Oct 23, 2012
Executives
Paulo Faustino da Costa – Market Relations Department Director Luiz Carlos Angelotti – Executive Managing Director and Investor Relation Officer
Analysts
Jorge Kuri – Morgan Stanley Mario Pierry – Deutsche Bank Thiago Batista – Itaú BBA Carlos Macedo – Goldman Sachs Marcelo Telles – Credit Suisse Philip Finch – UBS Saul Martinez – JP Morgan Victor Galliano – HSBC Jorg Friedemann – Bank of America Boris Molina – Santander
Operator
Morning, ladies and gentlemen. We would like to welcome everyone to Banco Bradesco’s Third Quarter 2012 Earnings Results Conference Call.
This call is being broadcasted simultaneously through the Internet in the website, www.bradesco.com.br/ir. In that address, you can also find a banner through which the presentation will be available for download.
We inform that all participants will only be able to listen to the conference call during the company’s presentation. After the presentation, there will be a question-and-answer session.
At that time, further instructions will be given. (Operator Instructions) Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996.
Forward-looking statements are based on the beliefs and assumptions of Banco Bradesco’s management and on information currently available to the company. Forward-looking statements are not guarantees to – 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.
Please go ahead, sir.
Paulo Faustino da Costa
Good morning, everyone, and thank you all for participating in our third quarter conference call. We are here today to provide you with all the information you may need about our numbers.
This is 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.
Luiz Carlos Angelotti, Executive Managing Director and Investor Relation Officer; Mr. Moacir Nachbar Jr., Deputy Officer.
I will now turn to our Managing Director, Mr. Luiz Carlos Angelotti, who will lead our conference call.
After his presentation, we will be open to answer your questions. Mr.
Angelotti, please go ahead.
Luiz Carlos Angelotti
Good morning, everyone. Thank you for being with us.
I will begin with the main period’s highlights, among which I would like to draw your attention, on the right, to our year-to-date adjusted net income, which reached to R$8.605 billion, 2.1% up on the same period last year. Total assets came to more than R$856 billion, 18.6% up in 12 months, while our expanded loan portfolio increased by 11.8% in the same period totaling R$372 billion..
On slide three, it is worth noting our assets under management, which ended the quarter at R$1.172 trillion, a 20.4% increase over September 2011. It is also worth mentioning the reduction in our delinquency ratio to 4.1%; and the improvement in our efficiency ratio, which closed the third quarter at 42.1%.
On slide four, we show the reconciliation between our book net income and the adjusted net income in the respective periods. This quarter, the main non-recurring items were: first, the earnings of R$2.1 billion from expanding maturities of securities, guaranteeing technical provision classified as available for sale; and second, the constitution of additional technical provision in the equivalent amounts, due to a lower interest rate usage in the calculation in line with the current economic scenario; and the third, the constitution of our provision for civil contingencies, which came to R$52 million.
Adjusting for these items, our third quarter adjusted net income came through R$2.893 billion and our year-to-date adjusted net income came to R$8.605 billion. Also, on this slide, you can see that our return on average equity came to around 20%.
Slide five shows our net income in recent quarters. Income growth in the third quarter was mainly due to the reduction in the costs of delinquency and the increased volume of operation, financial transactions and our broader offer of products, which had a positive impact on fee income, partially offset by the increase in administrative and personnel expenses, the latter mainly due to the collective bargaining agreement.
Slide six shows our efficiency ratio. It is important to emphasize the 12 months ratio, the red line, which improved for the third consecutive quarter, this time by 30 basis points to 42.1%, its lowest level for the last nine quarters.
This good performance was due to our investments in organic growth, infrastructure and technology, which are beginning to produce effects on net interest income and fee income and to our continued efforts to control expense, including the initiative of our efficiency committee. The third quarter ratio improved by 110 basis points over the same period last year due to the same factors as well as the 19.1% increase in the results of our Insurance group.
The blue line shows the efficiency ratio adjusted to risk, which remained flat over the previous quarter reflecting this acute stabilization of delinquency. Moving onto slide seven, as we have already mentioned, total assets came to R$856 billion, 19% up on September 2011.
The return on average assets remained at 1.4%, while the adjusted return on average equity stood at close to 20%. The Basel ratio closed the quarter at 16% and the reduction was basically due to the increase in the spreads and market risk-weighted assets, and the reduction in our Tier 2 capital, which comprise the subordinated debt.
The year-to-date reduction in the share of loans was mainly due to the field increasing in delinquency together with downward pressures on average spreads which the changing the loan portfolio mix. On slide nine, we see that unrealized gains remained about R$21 billion in the third quarter, just for R$148 million as ended previous three months.
This increase was essentially due to the appreciation of our investments in Cielo, partially offset by market-to-mark adjustments of secured, which went up by R$370 million, moving up their realizing gains in the amount of R$2.1 billion, as a result of extended maturity of our secured portfolio. I must remind you that these figures do not included the potential goodwill from our own profits in the total amount of R$3.4 billion.
On slide 10, we show the evolution of our net interest income from both non-interest and the interest earning operation. The slight reduction in the total net interest income in the quarter was basically due to the lower gains from the non-interest earning portion, reflecting a reduction in add flash trading gains offset by increase in the interest earning portion due to the loan operations and secured.
The year-to-date highlight was the 13.2% upturn in the interest earning portion mainly due to the higher average business volumes, especially loan operations and secured. Let’s now look at slide 11.
This quarter the interest-earning portion of the net interest income increased by 0.8% due to the extension of business volumes and the effect of not creating a hedge on the fixed interest portfolio, although this was partially offset by the pressure on average expense and the effects from the change in the loan portfolio mix. As a result, the annualized net interest margin came to 7.4% in line with our expectations.
