Jan 29, 2013
Executives
Paulo Faustino da Costa – Market Relations Officer Luiz Carlos Angelotti – Managing Officer
Analysts
Daniel Adrian Abut – Citigroup Global Markets Carlos Macedo – Goldman Sachs do Brasil CTVM SA Saul Martinez – JPMorgan Securities LLC Mario Pierry – Deutsche Bank Corretora de Valores SA Jorge Kuri – Morgan Stanley & Co. LLC Regina Longo Sanchez – Itaú Corretora de Valores SA Victor Galliano – HSBC Securities USA, Inc.
Boris Molina – Santander Central Hispano Investment Maclovio Pina – Morningstar Equity Research
Operator
Good morning, ladies and gentlemen. We would like to welcome everyone to Banco Bradesco’s Fourth 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 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 the results to differ materially from those expressed in such forward-looking statements.
Now, I’ll turn the conference over to Mr. Paulo Faustino da Costa, Market Relations Department Director.
Paulo Faustino da Costa
Good morning everyone and thank you all for participating in our conference call. We are here 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.
Marco Antonio Rossi, Chief Executive Officer of Bradesco Seguros Group, and Bradesco’s Executive Vice President; Mr. Luiz Carlos Angelotti, Executive Managing Director and Director, Investor Relations Officer; and Mr.
Moacyr Nachbar, Deputy Officer. I will now turn to 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. The fourth quarter of 2012 was marked by recover of the global economy.
Even it is very moderately and between July and at September we saw the lowest level in terms of growth. Global economy risk remains uneasily negative, but they are manageable and are currently noticed as lower than those including 2012.
This scenario, the global economy outlook towards Brazilian economy is positive from the commercial viewpoint and also considering the lack of inflationary pressure, or abrupt reduction of international liquidity over the next months. The recovery of Brazilian’s reduced economy also continues moderate, but it is certain that the second half of 2012 was better than the first half.
In 2013, the normalization of supplying, trading, and manufacturing is going to recover in this strong production under our scenario where our household consumption continues growing at solid base, supported by employment and income growth. It is also worth mentioning the excellent outlook for domestic agribusiness as well as its positive effect on the economics of small and medium-sized cities.
Brazil continues moving forward in institutional terms and most recently policies concerning the structural issues have been adopted, such as infrastructure and production cost and savings. Concerning the financial industry, specifically 2012 results, a very challenged scenario.
It is important to evaluate the changes seen in the system in view of the thing that this industry has undergone over the past few years. Therefore, financial institutions have been taking a very close look at the flow of operations and at the same time they have improved the scope of general services offered to their clients.
It is we think this macroeconomic context that Bradesco’s fourth quarter results were affected. The slides two and three show our period highlights.
I would particularly like to draw your attention to the slide two showing our adjusted net income for 2012 which reached to R$11.523 billion in 2012, 2.9% up on 2011. Total assets came to more than R$879 billion, 15.4% up in the year while our expanded loan portfolio increases by 11.5% in the same period totaling R$385 billion.
On slide three, it’s worth noting our assets under management, which ended the year at R$1.225 trillion, a 20% increase over December 2011. It is also worth mentioning the improvement in our efficiency ratio, which closes the fourth quarter at 41.5%, its lowest level for the past ten quarters.
On slide four, we show the reconciliation between our booked net income and adjusted net income. This quarter, the main non-recurring items were; the recording of tax credits and the full goodwill amortization, both from BERJ, totaling R$1.389 billion and R$1.156 billion respectively.
Again of this R$793 million from the sale of Serasa shares and the recognition of impairment losses amounting to R$1.470 billion, R$527 million of which resulting from the return revaluation of rights to provide banking services and the R$890 million relating to investment in shares classified as available for sale due to the adjustment of the book value to their realization value. Adjusting for these items, our fourth quarter adjusted net income came to R$2.918 billion and our annual adjusted net income came to R$11.523 billion.
You can see on this slide that our return on average assets came to 19.2%. The slide five shows our historical series of our quarterly net income.
Income growth in the fourth quarter was mainly due to the higher volume of operations and financial transactions and expanded half of our products and services both having a positive effect on fee income, and the net interest income grow from both non-interest and interest earning operations, and the reduction in the cost of the delinquency. In the annual comparison, this net income increased by R$325 million or 2.9%, thanks to the upturn in net interest income, net of provisions for loan losses, the increase in fee income due to a higher volume of transactions as a result of the investments in organic growth and the increased revenues from insurance operations.
Moving onto slide six, I would especially like to draw your attention to our 12 months efficiency ratio, the red line, which improved for the fourth consecutive quarter, falling by 60 basis points and closing this fourth quarter at 41.5%, its lowest level for the last 10 quarters. This important performance was due to our team’s efforts to control expenses, including the initiatives of our efficient committee and the maturation of our investments in organic growth, and the investments in information technology, which had a positive effect on the net interest income and fee income.
The fourth quarter ratio improved by 206 basis points over the same period last year. The blue line shows the efficiency ratio adjusted to the risk, which improved by 40 basis points over the previous quarter due to the same aspects mentioned above.
The Basel ratio closed the quarter at 16.1%, and the light reduction was due to the increase in market, and credit risk weighted assets, partially offset by increasing our tier 2 capital which comprises subordinate debt. We highlights that Bradesco is the first and only Brazilian bank authorized by the Central Bank to use its own internally-developed market risk management models to calculate regulatory capital as of January 2013.
The slide 8 shows the relative share of our main operations in net income. In both the quarterly and annual comparisons, the highlight was the increasing the relative share of insurance activities mainly due to its strong revenue growth in the life insurance and pension plan segments.
The annual reduction in the share of loans was essentially due to the period’s increase in delinquency, as well as the pressure on average spreads and the change in the portfolio mix. Let’s look at slide nine.
Unrealized gains totaled R$24.9 billion in the fourth quarter, R$3.8 billion less than the quarter before, basically due to mark-to-market adjustments in our fixed income securities. These figures do not include the potential goodwill from our own properties, in the total amount of R$3.5 billion.
