bbdfs2018_6ka.htm - Generated by SEC Publisher for SEC Filing

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K/A
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
 
For the month of March, 2019
Commission File Number 1-15250
 

 
BANCO BRADESCO S.A. 
(Exact name of registrant as specified in its charter)
 
BANK BRADESCO
(Translation of Registrant's name into English)
 
Cidade de Deus, s/n, Vila Yara
06029-900 - Osasco - SP
Federative Republic of Brazil
(Address of principal executive office)
 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.  Form 20-F ___X___ Form 40-F _______

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No ___X____

 .


 
 

 
 
Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)
 

Summary

 

Independent Auditors’ Report

3

Audit Committee’s Report

8

Consolidated Statements of Income

9

Consolidated Statements of Comprehensive Income

10

Consolidated Statements of Financial Position

11

Consolidated Statements of Changes in Equity

12-13

Consolidated Statements of Cash Flows

14-15

Notes to the Consolidated Financial Statements

 

 

 

1) General information 16   22) Financial assets and liabilities held for trading 105
2) Significant accounting practices 16   23) Derivative financial instruments 106
3) Risk Management 45   24) Financial assets at fair value through other comprehensive income 111
  3.1

Credit risk

46   25) Financial assets available for sale 112
  3.2 Market risk 54   26) Loans and advances to financial institutions 113
  3.3 Liquidity risk 63   27) Loans and advances to customers 113
  3.4 Fair value of financial assets and liabilities 74   28) Bonds and securities at amortized cost 115
  3.5 Independent Model Validation 81   29) Investments held to maturity 116
  3.6 Capital management 82   30) Financial assets granted as collateral 116
  3.7 Insurance risk/subscription risk 85   31) Non-current assets held for sale 117
4) Estimates and judgments 90   32) Investments in associates and joint ventures 118
5) Operating segments 92   33) Property and equipment 121
6) Net interest income 96   34) Intangible assets and goodwill 123
7) Net fee and commission income 97   35) Other assets 124
8) Net gains/(losses) on financial assets and liabilities at fair value through profit or loss 97   36) Deposits from banks 125
9) Net gains/(losses) on financial instruments classified as held for trading 97   37) Deposits from customers 125
10) Net gains/(losses) on financial assets at fair value through other comprehensive income 97   38) Funds from securities issued 125
11) Net gains/(losses) on financial instruments classified as available for sale 98   39) Subordinated debt 127
12) Net gains/(losses) on foreign currency transactions 98   40) Insurance technical provisions and pension plans 129
13) Net income from insurance and pension plans 98   41) Supplemental pension plans 137
14) Personnel expenses 99   42) Provisions, contingent liabilities and contingent assets 139
15) Other administrative expenses 99   43) Other liabilities 143
16) Depreciation and amortization 99   44) Equity 144
17) Other operating income/(expenses ) 99   45) Transactions with related parties 146
18) Income tax and social contribution 100   46) Off-balance sheet commitments 148
19) Earnings per share 103   47) New standards and amendments and interpretations of existing standards 149
20) Cash and cash equivalents 103   48)

Other information

154
21) Financial assets and liabilities at fair value through profit or loss 104  

 

 

           2     IFRS – International Financial Reporting Standards – 2018

 


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Independent Auditors’ Report

 

Independent Auditors’ Report on consolidated financial statements

 

To

Shareholders and the Board of Directors of

Banco Bradesco S.A.

Osasco – SP

 

Opinion

 

We have audited the consolidated financial statements of Banco Bradesco S.A. (“Bradesco”), which comprise the consolidated statement of financial position as of December 31, 2018 and the respective consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and notes, including significant accounting policies and other clarifying information.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Banco Bradesco S.A as of December 31, 2018, and of its consolidated performance and its consolidated respectives cash flows, for the year then ended, in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

 

Basis for opinion

 

We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards, are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Bradesco and its subsidiaries in accordance with the relevant ethical requirements included in the Accountant´s Professional Ethics Code and the professional standards issued by the Brazilian Federal Accounting Council and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key Audit Matters

 

Key audit matters are those that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were treated in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and, therefore, we do not express a separate opinion on these matters.

 

Expected losses from loans and advances to clients, loan commitments, financial guarantees, financial assets at fair value through other comprehensive income and securities at amortized cost

As mentioned in notes 2d viii, 3.1, 4, 27 and 47, Bradesco periodically reviews its portfolio of loans and advances to clients, loans commitments, financial guarantees, financial assets at fair value through other comprehensive income and securities at amortized cost (as hereinafter defined “transactions subject to credit risk”), evaluating the estimated expected losses from these transactions (impairment), in the amount of R$ 31,105,579 thousand, R$ 2,551,676 thousand e R$ 719,216 thousand, R$ 337,506 thousand, R$ 3,022,038 thousand, respectively, as of December 31, 2018. Beginning January 1, 2018, IFRS 9 – Financial Instruments standard entered into force, which among other changes, modifies the measurement of the estimated loss for transactions subject to credit risk from an "incurred losses" to an "expected losses" model. In accordance with that amendment, the Bradesco reviewed and modified its internal policies and methodologies for loss measurement for transactions subject to credit risk. The new methodologies require, by its nature, the use of judgments and assumptions by Bradesco, which include analysis of both external factors, such as general economic conditions and projections, and internal factors, such as payment and renegotiation history, counterparty credit risk evaluation and collaterals.

Due to the relevance of transactions subject to credit risk and the level of uncertainty and judgment for the determination of the expected loss, as well as related disclosure requirements, we consider this as a significant matter for the audit.

 

How our audit approached this matter

On a sample basis, we tested the design and operating effectiveness of relevant internal controls related to the approval and registration of transactions subject to credit risk, the analysis of policies and manuals related to the models, the application of the methodologies, the use of indexes and assumptions in the calculation of the expected losses of transactions subject to credit risk. On a sample basis, we evaluated the expected loss for transactions subject to credit risk considered individually significant; we inspected the documentation and assumptions that support Bradesco's evaluation of the expected losses, including the sufficiency analysis of the guarantees. We have also tested, with the technical support of our specialists, the models, assumptions and data used by Bradesco to measure  expected losses for transactions subject to credit risk evaluated on a collective basis, including the assumptions and data used to determine the expected losses through the application of statistical calculations to evaluate the performance and stability of those models and methodologies developed by Bradesco. Our procedures also included the evaluation of the disclosures made by Bradesco in the consolidated financial statements in relation to the applicable rules.

 

 

 

 

Bradesco      3


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 
Independent Auditors’ Report

 

 


Based on the evidence obtained through the procedures summarized above, we consider adequate the level of expected losses and related disclosures in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2018.

 

Measurement of financial instruments

As disclosed in the Notes 2d, 3.4, 21a e b, 23, 24 and 47, derivative financial instruments levels 2 and 3 amount to R$ 14,735,842 thousand (assets) and R$ 16,119,653 thousand (liabilities), the financial instruments measured at fair value through profit or loss levels 2 and 3 amount to R$ 18,792,441 thousand and the financial instruments measured at fair value through other comprehensive income levels 2 and 3 amount to R$ 8,123,144 thousand. These instruments, measured at fair value, are relevant to the consolidated financial statements of Bradesco. For the financial instruments for whose fair value measurement does not directly use quoted prices (Levels 2 and 3 in the fair value hierarchy), the determination of the fair value is subject to a higher uncertainty level to the extent Bradesco makes significant judgments to estimate such amounts. Therefore, we consider the fair value measurement of these financial instruments including the evaluation of indicative of evidence of loss as a significant matter in our audit.

 

How our audit approached this matter

On a sample basis, we tested the design and operating effectiveness of the relevant internal controls adopted by Bradesco to capture and process the information, parameterization of the calculation models for the financial instruments for which parameters are not observable (Levels 2 and 3 in the fair value hierarchy). For a sample of financial instruments classified in levels 2 and 3, with the technical support of our specialists in financial instruments, we evaluated the pricing models developed by Bradesco for determining fair values and the data reasonableness, the parameters and information included in the models, as well as the criteria and policies related to indicative evidence of  loss and we recalculate, on a sample basis, the amount of certain transactions. Our procedures also included the evaluation of the disclosures made by Bradesco in the consolidated financial statements.

 

Based on the evidence obtained from the procedures summarized above, we consider adequate the fair value measurement of financial instruments and disclosures in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2018.

