Jul 24, 2012
Executives
Paulo Faustino da Costa - Market Relations Department Director Luiz Carlos Angelotti - Executive Managing Director & IR Officer
Analysts
Regina Longo Sanchez - Itau BBA Saul Martinez - JPMorgan Daniel Abut - Citi Victor Galliano - HSBC Philip Finch - UBS Mario Pierry - Deutsche Bank Carlos Macedod - Goldman Sachs Marcelo Telles - Credit Suisse Boris Molina - Santander
Operator
Good morning ladies and gentlemen. We would like to welcome everyone to Banco Bradesco’s First Half 2012 Earnings Results Conference Call.
(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 based on the beliefs and assumptions of Branco 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.
Paulo Faustino da Costa, Market Relations Department Director. Mr.
Paulo, you may proceed.
Paulo Faustino da Costa
Good morning everyone and thank you all for participating in our second quarter conference call. We are here to provide you with all the information you may need about our numbers.
It is in in-line with our goal of always increasing the transparency of information disclosed to the market. We have here today Mr.
Julio de Siqueira Carvalho de Araujo, Executive Vice President; Mr. Marco Antonio Rossi, Chief Executive Officer of Bradesco Seguros Group and Bradesco Executive Vice President; Mr.
Carlos Angelotti, Executive Managing Officer and Investor Relations Officer; and Mr. Moacir Nachbar, Jr.
Deputy Officer. I will now turn to our Executive Managing Director and Investor Relations Officer Mr.
Angelotti, who will lead our conference call. After this presentation we will be open to answer your question.
Angelotti, please go ahead.
Luiz Carlos Angelotti
Good morning everyone. First of all I would like to thank you all for taking part in this conference call.
In slides two and three show our main (inaudible) highlights. On the slide two I will particularly like to mention our first half adjusted net income which totaled 5.7 billion reals, 2.7 more than the same period last year.
I switch to draw your attention to our adjusted net interest income which were by 15.4% over the first half of last year. And our total assets which came to 830 billion reals, 5.2% up in the quarter and 20.5% more than in June 2011.
On slide three, it specifically worked noting our assets under management which aided the quarter at 103 billion reals, a 20% increase over June 2011 and our efficiency ratio it fell by strong third base point in the last 12 months closing the first half at 42.4%. On slide four, we showed a reconciliation between our books net income and additional net income in the respective periods.
This quarter as in the previous three months there was only one non-recurring item, the provisions for civil contingencies, which totaled 67 million reals growth. Adjusting for this event, our book net income increased from 2.833 billion reals generating an NOI returning of 20.9% in the quarter.
Also in this slide, you can see that our return on average assets came to around 21% in both the booked and adjusted net income concepts. Slide five shows our historical series of our quarterly net income.
Income growth in the second quarter and in the first half of the year was mainly due to the higher net interest income, the higher fee income and increased revenues from our insurance group. This occurrence was partially impacted by higher provision for loan loss.
It is particular was noting that our earnings per share for the last 12 months increased by 5.3% from 2.82 reals to 2.90 reals. Slide six shows our efficiency ratio, the improvement in the second quarter efficiency ratio over the last 12 months was due to investments in our organic growth strategic, it started producing effect with the maturation of this certain investments and our continuous efforts to control expenses including the actions taken by our efficiency committee (ph) as the rate that most contributed to this improvement were the upturn in mass interest income and fee income thanks to the higher volume of business, the growth of our client base that are around 5 million new clients considering the financial and the insurance business and the 1.6 million new checking accounts.
On the slide seven, I would particularly like to draw your attention to the increasing our shareholders equity positively impacted by 4.1 billion reals in gain strong certain insurance group securities which used to be booked as held to maturity and are now classified as available for sale and the difference between their market value and their book value, it's taken directly to shareholders equity net of tax. It is also worth mentioning our exceptionally health based ratio which closes by quarter at 17% leading to a big increase in our capitalization margin.
The upturn in this ratio was due to the addition of 7.9 billion in subordinate financial bills but ratified by the central bank in the period, in addition to the gains from the securities I have just mentioned. As we have our (inaudible) 11:49 total assets came to 800 billion reals, a 100 billion (ph) or 20.5% margin in June 2011.
Return on average assets totaled 1.4% while the additional return on average equity stood at 20.6% (ph). Slide eight, shows the relative share of our main operations in net income.
The quarterly and six months highlight was the increases in the relative share of securities mainly due to higher trading gains. It is also worth noting the upturn in the relative share of our insurance group in the six months comparison to 31% of our net income thanks to the excellent performance of this segment.