On slide 10, we show the evolution of our net interest income from both non-interest and interest-earning operations. The quarterly increase in total net interest income was basically due to the upturn in the interest-earning portion especially in relation to the insurance and loan operation lines, and the non-interest portion reflecting higher arbitrage trading gains.
The annual comparison, it is worth noting the 12% upturn in the interest-earning portion, which was mainly due to the higher average business volumes, especially in regard to loans and securities operation. Moving on to the slide 11, this quarter the interest-earning portion of net interest income increased by 0.7%, basically due to the upturn in business volumes and the higher insurance margins partially offset by the pressure on average spreads and the impact of the change in the loan portfolio mix.
As we expected, the annualized net interest margin narrowed by 10 basis points to 7.3% in the period. We continue to expect nominal growth for the interest earning portion of the net interest income, but accompanied by a gradual decrease in the margin in the coming months.
These factors were offset by the lower gains from the securities margin. The annual highlights were the loan and securities margins, thanks to the increases in business volume.
The reductions in the funding and insurance margins were due to the decline in the Selic and the upturn in the IGP-M respectively. On slide 12, we can see that this quarter the gross credit margin, the grey area, totaled R$7,527 million, sustained by the upturn in business volumes, although impacted by the pressures on average spreads and the change in the portfolio mix as I have already mentioned.
The red area shows the provision for loan losses, which fell over the third quarter as expected, helping pushup this fourth quarter net debt margins. In the annual comparison, the net margin remains flat.
Look at the slide 14; we see that our expanded loan portfolio totaled R$385 billion in December 2012, 3.7% up in the quarter and 11.5% up in the annual comparison. These increases were mainly due to increasing the loans to large corporates, which moved up by 4.6% in the quarter, and 15% in the 12 months, and two SMEs which ended up by 3.7% in the quarter and 10.6% in the year.
In relation to the annual portfolio growth, if we exclude the acquired loans portfolio, plus the vehicle portfolio, the remaining loans grew by around 15%. Moving on to slide 15, at this quarter, I would like to emphasize the reduction in our delinquency ratio in the both in large corporate and SME segment.
In the individual segment, the ratio remains flat. In the coming quarters, we expect our gradual decrease in the delinquency in light of its short-term behavior and the expected economic scenario for 2013.
Slide 16 shows our delinquency ratio for loans overdue by between 61 and 90 days, which presented a reduction this quarter confirming our expectations, and the trend of gradual decrease.
These factors were offset by the lower gains from the securities margin. The annual highlights were the loan and securities margins, thanks to the increases in business volume.
The reductions in the funding and insurance margins were due to the decline in the Selic and the upturn in the IGP-M respectively. On slide 12, we can see that this quarter the gross credit margin, the grey area, totaled R$7,527 million, sustained by the upturn in business volumes, although impacted by the pressures on average spreads and the change in the portfolio mix as I have already mentioned.
The red area shows the provision for loan losses, which fell over the third quarter as expected, helping pushup this fourth quarter net debt margins. In the annual comparison, the net margin remains flat.
Look at the slide 14; we see that our expanded loan portfolio totaled R$385 billion in December 2012, 3.7% up in the quarter and 11.5% up in the annual comparison. These increases were mainly due to increasing the loans to large corporates, which moved up by 4.6% in the quarter, and 15% in the 12 months, and two SMEs which ended up by 3.7% in the quarter and 10.6% in the year.
In relation to the annual portfolio growth, if we exclude the acquired loans portfolio, plus the vehicle portfolio, the remaining loans grew by around 15%. Moving on to slide 15, at this quarter, I would like to emphasize the reduction in our delinquency ratio in the both in large corporate and SME segment.
In the individual segment, the ratio remains flat. In the coming quarters, we expect our gradual decrease in the delinquency in light of its short-term behavior and the expected economic scenario for 2013.
Slide 16 shows our delinquency ratio for loans overdue by between 61 and 90 days, which presented a reduction this quarter confirming our expectations, and the trend of gradual decrease.
On slide 18, underlining what we mentioned in regarding to the previous slide, we showed the coverage ratio of the allowance for loan losses, in relation to credit overdue by more than 90 and 60 days, which have remained at very comfortable levels. It is worth noting that the increase in the coverage ratio for loans overdue by more than 60 days, reflecting the period’s reduction in the short-term delinquency.
Looking at slide 19, we see that the investments in our organic growth as strong as the second half of 2011, such as increasing the number of branch and the service points led to an extension of our customer base and credit card portfolio, which increased by almost 2 million cards in this year, in turn leading to a continuous upturn in transaction volumes as a result in fee income. Fourth quarter fee income totaled R$4,675 million, 5.3% up from the previous quarter, mainly due to a higher income from cards, underwriting and financial advisory services and checking accounts.
In the annual comparison, fee income increased by 15%, led by underwriting and financial advisory services, which grew by 73.5%, credit cards, which moved up by 18.2% due to the formation expansion of the credit card base and a higher revenues from cards and the income from checking accounts due to the extended customer lease. Let’s now look to the slide 20.
The growth in our operating expense was below 10%. In fact it reached 7.7% for the year, which is below the lowest end of the guidance range, 8%, once again underlining our strong cost controls, which have [active] improvement of our internal efficiency committee.
Fourth quarter operating expenses increases by 3.2% over the previous three months, mainly due to the higher business volumes and the seasonal upturn in marketing expense. The 7.7% annual increase was due to the impact of investments made in the period offset by our strong costs control according to our search for higher efficiency.
The upturns in personnel expense were mainly caused by salary increases in line with the 2011 and 2012 collective bargaining agreement and the expansion of workforce in the second half 2011. Looking at the slide 21, we can see that the 5.3% increase in the fourth quarter.
Administrative expenses was basically due to advertising expense and the higher volume of business and services, partially offset by reducing expense with third-party services. The 5.6% increase in the annual comparison was mainly due to the higher expenses from the upturn in business and service volumes, the expansion of our distribution network and the contractual adjustments.