 

·         Provisions and contingent liabilities - tax, civil and labor

As described in Notes 2j and 42, Bradesco is defendant in tax, civil and labor lawsuits in the normal course of its activities, with provisions recognized in the consolidated financial statements in the amounts of R$ 8,204,206 thousand, R$ 5,614,362 thousand, and R$ 5,983,603 thousand, respectively. Some laws, regulations and judicial proceedings in Brazil have high complexity levels, and, therefore, the measurement, recognition and disclosure of Provisions and Contingent Liabilities, related to lawsuits, and/or, in certain cases, adherence to laws and regulations, require Bradesco’s professional judgment. Due to the relevance, complexity and judgment involved in the evaluation, measurement and disclosures related to Provisions and Contingent Liabilities, as well as those related to the compliance with laws and regulations, we consider this as a significant matter in our audit.

 

How our audit approached this matter

On a sample basis, we tested the design and operating effectiveness of the relevant internal controls related to the identification, evaluation, measurement and disclosure of Provisions and Contingent Liabilities, as well as those related to the compliance with laws and regulations. Additionally, we evaluated the sufficiency of the recognized provisions and disclosed amounts, by evaluating the criteria and assumptions adopted in the measurement methodology, also considering the assessment of the internal and external legal advisors of Bradesco, as well as historical data and information. This work included, when necessary, the involvement of our legal and tax specialists in the evaluation of the likelihood of unfavorable outcome and the documentation and information related to the main tax matters involving Bradesco. Our procedures also included the evaluation of the disclosures made by Bradesco in the consolidated financial statements.

 

 

 

           4     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Independent Auditors’ Report

 

Based on the evidence obtained from the procedures summarized above, we consider adequate Bradesco’s level of provisions and contingent liabilities as well as the respective disclosures in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2018.

 

§

Impairment of assets

The consolidated financial statements include deferred tax assets in the amount of R$ 53,280,933 thousand (Note 18c) and intangible assets, which include goodwill on the acquisition of investments in the amount of R$ 5,576,068 thousand and other intangible assets in the amount of R$ 4,795,136 thousand (note 34a) which realization is based on future profitability based on business plans and budgets prepared by Bradesco and which are supported by several economic and business assumptions, among others. As described in Notes 2i and 4, considering the frequent changes that occur in the economic and regulatory environment of the markets where it operates, Bradesco continuously evaluates the assumptions and estimates of taxable profit, profitability of the cash generating units “CGU“ to which goodwill and intangible assets are allocated, growth rates, discount rates, and cash flow projections or at least the existence of indicative impairment losses on assets. In view of the level of judgment inherent in the determination of these estimates and the potential impact that changes in the assumptions could cause on the consolidated financial statements, we consider this area significant to our audit.

 

How our audit approached this matter

On a sample basis, we tested the design and operating effectiveness of the relevant internal controls related to the assessment prepared by Bradesco of indicative of impairment losses of those assets. Additionally, we evaluated, with the technical support of our corporate finance specialists when necessary, the reasonableness and consistency of the data and assumptions used for preparing such assessment. We also performed an analysis of the reasonableness of the mathematical calculations included in technical study support for tax credits. Our procedures also included the evaluation of the disclosures made by Bradesco in the consolidated financial statements.

 

Based on the evidence obtained from the procedures summarized above, we consider adequate the measurement of the recoverable amounts of assets and related disclosures in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2018.

 

§

Technical Provisions – Insurance and Pension Plans

As mentioned in Notes 2l and 40, Bradesco has liabilities related to insurance and pension plans contracts denominated “Technical Provisions”, in the amount of R$ 251,578,287 thousand, which includes among others, the following provisions involving judgment: Provision for Claims Incurred But Not Reported (IBNR) in the amount of R$ 4,332,935 thousand, Claims Incurred But Not Enough Reported (IBNeR) and Provision for Claims to be settled (PSL) in the amount of R$ 5,818,525 thousand, Provision for Unearned Premiums for risks in force but not yet issued (PPNG-RVNE) in the amount of 158,535 thousand, Mathematical Provision for Benefits to be Granted – Insurance in the amount of R$ 1,218,860 thousand, Mathematical Provision for Benefits Granted in the amount of R$ 8,833,164 thousand, Provision for Insufficient Premiums in the amount of R$ 2,133,130 thousand, Provision for Related Expenses in the amount of R$ 558,190 thousand and Other Technical Provisions in the amount R$ 2,007,136 thousand. The measurement of such provisions and the liability adequacy test require significant judgment of Bradesco in the determination of methodologies and assumptions, which include, among others, loss ratio, mortality, longevity, persistency, and interest rates. Due to the relevance of these technical provisions and the impact that any change in calculation assumptions of technical provisions and of liability adequacy test could cause on the consolidated financial statements, we consider this matter significant to our audit.

 

How our audit approached this matter

On sampling basis, we tested the design and operating effectiveness of the relevant internal controls related to the process of determination and measurement, the technical provisions identified above and of liability adequacy test. With the technical support of our actuarial specialists, we evaluated the methodologies, the consistency of data and reasonableness of assumptions, such as loss ratio, mortality, longevity persistency and interest rates, used in the measurement the technical provisions and of liability adequacy test, as well as we performed the recalculation, on a sample bases, of technical provisions and liability adequacy test. Additionally, we tested the reasonableness of the databases used in the actuarial calculations. Our audit procedures also included the evaluation of the disclosures made in the financial statements, in particular the disclosure of the financial assets offered to cover the technical provisions.

 

 

Bradesco      5

 


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Independent Auditors’ Report

 

 

Based on evidence obtained from the procedures summarized above, we consider adequate the level of provisioning and the respective disclosures in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2018.

 

§

Application controls and information technology general controls

Bradesco has an information technology structure as well as a technology investment plan for conducting its businesses. The information technology structure has process for access and changes in the systems and applications, development of new programs, and automated controls and/or controls with automated components in the various relevant processes. In order to maintain its operations, Bradesco provides its employees with access to systems and applications, taking into account the duties, responsibilities and its organizational structure. The controls to authorize, monitor, restrict, and/or revoke the respective accesses to this environment are important to ensure that the accesses and information updates are appropriately performed and by the appropriate professionals to mitigate the potential risk of fraud or error arising from inappropriate access or change in a system or information, and to guarantee the integrity of the financial information and accounting records.

In view of the high investment level, heavy dependence of Bradesco on its technology systems, the high daily volume of processed transactions and the importance of access controls and the change management process in its systems and applications, we consider that this area is significant to our audit.

 

How our audit approached this matter

On a sample basis, we tested the design and operating effectiveness of access controls, such as authorization of new users, revocation of terminated users, and periodic monitoring of active users, with the assistance of our information technology specialists, whenever we plan to rely on specific information extracted from certain systems considered relevant for the purpose of preparing the financial statements. In areas where our judgment is highly dependent on information technology, our tests included also assessing password policies, security settings, and control over developments and changes in systems and applications. In addition, when we identify key internal controls fully automated or with some component dependent on systems and applications for the financial reporting process and other relevant processes, we tested, with the assistance of our information technology specialists, the design and operating effectiveness of these controls.

The evidence obtained through the above summarized procedures allowed us to consider information from certain systems to plan the nature, time and extension of our substantive tests in the context of the consolidated financial statements taken as a whole.

 

Responsibilities of management and those in charge with governance for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and internal controls as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement whether due to fraud or error.

 

In preparing the consolidated financial statements, management is responsible for assessing Bradesco’s ability to continue as going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless management either intends to liquidate Bradesco and its subsidiaries or to cease operations, or there has no realistic alternative but to do so.

 

Those charged with governance are those responsible for overseeing Bradesco´s financial reporting process.

 

Auditor’s responsibilities for the audit of the consolidated financial statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor´s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

 

 

           6     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Independent Auditors’ Report

 

As part of an audit in accordance with the Brazilian and International Standards on Auditing, we exercise professional judgment, and maintain professional skepticism throughout the audit. We also:

 

 

·

identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtained audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting material misstatement resulting from fraud is higher than for the one resulting from error, as fraud may involve collusion, forgery, intentional omission or misrepresentations, or the override of internal controls.

 

 

·

obtain an understanding of internal control relevant to the audit to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Bradesco and its subsidiaries internal control.

 

 

·

evaluate the appropriateness of the accounting policies used and the reasonableness of accounting estimates and related disclosures made by Bradesco.

 

 

·

conclude on the appropriateness of management’s use of the going concern basis of accounting, and, based on the audit evidence obtained, whether material uncertainty exists related to events or conditions that may cast significant doubt on Bradesco’s ability to continue as going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements, or if such disclosures are inadequate to modify our opinion. Our conclusions are based on the audit evidences obtained up to the date of our auditor’s report. However, future events or conditions may cause Bradesco and its subsidiaries to cease to continue as a going concern.

