Oct 31, 2015
Executives
Carlos Firetti - Market Relations Department Director Alexandre da Silva Gluher - Executive Vice President Luiz Carlos Angelotti - Executive Director, IR
Analysts
George Cooley - Morgan Stanley Mario Pierry - Bank of America Saul Martinez - JPMorgan Thiago Batista - Itaú BBA Victor Galiano - Barclays Pedro Fonseca - Haitong Boris Molina - Santander
Operator
Good morning ladies and gentlemen, and thank you for waiting. We are glad to welcome everyone to Banco Bradesco's Third Quarter 2015 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 the presentation available for download.
We inform that all participants will only be able to listen to the conference call during the conference presentation. After the presentation, there will be question-and-answer session when further instructions will be given.
[Operator Instructions]. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company.
They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstance 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. Carlos Firetti, Market Relations Department Director.
Carlos Firetti
Good morning, everybody. Welcome to our conference call for discussing our results for the 3Q ‘15 results.
We have today with us Mr. Alexandre da Silva Gluher, Executive Vice President of Banco Bradesco; Luiz Carlos Angelotti, Executive Director and Investor Relations Officer of Banco Bradesco.
I now turn the presentation to Mr. Angelotti to start with the main highlights.
Luiz Carlos Angelotti
Good morning everybody. Thank you for participating this conference call about the Bradesco’s results for the third quarter.
In the Slide 2 we have the highlight and our adjusted net income reached 13.3 billion in the nine months of 2015, increasing 18.6% in the third quarter. Our adjusted net income which is actually R$ 4.5 billion.
Our ROE rated 21.2%. The NII earning portion increased 16% in the nine months, mainly because of the increase in the average spread related to corporate portfolio.
We started to have this year some increase in the rates and probably will continue during this year and probably the first half of next year, then expect to have some new benefits in this increase, other thing that helped to be NII grow with healthy management and the gains with asset liability management. Our efficiency ratio remains at 37.9%.
This shows our higher commitment with the control of cost and efficiency and our operating coverage ratio, the relation between fees and the fixed cost reached at 79.1%, the best level that we have in our ratio. The fees and commissions term increases 12.3% in the nine months, they are growing at the double-digit.
The main effect came from the segmentation progress that we are creating new segments in the [indiscernible] days applied. These segments we created in May of 2014 then this year restructured to capture the benefits.
Probably this is growing in the regular -- mainly from the accounting revenues will continue during 2016, 2017 -- 2015 and 2016. We have got the benefits for May 13 from cards projects that are growing around 15%, [indiscernible] immigration of the products and they grow in the volumes of transactions and they grow in the client base.
Our operating expense grew 7.8% below the inflation in the last 12 months and this shows the commitment of our group. The total OpEx amounted at the end of the quarter at R$1.51 trillion.
Our extended loan portfolio reached at R$474 billion. And there is something that we need to highlight that the allowance for loan loss reached at R$28.6 billion in this quarter, and our coverage ratio for 90 days reached at around 206%, one of the highest level in the quarter.
Also our insurance business, the net income for insurance amounted to R$3.9 billion in the nine months and the deals grew at 18.6%. Now Carlos Firetti continues with the next slide.
Carlos Firetti
Okay, thank you, Luiz. Now we will go with more details in our numbers.
In Slide 3, basically our [indiscernible] book net income and adjusted net income. We have some important events this quarter.
Basically, we have an accounting gain of R$2.341 billion related to the revaluation of tax credits to be increased in the social contribution tax rate of 15% to 20%. We offset this gains with some provisions R$2.222 billion in the credit related provisions.
Part of this additional provision and part of it related to generic provisions related to the revision ratings in some specific credits that clearly do not belong to this quarter. Additionally, we have expenses with contingent liabilities, basically related to provisions for law-suits that are in our view one-off effects.
With this adjustment, the adjusted net income was R$4.533 billion with funds ROE for the quarter of 22.1%. In Slide 4, adjusted net income growth.
For the quarter our net income increased 0.6%, for the nine months 18.6%. For the quarter, the main drivers for the performance came from the NII, the interest earning portion of NII that was R$294 million higher.
Fee and commissions, that contributed with R$262 million, and others the R$228 million, mostly related to our lower tax rate in the quarter. On the negative side, we had a lower contribution from NII from the non-interest, a negative contribution from higher provision expenses, and also from operating expenses which we will detail in the next slide.
In the Slide 5, we have a breakdown of our net income. Basically, insurance represents 29% of our earnings, the banking business 71%, credit contributes with 34% and Phoenix 29%.
Non-credit related revenue sources represent 66% of our total market. In the Slide 5, we have our efficiency ratio.
Our efficiency ratio in the quarter was 38.4%. But focusing on the accumulated for 12 months, 37.9% that is still one of the best level, or the best level, we ever had.