The reduction in the share of loans was partially due to a higher linkage in the periods, together with narrower spreads. Moving on to Slide nine, unrealized gains total are substantial 21.5 billion reals basically due to the appreciation of the fixed income securities and some of our investments, especially Cielo’s shares, as well as unrealized gains from loan and leasing operation.
It is important to emphasize that this figures do not included the potential goodwill from our own properties in the total amount of 3 billion reals. On Slide 10, we show that net interest income portion increase by 2.9% in the quarter largely due to the upturn in average business volume and the non-interest earning portion recorded higher trading gains in the quarter.
Looking at the slide 11, as I have just mentioned it the interest earning portion of net interest income increased by 2.9% in the quarter. Thanks to the higher volume of the new business while the analyzed that interest margin is likely due to 7.5%.
Although this was in-line with our expectation. The main factor is behind the 10 basis point decline in the analyzed margin where the narrower insurance and the (inaudible) margins by partially offset by higher margins from securities including the effects of managing of our fixed loan portfolio.
Slide 12, gives a breakdown of the interest earning portion of the net interest income. Securities recorded most growth in the quarter, including gains from the management of our fixed commercial portfolio.
The reductions in the funding and insurance lines were caused by declining the interest rates, lower returns on Basel index, securities and our consumer pricing index and the 15.7% depreciation of the (inaudible) index in that period. In the comparison between the first quarters of 2012 which the same period last year, the highlight was the 14.3% increased in the gross margin mainly due to the upturn in the business volume.
On the slide 13 as we can see that the gross credit margins, the grey area, increased by 2.5% this quarter sustained by a higher business volume, but partially offset by this decreasing the average spreads. The red area shows the provision for loan loss, which increased partially due to the fixed adjustments of the provision levels in-line with expectations of loss from operations with a few corporate clients.
It is important to emphasize that this adjustments do not indicate any negative provision in trends as they consisted of a particular situations. In the analog comparison the net margin remains differently stretched due to higher, the (inaudible) despite to the increased in business volume.
Slide 14, our extended loan portfolio total 365 billion reals in June in 2012, 4% up in the quarter and 14.1% increasing compared in June 2011. This increases were mainly due to the higher loans to large corporates which moved up by 70% in the quarter and 16.9% in the annual comparison.
The annual comparison, the highlights were mortgage loans, export financing and capital market related operations, with credit risk basically comprising debentures and promissory notes. Individual loans resume, grow mainly due to the measures to stimulate consumption.
Moving on to slide 15, this quarter our total delinquency ratio for loans overdue by more than 90 days remains stable in the individual as well as micro as well small and medium price segment. The last thing I think the base point increases in the overall ratio over the previous quarter, was impacted on one off basis by the increasing in delinquency of the large corporate segment as I mentioned before.
This changing the large corporate segment business indicates any negative strength in the delinquency as there were only a few particular issues. We believe this ratio will show a slight decrease in the coming quarters giving the effects of the SELIC base rate first and the expectations of higher economic activity in the months ahead.
On slide 16, shows our delinquency ratio for loans over due by between 61 and 90 days and as you can see it has remained relatively stable. In the taking that the link (ph) base has really earned their control.
Slide 17, despite the upturn in the delinquent in recent quarters you can see on this slide that we have maintained comfortable provisioning levels. In fact our provisions exceeded central bank requirements by 4 billion reals.
Assuming the maintenance of the 12 months gross and net loss ratios as from June 2011, we had booking provisions in excess of 7.8 billion reals in relation to expected gross loss in the next 12 months. The dotted part of the blue line, or even 11.2 billion reals in relation to loss net of recoveries, the dotted part in the purple line, also for the next 12 months.
Slide 18, shows a coverage ratio of the allowance for loan losses, in relation to credit overdue by more than 90 and to 60 days which remains at comfortable levels and amongst the highest for Brazilian banks. For credits overdue by more than 60 days the coverage ratio is a 144 % and for credits overdue more than 90 days, it is a 177%.
Slide 19 the second quarter fee income totaled 4.281 billion reals, 4% up on the previous quarter. In the first half, fee income increased by 15.7% year-over-year mainly due to the extension of our customer service portfolio, the net addition of our own 1.6 million new account holders and extension of our service and networks, resulting for our organic growth investments.
Highlights were higher revenue strong, cards, checking accounts, asset management and underwriting operations. Let’s now move to slide 20, operating expense increase by 3.3% of the previous quarter.
The period obtained in personnel expenses was mostly due to the circular portion which was impacted by higher expenses to the reductive concentration of vacation. The non-structural portion was impacted by higher expenses with provision for legal claims, profit sharing and training.