 

 

·

evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

 

·

obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provided those charged with governance with a statement that we have complied with the relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear our independence, and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determined those matters that were of most significance in the audit of the consolidated financial statements of the current period, and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matters, or when, in extremely rare circumstances, we determine a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefit of such communication.

 

Osasco, March 07, 2019

KPMG Auditores Independentes

CRC 2SP028567/O-1 F SP

 

Original report in Portuguese signed by

Rodrigo de Mattos Lia

Accountant CRC 1SP252418/O-3

 

 

Bradesco      7

 


 

 

 

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Audit Committee’s Report

 

Bradesco Conglomerate Audit Committee’s Report on Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS)

 

In addition to the Audit Committee's Report related to the consolidated financial statements of Banco Bradesco S.A. for the year ended December 31, 2018, issued on January 30, 2019, we have also analyzed the financial statements prepared in accordance with International Financial Reporting Standards.

 

As mentioned in the report referred to above, our analysis has taken into consideration the work carried out by independent auditors and the internal controls systems maintained by the various financial areas of Bradesco financial conglomerate, mainly Internal Audit, Risk Management and Compliance areas.

 

Management has the responsibility of defining and implementing accounting and management information systems that produce the consolidated financial statements of Bradesco and its subsidiaries, in compliance with Brazilian and international accounting standards.

 

Management is also responsible for processes, policies and procedures for internal controls that ensure the safeguarding of assets, timely recognition of liabilities and risk management for Bradesco Organization transactions.

 

Independent Auditors are responsible for auditing the financial statements and for issuing an auditing report on their compliance with applicable accounting principles.

 

The responsibility of internal auditors is to assess the quality of Bradesco Organization's internal control systems and the regularity of policies and procedures determined by Management, including those used to prepare accounting and financial reports.

 

The Audit Committee is responsible for evaluating the quality and effectiveness of the internal and independent auditors' work, the effectiveness and adequacy of the internal control systems, and also for analyzing financial statements in order to issue, when applicable, pertinent recommendations.

 

Based on the review and discussions mentioned above, the Audit Committee recommends that the Board of Directors approves the audited financial statements for the year ended December 31, 2018, prepared in accordance with International Financial Reporting Standards.

 

 

Cidade de Deus, Osasco, SP, March 06, 2018.

 

MILTON MATSUMOTO

                                                                                                     (Coordinator)

 

PAULO ROBERTO SIMÕES DA CUNHA

                                                                                            (Financial Expert)

 

 

WILSON ANTONIO SALMERON GUTIERREZ

 

     8     IFRS – International Financial Reporting Standards – 2018


 

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Income

 

    

R$ thousand

Note

Years ended December 31

2018

2017

2016

Interest and similar income

 

122,053,139

126,232,328

147,700,375

Interest and similar expenses

 

(55,244,669)

(75,589,415)

(91,037,386)

Net interest income

6

66,808,470

50,642,913

56,662,989

Net fee and commission income

7

23,831,590

22,748,828

20,341,051

Net gains/(losses) on financial assets and liabilities at fair value through profit or loss

8

(11,676,573)

Net gains/(losses) on financial instruments classified as held for trading

9

9,623,108

16,402,770

Net gains/(losses) on financial assets at fair value through other comprehensive income

10

1,073,563

Net gains/(losses) on financial instruments classified as available for sale

11

570,358

(1,341,400)

Losses on investments held-to-maturity

29

(54,520)

Net gains/(losses) on foreign currency transactions

12

1,096,826

1,422,957

150,757

Net income from insurance and pension plans

13

7,656,872

6,239,990

4,155,763

Other operating income

 

(1,849,312)

17,801,893

19,367,890

Impairment of loans and advances

27

(16,860,835)

(15,350,278)

Expected loss on loans and advances

27

(15,091,975)

Expected loss on other financial assets

24 and 28

(1,172,860)

Personnel expenses

14

(18,871,462)

(20,723,265)

(17,003,783)

Other administrative expenses

15

(16,873,962)

(16,882,461)

(16,149,563)

Depreciation and amortization

16

(4,808,255)

(4,568,568)

(3,658,413)

Other operating income/(expenses)

17

(14,210,594)

(10,133,357)

(14,004,162)

Other operating expense

 

(71,029,108)

(69,168,486)

(66,166,199)

Income before income taxes and share of profit of associates and joint ventures

 

17,761,640

22,025,148

30,205,731

Share of profit of associates and joint ventures

32

1,680,375

1,718,411

1,699,725

Income before income taxes

 

19,442,015

23,743,559

31,905,456

Income tax and social contribution

18

(2,693,576)

(6,428,956)

(13,912,730)

Net income for the year

 

16,748,439

17,314,603

17,992,726

 

 

 

 

 

Attributable to shareholders:

 

 

 

 

Controlling shareholders

 

16,583,915

17,089,364

17,894,249

Non-controlling interest

 

164,524

225,239

98,477

 

 

 

 

 

Basic and diluted income per share based on the weighted average number of shares attributable to shareholders (expressed in R$ per share):

 

 

 

 

– Earnings per common share

19

2.36

2.43

2.55

– Earnings per preferred share

19

2.60

2.67

2.80

 

The Notes are an integral part of the Consolidated Financial Statements.

 

 

Bradesco      9

 


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Comprehensive Income

 

 

Note

R$ thousand

Years ended December 31

2018

2017

2016

Net income for the year

 

16,748,439

17,314,603

17,992,726

 

 

 

 

 

Items that are or may be reclassified to the Consolidated Statement of Income

 

 

 

 

Financial assets available for sale

 

 

 

 

Unrealized gains/(losses)

 

3,005,067

7,718,277

Gains/(losses) transferred to income

 

487,017

(1,459,372)

Tax effect

 

(1,260,609)

(2,571,397)

 

 

 

 

 

Financial assets at fair value through other comprehensive income

 

 

 

 

Unrealized gains/(losses)

 

(473,594)

Gains/(losses) transferred to income

10

1,023,299

Tax effect

 

(209,359)

 

 

 

 

 

Unrealized gains/(losses) on hedge

23

 

 

 

Cash flow hedge

 

(96,760)

(13,778)

39,198

Hedge of investment abroad

 

(209,300)

(59,739)

Tax effect

 

122,424

29,407

(15,679)

 

 

 

 

 

Exchange differences on translations of foreign operations

 

 

 

 

Foreign exchange on translations of foreign operations

 

113,198

29,002

(107,011)

 

 

 

 

 

Items that can not be reclassified to the Consolidated Statement of Income

 

 

 

 

Gains/(losses) on equity instruments at fair value through other comprehensive income

 

(756,042)

Tax effect

 

302,417

 

 

 

 

 

Other

 

(92,764)

 

 

 

 

 

Total adjustments not included in the net income

 

(276,481)

2,216,367

3,604,016

Total comprehensive income for the year

 

16,471,958

19,530,970

21,596,742

 

 

 

 

 

Attributable to shareholders:

 

 

 

 

Controlling shareholders

 

16,307,434

19,305,731

21,498,265

Non-controlling interest

 

164,524

225,239

98,477

 

The Notes are an integral part of the Consolidated Financial Statements.

 

 

10     IFRS – International Financial Reporting Standards – 2018


         
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Financial Position

 

 

R$ thousand

Note

On December 31

2018

2017

Assets

 

 

 

Cash and balances with banks

20

107,209,743

81,742,951

Financial assets at fair value through profit or loss

21a

246,161,150

Financial assets held for trading

22a

241,710,041

Financial assets at fair value through other comprehensive income

24

178,050,536

Financial assets available for sale

25

159,412,722

Financial assets at amortized cost

 

 

 

- Loans and advances to financial institutions, net of provision for losses

26

105,248,950

32,247,724

- Loans and advances to customers, net of provision for losses

27

380,387,076

346,758,099

- Securities, net of provision for losses

28

140,604,738

- Other financial assets

35

43,893,309

Investments held to maturity

29

39,006,118

Financial assets pledged as collateral

30

183,975,173

Non-current assets held for sale

31

1,353,330

1,520,973

Investments in associates and joint ventures

32

8,125,799

8,257,384

Premises and equipment

33

8,826,836

8,432,475

Intangible assets and goodwill, net of accumulated amortization

34

16,128,548

16,179,307

Taxes to be offset

18g

13,498,264

10,524,575

Deferred income tax assets

18c

48,682,569

43,731,911

Other assets

35

7,372,866

50,853,987

Total assets

 

1,305,543,714

1,224,353,440

 

 

 

 