The operating coverage ratios that are fees and commissions compared to administrative and personnel expenses, reached 79.1% that is also our best level ever. In Slide 7, we have some details of our NII, the interest earnings portion and non-interest earning portion.
Basically, the non-interest NII was lower this quarter, R$26 million, compared to R$126 million in the second Q, mostly related to the market volatility. Our need in the quarter continued to increase and reached at 7.5% in the 12 months accumulated growing 10 bps compared to the second Q.
And the net income coming from interest increased 2.2% Q-on-Q. In slide 8 we analyzed specifically the interest earning portion of our NII.
NII grew 16% year-on-year, 2.2% in the quarter, credit intermediations margins grew 11.2% in the quarter, basically driven by a good performance on the lending sides, where we have been able to improve our market funding and also in the credit side where we have been benefiting from the improvement in spreads. Insurance grew 32.3% in the year, still driven by a good performance in volume.
And secures and others in the quarter specifically came a little bit lower mostly due to the lower most of the [indiscernible] inflation in the quarter that and the session factor saw a part of the goals we have in our portfolio. In Slide 9 we have details on our Credit Intermediation Margin.
Basically our credit intermediation margin was flat in the quarter at 11.5%, this performance was impacted by the mix effect, basically the effect that increased the size of dollar [indiscernible] flows that has proportionally lower spreads, we still see the credit intermediation margin going up in the next quarter and throughout next year, basically there is still room for repricing of our portfolio, as you can see 48% of our loans have an average turnover 30-60 days, the average portfolio has the average terms of 1.5 years so the repricing effects will remain since spreads are actually higher. Basically our net credit margins after provisions increased 1.1% in the quarter and our [indiscernible] growing 8.1% in the nine months.
In slide 10 we have our numbers for our BIS ratio, our BIS ratio in the quarter was 11.4% the reduction compared to the second quarter. The main reason for this reduction is remained through the market to market in the secured portfolio but mostly through the accumulation of tax credits, first related to the revaluation of our DPA and also to tax credits related to our to the head of our assets abroad.
This tax credits should be consumed over the next two-three years. Basically alleviating the capital position also the prices, the price of assets have already improved in the quarter compared to the end of the third quarter.
What also contributes to an improvement in this position. But additionally we see our capital position evolving organically over the next few years within our capital growth more than a 100 bips per year just by the accumulated profits which we’ll have in the next few years while risky weighted assets that grew this quarter mostly due to the impact of tax credit and also the effects depreciation will not grow that much, so that basically incurred a loss of related regarding our capital position.
Considering the acquisition of Ajax we see our BIS ratio is calculated in the 9.1% for the third quarter. In Slide 11 we have our total assets, total assets grew 6.4% in the last 12 months with return on assets reaching 1.7% our equity grew 8.8% in the last 12 months with ROE for the nine months reaching 21.2%.
In Slide 12 we have our expanded loan portfolio. Our expanded loan portfolio grew 6.8% in the last 12 months, 2.4% in the quarter.
This was affected by FX. Without FX, it would have grown 1.7%.
The highlights coming from the corporate portfolio that grew 12.5% Q-on-Q and 12.8% year-on-year. The effect of FX which show effect is larger in this specific portfolio.
SMEs remain at almost flat year-on-year and in the legal basically have driven by [indiscernible] of 17.9% year-on-year real estate financing growing 26.6% year-on-year. In the slide 13, we have our credit quality in the -- basically our 90 days delinquency ratio increased this quarter 9 bps for the total portfolio well behaved as we have been saying to remain in the SME portfolio.
We have an increase of 39 bps, basically this portfolio is more sensitive to the economic activity but there is increase NPL is also related to the fact that this portfolio is not growing. Only as an example if this portfolio were growing by 5% actually this increase in the delinquency would be almost half of what it was.
In the individuals portfolio we have an increase 22 bps. We have a good comfort -- level of comfort with this portfolio given the change in mix, we will go a little bit deeper on that later.
We believe that for the fourth quarter we should have a better performance for seasonal reasons and for the future. Delinquency there should grow but in our field gradually.
In the corporate portfolio we have a reduction in NPL by 14 bps mostly due to higher write-offs in this portfolio and a little bit due to the FX depreciation. We believe that in this portfolio we should delinquency ratio at least flat going forward in the absence of specific cases.
The structure and delinquency ratio 50 to 90 days for the total portfolio went down 3 bps driven by large corporates and we had some pressure coming from the individuals’ portfolio. In the bottom of this slide we have numbers for our NPL formation in the gross provisions excluding what we considered non-recurrent, the additional provisions and in generic non-recurrent provisions.
Basically we show here that first the NPL creation went down in the quarter from 4.4 billion in the second quarter to 4 billion this quarter and basically that our gross provisions reached 111% of the NPL creation and very consistent to the pattern of provisioning we have been presenting over the last few years. That clearly shows that what we consider non-recurring really does not belong to this quarter.