It is worth noting that in the last 12 months, the IPCA and the IGP-M recorded variations of 5.8% and [17.8%] respectively. Slide 22 shows revenues from our insurance, pension plan and capitalization bond activities, which increased by 31% this quarter, primarily due the strong upturn in the pension plan segment, boosted by the higher concentration of pension plan contributions in the period.
In the annual comparison, there was a 17.7% increase. Our segments did well, once again recording double-digit growth.
For the quarter, net income moved up by 15.2%, mainly due to higher revenues, the improved financial results, our claim ratio under control and a greater administrative efficiency. The 12.1% annual upturn was basically due to the 17.7% increase in revenues, in turn caused by [restricted] control over claims and the reduction in the general and administrative expense.
The slide 23 shows some of main figures of our insurance activities. The combined ratio came to 86.6% in the fourth quarter, real flat in comparison with the previous three months.
Financial assets totaled R$142 billion, while the technical provisions stood at R$124 billion, a R$108 billion of which strong life insurance and pension plan products. The slide 24 shows our economic department GDP, interest rate, inflation and exchange rate estimates for 2013 through 2015.
We believe the stimuli introduced through various economic policy channels and instruments, which led to the recoveries in Brazil’s growth even through to modest and concentrated in the second half of 2012. We will become more apparent in the coming quarters, resulting in higher and more stable economic growth in the years ahead, which is strict control over inflation and the maintenance of interest rate.
Slide 25 shows our guidance for 2013. In 2013, we believe the loan portfolio continue to expanding growing by between 13% and 17%, mainly versus by loans to individuals and the SMEs.
We expect to see a slowdown in our operating expenses giving our substantial investments especially in information technology and our cost cutting initiatives under our continued search for improved efficiencies. In conclusion, we believe our results in 2012 were satisfactory given the modest base of economic activity throughout the year, not to mention the internal and external challenges we had to face.
The effect of our investments over the last few years, in infrastructure, technology and new products and sales enable to increase in the volume of transaction helping us to offset to pressure on margins. The constant improving our efficiency ratio reflected a tighter control over expansions and we also had the significant contribution of insurance group to the annual results.
It is worth noting that these results came from the correct repositioning of our organic growth strategy and the strong synergy between the banking and our insurance activity.
On slide 18, underlining what we mentioned in regarding to the previous slide, we showed the coverage ratio of the allowance for loan losses, in relation to credit overdue by more than 90 and 60 days, which have remained at very comfortable levels. It is worth noting that the increase in the coverage ratio for loans overdue by more than 60 days, reflecting the period’s reduction in the short-term delinquency.
Looking at slide 19, we see that the investments in our organic growth as strong as the second half of 2011, such as increasing the number of branch and the service points led to an extension of our customer base and credit card portfolio, which increased by almost 2 million cards in this year, in turn leading to a continuous upturn in transaction volumes as a result in fee income. Fourth quarter fee income totaled R$4,675 million, 5.3% up from the previous quarter, mainly due to a higher income from cards, underwriting and financial advisory services and checking accounts.
In the annual comparison, fee income increased by 15%, led by underwriting and financial advisory services, which grew by 73.5%, credit cards, which moved up by 18.2% due to the formation expansion of the credit card base and a higher revenues from cards and the income from checking accounts due to the extended customer lease. Let’s now look to the slide 20.
The growth in our operating expense was below 10%. In fact it reached 7.7% for the year, which is below the lowest end of the guidance range, 8%, once again underlining our strong cost controls, which have [active] improvement of our internal efficiency committee.
Fourth quarter operating expenses increases by 3.2% over the previous three months, mainly due to the higher business volumes and the seasonal upturn in marketing expense. The 7.7% annual increase was due to the impact of investments made in the period offset by our strong costs control according to our search for higher efficiency.
The upturns in personnel expense were mainly caused by salary increases in line with the 2011 and 2012 collective bargaining agreement and the expansion of workforce in the second half 2011. Looking at the slide 21, we can see that the 5.3% increase in the fourth quarter.
Administrative expenses was basically due to advertising expense and the higher volume of business and services, partially offset by reducing expense with third-party services. The 5.6% increase in the annual comparison was mainly due to the higher expenses from the upturn in business and service volumes, the expansion of our distribution network and the contractual adjustments.
It is worth noting that in the last 12 months, the IPCA and the IGP-M recorded variations of 5.8% and [17.8%] respectively. Slide 22 shows revenues from our insurance, pension plan and capitalization bond activities, which increased by 31% this quarter, primarily due the strong upturn in the pension plan segment, boosted by the higher concentration of pension plan contributions in the period.
In the annual comparison, there was a 17.7% increase. Our segments did well, once again recording double-digit growth.
For the quarter, net income moved up by 15.2%, mainly due to higher revenues, the improved financial results, our claim ratio under control and a greater administrative efficiency. The 12.1% annual upturn was basically due to the 17.7% increase in revenues, in turn caused by [restricted] control over claims and the reduction in the general and administrative expense.
The slide 23 shows some of main figures of our insurance activities. The combined ratio came to 86.6% in the fourth quarter, real flat in comparison with the previous three months.
Financial assets totaled R$142 billion, while the technical provisions stood at R$124 billion, a R$108 billion of which strong life insurance and pension plan products. The slide 24 shows our economic department GDP, interest rate, inflation and exchange rate estimates for 2013 through 2015.
We believe the stimuli introduced through various economic policy channels and instruments, which led to the recoveries in Brazil’s growth even through to modest and concentrated in the second half of 2012. We will become more apparent in the coming quarters, resulting in higher and more stable economic growth in the years ahead, which is strict control over inflation and the maintenance of interest rate.
Slide 25 shows our guidance for 2013. In 2013, we believe the loan portfolio continue to expanding growing by between 13% and 17%, mainly versus by loans to individuals and the SMEs.