Liabilities

 

 

 

Liabilities at amortized cost

 

 

 

- Deposits from banks

36

247,313,979

285,957,468

- Deposits from customers

37

340,748,196

262,008,445

- Funds from issuance of securities

38

148,029,018

135,174,090

- Subordinated debts

39

53,643,444

50,179,401

- Other financial liabilities

43

62,598,235

Financial liabilities at fair value through profit or loss

21c

16,152,087

Financial liabilities held for trading

22c

14,274,999

Provision for Expected Loss

 

 

 

- Loan Commitments

27

2,551,676

- Financial guarantees

27

719,216

Insurance technical provisions and pension plans

40

251,578,287

239,089,590

Other reserves

42

19,802,171

18,490,727

Current income tax liabilities

 

2,373,261

2,416,345

Deferred income tax assets

18c

1,200,589

1,251,847

Other liabilities

43

34,157,435

97,816,824

Total liabilities

 

1,180,867,594

1,106,659,736

 

 

 

 

Shareholders’ equity

44

 

 

Capital

 

67,100,000

59,100,000

Treasury shares

 

(440,514)

(440,514)

Capital reserves

 

35,973

35,973

Profit reserves

 

53,267,584

49,481,227

Additional paid-in capital

 

70,496

70,496

Other comprehensive income

 

2,206,718

1,817,659

Retained earnings

 

2,035,198

7,338,990

Equity attributable to controlling shareholders

 

124,275,455

117,403,831

Non-controlling interest

 

400,665

289,873

Total equity

 

124,676,120

117,693,704

Total liabilities

 

1,305,543,714

1,224,353,440

 
The Notes are an integral part of the Consolidated Financial Statements.

 

Bradesco    11


 

 

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Changes in Equity

 

 

 

R$ thousand

Capital

Treasury shares

Capital reserves

Profit reserves

Additional paid-in capital

Other comprehensive income (1)

Retained earnings

Equity attributable to  controlling shareholders

Non-controlling interest

Total

Legal

Statutory

Balance on December 31, 2015

43,100,000

(431,048)

35,973

6,052,949

43,867,071

70,496

(4,002,724)

2,096,710

90,789,427

125,335

90,914,762

Net income

17,894,249

17,894,249

98,477

17,992,726

Financial assets available for sale

3,711,027

3,711,027

3,711,027

Foreign currency translation adjustment

(107,011)

(107,011)

(107,011)

Comprehensive income

3,604,016

17,894,249

21,498,265

98,477

21,596,742

Increase of non-controlling shareholders’ interest

3,265

3,265

Purchase of treasury shares

(9,466)

(9,466)

(9,466)

Capital increase of with reserves (2)

8,000,000

(8,000,000)

 

Transfers to reserves

754,179

7,353,617

(8,107,796)

Interest on equity and dividends

(6,975,782)

(6,975,782)

(50,314)

(7,026,096)

Balance on December 31,  2016

51,100,000

(440,514)

35,973

6,807,128

43,220,688

70,496

(398,708)

4,907,381

105,302,444

176,763

105,479,207

Net income

17,089,364

17,089,364

225,239

17,314,603

Financial assets available for sale

2,187,365

2,187,365

2,187,365

Foreign currency translation adjustment

29,002

29,002

29,002

Comprehensive income

2,216,367

17,089,364

19,305,731

225,239

19,530,970

Increase of non-controlling shareholders’ interest

2,099

2,099

Capital increase of with reserves (3)

8,000,000

(8,000,000)

Transfers to reserves

732,888

6,720,523

(7,453,411)

Interest on equity and dividends

(7,204,344)

(7,204,344)

(114,228)

(7,318,572)

Balance on December 31,  2017

59,100,000

(440,514)

35,973

7,540,016

41,941,211

70,496

1,817,659

7,338,990

117,403,831

289,873

117,693,704

 

The Notes are an integral part of the Consolidated Financial Statements.

 

       12     IFRS – International Financial Reporting Standards – 2018

 


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Changes in Equity (continued)

 

 

R$ thousand

Capital

Treasury shares

Capital reserves

Profit reserves

Additional paid-in capital

Other comprehensive income (1)

Retained earnings

Equity attributable to  controlling shareholders

Non-controlling interest

Total

Legal

Statutory

Balance on December 31,  2017

59,100,000

(440,514)

35,973

7,540,016

41,941,211

70,496

1,817,659

7,338,990

117,403,831

289,873

117,693,704

Adoption of IFRS 9 (Note 47)

665,540

(2,802,754)

(2,137,214)

(2,137,214)

Balance on January 1ST, 2018

59,100,000

(440,514)

35,973

7,540,016

41,941,211

70,496

2,483,199

4,536,236

115,266,617

289,873

115,556,490

Net income

 

16,583,915

16,583,915

164,524

16,748,439

Financial assets at fair value through other comprehensive income

(296,915)

 

(296,915)

(296,915)

Foreign currency translation adjustment

113,198

 

113,198

113,198

Other

(92,764)

 

(92,764)

(92,764)

Comprehensive income

(276,481)

16,583,915

16,307,434

164,524

16,471,958

Increase of non-controlling shareholders’ interest

2,265

2,265

Capital increase with reserves (4)

8,000,000

(8,000,000)

Transfers to reserves

954,247

10,832,110

(11,786,357)

Interest on shareholders’ equity

 

(7,298,596)

(7,298,596)

(55,997)

(7,354,593)

Balance on December 31,  2018

67,100,000

(440,514)

35,973

8,494,263

44,773,321

70,496

2,206,718

2,035,198

124,275,455

400,665

124,676,120

(1)Mainly composed of financial assets at fair value through other comprehensive income and gains and losses with cash flow hedge and foreign investment;

(2) At Special Shareholders’ Meeting held on March 10, 2016, the shareholders approved the Board of Directors’ proposal to increase the capital by R$8,000,000 thousand, from R$43,100,000 thousand to R$51,100,000 thousand, with bonus in shares, through capitalization of part of the balance of the caption “Profit reserves - Statutory Reserve”, in conformity with Article 169 of Law No. 6,404/76, with issuance of 504,872,885 new registered shares, without par value, of which 252,436,456 are common and 252,436,429 are preferred shares, which will be granted to the shareholders, free of charge, as bonus, at the proportion of 1 new share to each 10 shares of the same type held by them on the base date;

(3) At Special Shareholders’ Meeting held on March 10, 2017, the shareholders approved the Board of Directors’ proposal to increase the capital by R$8,000,000 thousand, from R$51,100,000 thousand to R$59,100,000 thousand, with bonus in shares, through capitalization of part of the balance of the caption “Profit reserves - Statutory Reserve”, in conformity with Article 169 of Law No. 6,404/76, with issuance of 555,360,173 new registered shares, without par value, of which 277,680,101 are common and 277,680,072 are preferred, which were granted to the shareholders, free of charge, as bonus, at the proportion of 1 new share to each 10 shares of the same type held by them on the base date; and

(4) At Special Shareholders’ Meeting held on March 12, 2018, the shareholders approved the Board of Directors’ proposal to increase the capital by R$8,000,000 thousand, from R$59,100,000 thousand to R$67,100,000 thousand, with bonus in shares, through capitalization of part of the balance of the caption “Profit reserves - Statutory Reserve”, in conformity with Article 169 of Law No. 6,404/76, with issuance of 610,896.190 new registered shares, without par value, of which 305,448,111 common and 305,448,079 are preferred shares, granted to the shareholders, free of charge, as bonus, at the proportion of 1 new share to each 10 shares of the same type held by them.

 

The Notes are an integral part of the Consolidated Financial Statements.