The main factors behind the 10 basis points decline in the annualized margin were: first, the reduction in the average margins for loans, mainly impacted by the declining in the interest rates; and second, the change in the portfolio mix and foreign issues due to the increase in the easy time, which affected the adjustment for inflation of a part of the technical provisions in the period. We expect a nominal increasing in the interest-earning portion of the net interest income, although for the net interest margin, we expect a gradual decrease in the coming quarters.
Slide 12 gives a big down of the interest-earning portion of net interest income. Note the increase in the loans and secured clients in both quarterly and year-to-date terms, when the volume of operations help offset this reduction of impacts from the changing the loan portfolio mix.
The negative variations in this funding and insurance most were mainly due to the pressures on average spreads which were affected by the reduction in the SELIC base rate and the upturn in them respectively. On slide 13, we can see that this quarter the gross credit margin, the grey area, totaled R$7.5 billion sustained by the upturn in business volumes, although impacted by the pressures on average spread and the effects of the changing in the loan portfolio mix, as I had already mentioned it.
The red area shows the provisions for loan losses, which fell over the second quarter. This reduction helped push up the third quarter net credit margin.
In comparison with the first nine months in 2011, this margin remained flat. Looking at slide 14, we see that our expanded loan portfolio totaled R$372 billion in September 2012, 1.8% up in the quarter and 11.8% up in the annual comparison.
These increases were mainly due to higher loans to micro, small and medium size business, which went up by around 2% in the quarter and 13.3% in the last 12 months. And the large corporates which moved up by 1.5% in the quarter and 13.3% in the annual comparison, the corporate portfolio highlights were mortgage loans and the export in financing.
In annual terms, the goal of our portfolio remained above 15% excluding the acquired loans portfolio and the vehicle portfolio for individuals. On slide 15, on the positive side, we can see that as expected, this quarter our total delinquency ratio for loans overdue by more than 90 days went down by 10 basis points over the previous quarter to 4.1%.
As we mentioned in our last conference call, we believe this ratio will continue to go down in the coming quarters, leaving the effects of the lower selling rates and the expectations of higher economic activity in the months ahead. The slight increase in the SME segments was due to the change in the loan portfolio mix.
Slide 16 shows our delinquency ratio for loans overdue by more than – by between 61 and 90 days. Looking at the last quarter, we can see downward trend in the individual segment which may indicate a possible future behavior for delinquencies of more than 90 days as well.
Slide 17 shows that we have maintained strong provisioning levels despite the increase in delinquency in the recent quarters so much so that our provisions exceeded central bank requirements by R$4 billion. Assuming the maintenance of the 12 months gross and net loss ratios as from September 2011, we have booked provisions in excess of R$7.7 billion in relation to expected gross losses in the next 12 months.
The dotted part of the blue line or is in R$10.8 billion in relation to losses net of recoveries, the dotted part of the purple line also for the next 12 months. Just to underline what we mentioned in the previous slide, the slide 18 shows the coverage ratio of the allowance for loan losses in relation to our loan of – loans overdue by more than 90 and 60 days, which as you can see, having remained at very comfortable levels.
It is worth noting the increases in the coverage ratios in the third quarter, reflecting the effusive reduction in delinquency. Let’s now look at slide 19, investments in our organic growth, a wider branch network and the client base grow of around 1 million client in the last 12 months, as well as the 3 million new credit cards has provided for a continuous increases in transaction volumes of around 33% in the averaging net use, thus helping push-up fee income.
Third quarter fee income totaled R$4.4 billion, 3.7% up on the previous quarter, mainly due to higher income from consortium management, collections, asset management and credit card and loan operations. The weather resulting forward the increasing in surety and guarantee operations.
And partially offset by lower gains from underwriting and financial advisory operations. In the nine months year-on-year comparison, the fee term increased by 15.3%, mainly due to higher income from underwriting and financial advisory operations which moved up by 52.2%.
And from credit cards this increases by 18.5%. As a result of the higher revenues from credit card and the expansion of the credit card bill.
Moving on to slide 20, as you can notice, we’ve reached the level of 10% increase in the expenses one quarter before our initial target, which shows our strict control over costs, including the contribution of the internal efficiency committee. The trend of year-on-year percentage decline should continue in the fourth quarter.
Third quarter operating expenses increased by 3% over the previous quarter, essentially due to the impact of the collective bargaining agreement, higher business volumes, and the higher marketing expenses. And excluding the effects of the collective bargaining agreement, these expenses would have moved up by only 1.5%.
The comparison between the first nine months of 2012 and the same period last year, the 10.2% variation was due to the expansion of the service network, especially the opening of 720 branch and more than 10,000 new Bradesco Expresso points. The upturn in personal expense were mainly caused by our salary increase as a result of the 2011, 2012 collective bargaining agreements and the expansion of the workforce, which is the net addition of around 2,800 employees in the last 12 months.
On slide 21, the 3.6% increase in the third quarter administrative expense was basically due to the higher tax from the third-party services, especially variable expenses related to cards. In the advertising and particularly expenses related to advertising actions taken during the Olympic Games, including Rio 2016.
In the comparison between the first nine months of 2012 and the same period last year, the 7% increase was mainly due to the higher expansions from the upturn in the business enterprise volume, the addition of 11,400 new service points and the contractual adjustments. It is worth noting that the last 12 months, the IPCA and the IGP-M recorded valuations of 5.2% and 8.1% respectively.
Slide 22 shows non-recurring items that affected the results of our insurance group in the third quarter. Firstly, we constantly concentrate on improving the quality of our plan assets over in technical provision, and in – on confirming the technical provisions head of the long-term products.
This movement made us – posed an opportunity to extend the maturity of certain securities classified as available for sale by purchasing long term securities and risk adequate interest rates, which improved asset liability management and as a result provided for a positive effect of R$2 billion – R$2.1 billion in the results of our insurance group. And second, our insurance group as a principle has been discounting long-term technical provisions at the real interest rates due to the reduction of our real interest rate in the first half of the year and it is a dollar trend.
