. Where do you think the number could be?
Thank you.
Domingos Figueiredo de Abreu
Hi, Jorge, this is Abreu speaking. We understand that it will gradually grow more in the corporate side because the company is investing a lot, here where the economy, the big drive for the economy, will be now divestment for company that’s why we understand that the portfolio of corporate will grow more (inaudible).
Of course, it will continue to be important for us even in consumer side, but we are posting more conservative guidance for this, this could be more, we understand should be more, but we are just posting more conservative. One thing is exactly because it has been going more in the past, right is the movement that we need to replace some, for example, we grew in 2007 and 2008 in how to finance for example much more it was a very, very, big, big growth that we had.
Once we are replacing that plan, so we need to replace that plan and we need to grow that portfolio. So, that’s why you have this impact in the consumer side.
And say about net interest income that we are projecting growing between four to 18, it’s including a part of total gain, there are some part, you can see that there are of trading gain that we have been posted in the past, okay, we can consider its including deal [ph] but exceptional gains or losses is of course we need to reduce. And why it is here we are let’s say optimistic about this net interest income than we were in the last year.
One thing is because we start to remember that the last year we have an average movement in the credit portfolio. And in 2008 we got a lot (inaudible) you transfer the revenues for 2009 because we start in the point, a higher point.
During 2009 the portfolio didn’t grow as much that it’s growth in 2008, so you have this aspect on this. And we have some pressure for us in the spread during 2010, during 2009, during the higher, the most complicated period we need to increase spread, of course, once we have the economy going back in the normal base, we expect the spreads will continue to reduce a little bit.
So are there other questions? You got my point, is that?
Jorge Kuri – Morgan Stanley
The last is on provision, so if you can help us a little bit with your outlook for provisioning in 2010?
Domingos Figueiredo de Abreu
Look we don’t have a number like we see, you see like its present part of the total portfolio. Normally, we use a reference that the present charge-off our gross margin as you have in our slide #12 when the CDs, the total provision we can assume to be around 44% of gross margin, let’s say.
Jorge Kuri – Morgan Stanley
44% of interest income you mean?
Domingos Figueiredo de Abreu
Excuse me?
Jorge Kuri – Morgan Stanley
Interest income from loans?
Domingos Figueiredo de Abreu
Look at the margin that we have in slide 12, we have the great part of the gross margin, right. We normally, we work with something like this, the provision will be around, here we are close to 60%, in 2009, we are close to 6%.
We expect the net will be around 44%.
Jorge Kuri – Morgan Stanley
All right. That’s clear.
Well, thanks a lot.
Domingos Figueiredo de Abreu
Welcome.
Operator
Excuse me. Our next question comes from Mr.
Peter Irblad with Deutsche Bank.
Peter Irblad – Deutsche Bank
Hi, good morning. A couple of questions, just a follow-up on the financial margin you spoke about before.
You said you use some of the trading gains in your estimates, but some you don't. So just want to I know, it's hard to calculate but more forecast, but since to get a sense, if you look at that trading gains over the last few years averaged around R$600 million.
Is that more or less which you are using or do you think it could be lower than that particularly since the fourth quarter we were trading around R$300 million. So if you can maybe give us a little more color on that?
And then just second question related to your acquisition of the Banco Ibi Mexico? Can you maybe just give some more color in terms of, do you expect to grow more outside of Brazil, is this kind of a sign or you plan to go in Mexico, or is this just related to the previous acquisition of Banco Ibi?
Thanks.
Domingos Figueiredo de Abreu
Okay, Peter. Look at the slide #9, you'll see that we have the no interest scheme of what you see that the three previous quarter was very, very strong.
But you can see that in the past it's out of the curve. I think this year was particularly very good in terms of trading in.
We don't have a specific number for this but we consider as the number for around R$300 million and R$400 million would be a good guess for this number. Okay, the normal days, let’s say.
Right? In terms of the operational fee, Ibi's and (inaudible), you need to understand this more as an opportunity that we have, once you have made the agreement with the people from CNA company in Brazil and we have a good opportunity to – they shown the operation in Mexico is very small operation so far and we understand that we have some synergy with this because all the reprocessing in Brazil the cards (inaudible) so many, many situations that give us opportunity to go in different continents as Trabuco mentioned in his presentation the second biggest country in terms of GDP in Latin America.