Bradesco      13


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Cash Flows

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Operating activities

 

 

 

Income before income taxes

19,442,015

23,743,559

31,905,456

Adjustments to reconcile income before income tax to net cash flow from operating activities:

 

 

 

Expected loss on loans and advances

15,091,975

Impairment of loans and advances

16,860,835

15,350,278

Changes in the insurance technical provisions and pension plans

29,409,222

34,805,771

32,781,918

Net (gains)/losses from disposals of assets available for sale

(2,299,397)

(764,707)

(Gains)/Net realized losses on financial assets at fair value through other comprehensive income

(1,073,563)

Expenses with provisions and contingent liabilities

4,306,043

2,471,288

2,518,761

Deferred acquisition cost (insurance)

144,224

680,136

194,994

Impairment of assets

1,757,981

1,925,304

2,388,580

Depreciation

1,460,013

1,237,328

1,140,369

Amortization of intangible assets

3,348,242

3,331,240

2,516,777

Share of profit of associates and joint ventures

(1,680,375)

(1,718,411)

(1,699,725)

Losses on disposal of non-current assets held for sale

516,713

577,212

442,251

Net losses from disposal of property and equipment

98,182

106,722

24,791

(Gains) on sale of investments in associates

(270,977)

Effect of Changes in Exchange Rates in Cash and Cash equivalents

(751,769)

(806,312)

5,617,747

Changes in assets and liabilities:

 

 

 

(Increase)/Decrease in reserve requirement - Central Bank

(20,882,690)

(8,677,695)

11,651,121

(Increase)/decrease in loans and advances to banks

(403,312)

(2,493,535)

10,368,220

(Increase)/decrease in loans and advances to customers

(112,425,101)

(59,578,512)

(49,649,090)

(Increase)/decrease in financial assets held for trading

(23,089,236)

(40,248,319)

(Increase)/Reduction in financial assets at fair value through profit or loss

(3,625,822)

(Increase)/decrease in other assets

(30,301,912)

(23,384,107)

(8,296,942)

Increase/(decrease) in deposits from banks

(20,749,542)

3,955,797

33,269,744

Increase/(decrease) in deposits from customers

88,659,514

36,853,866

(6,707,994)

Increase/(decrease) in financial liabilities held for trading

839,321

(9,700,099)

Increase/(Decrease) in financial liabilities at fair value through profit or loss

1,877,088

Increase/(decrease) in insurance technical provisions and pension plans

(16,920,525)

(11,556,181)

(2,042,897)

Increase/(decrease) in other provisions

(2,994,599)

(2,272,970)

(3,019,960)

Increase/(decrease) in other liabilities

14,364,262

19,117,355

10,312,756

Interest received

61,660,260

61,743,368

70,917,068

Interest paid

(27,813,710)

(27,254,361)

(45,140,018)

Income tax and social contribution paid

(7,086,237)

(8,575,438)

(9,771,075)

Other changes in taxes

(1,923,895)

(720,182)

(400,787)

Net cash provided by/(used in) operating activities

(6,497,318)

35,551,788

53,959,218

 

 

 

 

Investing activities

 

 

 

(Acquisitions) of subsidiaries, net of cash and cash equivalents paid/received

(442,122)

(7,188,659)

(Acquisitions) of financial assets available for sale

(114,186,612)

(108,296,179)

(Acquisition) of financial assets at fair value through other comprehensive income

(103,432,365)

Proceeds from sale of financial assets available for sale

82,760,146

115,724,092

Disposal of financial assets at fair value through other comprehensive income

103,897,609

Maturity of investments held to maturity

4,219,351

Maturity of financial assets at amortized cost

21,759,857

(Acquisitions) of investments held to maturity

(204,557)

(Acquisition) of financial assets at amortized cost

(70,719,797)

Disposal of non-current assets held for sale

688,885

796,869

629,768

(Acquisitions) of investments in associates

(52,844)

(83,172)

(376,434)

Dividends and interest on shareholders’ equity received

1,463,448

845,134

510,285

 

 

       14     IFRS – International Financial Reporting Standards – 2018

 


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Consolidated Statements of Cash Flows (continued)

 

 

 

R$ thousand

Years ended December 31

2018

2017

2016

(Acquisition) of property and equipment

(2,389,433)

(1,897,645)

(2,779,321)

Sale of premises and equipment

361,240

445,347

486,303

(Acquisition) of intangible assets

(3,053,156)

(3,743,704)

(2,343,497)

Dividends received

50,264

83,341

117,972

Interest received

17,383,392

12,735,539

12,668,011

Net cash provided by/(used in) investing activities

(34,485,022)

(18,229,963)

9,152,341

 

 

 

 

Financing activities

 

 

 

Funds from securities issued

85,963,195

62,237,380

47,253,373

Payments on securities issued

(69,747,110)

(72,494,509)

(47,861,607)

Issuance of subordinated debts

10,890,606

6,594,610

3,787,207

Payments on subordinated debts

(9,181,501)

(8,666,038)

(581,713)

Acquisition of treasury shares

(9,466)

Increase/(decrease) of non-controlling interest

2,265

2,099

3,265

Interest paid

(16,986,503)

(24,465,562)

(20,504,528)

Interest on equity and dividends paid

(6,539,193)

(6,512,102)

(5,611,350)

Net cash provided by/(used in) financing activities

(5,598,241)

(43,304,122)

(23,524,819)

 

 

 

 

(Decrease)/Increase in cash and cash equivalents

(46,580,581)

(25,982,297)

39,586,740

 

 

 

 

Cash and cash equivalents

 

 

 

At the beginning of the year

156,054,442

181,230,427

147,261,434

Effect of Changes in Exchange Rates in Cash and Cash equivalents

751,769

806,312

(5,617,747)

At the end of the year

110,225,630

156,054,442

181,230,427

 

 

 

 

(Decrease)/Increase in cash and cash equivalents

(46,580,581)

(25,982,297)

39,586,740

 

 

 

 

Non-cash transactions

 

 

 

Credit operations transferred to non-current assets held for sale

1,947,924

1,953,996

2,122,871

Dividends and interest on equity declared but not yet paid

4,876,458

4,295,314

4,482,718

Unrealized (gains)/losses on securities available for sale

(2,187,365)

(3,711,027)

(Gains)/losses on financial assets at fair value through other comprehensive income

296,915

 

The Notes are an integral part of the Consolidated Financial Statements.

 

 

 

Bradesco      15


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

1)    General information

 

Banco Bradesco S.A. (“Bradesco”, the “Bank”, the “Company” or the “Organization”) is a publicly-traded company established according to the laws of the Federative Republic of Brazil with headquarters in the city of Osasco, state of São Paulo, Brazil.

 

Bradesco is a bank that provides multiple services within two segments: banking and insurance. The Bank complies with Brazilian banking regulations and operates throughout all of Brazil. The banking segment includes a range of banking activities, serving individual and corporate customers in the following operations: investment banking, national and international banking operations, asset management operations and consortium administration. The insurance segment covers auto, health, life, accident and property insurance and pension plans,  real estate ventures and capitalization bonds.

 

The retail banking products include demand deposits, savings deposits, time deposits, mutual funds, foreign exchange services and a range of loans and advances, including overdrafts, credit cards and loans with repayments in installments. The services provided to corporate entities include fund management and treasury services, foreign exchange operations, corporate finance and investment banking services, hedge and finance operations including working capital financing, lease and loans with repayments in installments. These services are provided, mainly, in domestic markets, but also include international services on a smaller scale.

 

The Organization was originally listed on the São Paulo Stock Exchange (“B3”) and then subsequently on the New York Stock Exchange (“NYSE”).

 

The consolidated financial statements, in accordance with the IFRS, were approved by the Board of Directors on March 06, 2019.

 

2)    Significant accounting practices

 

These consolidated financial statements of the Organization were prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The consolidated financial statements include the consolidated statements of financial position, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows as well as the notes to the consolidated financial statements.

 

These consolidated financial statements have been prepared based on historical cost, except for the following material items in the balance sheet: financial assets at fair value through other comprehensive income, assets and liabilities at fair value through profit or loss and financial instruments designated at fair value through profit or loss, and defined-benefit liabilities that are recognized at the present value of the defined benefit obligation.

 

The Organization has classified its expenses according to their nature.

 

The consolidated statement of cash flows shows the changes in cash and cash equivalents during the year arising from operating, investing and financing activities. Cash and cash equivalents include highly liquid investments. Note 20 details the accounts of the consolidated statement of financial position that comprise cash and cash equivalents. The consolidated statement of cash flows is prepared using the indirect method. Accordingly, the income before taxes was adjusted by non-cash items such as provisions, depreciation, amortization and Impairment losses on loans and advances. The interest and dividend received and paid are classified as operating, financing or investment cash flows according to the nature of the corresponding assets and liabilities.

 

The preparation of the consolidated financial statements requires the use of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the profit and loss amounts for the year. The consolidated financial statements also reflect various estimates and assumptions, including, but not limited to: adjustments to the provision for expected losses of assets and financial liabilities; estimates of the fair value of financial instruments; depreciation and amortization rates; impairment losses on assets; the useful life of intangible assets; evaluation of the realization of tax assets; assumptions for the calculation of technical provisions for insurance, supplemental pension plans and capitalization bonds; provisions for contingencies and provisions for potential losses arising from fiscal and tax uncertainties. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

       16     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

In 2018, the Organization adopted IFRS 9 – Financial instruments, which replaced IAS 39. For more details on the transition process to the new standard, classification and measurement of financial assets, impairment and hedge accounting, see Note 47.