Our insurance group based on the economy – economic and the actuarial results has decided to lower the discount rates used in calculating the long-term technical provisions, which originated an additional amount of R$2.1 billion. Please note that even after realizing gains totaling R$2.1 billion in available for sale securities, accumulated mark-to-market adjustments for this portfolio at Bradesco Seguros increased by R$189 million in the third quarter, amounting to R$5.8 billion as of September 2012.
Slide 23 shows revenues from our insurance pension plan and capitalization bond activities, which fell by 12.7% in the third quarter over the previous quarter mainly due to the strong increase in revenues from the pension plan segment in the second quarter. In the comparison between the first nine months of 2012 and the same period last year, however, there was a 17.3% upturn.
Our segment did exceptionally well once again recording double digit growth. The third quarter net income fell slightly essentially due to the reduction in revenues in the period.
The 12% year-to-date increase of net income was basically due to revenue growth of 17.3%, in turn as a result of our lower claims ratio, improved financial results, and reduced general expenses. Slide 24 shows some – the main figures from our insurance activity.
The combined ratio came to 86.5% in the third quarter, 150 basis points up on the previous quarter, basically due to reduced revenues from life insurance and pension plan products, partially offset by higher revenues mainly from capitalization bonds, health insurance and lower claims ratio. Financial assets totaling R$134 billion, while the technical provisions came to R$118 billion, R$102 billion of which related to life insurance and pension plan products.
Finally, we understand that we had another great quarter and they are aligned by our indicators, which remain sustainable irrespective of the domestic and external economic challenges we have been facing. We believe delinquency is under control and will continue to show a gradual decrease on the coming quarters.
We have maintained strict controls over loan ranking and the loan portfolio quality monitoring. In this context, it is worth point out that in the last 12 months, new borrowers have accounted for around 87% of portfolio growth, and the 95.8% of these new operations has good quality ratings from AA to C underlining the abstract and the consistency of our credit evaluation process guarantees and instruments.
We believe the Brazilian economy will continue responding to the government stimulus measures, whose resistance has become more apparent, including the terms of business confidence. Bradesco therefore continues with its organic growth track record leveraging its banking and insurance activities in a responsible manner and contributing to the more capitalization of credit and sustainable development of country.
Thank you very much 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) And our first question comes from Mr. Jorge Kuri with Morgan Stanley.
Jorge Kuri – Morgan Stanley
Hi. Good morning, everyone.
If I may, two questions. The first one is on loan growth expectations and particularly on the consumer side, this quarter consumer loans excluding mortgages, so just what’s really consumption loans was up 1.5% sequentially, which is obviously a very low number on an annualized basis.
And it seems to me that the environment for consumption is pretty good with very low level of unemployment, real wage gains. So what’s your expectation?
How is – why is it going to change or accelerate? It seems that you’re more optimistic about recovery of credits on the consumer.
And I just wanted to understand what would make a difference. I mean, clearly, the numbers that you’re showing over the last year or so in the context of a very strong labor environment are not that encouraging so I’m just wondering what’s going to change.
That’s the first question. I’ll ask the second one later.
Luiz Carlos Angelotti
Thank you, Jorge, for your questions. About the loan growth for individuals and consumer side, in the beginning of the year, our expectation for the GDP grow was around 3.7% and during the year we need to review this expectation because the economy was in a more stable way and the GDP grow is now around 1.6%.
Then the expectation that we have for the guidance that during the beginning of the year, we now a little under what we preview. We understand that the government is adopting some measures for – to trying to sync with the economy and they gave some tax incentives and we can see that in some sectors that they can show some movements that the economy is starting to recover.
Then we understand that for the next months our expectation is that the economy will start to increase. It will be more hot.
And probably in 2013, the grow for the economy and our expectation is that the GDP will be around the 4%, the consumer side will start to recover the grow. We don’t have any guidance for the next year, but probably for the economy was that – the number that we have – that would probably be positive, he understand that the growth for the – in the total system for credit will be around 15%.
Then in the consumer side, we understand that in 2013, we’ll be much better than we had this year.
Jorge Kuri – Morgan Stanley
I mean, I appreciate the comments on the economy, but when you look at consumer fundamentals, unemployment actually improved all throughout the year and there was a big jump in wages. So I’m just trying to differentiate between the two of them.
So just specifically on the consumer, how are things going to get better and then why is it going to accelerate? Isn’t it the problem that debt leverage is just too high?
Luiz Carlos Angelotti
We understand that we don’t have any kind of problem with the commitment with the Brazilians, with their families. We understand that they don’t have any problem with their leverage or with their debt.
In this year because the environment or because the problems in the economy in the order probably the consumers were more – particularly were more conservative. And now considering a better environment in 2013, probably they view consumer a little more products and we understand that we don’t have any kind of problem with the delinquency, the unemployment ratio in Brazil for the next year and understand that we will maintain a better ratio in the unemployment.
Then we understand that probably the consumer side we’ll had a better performance or we’ll had a better grow in the next few quarters.
Jorge Kuri – Morgan Stanley
All right. Thanks.
My second question is on Cielo. There’s several news items over the last weeks about potential regulation and caps on MDRs and all sorts of noise on it.
And just wanted to hear your view as controlling shareholder of Cielo of what’s your expectation if anything and how it’s going to play out in terms of pricing caps or all the regulatory changes at the acquiring company? Thank you.
Luiz Carlos Angelotti
Thanks for your question, Jorge. We understand that this question you need to – it’s better you ask far as Cielo.
For us we are not comfortable to comment about their business and we understand that it’s better you ask this question for Cielo.
Jorge Kuri – Morgan Stanley
All right. Thanks.
Luiz Carlos Angelotti
Thank you.
Operator
And our next question comes from Mr. Mario Pierry with Deutsche Bank.
Mario Pierry – Deutsche Bank
Hi. Good morning.
Let me ask two questions as well. The first one will be on your fee income generation.