We expect to see a slowdown in our operating expenses giving our substantial investments especially in information technology and our cost cutting initiatives under our continued search for improved efficiencies. In conclusion, we believe our results in 2012 were satisfactory given the modest base of economic activity throughout the year, not to mention the internal and external challenges we had to face.
The effect of our investments over the last few years, in infrastructure, technology and new products and sales enable to increase in the volume of transaction helping us to offset to pressure on margins. The constant improving our efficiency ratio reflected a tighter control over expansions and we also had the significant contribution of insurance group to the annual results.
It is worth noting that these results came from the correct repositioning of our organic growth strategy and the strong synergy between the banking and our insurance activity.
Thank you all very much for your attention and we are now available to answer any questions that you may have.
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mr.
Daniel Abut, Citi.
Daniel Adrian Abut – Citigroup Global Markets
,
And, I’m asking if you can give us some parameter, even though you are not providing guidance for loan loss provisions. I want to get a sense if there’s a room for that to become another driver overall in next year lower provisions and some of your companies have been guiding that way?
And question number two is on fee income, you’re guiding 9% to 13%, even that you grew 15% this year in challenging conditions and in an economy that was growing very little, would you say that 9% to 13% is a rather conservative type of guidance for a year in which you except economic growth to do much better than last year?
Luiz Carlos Angelotti
Okay. Thank you for our questions, Daniel.
About the loan provisions, we expect that the delinquency ratio, our delinquency ratio will continue to declining in 2013 it will be – still movement in a decrease, but we consider the scenario that we have for 2013 and the lower interest rate. We expect that our delinquency ratio will decline during 2013.
The expense which is loan provision since this is second quarter, while the second quarter was our peak in 2012 and in the third quarter, in the fourth quarter, we continued decreasing our expense. We normally doesn’t give guidance, but we understand that the total expense that we will have in 2013 not to exceed the number that we have in 2012.
Then, we understand it probably, will be a very similar number, will be [delinquencies] considering that the decrease that we’re expecting in the delinquency ratio. Above this income, our guidance is mainly to 2013.
It’s not a conservative guidance, but we understand that in 2012 we had 15%. The number of transactions is growing very fast.
We are working the same way for continuous, improving our client base, improving the number of cards, working for, our clients use more the (inaudible) channels for good transactions and we are very optimistic with our guidance in fees, but now is what we understand that is possible, would be during the year, if you understand that we can have an increase then we will change the guidance, but now what we experienced that to what to extent, understand that is possible to have.
Daniel Adrian Abut – Citigroup Global Markets
Maybe, if I can clarify the question was that anything unique in 2012 was a challenging year for Brazil overall, then you were able to grow 15% fees and you think it’s going to be below that next year.
Luiz Carlos Angelotti
Daniel Adrian Abut – Citigroup Global Markets
Thank you, Luiz and it’s very helpful.
Luiz Carlos Angelotti
Thank you.
Operator
Excuse me. Our next question comes from Mr.
Carlos Macedo with Goldman Sachs.
Carlos Macedo – Goldman Sachs do Brasil CTVM SA
Good afternoon gentlemen, thanks for the opportunity to ask questions. I have a couple of questions both related to your margin.
The first is related to your guidance. I was just trying to gauge how much confidence you have on the guidance you provided 7% to 11% growth in net interest income from market sources – not market sources sorry – from interest.
The credit, if you look at your numbers the average rate on your – average yield on your loans that decline from 11.1% in the fourth quarter last year to 10.6% in the fourth quarter this year, but most of the decline was in the third and the fourth quarter, especially in the fourth quarter, once the new rates on credit card loans, and et cetera were put in place. How, given the amount of loan growth that you expect for next year, do you think this is as realistic 7% to 11%, particularly with the pressure the government has been putting on pricing and on rates, and on the competitive pressure that, I mean, on the publicly-held banks are putting?
Do you think 7% to 11%; is it going to be more towards the lower end of that or the higher-end? And then, I have a second question.
Marco Antonio Rossi
Our guidance for margins 7% to 11%, we are very confident with our guidance which is the guidance is basing our internal discussions and is basing our budget. Then we are very confident with the guidance and we not only in the net interest income but in the other lines.
We consider, and the confidence that we have in the net interest income, we expect to grow to have a good growth in the credit margin. In the insurance margin, we’ll be [better] that the margin that we have in 2012.
We expect to have growth and the margins, bond and treasury we expect to have the streamlining secured (inaudible). We expect to have a, as people grow – to grow a little more in this line, but in this total, we expect to grow 7% to 11% according our guidance.
Carlos Macedo – Goldman Sachs do Brasil CTVM SA
Okay. But most of the growth, I mean in the credit margin, do you think there will be a decline in…
Luiz Carlos Angelotti
There will be a decline in the credit margin, yes. We will…
Carlos Macedo – Goldman Sachs do Brasil CTVM SA
Do you think…?
Luiz Carlos Angelotti
We expect to grow more considering our guidance that we have.
Carlos Macedo – Goldman Sachs do Brasil CTVM SA
So just a follow-up, on the credit yields that are now at 10.6% and closed the year, 2012, at 10.4%, do you expect that to contribute to this growth or are the credit yields continuing to contract as they have throughout 2012?
Luiz Carlos Angelotti
The credit growth that we expect is 13% to 17%. We expect to have the main contribution for the growing demand you can [find in] the credit line.
We expected that in our – considering all the gross margins that we are having. We expect that will have during 2012, we will lose something in our operations with credit card that will change our rates, we are seeing the order lines, we expect to maintain our spreads or we’ll work hard to maintain our spreads.
Carlos Macedo – Goldman Sachs do Brasil CTVM SA
Okay, thanks. The second question is also related to the spreads and it’s more related to the fourth quarter.
The spread on interest for insurance operations increased by 50 basis points, which is a quite sizable jump. I’m just wondering what’s the reason behind that increase was, and if there’s any – it says here that it was, the decline in inflation, in IGP-M that benefited reserves, so you can give us some color here as to what to expect going forward for yield in insurance?