So it’s an opportunity, of course, its opportunity to know, to stay, to understand a different country but it definitely does not indicate that we have in our strategic plans to continue to expand outside Brazil. Its an operation that could be, we understand this more as a good opportunity to stay with lower risk, stay in a different country with a lower risk with a partner that has been proved to be a very, very positive with us.
So that’s why that we understand then nature to see this.
Peter Irblad – Deutsche Bank
Okay. Great.
Thank you very much.
Domingos Figueiredo de Abreu
You’re welcome.
Operator
Excuse me. Our next question comes from Mr.
Daniel Abut with Citi.
Daniel Abut – Citi
Good morning. I just wanted to follow-up on loan growth in general and I would make two questions on this big topic.
One, if I know correctly, some of Mr. Trabuco’s remark, he said that the focus for 2010 will be to grow organically and to grow market share.
Yet, if I look at your guidance loan growth for the year, which is 21% to 25% that seems to me to be pretty much in line with what we’ve been hearing from most of your peers. So if that’s what you grow, it seem to me that you are going to grow pretty much above where the market will grow, therefore, you will not grow market share.
So what is your underlying assumption, how much the system, the market will grow loans this year, and if you really want to grow market share, don’t you need to grow a bit more than that? And second, if you can elaborate at least in broad picture terms, what do you expect for 2011 even though you are not going to give any specific guidance, because if I look at your macro outlook, you expect the growth to be exceptionally high this year, 6% like most economies out there.
But do you expect a slowdown or at least to more sustainable levels in 2011 to 4%, and while we get closer to 2011 we would have experienced significant increase in interest rates as you correct recall. So do you think that when we get to 2011 we’re going to see a significant moderation in loan growth or you think that by 2011 you can sustain something in the order of a 21% plus that you’re likely to see this year?
Domingos Figueiredo de Abreu
Just a minute Daniel, please.
Daniel Abut – Citi
Okay.
Domingos Figueiredo de Abreu
Sorry, Daniel, we just to be sure is I hadn’t understood your points. I understand your point that the bank is having the same guidance for (inaudible) in this way we will be in the same place in terms of much, okay, you are right.
But, of course, when we give some guidance we try to be more as conservative as possible to give that, right. When the (inaudible) will have space in different lines which will continue to grow and gain much.
Of course, in our view, even if you feel this market share we gained something close to 0.2%, 0.3% of market share, okay it’s not a big gain, but it’s a share. Of course, it will depend how the market will stay.
In relation to the 2011 we don’t have numbers for 2011 yet of course, but once you consider that 2010 we will be growing a lot of course have to expect to grow the same line, but normally we use something like to close to four times or five times the growth in GDP, let’s say, but not against just we did exercise 2011 yet.
Daniel Abut – Citi
So you say something like four times to five times GDP growth that would put you somewhere in the 15$ to 20% range. That’s a very preliminary number.
The significant increase in interest rate that you expect by then you don’t see that having any affect on volume growth?
Domingos Figueiredo de Abreu
Again if you consider that you need to have in mind that Brazil will be the mid of the many, many process of investment due to have some World Cup come in Brazil, you have Olympic Games. So I think Brazil will have many, many there.
So I think it could be possible to grow even more, even if you consider this growth of 4%, right. And why it is growing only to 4% in 2011?
I don’t have the reason, our economy changed right now, but we understand it’s just because we have growth in a base that is higher, right, you have 6% in 2010, you need to carry over a movement, let’s say. But the expectation of interest rate in 2011, if I remember that the movement that I saw the last movement, it should be a movement we start to move into reduce again, right.
It’s there when say 12.75 is high, okay, but if you beat the adjustment that you need in terms of monetize policy is at this movement, which would be less that it wasn’t in the previous time. Of course, the central bank needs to increase to 12.75, remember the last time it was 13.75.
It’s a movement of the policy monetizing, it’s right to choose the exact point where it needs to be stood. But (inaudible) achievable, but at the same time at least try to refine the level of those rates.
But we continue to have even for 2011 even when they post this 4% of course it should be the reduction spot to 4% to be driven by the increase in interest rate that we have in this year, right, in order to keep the inflation in control of what you need to let go a part of the growth to sacrifice the part of the growth is the point. But, again, in terms of growth it's just a multiple that we normally use to say 4% or 4 times, we don't have a specific number, sorry.
Daniel Abut – Citi
Thank you. Let me just close by adding my congratulations to Jean on his promotion, and wishing him good luck in his assignment.