Your fees are growing close to 15% year-on-year is very good growth, but we’re hearing more and more noise in Brazil about government pressure for the banks to reduce fees. So if you could comment a little bit about what is driving your fee income growth in terms of volumes in Paris?
And then the second question is related to your net interest margin. You made a comment saying that you expect margins to continue to decrease gradually in the coming quarters.
What is your expectation for net interest income? Because – I’m saying this because sure your net interest margin has been compressing throughout this year, but your net interest income is actually up above 14% year-on-year.
So if you could give us some guidance about your expectations for net interest income growth next year that will be great. Thank you.
Luiz Carlos Angelotti
Okay. Thanks for your question, Mario.
About the fee income, we had good growth in the last 12 months, 15.3%, as a result of higher investments in the organic growth. That’s helped the increase in our volume in these transactions.
The 1,000 branches, the investments in the Bradesco Expresso points, they’re growing our client base 1 million in the last 12 months and 3 million new credit cards this increasing our scale helped to improve the volume of transactions that in the last 12 months real more than 30%. Then this will be important revenue for the next years and we are improving our scale for – to continuously improving the fee income revenues.
The discussions about the price of the fees, we understand that we are analyzing the movement, but we understand that we maintain the competitive with the price that we have and we have for the – our clients accordingly profile different prices and sometimes according the relation that they maintained the stability that they maintain with us. They have a very good confidence.
We understand that we maintain very competitively with our fees. About the NIM, we expect that the NIM, we had in this quarter a little decrease in the NIM, 0.1%, and we expect that this movement will continues, because the pressures are – and the effects of the SELIC reduction and probably this – at the end of the year probably we’ll finish it with 7.3%, 7.2% and therefore 2013 probably this movement will continue and to the end of the year probably we’ll be something – we will have something next to 7%.
We don’t have the – we understand that the margin, the nominal number will continues growing, but we don’t have now the guidance for 2013. We will announce the guidance in the end of January.
Then we don’t have now the numbers for to talk about any guidance for the nominal growing in the margin for the next year.
Mario Pierry – Deutsche Bank
Okay. Great.
So let me just have two follow-up questions just to make sure that I understood on the fee. So your fee income is being driven by volumes and not necessarily by prices, but do you still think that your tariffs, your prices are competitive and thus you don’t see the needs to be reducing tariffs in the future.
Is that correct?
Luiz Carlos Angelotti
Yeah. We are analyzing, but we understand that we maintain very competitive price and the – we understand exactly probably we don’t need to review the price.
Mario Pierry – Deutsche Bank
Okay. And then, Angelotti, on the NIM, if you could give us an idea what percentage of your net interest margin compression so far has been driven by the lower market rates and how much of the pressure has been from just a change in your product mix as you highlighted, right, bringing your consumer loans as fast as you have been growing?
Luiz Carlos Angelotti
I don’t have the year-to-date number, but the majority of the effect is more because of the effects of the decline of the SELIC or the mix is represented achieved but it’s a small part in the effect.
Mario Pierry – Deutsche Bank
Perfect. Okay.
Thank you very much.
Luiz Carlos Angelotti
Welcome.
Operator
Our next question comes from Mr. Thiago Batista with Itaú BBA.
Thiago Batista – Itaú BBA
Yeah. Hi, everyone.
I had one question about the asset quality and the loan loss provision expenses. What is your view regarding asset quality next year?
And also if you could comment about your expectation of loan loss provision expenses rolled during next year, it is possible to see these expenses increasing at a slower pace than the loan growth in 2013?
Luiz Carlos Angelotti
Thank you, Thiago. About the asset quality, our delinquency ratio as we expect, that should decrease this quarter and we have now 4.1%.
We expect and to the end of the year probably to have something around this 4% or 3.9%. And these movements of the gradual decrease we expect that will continues in 2013.
We don’t have a guidance or but in 2011 the lowest level that we have was 3.7%, 3.6%. Then considering the better environment that we expect for 2013 would be that we have something similar that we had in 2011 that in the best moment the level was 3.6%, 3.7%.
This will be something very important for 2013, because according the loss of this offset will be decrease will help to have a compensation for the pressures in the market. And now about the grow of the loan portfolio, we understand that the now in the last quarter the fourth quarter, the economy will start to grow more.
We expect – we are maintaining our guidance that is 14% to 18% is our expectation. We expect to reaching the loss – the lower level of the guidance that we are working hard for to reaching in this target – in the lower level of our guidance something around 14%.
Thiago Batista – Itaú BBA
Okay. Thank you, Angelotti.
Operator
Our next question comes from Mr. Carlos Macedo with Goldman Sachs.
Carlos Macedo – Goldman Sachs
Good morning, gentlemen. I have a question regarding expenses.
Your guidance on expenses talks about 10% year-over-year growth on expenses, admin expenses. You’re really at that level or actually slightly below it after third quarter results year-to-date.
What should we expect with respect to expenses going forward? Is there – is the bank still focused on driving this to around inflation next year or given the pressure that we’re seeing on fees and margins and everything else, is there a view that you could go even lower than that?
Luiz Carlos Angelotti
Okay. Thank you, Carlos.
We reached these levels that our target 10% one quarter before our expectation and because we understand that we in the – probably in the next quarter this movement will continue and we probably will reach the lower level of our guidance something next in 9%. We are working hard in maintaining the control of costs.
We have the efficiency committee that is looking for opportunities for reduced costs internally and we don’t have the guidance for 2013. But considering the – thus the investments in 2013 probably will be something very similar, the organic growth will be something very similar that we had in 2012.
We will grow something in our other or next something in next 4% or 2.8% then we don’t have the final guidance. We will announce the guidance in January.
But probably it will be something next year’s inflation.
Carlos Macedo – Goldman Sachs
Well, just to follow-up then, will that kind of growth cost inflation, would that entail any additional efficiency gains or it’s just that – that’s just because the scale – you’re being able to deliver that kind of growth because of scale. In other words is there a more comprehensive product that we can see maybe even further gains in efficiency going forward to offset the pressure, as I said before margin and fees, or will it just be more passive role in trying to do this with scale?