The half-yearly comparison, the increased in these expenses was mainly due to the impact of the 2011 collective by gaining agreement and the net addition of 6200 employees to the workforce. It always worth emphasizing that the extension of our workforce is concentrated in our sales force due to both organic growth and improved segmentation.
Slide 21, we can see that administrative expense recorded a very slightly 1.2% upturn in the quarter reflecting the result of our intense efforts to control and to streamline our administrative expense. The increase over the same period last year was compatible with the extension of the search net worth (ph) and the consequent extension of business volume.
Slide 2 shows revenues from our insurance, pension plan and capitalization bond activities which increases by 22.8% in the second quarter led by life insurance and pension plans and capitalization bonds which grew by 4.5% and is 17.9% respectively. In the analog comparison the increase came into 20.1% with our segments recording the modest growth.
Second quarter net income recorded a slight decrease mainly due to the lower financial results in the periods. First half net income increased 14.4% year-over-year mainly due to higher revenues, the reduced claims ratio and the improve the financial position.
The slide tend to show some of the main few strong our insurance activities, the combined ratio came to 85% in the second quarter, 60 basis point now on the quarter before essentially due to the reduction in the claims ratio and the upturn in the revenues. Financial assets totaled a 128 billion reals, 21% up year-over-year while the technical provisions came to a 112 billion reals, 98 billion reals of which relates to a life insurance and patient (inaudible) products.
Moving on to slide 24, as for our 2012 guidance we have made few adjustments considering the behavior of our few portfolios in the first half and also the second half economic growth forecast. We revised our loan portfolio and vehicle and credit card products grow estimates.
And now we are revising the estimates for our real estate financing origination which should rest similar volume to that of 2011 for fee income and insurance premiums thanks to excellent performance during the fields and we are maintaining our initial estimates for the net interest income and operating expenses. To sum up we believe we had a quarter of health results.
As you have seen our results and ratios remain sustainable in respective of domestic and international economic challenge we had to face. Deliquesce is another control and tends to show a gradual decrease for the coming quarters.
We had also maintained a strict control over lowest ranking and low portfolio quality monitoring. In this context it is worth noting that in the last 12 months new borrowers have accounted for over 70% portfolio growth and 95% of this new operations has good quality ratings from AA to C.
And they align this (inaudible) of consistence of our credible evaluation process guarantees an instruments. While during the subject of loans we are maintaining our forecast in more rested reporting this half.
Although at somewhat slower pace than we expect at this beginning of the year. We have had recorded consistent revenue growth from the expansion of our operations, extension of our customer basis and the maturation of our organic growth investments.
Our operating expansion having been leveling of thanks to the continuous monitoring of expense and the scale gains from our consistent investment. Once again I would like to emphasize the positive impact of this performance in our efficiency ratio.
We believe the Brazilian economy we responded to the similar measures and by this we will therefore continue with this track record for organic growth. Leveraging its banking and insurance activities in our responsible manner and the contributing the democratization of sustainable development.
Thank you very much for your attention and we are now able to answer any question you may have.
Operator
Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions).
Our next question comes from Ms. Regina Longo Sanchez with Itau BBA.
Regina Longo Sanchez - Itau BBA
I have two questions, the first is that’s regarding the significant increase in the book value of Bradesco that we know what’s related to reclassification of the securities from the health to maturity portfolio for available for sale. In impact year, equity fell in the amount of 4 billion reals, what I would like to know is that I mean what was the motivation I mean was a regulation change or maybe regarding IFRS adoption in the insurance business that most of secured were related to insurance business and more important I mean now there is book that is available for sale, are there any real intentions of sales to securities or only eventfully in the future and what are their average maturities to get an idea of how long this gain will take to go through the income statement if you don’t sell them before maturity and then I will ask my second question.
Thank you.
Luiz Carlos Angelotti
It's just (inaudible) in the equity was more for called the adoption of the IFRS for our issues company and in the bank we decided to have the semi-account classification and now we are using the semi-classification in the accounting purpose. This was the motivation for to do this adjustment, this securities, the maturities somewhat is they have more than 10 years because they use this in our insurance business for support.
The provisions, then most of them has more than 10 years of maturities.
Regina Longo Sanchez - Itau BBA
Okay and do you intended to sell any intention of selling this before maturities?
Luiz Carlos Angelotti
As I said is this securities are using our insurance business for support the provisions, normally for pension plans and the for our own period then this is why the maturities more than 10 years.
Regina Longo Sanchez - Itau BBA
Perfect, okay, thanks for that and my second question is regarding asset quality going forward. We saw then an NPL ratios increase 10 basis points in the second quarter and you mean what is your expectation going forward and if you could give us break down if you expect corporate NPL ratios also to already decline or more in the individual side.