We turn to slide 14, we have out change in mix. Basically what is in your view the main driver for the relatively nice performance in terms of credit quality we have seen and we believe, we will continue to see in the future.
Basically compared for instance 2008 with now, the participation at the SMEs which is from 27% to 23.6%, and more importantly in the individuals portfolio, looking to the breakdown you can see that the participation of large [ph] retail credits like mortgage and payroll reached 37.9% in September compared to only 12.7% in 2008 while the participation of car loans went down from 43.5% to 16.5%. In 2008 the portfolio was growing above 30% year-on-year it’s at a much of higher level of down payment in the portfolio.
Today this portfolio is still shrinking and the down payment is around 47% what really makes it a much more secure portfolio than it was at any other moments in the past. Just basically why we say we expect this gradual increase in delinquency for the coming quarters.
On page 16, you have our coverage ratio our coverage ratio in the quarter reached to 105.7%, the highest level we saw since 2007. The fixed based coverage reached at 168.4% also one of the highest levels.
This gives us a lot of comfort for the current environment and we see this provision as conservative position for going through the current economic scenario. Our total provisions represent 7.8% of our total portfolio compared to net charge offs of only 3% the coverage ratio of charge offs is 260%.
In Slide 16 we have details from our fees and commissions. Basically fees are growing at 12.3% for the nine months of the year the main drivers coming from cards growing at 18.7% and checking account fees growing at 21.4% and consortium management growing at 19.5%.
In the case checking accountancy the driver is our segmentation we created new classes of services in the retail segment what which we call exclusive in plastic. We are migrating our clients to this class of service we have already migrated a large amount and we provide higher value added services in this for this segment and they pay fees for it.
We believe the driver in checking accounts will remain for the coming quarters and should continue to be a driver for fees. We believe the one remaining at the top of our guidance obviously that goes from 8% to 12% and we expect this performance to continue next year, this good performance continues.
In cost, Slide 17, our costs are growing 7.8% year-on-year with personnel growing 5.5% and G&A expenses growing at 10.1%. Basically this quarter we had higher administrative expenses mostly related to marketing that was an anticipation of expenses that otherwise would be reflecting in the fourth quarter as for instance happened in 2014.
Therefore, we believe that we will remain inside of our guidance that goes from 5% to 7% for the full year. We are relatively comfortable with this guidance.
In Slide 18, we have details on our insurance operations. Will remain we saw very strong performance in the insurance business with net income growing 22.5% for the nine months with ROE of 26.8% for the third quarter specifically.
Total premiums growing at 18.7% with main highlights coming from Life and Pension growing at 26% and Health growing at 20.7%. In Slide 19, we have some highlights from our insurance business with our coverage ratio at 6.9% in the third quarter and with our technical reserves and financial assets in the insurance business is still growing.
Now I turn the presentation to Luiz Angelotti to the further comments.
Luiz Carlos Angelotti
In closing, we will say that we have a good performance using the scenario we faced in the first nine months of 2015, we managed to keep the solid ratio such as the efficiency ratio remaining at 37.9% and the ROAE of 21.2%. We -- this is the provisioning level for the loan loss and we have now at R$28.6 billion in provisions.
The coverage ratio reached around 206% our main sources of income have posted double digit growth and our cost keep running below the inflation then we have seen that we have also maintained good remuneration for our shareholders. Thank you for your time and we would now be glad to take your questions.
Operator
Ladies and gentlemen we will now initiate the questions and answer section. [Operator Instructions] Our first question from Mr.
George Cooley from Morgan Stanley, you may proceed.
George Cooley
Hi, good morning everyone. I have two questions if I may, the first one is from GSBC.
Can you explain to us how you hedge the $5.2 billion that you're supposed to pay at the close of the transaction, exactly how is that hedge fund percentage, which is actually hedged, what is the carry cost of that hedge, and what does that imply in terms of your expectation for accretion of the transaction or impact on your capital given the currency has moved a lot from where you [indiscernible]. And then my second question is on asset quality, again certainly things have gone worse and you disclosed early this year, between renegotiated loans and NPLs we've seen a bigger jump that you were expecting early on this year.
The amount of provisions that you've created in obviously make very clear what your concerns are, I get the level of your concerns are. What lies ahead, at what point do you think the NPL cycle will peak.
Your GDP expectation of 1.5% negative for next year looks optimistic at this point I guess in a consensus result, moving closer to 2 and beyond. To what extent a repeat of 2015 will make when the current contractor 3% or around that changes your view on asset quality what is the sensitivity around that, thank you.
Luiz Carlos Angelotti
Thank you. Thank you George for the questions.
About the hedge with GSBC, given in the market the normal operation that we do, the amount is a very higher but with the total hedge and the price that we finally - the R$18.16 we'll maintain with this hedge. [indiscernible] those affected the final price.