Luiz Carlos Angelotti
We are working in the semi fronts – in both fronts. We are working for improved efficient and we expect that our efficient ratio – our efficiency ratio will continues reducing during the next year.
We will expect to start to have some gains or some – because the investments in technology, our IT realization, the new IT tooling in IT will start to help us to have some gains that is starting in the next year. Then one of the gains or the effective view came from the – the gains from – that came from the investments in technology are inefficient.
And it’s something that will help us to reduce the cost. And we are working or we are investing, having an improved our scale, our – the investments that we did during 2011 improving the network, it will help – is helping us to improve the scale in getting more clients or improving the number of cards and the number of transactions is increasing.
And we are working in the both fronts looking for efficiency, reducing costs and the investing on technology and the working for the improve the scale, acquiring or getting more clients and improving the number of credit cards and improving the number of transactions.
Carlos Macedo – Goldman Sachs
Thank you very much, one final follow-up. Specifically, can you give us a number, a couple of lines where we should expect the most improvement?
Would it be something like data processing given the like the architecture, or would it be outsourcing, or would it be personnel or marketing, or where should we expect the biggest improvement going into next year?
Luiz Carlos Angelotti
Well, I think the improvement that came from IT is through to the IT – newer real healthy. We have some gains and efficiency inside of branch or the wards or the cashier unit.
Less time is for to shorten the clients and they will have out shortened more clients or sell more products. This is one part of the pieces or the improvement came from these effects of the IT.
The less standard unit to – for development new products or services. One part came from soft cost, we are revising process internally.
Our efficiency committee is looking for opportunities for reduced costs, discussing the new agreements are with the suppliers trying to reduce the costs are looking for opportunities of reducing costs, revising some process internally. Then we can have some reductions in some lines in terms first of all in communication.
Then we are working in different fronts, looking for opportunities for reduced costs or improving the revenues they’re efficient.
Carlos Macedo – Goldman Sachs
So in other words, they will come across the board, there wouldn’t necessarily be a specific line?
Luiz Carlos Angelotti
We don’t have any specific line, because we are working in different fronts and we are revising many processes internally in the bank and the efficiency committee is working hard. We have meetings two time a month and we have a specific group that – they have some targets, some areas that they are looking internally in the banking.
Our areas are involved and looking for efficiency or reducing costs or trying to improve the revenue. Then we don’t have any specific lines where we expect it to have a big reduction, but we are revising many fronts inside the bank looking forward opportunities.
Carlos Macedo – Goldman Sachs
Okay. Thank you.
Luiz Carlos Angelotti
Thank you.
Operator
Our next question comes from Mr. Marcelo Telles with Credit Suisse.
Marcelo Telles – Credit Suisse
Hi. Good morning, Luiz.
Good morning, Paulo. Thanks for the opportunity.
I have two questions. The first one is still on the margin, sorts of – keep asking more questions in that regard.
But I just want to know, I mean, one, you talk about margins of 7% by the end of next year, are you – what is your assumption for overdraft rates? I will assume what sort of a compression express are assuming that scenario and if – because today your overdraft rates are almost twice as much the overdraft rates that are being on chart by Banco do Brasil and also they are well above your new credit card rates.
So I’m assuming that they’re also going to go down over time or just keeping them constant? And then after your answer I can go with me second question.
Thank you.
Luiz Carlos Angelotti
Okay. Thank you, Marcelo.
For the overdraft, we create a specific products in last May where our clients they can have the access for a better rates 4.7% or 3.9% for the prime client, but they need to have therefore a special attach of fees. And they – when they – as they start to have the access for this better rates, then this is a product that the clients need to do an option.
They are using or they are starting to increase their participation and we understand that’s for the overdraft, we already have the product and probably we will have immigration for this new product in the next – during the next quarter, but the clients need to pay to add for a special attach of fees. Then we understand, we already have this product and we did the modification for the overdraft.
Marcelo Telles – Credit Suisse
And in your 7% assumption, how much of your client base are you assuming is going to be under the lower rate?
Luiz Carlos Angelotti
We are now in a – in the beginning of the movement, but I don’t have here the number. But probably the immigration is increasing and until the next year we will have a good group of clients.
I don’t have now the numbers here, but this product is available for all kinds of trades.
Marcelo Telles – Credit Suisse
Thank you. And my second question regarding your securities revenues, I know, I mean, that – I mean, if you look at the securities’ results the margin on the securities portfolio, I see there was – from the beginning of the year, there was an increase from R$1 billion per quarter to roughly R$1.4 billion.
And I remember in previous quarters, I mean, you did mention that you would expect that margin, the R$1.4 billion to go back to something around R$1 billion. My question is, is it still the case?
When would that happen? And I know that you did some reclassification from credits available for sale in the first quarter, so that might have helped your – that result overtime and maybe you can recognize for a little bit longer.
But what you’re going to expect in that regard? Thank you.
Luiz Carlos Angelotti
Thank you. The insurance margin we have some effects that...
Marcelo Telles – Credit Suisse
It is not insurance, it’s the securities margin, sorry.
Luiz Carlos Angelotti
In the securities margin, we have here the effects of the prefixed portfolio is one part of the growth that we have here, not the total, but it is only one part. Probably for the next year, this effect of the prefixed portfolio will be in that similar level, a little less, but the number will be similar that we had – we are having now in 2012.
Then, we expect something similar for the next year, probably the growth will not be when you compare 2013 with 2012 you are not to be – it doesn’t expect to have a huge growth, but it will be something similar, we only talk about this line.
Marcelo Telles – Credit Suisse
Okay, perfect. No, yeah, I asked that because I mean, I struggle a little bit to believe that NII would actually grow next year, I mean, let’s say high single digits or so, because the – I mean, on one hand, we have this securities gain which is not going to increase and on the other hand you’re going to have, you’re having let’s say lower credit growth.