In another data I am not sure if you have that information, the early NPL ratio the NPL ratio between 15 and 90 days if you have a sense as a leading indicator how was it in this segment quarter. Thank you.
Luiz Carlos Angelotti
We had a zero increase in our delinquency ratio 0.1% considering that segments that we have here individual who during the last quarter was stable, SME’s in the similar situation but in the corporate side we had a specific situations that we had a zero increase is not obtained due (ph) for the future it involves only a specific situation and we expect for the next quarters that our delinquency ratio we will start to have a gradual decrease because for the second half we really expect that the effect of SELIC rating economy and the expectations towards our better growing economy we have tentative we will have start to decreasing in the delinquency ratio. And the short delinquency ratio in some products we can see that we start to had a better situation in more individuals and is more clear that we start to have a better delinquency ratio in some products.
Regina Longo Sanchez - Itau BBA
Perfect and as you mentioned that you expect a gradual decrease, can you give us a range or an idea of how many basis points do they expect to see NPL ratios declining by the end of the year.
Luiz Carlos Angelotti
Difficult to give you a guidance level but probably we will have something similar we start the year, something the all 3.9%, 3.8%.
Regina Longo Sanchez - Itau BBA
Perfect, thanks a lot and congratulations on the operating trends that we like to see a number of clients increasing, checking accounts increasing and number of employees declining quarter-over-quarter. Thank you.
Operator
Our next question comes from Mr. Saul Martinez with JPMorgan.
Saul Martinez - JPMorgan
Couple of questions, first a clarification to the question on the reclassification from health to maturity available, so I just want to make sure I understand so the reclassification is related to the adoption of IFRS accounting at your insurance subsidiaries which mandates that your reclassify them and you want to be consistent in your accounting for that at the financial group. Am I understanding that correctly?
Luiz Carlos Angelotti
Yes, we are now adjusting the criteria’s for, using the same criteria is in the company’s because they are IFRS is something new in the counting (inaudible) and the companies start to immigrate and the fact that adopted IFRS they insure the companies, they start to adopt during 2011, the financial companies the Brazilian real not adopting the IFRS companies, we are adopting in part. We are following the Central Bank rules but talking about these securities.
We are now using the semi-classification and then we decide to use it in the semi-basis this is why these adjustments in this quarter.
Saul Martinez - JPMorgan
Okay that’s helpful. Secondly, one I will also follow-up on the corporate NPLs, you seem to be very confident that these are sort of temporary issues related to very small numbers of credit.
Can you just help us understand a little bit better why are you so confident that these are sort of temporary issues. I know you can’t get in a lot of color because of bank secrecy laws but are we talking about one credit, a very small number of credit, anything you could say that would help us understand the issue and help us feel comfortable that this is a temporary issue and that it's not going to continue to worsen.
It would be helpful.
Luiz Carlos Angelotti
We have a total credit off our loan portfolio, we maintain, the quality then during this last year I think the last two years our last 80 around the two years it was stable the corporate the NPL ratio, then these already I specifically situation that we had and we not see any order brought in any order situation that can represent some risks for us in these segments then this why we say that we are confident that these are specific situation and for the future we will not have a problem with this segment.
Saul Martinez - JPMorgan
Okay so this is a specification situation.
Luiz Carlos Angelotti
A specification situation.
Operator
Our next question comes from the line of Daniel Abut with Citi.
Daniel Abut - Citi
Couple of questions, gentlemen on that quality, if you got comment on your coverage ratio which has remained very healthy both measure on a 60 day basis or 90 day but it has been decline in since it peaked in September of last year. Is it not stabilize the coverage levels or should we expect it to gradually continue to decline and what it's a level of coverage whether you wanted a find it 60 days or 90 days that you will be comfortable sustaining over time.
And second on expenses for the first half of the year your operating expenses including both personnel and means of expenses have grown that’s up about 12% year-on-year 12.4%, your guidance which you reiterated for the year is 8% to 12%. Do you think it's going to be stretch to reach even the high end of that guidance or do you expect a moderation in expense over in the second half of the year below this 12.4% that we have seen in the first half.
Luiz Carlos Angelotti
Talk about the coverage ratio, we had a zero decline this quarter because we are maintaining the excess provision stable for 1 billion reals, and we are having growing our portfolio, the delinquency ratio is stable then this while we had a zero decline. We understand that considering this decline we must see a very good coverage compared with other banks the Brazilian banks with the system, we have a very good coverage.