 

The accounting policies listed below were used in all the periods presented and by all the companies of the Organization.

 

a)     Consolidation

 

The consolidated financial statements include the financial statements of Bradesco and those of its direct and indirect subsidiaries, including exclusive mutual funds and special purpose entities.

 

The main subsidiaries included in the consolidated financial statements are as follows:

 

 

Activity

Shareholding interest

On December, 31

2018

2017

Financial Sector – Brazil

 

 

 

Ágora Corretora de Títulos e Valores Mobiliários S.A.

Brokerage

100.00%

100.00%

Banco Alvorada S.A. (1)

Banking

100.00%

99.99%

Banco Bradescard S.A.

Cards

100.00%

100.00%

Banco Bradesco BBI S.A.(2)

Investment bank

99.96%

99.85%

Banco Bradesco BERJ S.A.

Banking

100.00%

100.00%

Banco Bradesco Cartões S.A.

Cards

100.00%

100.00%

Banco Bradesco Financiamentos S.A.

Banking

100.00%

100.00%

Banco Losango S.A.

Banking

100.00%

100.00%

Bradesco Administradora de Consórcios Ltda.

Consortium management

100.00%

100.00%

Bradesco Leasing S.A. Arrendamento Mercantil

Leases

100.00%

100.00%

Bradesco-Kirton Corretora de Câmbio S.A. (3)

Exchange Broker

99.97%

99.97%

Bradesco S.A. Corretora de Títulos e Valores Mobiliários

Brokerage

100.00%

100.00%

BRAM - Bradesco Asset Management S.A. DTVM

Asset management

100.00%

100.00%

Kirton Bank Brasil S.A.

Banking

100.00%

100.00%

Tempo Serviços Ltda.

Services

100.00%

100.00%

Financial Sector – Overseas

 

 

 

Banco Bradesco Argentina S.A.U (4) (5)

Banking

100.00%

99.99%

Banco Bradesco Europa S.A. (5)

Banking

100.00%

100.00%

Banco Bradesco S.A. Grand Cayman Branch (5) (6)

Banking

100.00%

100.00%

Banco Bradesco S.A. New York Branch (5)

Banking

100.00%

100.00%

Bradesco Securities, Inc. (5)

Brokerage

100.00%

100.00%

Bradesco Securities, UK. Limited (5)

Brokerage

100.00%

100.00%

Bradesco Securities, Hong Kong Limited (5)

Brokerage

100.00%

100.00%

Cidade Capital Markets Ltd (5)

Banking

100.00%

100.00%

Bradescard México, sociedad de Responsabilidad Limitada (7)

Cards

100.00%

100.00%

Insurance, Pension Plan and Capitalization Bond Sector - In Brazil

 

 

 

Atlântica Companhia de Seguros

Insurance

100.00%

100.00%

Bradesco Auto/RE Companhia de Seguros

Insurance

100.00%

100.00%

Bradesco Capitalização S.A.

Capitalization bonds

100.00%

100.00%

Bradesco Saúde S.A.

Insurance/health

100.00%

100.00%

Bradesco Seguros S.A. (8)

Insurance

99.96%

100.00%

Bradesco Vida e Previdência S.A.

Pension plan/Insurance

100.00%

100.00%

Kirton Capitalização S.A. (9)

Capitalization bonds

100.00%

 

 

Bradesco      17


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

 

Activity

Shareholding interest

On December, 31

2018

2017

Kirton Seguros S.A. (9)

Insurance

98.54%

Kirton Vida e Previdência S.A. (9)

Pension plan/Insurance

100.00%

Odontoprev S.A. (10)

Dental care

50.01%

50.01%

Insurance - Overseas

 

 

 

Bradesco Argentina de Seguros S.A. (5) (10)

Insurance

99.98%

99.98%

Other Activities - Brazil

 

 

 

Andorra Holdings S.A.

Holding

100.00%

100.00%

Bradseg Participações S.A.

Holding

100.00%

100.00%

Bradescor Corretora de Seguros Ltda.

Insurance Brokerage

100.00%

100.00%

Bradesplan Participações Ltda. (11)

Holding

100.00%

BSP Empreendimentos Imobiliários S.A.

Real estate

100.00%

100.00%

Cia. Securitizadora de Créditos Financeiros Rubi

Credit acquisition

100.00%

100.00%

Columbus Holdings S.A.

Holding

100.00%

100.00%

Nova Paiol Participações Ltda.

Holding

100.00%

100.00%

União Participações Ltda. (12)

Holding

100.00%

Other Activities - Overseas

 

 

 

Bradesco North America LLC (5)

Services

100.00%

100.00%

Investment Funds (13)

 

 

 

Bradesco F.I.R.F. Master II Previdência

Investment Fund

100.00%

100.00%

Bradesco F.I. Referenciado DI Performance

Investment Fund

100.00%

100.00%

Bradesco F.I.C.F.I. R.F. VGBL F10

Investment Fund

100.00%

100.00%

Bradesco F.I.R.F. Master IV Previdência

Investment Fund

100.00%

100.00%

Bradesco F.I.R.F. Master Previdência

Investment Fund

100.00%

100.00%

Bradesco Private F.I.C.F.I. RF PGBL/VGBL Ativo

Investment Fund

100.00%

100.00%

Bradesco FI Referenciado DI União

Investment Fund

99.83%

99.92%

Bradesco Private F.I.C.F.I. R.F. PGBL/VGBL Ativo - F 08 C

Investment Fund

100.00%

100.00%

Bradesco F.I.C.R.F. VGBL FIX

Investment Fund

100.00%

100.00%

Bradesco F.I.C.F.I. Renda Fixa V-A

Investment Fund

100.00%

100.00%

(1) In December 2018, there was acquisition of shares held by a minority shareholder;

(2) In May 2018, there was acquisition of shares held by minority shareholders by Banco Bradesco S.A.;

(3) In November 2018, there was a change in the corporate name of Bradesco-Kirton Corretora de Títulos e Valores Mobiliários S.A. to Bradesco-Kirton Corretora de Câmbio S.A.;

(4) Change in the percentage of participation, by assignment of quotas and change of corporate name to unilateral company;

(5) The functional currency of these companies abroad is the Real;

(6) The special purpose entity International Diversified Payment Rights Company is being consolidated. The company is part of a structure set up for the securitization of the future flow of payment orders received overseas;

(7) The functional currency of this company is the Mexican Peso;

(8) Reduction in participation due to the merger of Kirton Seguros S.A. through the exchange of minority shares;

(9) Companies merged into their repective counterparts in June 2018 (Bradesco Seguros S.A., Bradesco Capitalização S.A. and Bradesco Vida e Previdência S.A.);

(10) The financial information portrayed is from the previous month;

(11) Company merged in October 2018, by the company Nova Paiol Participações Ltda.;

(12) Company merged in November 2018, by the company Nova Paiol Participações Ltda.; and

(13) The investment funds in which Bradesco assumes or substantially retains the risks and benefits were consolidated.

 

i.       Subsidiaries

 

Subsidiaries are all of the companies over which the Organization, has control. The Organization has control over an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The subsidiaries are fully consolidated from the date at which the Organization obtains control over its activities until the date this control ceases.

 

       18     IFRS – International Financial Reporting Standards – 2018


 

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

For acquisitions meeting the definition of a business combination, the acquisition method of accounting is used. The cost of an acquisition is measured as the fair value of the consideration, including assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the consideration given over the fair value of the Organization’s share of the identifiable net assets and non-controlling interest acquired is recorded as goodwill. Any goodwill arising from business combinations is tested for impairment at least once a year and whenever events or changes in circumstances may indicate the need for an impairment write-down. If the cost of acquisition is less than the fair value of the Organization’s share of the net assets acquired, the difference is recognized directly in the consolidated statement of income.

 

For acquisitions not meeting the definition of a business combination, the Organization allocates the cost between the individual identifiable assets and liabilities. The cost of acquired assets and liabilities is determined by (a) recognizing financial assets and liabilities at their fair value at the acquisition date; and (b) allocating the remaining balance of the cost of purchasing assets and assuming liabilities to individual assets and liabilities, other than financial instruments, based on their relative fair values of these instruments at the acquisition date.

 

ii.      Associates

 

Companies are classified as associates if the Organization has significant influence, but not control, over the operating and financial management policy decisions. Normally significant influence is presumed when the Organization holds in excess of 20%, but no more than 50%, of the voting rights. Even if less than 20% of the voting rights are held, the Organization could still have significant influence through its participation in the management of the investee or representations on its Board of Directors, providing it has executive power; i.e. voting power.