Also the, when we probably expect to have the approvals of the regulators probably could happens in the end of this year or in the beginning of 2016. Then when we do the payment after the payment we expect to join [indiscernible] probably our ratio there, we did that simulation using multiple days and ratios are we understand absolutely, how to assume the bank in a normal way, we have a margins and off in the ratio [indiscernible] they can be our profitability in the next few years.
We’ll be an offer to maintain the ratios along with the levels that we’ll [indiscernible], it will be an offer to maintain the resources along the levels that we need to have. But if we have the another way that is [indiscernible] show in the simulation that we have the option to issue a [indiscernible] year loan and we will maintain our dividend spent in normal doing, something that we can do that in the meantime in the past years and offer new shares for our shareholders to use [indiscernible] to subscribe with it advance payment.
This is something that's possibility and we have for two month paying the ratios along the level that we understand that’s then lost for two months. [indiscernible] mostly asset is quality I think you talked about the renegotiated portfolio that is grow little more but the normal growth that we expect for this [indiscernible] is the correlation between the goal of our loan portfolio and the renegotiated portfolio very similar and here I think you made the goal, we've got a little of both but it's normal for [indiscernible] I think we needed many investments in -- to be very faster enough about investments to be fairly faster in double-digit.
How to deal with these operations and how to control the guarantees and if we could reduce the loss with the operations, the quite operation in this portfolio, I think the delinquency ratio, we could not have been running on low level, but the normal rule we understand that we had -- because the verticals of the growth of the portfolio. And today the increase in the provisions, we believe increasing the additional provisions R$2.4 billion and they are larger part of the -- the reason will be the -- one is revised ratios or the ratings of our clients, some good corporate clients, specific clients.
We took that was a month to do this review. We have on the other side the gain or the accounting gain which is the social contribution.
This is why we did adjustments in the provisioning. But we understand that we don’t need to use these provisions now with a more conservative procedure that we reach.
The additional provision is probably is only in our [indiscernible] situation that we probably need to use. We have now R$6.4 billion, whether you do the provisions when you are in better time, not, when you are in a stress time it is not possible to do provision, then we aren’t stating any pressure problem, we don’t see any problem in the market, we see only -- because economic environment is a little more -- we have now the GDP growth in the countries negative grow then we understand that we are not reaching the economy but we don’t see any higher potential grow in the quality, to have a problem with the quality of the [indiscernible] within the vicinity the growth that we have always supporting our expectations and the adjustment in the provisions is more because we are adopting more conservative procedures and we don’t expect to use these provisions, the additional provisions or the reaching downgrade that we did for some time.
There is only adjustment for our correct policy. We started the year with the lending profit above the GDP growth that our expectations at the beginning of the year for the GDP growth was that we will be -- now whether are not able to -- we finish the year much closer 3% of negative growth, for the next year we will be closer 1.5% negative growth, the GDP.
We have [indiscernible] the asset quality that we have now as we told during the conferences that we have told above our portfolio now we incidentally have the that we have a better quality, the mix is better with less risk. We did investments in our instruments to do the analysis to approve grants then we did main investments.
We -- inside of the company we changed the procedures to recover operations and guarantees. We have now better procedures to have a better guidance.
Then we could reduce the risk and we decide to have an increase in the -- higher increase in the provisions or in the expense linked provisions. What we see probably that we are like around 15% is near growth 18% probably, finish maintain this gradual 15% to 18% probably.
And next year probably we expect to have something close of this level. But you need to consider that the revenues from the margins of interest earnings, the increase in the NII and the spreads are increasing in the corporate portfolio.
And I think we had more space to re-price our portfolio, only 6% I think our portfolio has been re-priced. Then we expect that with the contribution revenues from spreads will continue.
We will maintain the margins after delinquency ratio growing up steadily. You need to consider to have other revenues from insurance fees that we are growing in local [indiscernible] with more stability and we expect to maintain a top stability running around this lesson that we are having now.
Operator
Our next question comes from Mr. Mario Pierry of Bank of America.
You may proceed.
Mario Pierry
May I ask you two questions, the first one is, I’m going to stay on the asset quality topic, we’ve seen the NPLs they’ve been rising about 10 basis points per quarter for three consecutive quarters now? But we’re seeing when we look at the SME portfolio and the individuals’ portfolio the deterioration is starting to increase, individuals are growing close to 20 basis points and SMEs just increased 40 basis points this quarter.
So, my question then is related why would you only expect that gradual deterioration. It almost seems to us listening is that, you expect the deterioration next year to be similar to this year, but we’re starting to see an acceleration.
So just wanting to understand why would things start to decelerate going forward in terms of NPLs? And my second question is related to what you just said about your [indiscernible] pricing, your loan portfolio, especially your corporate loan book.
What I wanted to hear from you is about your ability to continue to increase rates because looking at potential banking data most recently we saw the spreads at least in the last month, they have come. So just wanted to hear rather than just the good pricing on book is about your ability to continue to raise spreads going to next year?