Jean Thank you.
Domingos Figueiredo de Abreu
Thank you.
Operator
Excuse me. Our next question comes from Mr.
David Vaamonde with Fidentiis.
David Vaamonde – Fidentiis
Hi, everyone. I wanted to clarify one thing on the provisioning charge.
As I see it, but at least could we looking at decline in the cost of risk of more than 100 basis points in 2010 versus 2009. And in fact, I was looking more at 150 basis points of decline on my calculations.
I don't know if that calculation is correct, if that sounds right to you or not. Thank you.
Domingos Figueiredo de Abreu
Just one moment please. So, David, yes.
David Vaamonde – Fidentiis
Yes.
Domingos Figueiredo de Abreu
Sorry, I don't have the specific number the way that you're looking, maybe we can talk later to understand, but the point that the way that is the provisions, exactly the way that we already mentioned in this answer to another question is that we considered the total provision is in the year would be around 44% of the gross margin of credit, as reported in slide number #12. Unfortunately, I don’t have exact the way that you are seeing this.
So maybe we can find this later if you don’t mind.
David Vaamonde – Fidentiis
Yes. Yes, yes, yes, no problem at all.
I was just doing loans provision charge of around R$11 billion over a loan book of let’s say R$274 billion by the end of 2010, but we can clarify later. Okay.
Thank you.
Domingos Figueiredo de Abreu
Okay. But remember this R$11 billion, I think we have is included in 1.3 billion to R$1.4 billion of extra provision, right?
David Vaamonde – Fidentiis
Yes.
Domingos Figueiredo de Abreu
Okay.
Operator
Excuse me. Our next question comes from Mr.
Victor Galliano with HSBC.
Victor Galliano – HSBC
Hello, good morning. Just a quick question here on the IT CapEx program.
I think the CEO mentioned R$4 billion for 2010. Can you just clarify as to whether that is expensed or capitalized and amortized over time?
And what can we expect for 2011, can we expect this to be winding down by then if you can give us some kind of indication? Thank you.
Domingos Figueiredo de Abreu
Hi, Victor.
Victor Galliano – HSBC
Hi.
Domingos Figueiredo de Abreu
Trabuco mentioned R$4 billion investment, it includes everything that we invest in Brazil. It includes investment that normally we have in IT.
I would say that the most portion of this is a normal base, don't to be over above is in terms of projections in the future, and the most part of this because the things as Trabuco mentioned is 20% higher that we had, okay, the impact in the numbers for next year. You can see there could be marginal, let’s say.
The newest thing to hear is about that we are planning to open 258 new branches which will remain to close to maybe R$300 million owned, and the rest, of course, will have a part of the IT program that will have more, we are investing a little bit more than we normally invest. But it’s something that has been happening since the last two years or three years, all right?
So I don’t think it should be impact so much your projection in the future.
Victor Galliano – HSBC
Okay. And just a quick follow-up if I may on what Trabuco was saying about the penetration in the C and D class.
I mean, do you have any data you can share with us or any kind of color you can give us in terms of how that is going in terms of penetration into those socioeconomic classes, say, how you are penetrating the C class, what your level of penetration is now relative to where it was maybe two years ago? I don’t know if you have anything like that or maybe we can talk about that after the call.
Domingos Figueiredo de Abreu
Victor, just a minute please.
Victor Galliano – HSBC
Thank you.
Domingos Figueiredo de Abreu
Victor, unfortunately we don’t have the specific data about this, but we have some numbers that would give you some idea about this. I don’t remember, Trabuco said this in his presentation, but the last year, we opened 6,000 demand accounts for people come on a daily basis for people came from class C and D, D and C.
Victor Galliano – HSBC
6,000 the accounts per working day in 2009 from classes C and D.
Domingos Figueiredo de Abreu
Yes, just to have an idea.
Victor Galliano – HSBC
Okay.
Domingos Figueiredo de Abreu
Unfortunately don’t have other, it was my view, but can post some latter if you have them.
Victor Galliano – HSBC
Yes, okay. Thank you.
Thanks very much, Abreu.
Domingos Figueiredo de Abreu
You are welcome.
Operator
Excuse me. Our next question comes from Mr.
Jason Mollin with Goldman Sachs.
Jason Mollin – Goldman Sachs
Hello, everyone. A lot of my questions have been asked.