You are going to have a negative mix impact. You have your credit margin coming down and likely to come down more once you reflect the lower credit card rates that could effect in November.
So how – what’s going to drive your NII growth in expectation for 2013?
Luiz Carlos Angelotti
Yeah, we don’t have the guidance for the – our expectation for the growing in the margin. Probably the highest level of the guidance it will be to this, but we don’t have this number now for – for our portfolio – the guidance we will give you in January.
Marcelo Telles – Credit Suisse
Perfect. Thank you.
And one final question. On asset management fees, have you reduced your fees in any way, and how do you see your fees compared for instance to some of your competitors Banco do Brasil, which had lowered their fees quite a bit.
Do you think that could be a hit to fees and next year are you considering that in your budget?
Luiz Carlos Angelotti
We are analyzed the movements and we will try to maintain very competitive in our products and probably we will adopt some actions if we understand necessary for to maintain the competitive.
Marcelo Telles – Credit Suisse
Okay. Thank you so much.
Thanks for your answers.
Operator
Our next question will come from Mr. Philip Finch with UBS.
Philip Finch – UBS
Yes. Good morning, gentlemen.
Thank you for hosting the call and taking my questions. A couple of questions please.
First, in regards to refinancing and possibility, have you seen any evidence of refinancing taking place because of lower interest rates that you are now offering? And/or any evidence of customers moving to state backed who are offering lower lending rates in terms of products?
And the second question is in regards to the leverage of your balance sheet, which seems to be increasing with your Tier 1 ratio coming down 50 basis points in the third quarter to 11.3%. There seems to be a quite a steady trend in the last few quarters even in the last couple of years.
How much lower do you expect your Tier 1 ratio will be? What is a level that you would feel comfortable with?
Thank you.
Luiz Carlos Angelotti
Okay. Thank you.
Luiz Carlos Angelotti
For refinancing – well, we are working for to maintain the spreads and the – in a – we are not having many. If you analyze the loan portfolio, we have the corporate operations and the individuals operation.
In the corporate operations, we are working for trying to maintain the spreads. We are in the corporate side, the spreads already is smaller and we don’t have space for reduced more.
And the SMEs, the operations, the markets they are competitive, but we are working and trying to maintain this spread stable. Then we are obviously having the movement there to finance for a lower interest rates.
This spreads now they had an adjustment but they are stable. And the individual side, we have – the only affecting specific products that we did there is an adjustment in the credit card portfolio and we will start to work now in November the new rate.
But there are other products according the – according to the specific products they have the specific rate incentive and we are in a strong competitive, but we are maintaining the spreads in a reasonable and stable. And talking about the leverage, the Tier 1 reduction that we had, just one part of the statute was deposited the credit growth, but we had another effect that is the market risky that we had some modifications in the rules that is in the new calculation.
We had a zero increase in this risk and one part of this effect is the new calculation for market risk. We expect now that probably in the end of the year that our Central Bank, we announced the new rules for Basel III.
We need to analyze the new rules, but probably we’ll maintain our Basel ratio, which is some margin of course with – for margin to maintain the comfortable level that we understand. We don’t have now the specific number, but probably we will maintain a level that we understand that is comfortable according to the administration understand.
Philip Finch – UBS
Okay. Thank you very much.
Luiz Carlos Angelotti
Thank you.
Operator
Our next question comes from Mr. Saul Martinez with JP Morgan.
Saul Martinez – JP Morgan
Hi, good morning. Most of my questions have been answered.
So just a couple of very quick follow-ups. On the capitalization, the answer you just gave, you mentioned that the new rules should be up by yearend.
How comfortable are you at this point that to believe that there could be some relief in terms of the rules regarding the deductibility of the deferred tax assets, how do you see that playing out? And secondly, another follow-up on the margin that if I could go to page 12.
You already talked little bit about the securities and what your expectation are there. Insurance is a smaller line but it’s been very weak this year, I think because of negative valuation, I think this quarter I could see – this quarter was R$694 million a year, this year 12%, 13% year-on-year, how should we think about that line under a more normalized scenario?
What’s kind of a more normalized run rate do you think for insurance NII?
Luiz Carlos Angelotti
Okay. Thank you, Saul.
About our strategy for the capitalization about the Basel III rules, we expect that our Central Bank, we announced the new rules into the end of the year. According to some discussions around the world, we have some effects that some countries decide – they decided not to –example to exclude the insurance company or the insurance investment and the USF the insurance.
This is the one thing that we understand that our Central Bank is analyzing and it could be that you adopted because they expect about the international rule according to how will be the implementation they worked. And about this deferred tax, the tax spread here in Brazil we are considering the difference between the Central Bank rule and the tax rules we have here normally a big number in our assets and we understand that the Central Bank is analyzing this or it is under our jurisdiction is something relevant and we, in our case, the banks, we understand that this spread is a good spread as they have good quality because we have recorded this spread consistently, the movements of the provisions in the assets.
We understand that we have some possibility that they affect the one part of the tax spread. We now compare with some other competitors, who have the – they have similar effect.
We have different subscription in the order and the some competitors are not adopting the tax spread, similar – the similar effect. Then the favorable – document for the Central Bank, the federal – the bank association send their document, where we show the – what we understand about the tax spread, about the quality and the effect if they decide to reduce for the future.
We have expectation that they view a factor – one part of this factor not to have a reduction in the equity, but we don’t have until now the final rules, but we have expectation that something will be affected.
Saul Martinez – JP Morgan
Okay. Great.
Luiz Carlos Angelotti
And about the margin – okay, about the margin, we don’t have the guidance. We don’t have – how to offer you now some guidance or some scenario.
We understand for the next year, probably we are finalizing our budgets, but probably the guidance is the highest level, the guidance will be double-digit. But we don’t have the final numbers for to offer you are what we understand – what will be the level for the next year and...