Luiz Carlos Angelotti
Carlos Macedo – Goldman Sachs do Brasil CTVM SA
Okay, thank you. Thank you, Angelotti.
Thank you, gentlemen.
Operator
Excuse me. Our next question comes from Mr.
Saul Martinez with JPMorgan.
Saul Martinez – JPMorgan Securities LLC
Hi, good morning guys. I also wanted to follow-up on the questions on your net interest income guidance and more specific, I guess, I will be even more specific.
The securities in other line, you mentioned your expectation for securities and others will be more or less stable in 2013 versus 2012 and that is what is constituted or embedded in your guidance. The securities and other line rose 75% in 2012 versus 2011 and my understanding of that and please correct me if I am wrong is that, there was a benefit from the lower interest rates on your prefix portfolio, fixed rate portfolio.
If rates are to remain stable, I am having a hard time understanding why that benefit from declining rates will continue to be there in 2012. Can you give us a little bit more color on why you are expecting that line item securities and others to remain stable in 2013?
Luiz Carlos Angelotti
Okay. In this line, okay, we have the effect for your question, Saul.
In this line, we have this effect of pre-fixed portfolio, but we have the effects from other assets. Some assets that is, which are quite risk and we are considering in this line.
During this year, we’re continuing to have the effects from the pre-fixed portfolio in these lines, in another, very similar, little similar that we had a year before in 2012. And we have the (inaudible) of all the assets that are designed, then that is the markets that we have credit risk, and the debentures and other assets.
And this is why we understand that for this year we will have a stable effect in designing and this is what you expect for designing security and others.
Saul Martinez – JPMorgan Securities LLC
Okay. So in 2012, I’m sorry these are somewhat technical questions, but in 2012, are these benefits valuation gains on these pre-fixed portfolios, or are they actual gains in these spreads that you are making on that portfolio?
Luiz Carlos Angelotti
I think the increase that we here is not only recorded pre-fixed portfolio, we recorded all the assets that we are increasing in these all other assets, our portfolio. Then one part of that is the huge growth that we have in 2012 came from the pre-fixed portfolio, but we have all their assets that is provided this growth during 2012 then it’s not only the pre-fixed portfolio sector we have.
Saul Martinez – JPMorgan Securities LLC
Okay, and maybe we can go over off-line as well. Second question is related to your overall guidance.
You mentioned on an earlier question that you think loan loss provisions will be at worst flat versus 2012, and if I look at your other guidance line 7% or 11% net interest income, that low double-digit fees, operating efficiency improving, insurance 12% to 15%, you plug that into your model. You’re getting to a very pretty healthy earnings growth of sort of in the low-teen to high-teen range.
Are you – I know you don’t give guidance for earnings and for ROEs, but is it fair to say that you’re optimistic that earnings growth in 2013 is going to rebound versus what amounted to fairly challenging 2012?
Luiz Carlos Angelotti
We are working hard for to improving our efficiency, improving our growth in operations, then we had our guidance, normal guidance that we have for ROEs, is that 18% to 20% that we will work for to maintain. And we understand that is reasonable this level for considering the scenario that we have in our current economy.
We work in different fronts for to maintain the ROE and the efficiency that where we have the internal committee of the fee efficiency where we look forward to transfer this course or improve revenues and then something that we either helping us to improve our efficiency. We did have a strong presence – we did invest in strong investments in IT and we expect to collect some benefits during 2013 and 2014 with investments in IT that we’ll reduce our costs and will help us to improve some gains in with the new systems that we expect that we start to running during this year.
And for efficiency we have target that is to reaching 39% in 2014 at the end of 2014, but we have an order [concept] we have our insurance business that it represented all the – one third of our profits that is the risk diversification. Then the insurance business, the ROE – the average ROEs are only 24%, 25% and is our belief that we will have to be able to improve our profitability for the next few years.
We expect that the delinquency ratio will continue to decline in (inaudible) the lower interest rates that we have with (inaudible) the delinquency ratio probably will adjusted in a more, will be adjusted by a more lower (inaudible). And we are working as for improving the volume of transaction to offer more products for our clients considering the clients base that we have improving the profitability with these clients considering the investments that we did in the segmentation, the opportunities that we’ve with the synergy between the insurance and financial business.
Then we’re working different fronts to improve our profitability and this is our another important revenue that we understand that we’ll have some competition. You helped us to have some competitions for the Basel in the margin.
Then we understand that is a more reasonable ROEs that we have for the next period is 18% to 20%.
Saul Martinez – JPMorgan Securities LLC
Okay, great. Thank you so much.
Paulo Faustino da Costa
Okay.
Operator
Our next question comes from Mr. Mario Pierry with Deutsche Bank.
Mario Pierry – Deutsche Bank Corretora de Valores SA
Hi, good afternoon. Let me ask you also a couple of questions.
The first one is related to your loan growth guidance of 13% to 17%. I was interested in hearing what is your expectation for market growth, because in 2012, we saw your loan book expand about 8%, but state-owned banks grew their loan books more than 20%.
So I was wondering if you believe that the state-owned banks will be more rational or less aggressive in 2013 and then you expect to grow in line with the markets, or you still expect to – to continue to lose market share. And also, related to that question, I think some of your margin pressure that we saw in 2012 was related to this aggressive competition from the state-owned banks.
Do you think that we could also see a more rational pricing environment in 2013 as the state-owned banks become less aggressive? And finally – there's two and a half questions.
Then if you could provide us with any guidance with regards to your sensitivity of net interest margins to movements in the Selic rate. You do expect the Selic rates to remain relatively stable going forward, but can you provide us any guidance?
What would happen to your net interest margins if the Selic was increased 100 basis points in 2013?
Luiz Carlos Angelotti
Okay, Mario, thank you for your questions. About the loan growth guidance, for the system, we expected, for the total system, we expected to grow around 15%.