Thank you.
Luiz Carlos Angelotti
Mario related to the first question, the deterioration yes and in individuals, basically our field in terms of the gradual deterioration we expect is related to the -- is like a mix between the asset. We believe our portfolio now is much less riskier than it was at any time in the past.
There is a large number or there are credit lines that are doing very well and are sizeable in the total portfolio. We had in the case of individuals an acceleration, but actually into this fourth quarter we may see some better performance.
There is this seasonal impact coming from the salary and other things that helps. Going forward, we are growing zero in this portfolio, basically part of this because demand is low but also because we have the cautious far sometimes and there are mature improvements inside of the credit lines, it’s not that only the mix improved but each line is now better.
We have the economy under pressure but our individuals’ portfolio is there. In the SME portfolio as I said good calculation, good 5% growth, we see the NPL evolution would be lower we have a portfolio that is not growing actually year-on-year, it’s shrinking a little bit.
We see the portfolio, we see the cases of credit cards of course and we believe that the most likely outcome knowing deeply the companies it’s a gradual evolution. In terms of repricing, the repricing comes -- it’s more market driven and basically our point here we don’t want to make a point [indiscernible] continue increase, et cetera.
But just by repricing what has happened it still has sizeable impact in our credit portion. So, basically the positive driver only from the repricing is already off to offset most of the pressure or the big portion of the pressure that comes from credit card policy in our earnings.
Alexandre da Silva Gluher
On the some premises are above the quality then it heals for 90 days and 60 days model they decreased this quarter, they’re not [indiscernible] the next quarter just to -- we don’t have increasing in the delinquency ratio they’re not, we see some below there is some stabilization could happen, but this is something that you need to consider into the formation.
Mario Pierry
Let me ask you then on specifically then on the individuals portfolio. What concerns you the most about potentially leading to higher NPLs, is it inflation, is it unemployment, what do you thinking has the biggest impact on your individuals NPLs?
Luiz Carlos Angelotti
Normally, probably tracing is the main thing that’s set to be the [indiscernible] ratio, but as we told you, we are good part of this portfolio, we have now the payroll loans and the mortgages that we have a very small interest ratio. More normally while we have some increase is [indiscernible] based on our loan and the cards, but as we told you, we are what -- we with these investments in our system in our models virtue, reduce the resource to have better controlled results and we are more effective in to charging the client for to be [indiscernible] and then began, we are working to reduce the risks and this is why we expect some increase, but not something that's in the rule and could hurt higher risk and the [indiscernible], what you see that [indiscernible] we expect that 2017 economy will recover the growth.
And the [indiscernible] the second half of 2016, I think the environment will be a little better as we're expecting some stabilization in the delinquency ratio and maximum probably to.
Operator
Our next question comes from Mr. Saul Martinez from JPMorgan, you may proceed.
Saul Martinez
Hi, guys, two questions. First, on your capital position, and I want to gauge whether your comfort level depends on your ability to sustain pretty high levels of profitability.
And by definition, you hold capital for unexpected losses, but you're talking about capital and capital generation based on the expectation that you don't have unexpected losses, that your profitability remained very high. So, I want to ask you, does your view on capital really depend on sustaining close to a 20% ROE?
And if you are wrong, is there a level of profitability when your profitability comes in some? What you might expect, given the macro backdrop, how do you feel about your core tier one at that lower level of profitability and a lower level of capital generation?
My second question is on renegotiation of credits. You guys give less disclosure than some of your peers.
You've renegotiated credit only for delinquent loans as opposed to renegotiations for performing loans. And obviously that could mask some strain if you're renegotiating loans that haven't fallen into delinquent status.
Is there a big difference in terms of the trend if we were to look at the whole performing loan portfolio? And I ask that because you obviously have a very sizable SME book, and I would guess there, like at some of your peers, you would be seeing more renegotiations.
So, my question is, if we were to have a more expansive view on renegotiations, would that number change? And if you actually do have that number, it'd be great to disclose that.
Luiz Carlos Angelotti
Saul, I'm going to answer the first question. Basically on capital our view on capital doesn’t depend on our view on our profitability, basically first we would be generating and still a lot of capital even at lower level of total profitability and there is also the scenario that the risk weighted assets are not going to grow materially for some time.
Maybe 2016 and '17. The increase the risk weighted assets this quarter came a lot due to tax credit and Fx, but tax credits are going to be recovered over the next two-three years, so we absorb that relatively fast.
Our profit comes from basically the fact that remember the level we have, it's still enough, basically we have options as we, and perhaps we could issue subordinated VAT if you want we can do what we have done in the past like offering a subscription at a lower price and we pay the difference but basically this, all the options we have together with the fact that we will accumulate more capital is what gives us comfort. Not only was the capital issues, firstly they're maintained well we never [indiscernible], to have a small or usually increasing the profitability level, is only our opinion so it expected to have this.