For the future considering that the we expect that the declining in the delinquency ratio could be that this reduction, we will start to reduce, we will start decline, we will be lower in the future and could stabilize, if you we had growing, considering that the this predictions (ph) for the future with the decline of the delinquency ratio and the growth that we expect probably we will have the capitalization in this ratio, the coverage ratio. Talk about the expenses, the guidance that we have is 8 to 12, we finish this quarter and year-by-year comparison with 12.4%, economize (ph) the year 2012 we had strong growth in the second half than we in the second half 2011 we opened the 1000 new branch, then our expense in the second half 2011 was higher.
Then considering that the next two quarters, the quarter that we are having now in our expenditures (ph) we have a target for the 2012 the growth that the expense will all 10% and we expect that the we understand that the we can reaching this target, we are very committed to reach this, that’s why we are not paying the guidance and we understand the final role compare to 2012 has reached 2011 will be in our target will be 10%.
Daniel Abut - Citi
That’s all makes sure I understood you correctly in your second response Luiz Carlos, you are saying that although the guidance is arranged 8 to 12, you are really targeting 10 and that you feel comfortable you reach 10 or 10 is pay that you expect for the second half of the year?
Luiz Carlos Angelotti
Then is 10 the grow that we expect comparing 2012 versus 2011, growth for the year, 2012.
Daniel Abut - Citi
Okay that’s useful and just to elaborate a bit more on the response to the first question, I was not referring only to the small decline that we saw in this quarter in your coverage ratio, your coverage ratio has been declining quite steadily for the past several quarters. If I look at slide 18 for much of 2010-11 your coverage ratio measure on the per basis how you measure that was in the 190% plus level and then it declined to the 180s towards the end of last year, early this year now it's in the 170s.
So you think it's going to still alive somewhere in the 170s or at some point the NPL ratios start to decline, this ratio may start to overcome.
Luiz Carlos Angelotti
We say that with this (inaudible) there is the NPL ratio we will start to decrease, improve our stabilization will be around the levels that we have now for the 144 for the 60 days, 170% for the 90 days. The stabilization will be the level, the actual levels at which they could.
Operator
Our next question comes from Victor Galliano with HSBC. Please go ahead sir.
Victor Galliano - HSBC
My questions have been asked and answered pretty much but maybe I could ask a follow-up on the insurance side of the business. I mean you did mention that you are seeing this be impacted at least for times be impacted by lower rates, I mean if we do see rates continue to go lower which is very possible here.
Do you think you can expect further pressure here on insurance returns and do you think in 2Q are we just beginning to see the first effects of monetary relaxation, will we see the full impact do you think in the second half of the year of say 8% SELIC rate.
Luiz Carlos Angelotti
The seg that we had in the second half, one part came from the reduction in the SELIC rate but another part comes from decline that we have in the (inaudible) because the our insurance company they have some shares in the portfolio that affect the margins then in the second part of the (inaudible) reduce it around 15% then this was round off the sect that we had in the insurance business. We expect what it is the next part that probably in the second half probably we have stabilization and the growth that we have in the premium side the good results we have and the expectation for the insurance business, the purchase that we have in the country.
We have standard that these (inaudible) can maintain the profitability the ROE for the year.
Operator
Our next question comes from Philip Finch with UBS. Please go ahead sir.
Philip Finch – UBS
My question is in regards to your Tier I capital ratio on slide seven of your presentation, your Tier I capital ratio has been consistently falling over past six or seven quarters, so the latest numbers are in the second quarter was down to 11.8% now a year earlier it was 12.9% and if you go back six, seven quarters I believe that was around 13.5%. So the question really is really if you can help explain why this is happening, what is causing it and I guess going forward is this trend likely to continue?
Luiz Carlos Angelotti
We had a zero decrease in the Tier I, what part is because they go after the assets. We had some (inaudible) in the recent market because of new rules and we had some adjustment that affected the Tier I ratio but we expected more stabilization in the future.
Philip Finch – UBS
So I guess on your risk weighted assets growing very rapidly is that why this ratio keeps on coming down?
Luiz Carlos Angelotti
We had in fact of the grow, the growing the assets but one another effect is in the, is one exclusive (ph) because new rules that we have in the market risk and this adjustments reduce zero to Tier I.
Philip Finch – UBS
Okay and I guess going forward I mean is this going to continue falling or we seeing things stabilizing now.
Luiz Carlos Angelotti
We expect that’s probably we will have more stabilization, big rule that we expect too has and probably will have a compensation with the profitability’s. These adjustments that we have here, where we understand not to impact in the future but we expect more stabilization in the future for this Tier I ratio.
Operator
Our next question comes from the line of Mario Pierry from Deutsche Bank.
Mario Pierry - Deutsche Bank
Let me ask one question, you have reduced your loan growth guidance while you maintained your net interest income growth guidance and changed. So I was just trying to hear from you how do you plan on maintaining your net interest margin stable even though the SELIC is under pressure, there is significant pressure on the banks in Brazil to reduce credit spreads.