But maybe I can just ask the questions on asset quality, which you focused on in your presentation ex-Banco EV loans to individuals delinquent more than 90 days, improved quarter-on-quarter. Can you provide us with the sense of the movement by product, especially, was there any product and consumer product that show deterioration in asset quality rather than improvement, is there anything that’s not getting better?
Domingos Figueiredo de Abreu
Jason, Abreu speaking. When we have deteriorations, I’d say it's more – if only credit cards could live a part of this credit card keep the during the period to give, they had a very good, good, it will have a steady, very good during dispute, it will have so many impacts in this credit card.
The other lines all of them will have the more ventures who will have deterioration. So now we are going back, all of them is coming back in the growth of the company.
I don’t know if I answer your question, Jason.
Jason Mollin – Goldman Sachs
Yes, I mean I’m just thinking like some of the areas, I mean you mentioned that on average we are seeing NPLs move back to pre-crisis levels. But for example in the auto business what did we learn through this crisis, is there segments that you would rather not be as active in.
We’ve seen some of the market participants say that very used cars, let’s say cars over seven years of age had very substantial losses and some have backed away from that business entirely. I don’t know if you can give us any comments on the auto space and if your strategy has changed?
Clearly, we’re seeing you grow much slower in the auto space or your expectation is to grow much slower in the auto space this year 2010?
Domingos Figueiredo de Abreu
Look, we understand the credit need to be careful all the time. When the economy is growing very good you need to be very careful with credit, not only when the economy is not good and when so good.
What has happened that when we have a change in this cycle like you had this even that all care that you have with credit of course you need to be of practice is different, of course. We understand that what I think this even for us we have some internal comments about this.
This credit, we understand what we’re going to say now, right. This credit for us could be very important for us because we have been growing credit for a long period of three years or four years and didn’t have any moment that we have some moving like this, right.
That’s why I think it was important for us to, and to prove for rather for the market that we have very, very good approach in terms of credit. Of course, we felt a lot what happened I think when you have a bigger change in the cycle like this.
But what’s important is to that we have conditions to absorb, absorb what happened. That's why the bad thing that we have to take from this movement, I will say.
Of course, lines of credits, some credits we need to change the movement, the model we are improving everyday and every month it depends on the some time, some practice of one model that explain better in the moment, it could change, so, something is very, something that we need to be very carefully every time.
Operator
Excuse me. Our next question comes from Ms.
Flavimontodu [ph] with BlackRock.
Flavimontodu – BlackRock
Hi, everybody. I have two questions.
One is regarding, I have some sell-side analysts here expecting to see an increase in reserve requirement, so I was wondering what do you expect and you have incorporated in your projections. And then another question is regarding the investments and how you're going to grow more on corporate side, because I think if it's true that we are going to have a lot of investments, maybe we should see more capital markets activities this year.
So I was wondering if part of your fee income grow it's because of this higher capital markets and if you are somehow dividing what is going to be just corporate loans and what is going to be capital market activities.
Domingos Figueiredo de Abreu
Okay. We understand that we can have some changes with the requirements once the Brazilian government start a movement to take out of the cycle policy they create.
But we understand they view, it won’t affect our budget for, it will affect the liquidity of the system, of course, but once we now we have a very, very high level of liquidity I don’t think it will affect too much in our net income at the end. And the other point, you are right, let's say, you are correct when you say that in the last quarter we expect to grow 20 to 26 and just to answer a question like this in the Portuguese section, it was at the point.
Maybe you won’t see this in the total loan portfolio because we don’t know exactly where we are going to grow. Maybe you are going in some securities like debentures, like notes and other than (inaudible) maybe we need to show reports to the market.
But in terms of the credit risk, we understand the growth would be this size. All right.
Maybe you see this in other lines of the balance and not in the credit, in other words.
Flavimontodu – BlackRock
Thanks and I am sorry, but I didn’t participate in the Portuguese one.
Domingos Figueiredo de Abreu
No, no problem. It was good, your question just replied if I did in English.
Okay?
Luiz Carlos Trabuco Cappi
Okay. Trabuco speaking.
In conclusion, I would like to thank you, each and everyone health, success and the year full of accomplishments. I wish a happiness in your life, in your social, professional and family aspects.
If you have any further questions, please feel free to contact us. Thank you.
Thank very much.
Operator
That does conclude the Banco Bradesco’s audio conference for today. Thank you very much for participation and have a good day.