And about the asset quality, the assets grew. Probably in the next two years we will have a very small growth in the assets, then there is something that you need to consider that the consumer capital because assets grow in the next two years probably.
About the renegotiated portfolio, it shows [indiscernible] our portfolio we have R$12 billion, this year grew a little more than the total portfolio. It’s more related to the environment that we have nowadays.
This way that we’ve shown, we don’t pay for this portfolio, the provisions are all probably in the normally what we lose is only one-third percent of the delinquency ratio of this portfolio, that is a little more, the portfolio has a ratio. The rest of the portfolio we maintain according the sense of the tools is following the ranges and the -- our guarantees and risk evaluation that we maintain in a normal way and follow all bank rules what we have.
Saul Martinez
Okay. That’s helpful.
And I am just curious for that, I am not might be -- not that your probability gets impaired dramatically but capital by definitions for scenarios that are worse than what the base case is and I guess my question is more along the lines, is if you are wrong and I don’t have a crystal ball and you don’t have a crystal ball, but if you are wrong and you are with 15% for example or 16%, it’s a pretty good ROE in this environment. Is it fair to say you will still be -- you will still generate capital, you will still complete the tax credit with that level of profitability?
Luiz Carlos Angelotti
You need to understand that we consider to maintain some margin to support any stress movement that happens and in our models, in our analysis when we talk about capital, the tier 1 ratios and tier 2 ratio, the total ratios for Basel III, we consider to maintain margins on buffers and capital buffer to support any surprises. But we don’t expect to have surprise, but the margins that I told you today is 25% to 30% that we expect to maintain, an additional above the minimum requirements.
During the revision we see could be moments that we will be running closer to the minimum margins around but we don’t expect to have any surprise in the margins that we maintain, would be an offer to support any volatility.
Operator
Our next question comes from Mr. Thiago Batista of Itaú BBA.
You may proceed.
Thiago Batista
Yes hi guys. Thanks for the conference.
I have two simple questions. The first one about the NPL coverage ratio.
The coverage ratio is now at a very high level, do you expect to see some construction in NPL coverage ratio going forward for some quarters, we should expect an increase in NPL coverage ratio? The second one, what you believe would be your normalized utilizes level of taxes for next three years?
Luiz Carlos Angelotti
Normalized level of what?
Thiago Batista
Of tax rate.
Luiz Carlos Angelotti
Tax rate. Okay.
I will answer the first one. Basically in terms of NPL coverage, we don’t expect to consume this coverage basically in normal situation we should basically continue provisioning the formation.
The coverage may go down because we have a fixed portion that is the exact provision and eventually will be dilutive on the total coverage. But unless we have specific event that we don’t foresee we don’t tend to consume this coverage provisioning unless necessary.
Alexandre da Silva Gluher
On the tax ratio, what we expect for the next three years, we see that we will have the social contribution of 5% more with a total ratio of 20%. Probably we will have an increase in the normal ratio and 4%, 5% is what we expect the normal level was around 34% and probably will running next year 38%.
Probably will start more effecting in the last quarter, now until the end of 2018.
Operator
Our next question comes from Victor Galiano of Barclays. You may proceed.
Victor Galiano
Earliest my many questions have been answered. But just a follow up on capital here.
When you first announced the HSBC acquisition you gave some fully loaded estimates there at 9.9%. And in this third quarter now you’re down to 9.1%.
So is that 80 basis points of consumption? I just want to confirm here that there nothing that’s changed here in terms of the risk weighted assets that you’re expecting from HSBC.
Is that down to what you said about the higher tax credits and also the depreciation of the real?
Luiz Carlos Angelotti
The HSBC, basically we are now using the second quarter financial statements with this the first analysis on the fourth quarter 2014.
Victor Galiano
So you’re using the lower base of Q3?
Luiz Carlos Angelotti
Yes.
Victor Galiano
Okay, thank you.
Operator
Our next question comes from Mr. Pedro Fonseca - Haitong.
You may proceed.
Pedro Fonseca
Hello, everybody. I have a follow-up question on capital.
Your capital ratios are now going down, particularly with this HSBC acquisition. What is your confidence level of capital?
You have said it's 25% above minimum requirements, but I'm not so sure which one you're talking about. If we just focus on core capital, which is beyond the type of capital a lot of us care about, and if you focus on Basel III fully loaded, is this the minimum requirement right now you want to focus on, the 25% above?
Is that the requirement in 2019 that you want to be 25% above? What is it?
And also, when you answer, can you kindly let us know why you guys insist on this unorthodox way of presenting Basel III fully loaded? Because it's not standard.
And while different countries have -- may have different versions of Basel III, the concept of fully loaded is fairly universal, which is you pick all the adjustments, all the deductions that you have to make by 2019. It has nothing to do with what the balances will be in 2019, such as goodwill.