 

Investments in associates are recorded in the Organization's consolidated financial statements using the equity method and are initially recognized at cost. The investments in associates include goodwill (net of any impairment losses) identified at the time of acquisition.

 

iii.    Joint ventures

 

The Organization has contractual agreements in which two or more parties undertake activities subject to joint control. Joint control is the contractual sharing of control over an activity and it exists only if strategic, financial and operating decisions are made on a unanimous basis by the parties. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the arrangement, rather than rights to its assets and obligations for its liabilities. Investments in joint ventures are recorded in the consolidated financial statements of the Organization using the equity method.

 

iv.     Structured entities

 

A structured entity is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

 

Structured entities normally have some or all of the following features or characteristics:

 

 

restricted activities;

a narrow and well-defined objective, such as, to effect a specific structure like a tax efficient lease, to perform research and development activities, or to provide a source of capital or funding to an entity or to provide investment opportunities for investors by passing risks and rewards associated with the assets of the structured entity to investors;

thin capitalization, that is, the proportion of ‘real’ equity is too small to support the structured entity’s overall activities without subordinated financial support; and

financing in the form of multiple contractually linked instruments to investors that create concentrations of credit risk or other risks (tranches).

 

 

Bradesco      19


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

v.      Transactions with and interests of non-controlling shareholders

 

The Organization applies a policy of treating transactions with non-controlling interests as transactions with equity owners of the Bank. For purchases of equity from non-controlling interests, the difference between any consideration paid and the share of the carrying value of net assets of the subsidiary acquired is recorded in equity. Gains or losses on sales to non-controlling shareholders are also recorded in equity.

 

Profits or losses attributable to non-controlling interests are presented in the consolidated statements of income under this title.

 

vi.     Balances and transactions eliminated in the consolidation

 

Intra-group transactions and balances (except for foreign currency transaction gains and losses) are eliminated in the consolidation process, including any unrealized profits or losses resulting from operations between the companies except when unrealized losses indicate an impairment loss of the asset transferred which should be recognized in the consolidated financial statements. Consistent accounting policies as well as similar valuation methods for similar transactions, events and circumstances are used throughout the Organization for the purposes of consolidation.

 

b)    Foreign currency translation

 

                 i.          Functional and presentation currency

 

Items included in the financial statements of each of the Organization’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Brazilian Reais (R$), which is the Organization’s presentation currency. The domestic and foreign subsidiaries use the Real as their functional currency, with the exception of the subsidiary in Mexico, which uses the Mexican Peso as its functional currency.

 

                ii.          Transactions and balances

 

Foreign currency transactions, which are denominated or settled in a foreign currency, are translated into the functional currency using the exchange rates prevailing on the dates of the transactions.

 

Monetary items denominated in foreign currency are translated at the closing exchange rate as at the reporting date. Non-monetary items measured at historical cost denominated in a foreign currency are translated at the exchange rate on the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates on the date when the fair value was determined.

 

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at each period exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of income as “Net gains/(losses) of foreign currency transactions”.

 

In the case of changes in the fair value of monetary assets denominated in foreign currency classified as financial assets at fair value through other comprehensive income, a distinction is made between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in the consolidated statement of income, and other changes in the carrying amount, except impairment, are recognized in equity.

 

 

       20     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

               iii.          Foreign operations

 

The results and financial position of all foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

 

·

Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the reporting date;
 

· Income and expenses for each consolidated statement of income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rate prevailing on the transaction dates, in which case income and expenses are translated at the rates in effect on the dates of the transactions); and
 
·

All resulting exchange differences are recognized in other comprehensive income.

 

Exchange differences arising from the above process are reported in equity as “Foreign currency translation adjustment”.

 

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to “Other comprehensive income”. If the operation is a non-wholly owned subsidiary, then the relevant proportion of the transaction difference is allocated to the non-controlling interest. When a foreign operation is partially sold or disposed, such exchange differences, which were recognized in equity, are recognized in the consolidated statement of income as part of the gain or loss on sale.

 

c)     Cash and cash equivalents

 

Cash and cash equivalents include: cash, bank deposits, unrestricted balances held with the Central Bank of Brazil and other highly liquid short-term investments, with original maturities of three months or less and which are subject to insignificant risk of changes in fair value, used by the Organization to manage its short-term commitments. See Note 20(b) – “Cash and cash equivalents”.

 

 

d)     Financial assets and liabilities

 

Accounting Practices adopted as of January 1, 2018.

 

i.       Financial assets

 

In 2018, we began to apply IFRS 9, which contains a new approach for classification and measurement of financial assets, where the entity is based on the business model for the management of financial assets, as well as the characteristics of contractual cash flow of the financial asset. This new approach replaced the financial assets categories foreseen in IAS 39: (i) measured at fair value through profit or loss; (ii) investments held to maturity; (iii) loans and receivables; and (iv) available for sale.

 

IFRS 9 classifies financial assets into three categories: (i) measured at amortized cost; (ii) measured at fair value through other comprehensive income (FVOCI – Shareholders’ Equity); and (iii) measured at fair value through profit or loss (FVTPL).

 

 

Bradesco      21


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

- Business model: it relates to the way in which the entity manages its financial assets to generate cash flows. The objective of the Management for a particular business model, is: (i) to maintain the assets to receive contractual cash flows; (ii) to maintain the assets to receive the contractual cash flows and sales; or (iii) any other model. When the financial assets conform to the business models (i) and (ii) the SPPI test (Solely Payment of Principal and Interest) should be applied.

 

- SPPI Test: the purpose of this test is to assess the contractual terms of the financial instruments to determine if they give rise to cash flows at specific dates that conform only to the payment of the principal and interest on the principal amount.

 

In this sense, the principal refers to the fair value of the financial asset at the initial recognition and interest refers to the consideration for the time value of money, the credit risk associated with the principal amount outstanding for a specific period of time and other risks and borrowing costs. Financial instruments that do not fall under the aforementioned concept are measured at FVTPL, such as derivatives.

 

     Measured at fair value through profit or loss

 

All financial assets that do not meet the criteria of measurement at amortized cost or at VJORA are classified as measured at VJR, in addition to those assets that in the initial recognition are irrevocably designated at VJR, if this eliminates or significantly reduces asset-liability mismatches.

 

Financial assets measured at VJR are initially recorded at fair value with subsequent changes to the fair value recognized immediately in profit or loss.

 

They are held for trading if it is acquired by Organization for the purpose of selling it in the short-term or if it is part of a portfolio of identified financial instruments that are managed together for short-term profit or position taking, or, eventually, assets that do not meet the SPPI test. Derivative financial instruments are also categorized as VJR.

 

Financial assets are initially recognized in the consolidated statement of financial position at fair value and the transaction costs are recorded directly in the consolidated statement of income.

 

Realized and unrealized gains and losses arising from changes in fair value of non-derivative assets are recognized directly in the consolidated statement of income under “Net gains/(losses) on financial assets and liabilities at fair value through profit or loss”. Interest income on financial assets measured at VJR is included in “Interest and similar income”. For the treatment of derivative assets see Note 2(d)(iii).

 

·       Measured at fair value through other comprehensive income

 

They are financial assets that meet the criterion of the SPPI test, which are held in a business model whose objective is both to maintain the assets to receive the contractual cash flows as well as for sale.

 

Financial assets are initially recognized at fair value, plus any transaction costs that are directly attributable to their acquisition or their issuance and are, subsequently, measured at fair value with gains and losses being recognized in other comprehensive income, except for impairment losses and foreign exchange gains and losses on debt securities, until the financial asset is derecognized. The expected credit losses are recorded in the consolidated statement of income in contrast to "Other comprehensive income", having no impact on the gross carrying amount of the asset.

 

 

       22     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Interest income is recognized in the consolidated statement of income using the effective interest method. Dividends on equity instruments are recognized in the consolidated statement of income in ‘Dividend income’, within “Net Gains/(losses) on financial assets at fair value through other comprehensive income” when the Organization’s right to receive payment is established. Gains or losses arising out of exchange variation on investments in debt securities classified as VJORA are recognized in the consolidated statement of income. See Note 2(d)(viii) for more details of the treatment of the expected credit losses.

 

·       Measured at amortized cost

 

Financial assets that meet the criterion of the SPPI test, which are held in a business model whose objective is to maintain the assets to receive the contractual cash flows.

 

Financial assets measured at amortized cost are recognized initially at fair value including direct and incremental costs, and are subsequently recorded at amortized cost, using the effective interest rate method.