Saul Martinez – JP Morgan
Fair enough. What I was asking, sorry to interrupt.
But what I was asking was more specific question on insurance NII. The last couple of quarters it’s been R$700 million more or less the quarter, which had been much lower than what it was.
Can you talk a little bit about what you think a more normal level per quarter is for insurance NII?
Luiz Carlos Angelotti
Yeah. We had some effects this quarter considering the payment increase and in some quarter we had the effects of the shares of – the price of shares that’s – that weren’t part of this margin effect.
But probably the more reasonable level is something around the R$800 million – probably, I think it’s between R$700 million to R$800 million. Probably it will be normalize in the next quarter, but we don’t have the specific guidance for this quarter.
Saul Martinez – JP Morgan
Got it. Okay.
That’s fair. Thank you very much.
Luiz Carlos Angelotti
Thank you.
Operator
Our next question comes from Mr. Victor Galliano with HSBC.
Victor Galliano – HSBC
Hi. My questions have been answered, but maybe I could ask a couple of follow-ups here.
Looking at your – you mentioned about how you’ve added 1 million new clients over the last year and 3 million in credit cards. Can you give us some idea of what the kind of composition of this additions to the client base are in terms of are they Plus C consumers, B, where are these – what segment of the income groups are these consumers coming from.
What do you expect going forward? And in terms of your branch expansion and your additions to your Expresso points, how do you see that developing especially in the case of the Expresso points?
Are you managing to retain quite a lot of customers from the old Banco Postal franchise?
Luiz Carlos Angelotti
Okay. Thank you, Victor.
About the client base there is the growth that we had 1 million, I don’t have here the profile of the clients. But considering that this is what we have the best in our country and we kept as of by-runs of the Brazilian economy.
Then we understand that this increase that we have in our client base is very similar of the parameters. One, information that I have for you this one region – that is 800 million accounts is individual accounts and the rest is in the corporate.
But probably the profile is very similar of the Brazilian by-runs. And about the banks, the branch expansion and the Bradesco Expresso points, when we decided to improve the 1,000 branch, the rest that we did in 2011 was because the Postal Bank auction.
We understood that we did the correct movement, because now analyzing the tax, we could retain most of the clients that we understood that we could. When we did a calculation we expect that we will lose something around 25% of the clients, but we could maintain the majority of that.
And now all of these branches are reaching the healing point and we expect in the next two years probably this branch we will have the payback. Then we understand that we did a correct investment and that we could add values for the company doing this movement and now we have the client base, we maintained the tariffs, we maintained the coverage in 100% of the seats in the Brazil.
And we understand that we have now how to catch the goal that we expect for the Brazilian economy for the next year.
Victor Galliano – HSBC
Sorry, did I hear correctly you said you retained 25% or that was what you were expecting to lose?
Luiz Carlos Angelotti
Something around 25%. But we retain much more than 75%.
We maintain – we understand that we could maintain more than 9% of the clients when analyzing the nerves and the movements of the accounts after the transfers or after the – we closed the contract or the agreement. You can see in the – our number of clients that it continues growing in the last few years.
We don’t have any reduction in our number of clients.
Victor Galliano – HSBC
Okay. Thank you very much.
Luiz Carlos Angelotti
Thank you.
Operator
Our next question comes from Mr. Jorg Friedemann with Bank of America.
Jorg Friedemann – Bank of America
Thank you very much for the opportunity. I’d like to go over two points that you already discussed but with a little bit more color as possible.
In the first point when you talk about the efficiency, you mentioned that you don’t have any specific projects for cost reduction, but if I’m not mistaken I remind that couple of years ago you were sharing ATM networks among different banks in Brazil. I look, right now you have 35,000 ATMs of your ownership and I’m not sure if I know the start of this project is evolving, how much representative it could be toward administrative cost?
And then I make my second question. Thank you.
Luiz Carlos Angelotti
Okay. Thanks, Jorg.
About efficiency, we have internally many front or many points where we are analyzing opportunities for to looking for reducing cost, specifically about the ATM machines working with other banks. We started the discussion some years ago.
We didn’t finish the discussion we are analyzing. We have discussed with other banks.
But we didn’t reach an agreement until now but it probably is not something that, it’s something that could happen in the future, it’s not something that we finished the discussion.
Jorg Friedemann – Bank of America
And do you have an idea about how representative the maintenance, logistics, security of the ATM network represent the total cost at the moment?
Luiz Carlos Angelotti
I don’t have here these numbers but it’s something relevant, it’s something that we are internally analyzing our numbers, and revising our internal process for trying to reduce the cost. Only talk about this from our internal process, it’s something – is one of the fronts that we’re having our efficiency committee and we are trying to reduce the final cost with transports or this an the month end but I don’t have here the numbers for offer you how is it final affecting the results.
Jorg Friedemann – Bank of America
Okay. But had its relevant okay.
Let me go to my second question in terms of asset quality, we saw I know not only yourself, but your main competitor also showing an improvement in terms of 90 day and care house, I think I also did the delinquency starting to show some signals of improvements, but I still see charge-offs evolving on the contrary side they are still on the rise. So what do you expect for charge-offs going forward in the next couple of quarters?
Thank you.
Luiz Carlos Angelotti
Okay. Thank you.
The growing charge-offs is related to grow the delinquent ratio that we had in the last quarters. In our case, we don’t sell the portfolio.
We don’t – we maintain the loose of now according to central bank rules. Then these effects have increasing in the charge-offs is because in the last quarter, we had an increasing delinquents ratio.
Probably now with this reduction in the delinquent’s ratio, this effects of the charge-off, we will start to reduce. But normally you needed six months for to charge-off the operation at the minimum.
You need the – we understand that’s probably these effects of reduction will be will have more in the next year because the effects of the charge-off is a little later than this first symbols in the delinquents ratio reduction that we are having now. Okay.