It's all about removing them all now, because if you did that, obviously you're core tier one is most definitely not 9.1 fully loaded. So, if you could just enlighten us a little bit, I think we'll all be very grateful.
Thank you.
Luiz Carlos Angelotti
This is the way that we show [indiscernible] the normal way. We have started up for acquiring [indiscernible] HSBC and we wanted the margins for -- to be fully loaded when we reach in the industrial 2018.
What is sure here is that stimulation of this fully load and we understand that we have had sold a capital opportunity to do the acquisition, to do the -- to maintain eventually in the higher level. And I think you need to consider that for the next period we have the profitability of the Bank that we have kept on, normally 100 bps per year of the NIM that we expect for each year that we have until 2018, then we are comfortable with this ratios.
Pedro Fonseca
I am sure you have answered the questions, so the 25% above minimum requirements. Is this I mean if you just think about quarter one, is it because to the ratio that’s required right now, is that ratio require in 2019, because the ratio are different.
How should we think about these capital ratios please?
Luiz Carlos Angelotti
Today with the acquisition we have the Tier 1 and the additional of margin that we expected to have 25%, we are comfortable to do the acquisition to-date and to maintain the margins. And these margins will be maintained probably in 2018, then we will have the similar, we have now today margins and also to finish the acquisition -- conclude the acquisition and maintain around 25%-30% as we told that our internal limits for sure that we expect to maintain.
Pedro Fonseca
So what you say is basically looking at capital in terms of what direct relations are right now and now they’re going to be in the future, is that correct?
Luiz Carlos Angelotti
We have it today and we will have in 2018, this capital, the simulation that we have here shows that we have the capital on all part to do the acquisition.
Pedro Fonseca
I am not disputing that, I’ve agreeing to that point, I am just trying to think understand how you think about the capital on a rolling basis. From what you’re telling me you concentrate on what the regulation is right now and you add it to and you demand that 25% to 30% extra buffer.
Is that correct or am I mistaken?
Luiz Carlos Angelotti
We have here but to do that initiative there you have the requirements that the level that we have today to have now and then we have the margins that we consider impaired, we have this at 10%-12% [ph] and this margins we will maintain after the acquisition on future dates 2018 as we expect to have them.
Pedro Fonseca
Okay, think what you're saying is that you look at the regulations as they are now and you want to make sure that you keep a 25% margin all the way through to this interest, that correct?
Luiz Carlos Angelotti
Yes, our internal regulation that we have, ours [indiscernible], in fact 25% is, 25%-30%. And we'll maintain this buffer, the minimum buffer, all time.
Pedro Fonseca
Okay, thank you very much. You realize most banks think several years ahead in terms of 2019 what the requirements will be then and then try to get a buffer.
But alright thanks you very much for your answers.
Operator
Our next question comes from Mr. Boris Molina of Santander, you may proceed.
Boris Molina
Yes, thank you. I'm going to back to the situation of capital again.
When we look at your slide on page number 10, it's fully loaded by Basel III evolution, but [indiscernible] from your basic. Can you hear me?
Luiz Carlos Angelotti
Speak slowly and a little bit louder, we cannot hear you.
Boris Molina
Is this better? Okay, wonderful.
I want to go back to the situation of the capital position of the bank. If you look at your slide on page number 10, we see a fully loaded Basel III common equity of 9.7 before the consumption of tax credits.
I mean, this is kind of like the number we used because we felt that process has been growing for the last couple of years, and execution is to be pretty concerning, no? If you do a [indiscernible] calculation just to see what would be the impact to this capital ratio if you didn't include the government guarantee, which is a very, I would say, toxic option to get government support in case of a crisis?
We would have to come somewhere between 200 and 300 basis points. And then, maybe like the 200 basis points from the HSBC acquisition, and we are at somewhat closer to 5%, 6%.
Now, in the [indiscernible] Central Bank has a history of allowing banks to operate, if I look into your capital ratios at dispensing the public sector banks, right? However, [indiscernible] Central Bank, you have to stand on your own two feet.
They're a no-product bank. They don't make an [indiscernible] invest in other relation.
And so, what I mentioned before, this capital is to take care of unforeseen situations. Now, my question for you is -- and obviously the Central Bank is not going to stop your acquisition.
It's going to go ahead, and you're going to end up in the first quarter of a fully loaded true capital ratio of around 5%. Do you think that this is a comfortable level to take care of the financial tail risk that we think [indiscernible] nobody expected two years ago that we’re going to be in the situation in we’re in today?
What happens if, two years from now, we are in a situation that is relatively weak? Now, I'm starting from that base, you say that you can make the 100 basis point.
By the time that you reach this 12%, 13% level that you should have, being [indiscernible] for sale, and [indiscernible], it's going to take maybe eight years. So, my question to you is do you have any plan to accelerate improving your capital ratios over the next 12 months?