Then our guidance 15% to 17%, center of the guidance is 15%. Then we expect to grow according to the market to maintain our market share.
Then, we work normally to increase our participation in the operations, but we expect, according our guidance, maintain our market share.
Mario Pierry – Deutsche Bank Corretora de Valores SA
The [Selic theory]?
Luiz Carlos Angelotti
If we have decreased 100 basis points in the Selic rate, it’s around 1% or 100 point basis with net loss R$400 million before tax. Then if we have an equity for up or go down around the R$400 million is effect, but we expect that the Selic rates will be stable during 2013.
Mario Pierry – Deutsche Bank Corretora de Valores SA
Okay. So then to summarize what you said, or to make sure that I understood, is that you do expect then the state-owned banks to be more rational in 2013 for you to grow in line with the market rather than lose market share.
And then we have already seen a significant impact of a lower interest rate environment already impacted your results in 2012, because this Selic rate fell by almost 500 basis points during the year. Is that right?
So you already felt a big negative impact from the drop in Selic rates in your results.
Luiz Carlos Angelotti
Yeah. For 2013, we expect that Selic rate will be stable.
Then we does expect too to have the main effect. But if you had an increase or one decrease around the 100 basis points, the effect will be around R$400 million before tax, what is the effect, the average of the effect.
But we doesn’t expect mortification Selic rate for the year.
Mario Pierry – Deutsche Bank Corretora de Valores SA
Okay, great. Thank you very much.
Luiz Carlos Angelotti
Thank you, Mario.
Operator
Our next question comes from Mr. Jorge Kuri with Morgan Stanley.
Jorge Kuri – Morgan Stanley & Co. LLC
Hi, good morning, good morning everyone, sorry. Can you, just wanted a bit more specific on your expectation for NPLs.
You did mention that you expect NPLs to go down. They’re at 4.1% now.
Do you have a specific number that you think they can reach by year end 2013? That’s my first question.
And then the second question is if you can provide us a little bit more color on exactly what you’re doing on the cost side. I do understand that you have a new IT system that is going to allow you to operate with better costs, but what does that mean?
I mean does the IT system allow you to fire people? I mean, how does it provide better cost?
And if I look at your expenses and your employees, your employee base is basically the same since the start of last year. I think it’s probably down 1%.
Some of your peers, actually your main competitor on the private side, their expenses are down; their employees are down around 10%. So how do you really modify your cost structure, which is obviously what you need to do as you are moving into a lower rate environment and margins are going to come under significant pressure without really changing your employee base?
So, if you can just give us a little bit more color on how you are going to get through the efficiency levels? Thank you.
Luiz Carlos Angelotti
Thank you for your questions. About delinquency ratio, we finished the year with 4.1%.
We expect that we will continue to have a decrease in the delinquency ratio during 2013. We have guidance, specific guidance, but total through the end of the year, we will have the lower level in the delinquency ratio.
Looking what we had during 2011, the best moment that we had was the delinquency ratio was around 3.6%, 3.7%. It could be until – that until the end of the year we will be reaching some in that level similar of that, but we don’t have a specific guidance for the 2000 delinquency.
About the cost side, we have many fronts inside of company, one of that is the Efficiency Committee that is we have our group of Directors between Vice Presidents and Directors that we discussed opportunities for reduced cost in our line is in the third-party services, communication, data processing, transports. Then we are revising different process inside the bank.
Then this committee we have for all of the three years. Then we start name process that will help us to get something probably in the next periods.
Then we have some actions that is started and we expect to collect benefiting during the year, during this year and during the next year. Then it’s our process that we’re having said that we will discuss our process and we – how departments inside the Bank are involved in this process And another front is both our investments in IT that is we are now in the last year of our IT capitalization plans.
And we are now revising our systems and we expect to collect some benefits this year probably we will finish to – we rise the system ended during 2014 we will finish with that. Then probably some systems that we have now will help us to reduce the cost.
Some example that we have now it will help us to reduce the costs. Some example that we have is, some systems that start to work in the branch that is the employees, the cashier will need less time for attend the clients, then probably we will perhaps know how to improve the number of clients that we are obtained in the branch.
About the cost side, we have many fronts inside of company, one of that is the Efficiency Committee that is we have our group of Directors between Vice Presidents and Directors that we discussed opportunities for reduced cost in our line is in the third-party services, communication, data processing, transports. Then we are revising different process inside the bank.
Then this committee we have for all of the three years. Then we start name process that will help us to get something probably in the next periods.
Then we have some actions that is started and we expect to collect benefiting during the year, during this year and during the next year. Then it’s our process that we’re having said that we will discuss our process and we – how departments inside the Bank are involved in this process And another front is both our investments in IT that is we are now in the last year of our IT capitalization plans.
And we are now revising our systems and we expect to collect some benefits this year probably we will finish to – we rise the system ended during 2014 we will finish with that. Then probably some systems that we have now will help us to reduce the cost.
Some example that we have now it will help us to reduce the costs. Some example that we have is, some systems that start to work in the branch that is the employees, the cashier will need less time for attend the clients, then probably we will perhaps know how to improve the number of clients that we are obtained in the branch.
Jorge Kuri – Morgan Stanley & Co. LLC
All right. Many thanks for your response.
Luiz Carlos Angelotti
Thank you.
Operator
Our next question comes from Ms. Regina Sanchez with Itaú BBA.
Regina Longo Sanchez – Itaú Corretora de Valores SA
Hi, everybody. My first question is related to expenses.
Actually, I like a lot the administrative and personal expenses. But our bottom line, the bottom line came slightly below our estimates because of other operating expenses that came higher than our estimates.
But we read that the bank improved the methodology for amortization of prepaid expenses. If you could give more color what was this change, and how much this change impacted the other operating expenses in the fourth quarter.
I mean, had you not changed this methodology, how much less expense you would have in the quarter? And if you could provide a guidance for this line, even if not official, for 2013, I mean, is it going to be more correlated with NII growth or with inflation?