If you can provide us some color on that, that will be great. Thank you.
Luiz Carlos Angelotti
We reduced our growth for plans because at the beginning the year when we gave the guidance we expect the our GDP growth for the year was our around 4% then we started to have some adjustments in the expectations for the GDP growth. Now we have all the 2.1% this is our expectations for the year and considering the growth that we are having in our portfolio, we provide a new guidance for the year.
But for our net interest margin we consider that the guidance that we gave in the beginning of the year and was on year conservative and the fact that we are having the components of the margin, they grow (inaudible) and the effect of our prefixed portfolio that impact is in our margins. We have to say that we cannot paint this guidance as far as the margin, the net interest income, that’s why we tend to tell you that we decide (inaudible) pressure that we are having in the margin, in the spreads.
We are having in some specific products that’s represents a small portion of the total portfolio. Then the fact that we are having in this spreads, we are having over own fixation (ph) with the volume and the grow in the credit portfolio if you compare the growing the margins of credit in the last year is around 15% then we understand for this year became month end is guidance for the net interest income.
Operator
Our next question comes from Carlos Macedod with Goldman Sachs. Please go ahead, sir.
Carlos Macedod - Goldman Sachs
Actually I have a couple of questions, the first one is a follow-up on Mario’s question on margins, as you were saying the margins in the quarter for your credit operations and they were down around 10 basis points and for insurance they were down more than that. The credit, the margin on your fixed -- on your securities book however was up around 60 basis points and helped stabilize the margin on a sequential basis.
You talked in the past about a fixed income book, fixed rate security book that you have that provide support to your margins as rates go down, what’s the maturity of that book how much longer can we expect that book to support your margins going forward. Is it something that will last until the end of this year or should we expect it to last until the middle of next year or maybe even further and I will wait for the answer for my next question.
Luiz Carlos Angelotti
This operation, the prefixed operation was rated for our own part for how to lower this more in those operations, the one parts of this portfolio, though to loans (ph) operation and do you expect that probability affects view, we will have this year ended for 2013, we will maintain one part of these effects, then the ad (ph) of maturity was on the 18 most, 1.5 year but we expect during 2013 we will have some effect of this prefixed portfolio in the margin.
Carlos Macedod - Goldman Sachs
So we should expect your margins to remain resilient through the end of this year and the beginning of next year.
Luiz Carlos Angelotti
We expect one part of this expect will be effecting 2013.
Carlos Macedod - Goldman Sachs
Okay good, second question. It's great performance on the admin expense side of the expense base however I was noticing that the other operating expenses they were up 4% this quarter and they are up 20% year-to-date compared to last year and I just wanted to see what is expectation for this line if you just look at the graph that you have in your MD&A and does look like it took a step up, is this related to the branch opening of that throughout the year last year, what should we expect for this other operating expense line going forward.
Carlos Macedod - Goldman Sachs
For the operating expenses…
Carlos Macedod - Goldman Sachs
Not the administrative expense, not the other operating expenses in revenue line.
Luiz Carlos Angelotti
We have the guidance, only for the operating expenses, (inaudible), the total guidance is for 8% to 12%.
Carlos Macedod - Goldman Sachs
Okay. But would it be reasonable for us to expect that other operating expense in revenue to decelerate from the 20% pace that is running right now or is it likely to increase the pace?
Luiz Carlos Angelotti
Probably it will be, we have all the guidance for this but probably be stable, we will continue to grow our more stable.
Carlos Macedod - Goldman Sachs
Okay so we will decelerate a little bit right, not the same pace the 20% that we have seen so far.
Luiz Carlos Angelotti
No. We expect that to be.
Operator
Our next question comes from Marcelo Telles with Credit Suisse. Please go ahead, sir.
Marcelo Telles - Credit Suisse
I have two questions, the first one is a follow-up on the capital, I mean of course the change in the classification of securities and you helped quite a lot on your capital but are you expecting the regulation on the insurance business I mean regarding the one that that you mentioned before that could have a negative impact of maybe 7 billion reals in your card capital. Do you think this is about to be released or when should you expect any news on that and my second question is regarding provisions.
I mean of course there was an increase in provision in the quarter you mentioned this was in related to some corporate loans. Would you expect any extra provisions or some left over arising from the same corporates to be recognized in the third quarter or everything has been done and that’s it?
Thank you.