And I guess there's obviously a big problem, because [indiscernible] tax assets -- for tax assets for nonperforming [indiscernible] are twice the level they should be when you calculate it in the provisions times the tax rate. Obviously you cannot collect on your [indiscernible] tax assets as you write off the loans and if this [indiscernible] is going to continue to grow, as the economy weakens and you write off more loans.
So, if we [indiscernible] banks sitting on performing loans, is it something that you think we should -- I think you should accelerate, because these [indiscernible] tax assets are losing net present value every month. So, is it something that -- is there a plan that you have apart from those credit [indiscernible] issues?
[indiscernible] cutting your [indiscernible]. Is there something that you can do that you want to [indiscernible] increase?
And then, my second question is regarding asset quality. And we've seen [indiscernible]--.
Luiz Carlos Angelotti
Sorry, to be very honest, we got very little of what you said because the call we can’t hear you very well, [indiscernible] second question, speak slowly please.
Boris Molina
Okay I'm sorry, the second question is related to asset quality. And if we look at your individual non-performing loans, stripping out that would be a nonperforming asset for the mortgage and payer loans recently completed.
Do you view those -- consumer [indiscernible] and nonperforming loans [indiscernible] couple of quarters and you're heading to the levels we saw on the previous cycle. Do you have any expectation of how or when this thing below the asset quality is going to peak in relation to a moment when unemployment [indiscernible] in June 2016 but in the real non-performing loans continue to increase three, two, four quarters after that.
Is there something like a euro fund that you have in your models? Thank you.
Luiz Carlos Angelotti
About the capital, we are comfortable with the acquisition -- with the level of acquisitions, okay, we are not -- we will looking what we can -- how we can improve the internal capital ratio. Then our possibilities we can use if we understand that it will be necessary, then subordinated debt tier 1 is something that we can do to internally to use some reorganization for to improve the or to have some gains with is the capital, then we are normalizing how to improve or how to have the debt, use our capital.
Then we are not stopped or we are thinking and planning how to use the capital, how to maintain our internal requirements to have the margins as we require. Then we are not stopping.
We are managing the capital of the bank and considering our risks and operational Fx with acquisitions and others Fx, then we are setting output tools and improving [indiscernible]. We will continuously de-risk normally but we can have times to pay dividend and to use the [indiscernible] business to issue new shares.
That is one option of our shareholders if they want to buy or not, they can do but only using the dividend payment. We will maintain this advantage normally.
We are comfortable with the capital levels and we are managing the capital ratios to maintain the banking and to buy GSSE after the approvals of the regulator.
Boris Molina
I am sorry. If I can follow-on.
Do you have any plan to address the deferred taxed assets from loan loss provisions? Because you have been growing pretty [indiscernible] your last year, there is an issue about collecting your tax benefit from the government and these numbers are hanging on the balance sheet.
We would like to see bank’s portion of these non-performing loans that I have been looking for in order to collect 34% tax benefit on the face value that you lost, this is a huge amount, it’s R$23 billion 34% [indiscernible]. So is there something in the plan to deliver this?
Luiz Carlos Angelotti
We don’t have a non-definitive loans hanging on the balance sheet, basically we have [indiscernible] and we have loans that follow the normal evolution. You know the rules here.
We do the provisioning after the wage rate engage, six months later we do the [indiscernible] it’s plain, it’s simple. And that’s what happened in Brazil, I think it’s straight forward and very conservative.
Basically we have provisions and we have additional provisions and one thing even after we have the write-off, it still takes one year, one year and a half to have the tax credit tax deductible. That’s kind of the unique thing we have in Brazil and that’s why Brazilian banks carry so much tax credit.
Boris Molina
Okay, okay. Wonderful.
And on the consumer peak related to the internal rate, you haven’t adjustments, what we could use?
Luiz Carlos Angelotti
We have been saying we believe NPLs will peak for the second half, that’s our view on this, as long they keep together and the long road starts to pick up a little bit. So that’s.
Alexandre da Silva Gluher
Our view on the NPLs provisions actually.
Luiz Carlos Angelotti
Yes, NPL provision actually you see, NPL provision has already 0.8 down this quarter.
Alexandre da Silva Gluher
They both decreased this quarter. I think the increase [indiscernible] we expected.
We actually see some -- could be some stabilization this quarter.
Boris Molina
Okay, wonderful. Thank you so much.
Luiz Carlos Angelotti
Thank you.
Operator
Excuse me ladies and gentlemen, since there are no further questions. I would like to invite the speakers for the closing remarks.
Carlos Firetti
Hi, okay. Thank you.
Okay, thank you everybody for participating in our conference call. The investor relations department is available for any other questions you may have.
Thank you all.
Operator
That does conclude the Banco Bradesco’s audio conference for today. Thank you very much for your participation.
Have a good day.