Or could expect even lower figure considering that you have already made some impairment of intangible assets, which I understand that the amortization of these intangible assets go through this other operating expense line. And then I have a second question.
Thank you.
Luiz Carlos Angelotti
Regina Longo Sanchez – Itaú Corretora de Valores SA
Paulo Faustino da Costa
We don’t have the guidance for other operating expense. We have only guidance for the non-operating expense, we don’t have to give that guidance for this other operating expense.
Regina Longo Sanchez – Itaú Corretora de Valores SA
Okay.
Paulo Faustino da Costa
You can consider stable compared with what we had in the last quarter. We believe that, that will be stable.
Regina Longo Sanchez – Itaú Corretora de Valores SA
And my second question is related to Basel III. We saw in newspaper articles commenting on possible measures that the Government could take to reduce the impact of Basel III implementation in Brazil.
I would like to know if you support these measures and when do you expect to see them implemented. Do you believe?
I'm mentioning related to that a government warranty for deferred tax assets. Do you think this will be related to all deferred tax assets from timing difference, or only the ones related to loan loss provisions?
Thank you.
Luiz Carlos Angelotti
Okay. Regina, we don’t have the final – we have some discussion, but considering the rules that we know that according that our Central Bank publishes.
We have now to implement Basel III through 2018 without this – we’ll have now to do the implementation, but it is – we have now some notification that we’ll – one part of the tax that will be accept, because our government gives a guarantee, it’ll reduce the effects of the Basel III implementation; will be favorable for the Bank. But we don't have the final guidance for the – or the final rules.
The discussion that we have is about the portion related to the provisions for loan loss spreads that is the tax spreads that’s related to this part of the provisions could have a guarantee and not will be to deducted for the future in the Basel III calculation. But we don’t have the final rules, we don’t know how we’ll do the implementation, but in considering the whole scenarios, we’ll have now to do the implementation.
If we have some improvements in the rules will be better, but we don’t have this final order the final rules.
Regina Longo Sanchez – Itaú Corretora de Valores SA
Okay, fair enough. Thanks a lot.
Paulo Faustino da Costa
Thanks Regina.
Operator
Excuse me. Our next question comes from Mr.
Victor Galliano with HSBC.
Victor Galliano – HSBC Securities USA, Inc.
Hi, thank you. Yes, couple of questions here, just a follow up if you’ll allow me on the margin side.
I’m just looking here at the loan margin and the growth of that loan margin. So, if you look at the 4Q interest income from loans and look at the annualized rate that only grew at 5.1%, and you look at the average loan balance, that grew at 9.5%.
Now, is it not clear that there’s going to be a lot of margin pressure coming through in 2013 on the one hand from the fact that you’ve got the impact of the Selic, and the loans repricing with a delay, and we’re just beginning to see that in Q4, and also the fact that you still have a lot of competition coming through from the public banks and in particular from Banco do Brasil in areas like credit cards and overdrafts, and also increasingly in the SME space? So, I’m just trying to square the circle and I just – my sense is that 7% to 11% plus Saul’s earlier comment on the securities portfolio.
It gives me some impression that, that 7% to 11% net interest income growth with the loan growth that you have seen quite aggressive. I know you talked about this ad nauseam on this call but it’s – for me it’s a gorilla in the room and it won’t go away.
Luiz Carlos Angelotti
Okay. Victor, about the margin, the guidance that we gave here, I find that is related to credit, to loans.
We understand that for 2013, the portion that where we expect to grow more is in individuals and SMEs and these kind of operations has better margins or better spreads. And, we understand that we will improve the mix of the portfolio improving these operations.
And, we expect to have a better growth in this line if you compare with 2012. But we have other lines where we expect to have a positive growth that is in the insurance margin, we expect to have a better growth compared with 2012.
Then, we understand that we will have to reaching this margin, this net margin guidance that we gave. Considering our strategy for 2013, the portfolio that we have in our, that we have now, that we finished 2012.
We understand that it’ll be possible to reach in this level, because with this guidance considering our (inaudible) that we have now ended our strategy for 2013.
Victor Galliano – HSBC Securities USA, Inc.
Okay. Just a quick follow-up there, I mean, the areas that you’re growing in individuals is from (inaudible) is relatively low risk.
Am I right?
Luiz Carlos Angelotti
Yeah.
Victor Galliano – HSBC Securities USA, Inc.
Okay. Okay.
Just one quick follow-up. Renegotiated credits, they have been pretty stable at around 3.5% of the portfolio for the first three quarters of this year; picked up a bit to 3.6%.
Is there anything we should worry about there, or not really?
Luiz Carlos Angelotti
The growth that we are having renegotiated portfolio is stable. These are similarities that we have for the total loan portfolio, then probably doing this year 2013 probably the growth will be similar that we’re having at the total portfolio.
We don’t expect to that we will have something different. We have here one slide in together that in the presentation that is number 36.
Victor Galliano – HSBC Securities USA, Inc.
Right.
Luiz Carlos Angelotti
For the renegotiated portfolio, we have their delinquency ratio stable around the 28%, next 30%. Then is this what we expect that we will continue happening during 2013.
Then we don’t expect our modification and significant, any significant modification for this portfolio during 2013 probably the delinquency ratio maintain stable in this level. And probably the growth that we will have in this portfolio is similar that we will have in the loan portfolio.
Victor Galliano – HSBC Securities USA, Inc.
Okay. Thank you.
Thank you very much, Luiz Carlos.
Operator
Our next question comes from Mr. Boris Molina with Santander.
Boris Molina – Santander Central Hispano Investment
Yes. Thank you very much for taking my questions.
I have a question regarding the growth in the capital gains that you showed in the quarter was around R$1.9 billion, after tax in your available for sale portfolio. Could you give us some color regarding whether this was driven by fixed income or by equity portfolios?
And was this in the Bank portfolio or in the Insurance portfolio? And whether you believe next year, given that rates are going to be flat, this is going to be something that might not perform as well; was there any reclassification of securities from portfolios?