Luiz Carlos Angelotti
Okay. Talk about the capital, we consider the insurance be probably the minimal requirement considering the actual rules in the view for the minimal capital is around the 80 billion reals, the Basel III rules in Brazil will be implemented and through 2017 then during this period we will do the adjustments that we understood that we will be in the net four month (ph) to do for maintain the investments a 100% of the insurance business and the candidate (ph) rules of Basel III ratio.
Probably we will need to do some reorganization in the structure in the probably we will need to some this but we don’t have any final rules and probably some new rules we will in the future we have said that we have how to attend the implementation of the Basel III regulation and the month ended the investment and what we need to do is some reorganization in our structure for month end, all the ratios according to the new rules and talk about the provisions. We want to say that we don’t, we will have a new extra provisions for the corporate sites, there was always something more it's to fix (ph) more over something similar then we don’t expect our extra provisions or more provisions it is something more a specific.
Marcelo Telles - Credit Suisse
Perfect. Thank you.
Just a follow-up question on the margin, now the reclassification of securities from how to maturity to available for sale, does that help you in anyway in your margins going forward. I know the securities are very long term you know about like 10 years as you mentioned earlier but does it help you any shape or form?
Luiz Carlos Angelotti
These reclassification doesn’t effect in the margin because any revenue was accounted because what we have in the equities is only the probably the future gains that we can with these assets. We understand that when you do the calculation the ROE you need to exclude this number, this securities because we don’t have any revenue in our results, the correct thing is to exclude this number, this portfolio, this number 4.1 billion for to do the calculation for the ROE because any revenue we have accounted in the results.
Operator
Our next question comes from (inaudible) with BTG Pactual. Please go ahead, sir.
Unidentified Analyst
I have a couple of questions, first one is a follow-up on the net interest income, then I have two separate issues one on the loan side, your name the way that you reported around 10.9% used to 11.1% in the fourth quarter of 2011. Do you still expect this to throw up another 30 basis points by the year end, does it exceed your expectations?
Luiz Carlos Angelotti
Remember that you talked this about the margins that we have owing the spreads products.
Unidentified Analyst
Yes exactly.
Luiz Carlos Angelotti
We have the decline in the quarter 0.1% probably for the futures, we could have a zero decreasing this number because of the pressure that we are having the spreads but the decline is just will be probably we expect to have zero decline in the future considering the expectation that we have for the 2000 margins that the 7.6% we expect the probably the number that we have had is considering that the results for the period, we had a declining was 7.6 in the first quarter is now 7.5 probably to the end of the year we will have a zero decline. One part of these effects will be effecting in the spreads in the loan portfolio and the pin-point 90% that we have this quarter probably we will have a zero decline into the end of the year.
Unidentified Analyst
So another 20 bips, 30 bips, is that a far assumption till the year end in terms of the credit specific.
Luiz Carlos Angelotti
Year-by-year we have about in this quarter we have 0.1% decrease probably will be a very well decrease but I don’t have that guidance but probably we will have zero decrease until the end of the year.
Unidentified Analyst
Okay and on the securities portion and I mean if you look at the evolution if you look on the page 12, specifically this quarter I mean basically the variation between 1Q and 2Q was explained by the securities in our, so and with this effect your NII I mean wouldn’t grow at all, actually it will decline quarter-over-quarter. So I understand that you have this fixed income book that you are acquiring gains but just to let say the let’s start with the assumption that the field curve doesn’t change going forward, stay the same level that we are now.
What should we expect in terms of security gains in the coming quarter? Does this going to stay at 1.4 billion reals, is it going decline or is it continue to increase it's like 300, 350 million that we saw in this quarter and that and how long this will last, can you perform this 1.4 billion until you know I mean next year, could you give a little bit more and I just want to.
Luiz Carlos Angelotti
Okay one part of this number is the effects of the prefixed portfolio, only one part not the total number. Probably this one and the effects of this growth that we have in these line is reflected because the decline of this decrease, then probably for the next two quarters this number will be a zero (inaudible) will be stable, probably will be next year and for 2013 probably will start to decrease zero because it seeking part portion that comes from the prefixed portfolio we will start to reduce but need to be clear that prefixed portfolio is exactly only most part of this number not the total number, okay.
This is what we expect for this line.
Unidentified Analyst
Just wondering how much you can lessen this because this number in the third quarter of 2011 was 680 million so now it's more than double so it's like you have a like 700 million reals gain on this specific so like, so 100% increase and I understand this is coming down 2013 but is this coming down to similar levels in the past or is this going to stay above if you give us because it's very hard to, to give us a little bit more guidance, can stay above a billion in 2013 secret give us a little bit more color this would be great.