This never reduce more in the next quarters. But if you analyze the – our numbers and you look for the last year charge-offs that we had in the last quarter.
This number start to grow when they start to grow the delinquency ratio then and it probably now that start to reduce probably the fact will be, you came in a little later, but we have said this probably in 2013, the charge-offs will start to reduce. But we maintain the normal rule of Central Bank and we never sell portfolio under – the fact is the normal accounting rules.
Jorg Friedemann – Bank of America
Okay. Thank you very much.
Okay.
Luiz Carlos Angelotti
Yeah.
Operator
And now our next question comes from Mr. Boris Molina with Santander.
Boris Molina – Santander
Yes. Good morning.
Thank you very much for taking my questions. Mostly has been said about the effect of the government putting pressure on the banking industry to reduce basics, but we haven’t heard much in terms of progress on the part of the government in delivering on the 26 point, you said that the Central Bank to enter the agreement in terms of the potential reductions or of costs and overhead that could be lower rates in Brazil.
So I don’t know if you have any update in terms of how could we expect potential changes either in regulation or taxation will help you reduce rates for lending without reducing profitability. Has been – has there been any progress that you could talk to us about it?
We’ve seen some progress in lower reserve requirements, I don’t know if you could comment about how could we expect this to impact your results in the fourth quarter of next year? We also saw recently the approval of the regulation for the positive credit, so I don’t know if could give me color as to how we could expect the positive credit your database being build up and when could we see it having an impact on your – on the pricing of credit risk investment?
Luiz Carlos Angelotti
Okay, Boris, thank you for questions. So we start a discussion with a governor about some list of points where we understand that we can have some modifications in laws or in rules where we can have some reduction in the spreads or in the companies of the spreads because when you are widely spreads here in Brazil we had one part is a delinquency ratio actually 28%, 30%, but we have a next to 26% that is tax and the 13% that is administrative cost.
Then people above and least with around the 22 points, where we understand that we truly have some modification in rules or in laws. We can transfer the benefit that we have further declined reducing these spreads, but these discussions – we are maintaining with the government.
We don’t have the now – until now any final movement but probably in the next few one or two years we can have some modifications that will help the reduction in the spreads. What we had recently is one tax rules where the – our renegotiation we don’t need more to tax in the front.
We can to do the taxation in cash flow base. These are one important movement or important signals that the government is trying to show to offer some modifications.
We understand that probably in the next one or two years, we could have some modifications in the law that it can help with transfer the benefit. No, no probably we needed more time for to have this effect.
About the post GP rule, we have the laws more than two years and now in 3Q we had the – our regulamentation that in the federal environment. But we needed a new – for the banks we needed the regulamentation that came from the Central Bank.
Probably after that we will start the post GP rule. We understand that it will be something important for the future for – to reduce the delinquency ratio we contribute for the banks to reduce the delinquency ratio.
But we need to have the participation not only the banks, but from the other segments of the economy. And it’s something that you understand that will be important for the future, but it’s not something that will happen very fast.
But if we have the involvement from many segments in the economy will be are very important instruments for to reduce the delinquency ratio in the Brazilian system.
Boris Molina – Santander
So you basically are telling us that the rules do not require a, for instance, the installment purchases from retailers to be reported to Credit Bureau. I thought it was included.
I mean what aspects would you think that are doubtful of inclusion in the Credit Bureau, is it because it’s voluntary and not mandatory for consumers or retailers to report data to the credit bureau?
Luiz Carlos Angelotti
We will be – the data base, the banks, in our view, need to do the implementation. We needed some the central bank, the regulamentation part, the banks to do the implementation.
After that we – the banks operates their positively bureau, but example, we need that in order to segment decline – for example the commercial size or an example of the energy companies or the telephone companies that they exchange the information for these positive bureaus part. In the economy, we create a huge data base, where we will have better information, because if we contain the information only about the banks, we have the negative information that is something very similar.
We understand that we can add more quality or add more instruments. If we have information that you can from the other sectors in the economies, then it’s something that we probably will – we will need more time and – but we understand that it will be a very important instrument for the future.
And we will work – the banks and the other segments in the economy probably will work together for tool to create this huge data base.
Boris Molina – Santander
So the creation of the bank credit bureau is the reason why all the banks are selling their fixed asset now?
Luiz Carlos Angelotti
Please, you can repeat the...
Boris Molina – Santander
The creation of the bank also the credit bureau is the reason why banks are selling their shares in their assets now.
Luiz Carlos Angelotti
No, no. We – in 2007 (inaudible) is a company that is the Brazilian bank we created together.
In 2007, Experian bought 70% of the total shares in this company and we remained with 30%. Until now that the Experian decided to buy 100% of the share, okay?
We resell but we will maintain the strategy with the Experian. And for the future the positive bureau, we have some in the law that we have now, until now we have some rules where we need to maintain a secret or information about the price.
According to the Brazilian rules we need to maintain a banking secrecy about information of the client, then we don’t know how we will be in the future if the banks you need to have specifically positive bureau or if we can create together with non-financial company. Something that we have now in the rules that is not changed, but after the legalization of Central Bank probably we need to do some movement and we will start to create this data base at the post bureau.
And if you be together with non-financial companies or only between the bank we don’t know, but this movement that we had selling this that our shares is something that started in 2007. And now – we’re now serious at where Experian has option to buy the shares.
And we decide to do an agreement and sell the shares. It’s something not related to the positive bill.
Boris Molina – Santander
Okay. Thank you.
Luiz Carlos Angelotti
Thank you.
Luiz Carlos Angelotti
We don’t have more questions. Thank you everyone for to staying with us.
And now I will transfer Paulo finish the conference. Have a good day everyone.
Paulo Faustino da Costa
I just 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 third quarter 2012 and other information concerning Bradesco is on our website.
Thank you very much.
Operator
That does conclude the Banco Bradesco’s audio conference for today. Thank you very much for your participation and have a good day.