I think something occurred in the recent past on this front that you may help us?
Luiz Carlos Angelotti
Mr. Boris, can you repeat the question?
Boris Molina – Santander Central Hispano Investment
Yes, the question was if you could provide some color for the R$1.9 billion after tax improvement in unrealized capital gains in your available for sale portfolio?
Luiz Carlos Angelotti
Okay.
Boris Molina – Santander Central Hispano Investment
And the question was a little bit to see whether it comes from the Banking portfolio, or whether it was in the Insurance portfolio? Was it related to fixed income, or have you increased your exposure to [equity] in the fourth quarter; that was pretty good for equities?
A little bit of color just to help us understand this movement which was pretty large.
Marco Antonio Rossi
The R$1.9 is the…
Boris Molina – Santander Central Hispano Investment
Is the mark-to-market of available for sales securities, the growth in the…
Luiz Carlos Angelotti
You have the slide in page 39, where we have the – these unrealized gains, the R$12.9 billion that we have is in the securities. The majority is available for sale and it’s related to our insurance portfolio.
And if you – in our equity we have our reserve around R$5 billion, R$6 billion that is related to this securities. Then probably this revenue, this potential revenues will be registered in the future according the accrual the maturity of the operation or the securities.
Then we are happy in growing this portfolio because the evaluation according to the market volumes that we’re having in the last few quarters and every balance or every quarter we do the evaluation according the markets volume and the fact that we have been registered in the available for sale. We’re increasing our equity, while we raising the equity.
Boris Molina – Santander Central Hispano Investment
Okay, excellent. Thank you.
And the other question was regarding Basel III and this news that came out a couple of weeks ago. It would appear that the guarantee for deferred tax assets would be activated once the Bank becomes insolvent.
So do you have any indication? It would appear that this improvement in the capital ratio should classify as tier 2 capital, not as tier 1, given that the guarantee is not activated as a going concern, but once the Bank is insolvent, so shareholders are not going to see anything.
So do you have any indication from the Central Bank whether this is going to be tier 1 or tier 2? Basically, we would like to see if this reform follows the spirit of Basel III, or if it's going to be a little bit different in Brazil than elsewhere?
Luiz Carlos Angelotti
Okay, it is a discussion that we are having about to do some adjustments in the Basel III calculation. And about tax credit, considering the rules that we had now related to the tax credit found in the tier 1 capital.
If we have some modification in this calculation where one part of this tax credit will be acceptable not to be considered in the discount, the effect will be the tier 1 capital. In our case, if the portion related to provisions for tax credit, there are 6% of our total tax credits.
Then the number that we have here something around is R$12 billion or R$13 billion is the number that we have, but we don’t have the final rules or we don’t have the, how big the calculation or what you will be considering in this rule, if we have this modification. But…
Boris Molina – Santander Central Hispano Investment
But you expect it to be tier 1?
Luiz Carlos Angelotti
We expect to be in tier 1.
Boris Molina – Santander Central Hispano Investment
Okay, excellent. Thank you.
Luiz Carlos Angelotti
Thank you.
Operator
Our next question comes from Mr. Maclovio Pina with Morningstar Equity Research.
Maclovio Pina – Morningstar Equity Research
Hi, good morning. Thank you for taking my call.
I have actually two questions. And the number one is, I know you don’t give specific numbers for credit quality in any of your particular business lines.
But can you comment just on the improvement on NPLs for corporate and SMEs, both in 90 plus days and early delinquencies? Is there any particular industry that’s showing more strength, that’s driving the improvement or is it just broad based?
Luiz Carlos Angelotti
The improvement in the short we the costs for corporates and the SMEs, we had a declining delinquency ratio in the 90 days base. And the short-term fees and the delinquency ratio, that’s fixed 90 days, we had a decrease in the same way.
We expect that the delinquency ratio, the total delinquency ratio will continue to decline. We don’t have explicit sector of economy where we had a better performance, but in the total portfolio, in the corporate side we are having the decline.
For individuals the last quarter was more stable, the delinquency ratio. But during 2013 we expect that we will have that declining probably below two.
Then in the total portfolio we expect that during 2013 we will have declining the delinquency ratio. We don’t have the specific sectors or operations that where we understand that we are having an – in the total portfolio we are having an improvement in the quality of the portfolio.
Maclovio Pina – Morningstar Equity Research
Okay. And, with regards to individual mortgages, do you expect that the rate that they’re outgrowing the rest of the individual portfolio will continue into 2013 and 2014?
And, can you just give us a sense of, do you have any comment on the credit quality of these new mortgages that are coming online and, if you have any visibility and especially, how are you thinking about provisioning for these mortgages and in terms of coverage?
Luiz Carlos Angelotti
We expect to continue growing in the mortgage portfolio individuals and in the corporate side, is our one important product. The delinquency ratio for this product is very small in our portfolio, then and there is an important product where you have a long term relation with the client.
And you can offer all the products during this period of the transaction. Then, we expect to continue to grow in this specific product, the delinquency ratio is very small and the declines that we have in our portfolio is very good and we expect to continue to grow.
Maclovio Pina – Morningstar Equity Research
Okay. And so it’s – just to recap, is it fair to say that you do expected to keep outpacing the broad loan expansion at the rate, it’s been doing so?
Luiz Carlos Angelotti
Yeah, for this product we expect to continue, having to grow similar we have – we are having in the last two years and it’s our important product. And in Brazil, we expect that mortgage will be – we’re continuously growing very fast for the next year for other (inaudible) important products for the future.
Maclovio Pina – Morningstar Equity Research
Okay, excellent. Thank you very much again.
Luiz Carlos Angelotti
Thank you.
Operator
This concludes today’s question-and-answer session. I would like to invite Mr.
Paulo Faustino da Costa to proceed with his closing statements.
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 fourth quarter 2012 and other information concerning Bradesco is in our website. Thank you very much.
Operator
This concludes Banco Bradesco’s audio conference for today. Thank you very much for your participation.
Have a good day.