Luiz Carlos Angelotti
As I said in this number all you want part is came from the prefixed portfolio. The growth that we have okay one part of this growth came from the prefixed portfolio then probably doing this year, you maintain this level and for 2013 probably we will be something or the one be down (ph) there, we will start to take initiative probably we will have stabilization or all this on these level (ph).
We don’t have a guidance but probably the main issues that there will be something there that…
Unidentified Analyst
Okay and just one more question sorry, on the insurance.
Luiz Carlos Angelotti
These are the I mean we talked about it is…
Unidentified Analyst
Yes I got it. Thank you for that and on the insurance portion so, I understood what you have done on the asset side, in reclassification but I am also concerned on the liability side the actual -- so when you have like this big decrease on the interest rate, how comfortable are you that your liability side on the insurance should or should not be adjusted in a fair value basis as we all are or how do you handle this on your assurance company by the way.
Luiz Carlos Angelotti
Can you repeat the question?
Unidentified Analyst
Just wondering because on the liability side of your insurance company you have to meet, your probations I am just trying to understand how is it on the fair value basis because of this huge decrease in interest rates. If this should not cause important increase on your liability side on the insurance company.
Luiz Carlos Angelotti
We have our liability for the insurance business, the interest rate that we adjusted is one of the most conservative, the ratios that we have is our own 4% interest rate that we have. Then we need to say that considering the significant expectation that we have now is a comfortable number and we have to tend that we are prepared, the problems that we have for the insurance is compatible with the liabilities ratios or the interest ratios that we have in the liabilities, we be prepared we do sit the problems for this moment then considering the expectations for the future, we understand that we are prepared considering that the portfolio problems that we have and expectation of the interest rate for the future.
Operator
Our next question comes from Boris Molina with Santander. Please go ahead, sir.
Boris Molina – Santander
I have a question regarding your regulation for the capital insurance operations. You have been saying for a while that your insurance prices could work with around 7 billion and you have around 17 billion in capital or equity in this operation.
Are there any regulatory changes that would increase this capital consumption over the next couple of years, we know that this was again we are working a lot of concealment assortment into a gradual transition so I don’t know if there is an increase in this 7 billion number that we could already forecast into next couple of years and the second question is what stops you from distributing this surplus capital from insurance into your banking operations where under Basel III after viewing the application of insurance deduction. You would be left with a relatively weak, (inaudible) capital ratio.
So we know that most of the capital gains that you have realized on securities that have been a gaining with a declining interest rates but as far as I understand these securities are not on free position and you can actually sell them to realize these gains. So we will not how much of these 17 billion is actually available for distribution or not locked into satisfy your actual reliability, your insurance and business where you have to ask for permission, to actually sell them and pay a dividend.
How would this play out in the future. You talk about a reorganization, what would this mean.
So how can have confidence that the insurance regulatory is going to agree to have the situation of capital from insurance into a banking in a relatively foreseeable future.
Luiz Carlos Angelotti
Considering the rules that we have now need more requirements, is around to 8 billion reals but probably because you will have an implementation of new rules for the insurance business and we can have an increasing in these minimal requirement.
Boris Molina – Santander
Do you have an idea more or less what it could cause, is there any?
Luiz Carlos Angelotti
The SUSEP that is the regulator started a discussion but they don’t have find out rules, they start the regulator the discussion platform, they don’t have the rooms, they are only start with the (inaudible). To do the adjustments in our structures in the future probably the excess capital or the adjustment that we will need to do probably we will do try to choose the best way for to do this reduction, pay dividends or sometimes doing capital reduction but we doubt causing any problems or any limitations for the operations in our issuance company, for Bradesco possible (ph).
If you look at the total assets that we are having in the insurance business it's only 120 billion reals, the financial assets that we have for the insurance business it's only 120 billion reals and stock provisions that we have here for is a 111 billion reals. We can choose some of these financial assets to do the adjustments to reduce the capital, then we can say that we have how to do this these adjustments if it is necessary because we have all other ways to obtain the Basel III regulations but we will choose the best moment for to do that, if it will be necessary or not but we had how to do, doing the reorganization in our chart in the interest of the company.
We doubt can cause any impacting the capacity of the Bradesco insurance but as it goes continue to operations in, continue to have a good grow as they are having in their operation.
Operator
Ladies and gentlemen this concludes our question and answer session. I would like to invite Mr.
Paulo Faustino da Costa to proceed with his closing statements. Please go ahead, sir.
Paulo Faustino da Costa
Thank you all for participating in this conference call. I would like to take this opportunity to remind you that our Market Relations Department and our IR team are at your disposal and that all the content of our second quarter 2012 and provide information concerns Bradesco is in our website.
So thank you very much.
Operator
That does conclude Banco Bradesco’s audio conference for today. Thank you very much for your participation and have a good day.