 

Interest are recognized in the consolidated statement of income and reported as “Interest and similar income”. In the case of expected credit loss, it is reported a deduction from the carrying value of the financial asset and is recognized in the consolidated statement of income.

 

ii.      Financial liabilities

 

The Organization classifies its financial liabilities as subsequently measured at amortized cost, using the effective interest rate method, except for the following financial instruments.

 

·       Measured at fair value through profit and loss

 

These financial liabilities are recorded and measured at fair value and the respective changes in fair value are immediately recognized in the income statement. These liabilities can be subdivided into two different classifications upon initial recognition: financial liabilities designated at fair value through profit and loss and financial liabilities held for trading.

 

-        Financial liabilities designated at FVTPL on initial recognition

 

These are liabilities that on initial recognition are irrevocably designated at VJR, if this eliminates or significantly reduces asset-liability mismatches.

    

The Organization does not have any financial liability designated at fair value through profit and loss in income.

 

-        Financial liabilities held for trading

 

Financial liabilities held for trading recognized by the Organization are derivative financial instruments. For the treatment of derivatives see Note 2(d)(iii).

 

·       Financial guarantee contracts and loan commitments

 

Financial guarantees are contracts that require the Organization to make specific payments under the guarantee for a loss incurred when a specific debtor fails to make a payment when due in accordance with the terms of the debt instrument.

 

Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Organization’s obligations under such guarantees are measured by the higher value between (i) the value of the provision for expected losses and (ii) the value initially recognized, minus, if appropriate, the accumulated value of the revenue from the service fee. The fee income earned is recognized on a straight-line basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in the consolidated statement of income within “Other operating income/ (expenses)”.

 

Bradesco      23


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Loan commitments are recognized as the amount of expected credit loss calculated as described in Note 3.1.

 

iii.     Derivative financial instruments and hedge transactions

 

Derivatives are initially recognized at fair value on the date the derivative contract is signed and are, subsequently, re-measured at their fair values with the changes recognized in the income statement under “Net gains or losses on financial assets at fair value through profit or loss”.

 

Fair values are obtained from quoted market prices in active markets (for example, for exchange-traded options), including recent market transactions, and valuation techniques (for example for swaps and foreign currency transactions), such as discounted cash-flow models and options-pricing models, as appropriate. The calculation of fair value, the counterparty's and the entity's own credit risk are considered.

 

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not recorded at fair value through profit or loss. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognized in the consolidated statement of income.

 

The Organization has structures of cash flow hedges, whose objective is to protect the exposure to variability in cash flows attributable to a specific risk associated with all the assets or liabilities recognized, or a component of it. The details of these structures have been presented in Note 3.2 – Market risk.

 

iv.     Recognition

 

Initially, the Organization recognizes deposits, securities issued and subordinated debts and other financial assets and liabilities on the trade date, in accordance with the contractual provisions of the instrument.

 

v.      Derecognition

 

Financial assets are derecognized when there is no reasonable expectation of recovery, when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred. Financial liabilities are derecognized when they have been discharged, paid, redeemed, cancelled or expired. If a renegotiation or modification of terms of an existing financial asset is such that the cash flows of the modified asset are substantially different from those of the original unmodified asset, then the original financial asset is derecognized and the modified financial asset is recognized as a new financial asset and initially measured at fair value.

 

vi.     Offsetting financial instruments

 

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when, the Organization has the intention and the legal enforceable right to offset the recognized amounts on a net basis or realize the asset and settle the liability simultaneously.

 

vii.    Determination of fair value

 

The determination of the fair values for the majority of financial assets and liabilities is based on the market price or quotes of security dealers for financial instruments traded in an active market. The fair value for other instruments is determined using valuation techniques. The valuation techniques which include use of recent market transactions, discounted cash flow method, comparison with other instruments similar to those for which there are observable market prices and valuation models.

 

 

       24     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

For more common other instruments the Organization uses widely accepted valuation models that consider observable market data in order to determine the fair value of financial instruments.

 

For more complex instruments, the Organization uses its own models that are usually developed from standard valuation models. Some of the information included in the models may not be observable in the market and is derived from market prices or rates or may be estimated on the basis of assumptions.

 

The value produced by a model or by a valuation technique is adjusted to reflect various factors, since the valuation techniques do not necessarily reflect all of the factors that market participants take into account during a transaction.

 

The valuations are adjusted to consider the risks of the models, differences between the buy and sell price, credit and liquidity risks, as well as other factors. Management believes that such valuation adjustments are necessary and appropriate for the correct evaluation of the fair value of the financial instruments recorded in the consolidated statement of financial position.

 

More details on the calculation of the fair value of financial instruments are available in Note 3.4.

 

viii.   Expected credit losses

 

The Organization calculates the expected losses in prospective bases for financial instruments measured at amortized cost, at FVOCI (with the exception of investments in equity instruments), financial guarantees and loan commitments.

 

Expected credit losses on financial instruments are measured as follows:

 

Financial assets: it is the present value of the difference between contractual cash flows and the cash flows that the Organization hopes to recover discounted at the effective interest rate of the operation;

 

Financial guarantees: it is the present value of the difference between the expected payments to reimburse the holder of the guarantee and the values that the Organization expects to recover discounted at a rate that reflects the market conditions; and

 

Loan commitments: is the present value of the difference between the contractual cash flows that would be due if the commitment was used and the cash flows that the Organization expects to recover discounted at a rate that reflects the market conditions.

 

Expected losses will be measured on one of the following basis:

 

− Credit losses expected for 12 months, i.e., credit losses as a result of possible events of delinquency within 12 months after the reporting date; and

− Credit Losses expected for the whole of lifecycle, i.e., credit losses that result from all possible events of delinquency throughout the expected lifecycle of a financial instrument.

 

The measurement of expected losses for the whole lifecycle is applied when the credit risk of a financial asset, on the date of the report, has increased significantly since its initial recognition and the measurement of credit loss of 12 months is applied when the credit risk has not increased significantly since its initial recognition. The Organization may determine that the credit risk of a financial asset has not increased significantly when the asset has a low credit risk on the date of the report.

 

With respect to Brazilian government bonds, the Organization has internally developed a study to assess the credit risk of these securities, which does not expect any loss for the next 12 months, that is, no provision is required for credit losses.

 

 

Bradesco      25


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The Organization evaluates if the credit risk increased significantly for both individual assets and assets at collective level. For the purposes of a collective evaluation, financial assets are grouped on the basis of similar credit-risk characteristics (that is, on the basis of the Organization’s rating process that considers product type, market segment, geographical location, collateral type, past-due status and other related factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

 

The amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced through provisions and the amount of the loss is recognized in the consolidated statement of income.

 

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral.

 

The methodology and assumptions used for estimating future cash flows are reviewed regularly to mitigate any differences between loss estimates and actual loss experience.

 

Following the recognition of expected credit loss, interest income is recognized using the effective rate of interest which was used to discount the future cash flows, on the accounting value gross of provision, except for assets with problem of credit recovery, in which, the rate stated is applied at the net book value of the provision.

 

The whole or part of a financial asset  is written off against the related credit loss expected when there is no reasonable expectation of recovery. Such loans are written off after all the relevant collection procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the consolidated statement of income.

 

The criteria used to calculate the expected credit loss are detailed in Note 3.1.

 

Accounting Practices adopted until December 31, 2017.

 

The Organization opted for the exemption provided by the Standard not to restate comparative information from prior periods arising from the changes arising from IFRS 9, therefore we present below the accounting policies applied to Financial Instruments up to December 31, 2017:

 

i. Sale and repurchase agreements

 

Securities sold subject to repurchase agreements are presented in the consolidated financial statements in “Financial assets pledged as collateral”. The counterparty liability is included in “Deposits from Banks”. Securities purchased under agreements to resell are recorded in “Loans and advances to banks” or “Loans and advances to customers”, as appropriate. The difference between sale and repurchase price is treated as interest in the consolidated statement of income and recognized over the life of the agreements using the effective interest rate method.

 

ii. Financial assets

 

The Organization classifies its financial assets into the following categories: measured at fair value through profit or loss, available-for-sale, held-to-maturity and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets on initial recognition.

 

 

·  

Measured at fair value through profit or loss

 

Financial assets are recorded and initially measured at fair value, with subsequent subsequent changes in fair value recognized immediately in profit or loss. These assets can be subdivided into two distinct classifications: financial assets designated at fair value through profit or loss; and financial assets for trading (upon initial recognition).

 

 

 

 

       26     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

- Financial assets designated at fair value through profit or loss

 

The Organization does not have any financial assets designated at fair value through profit or loss.

 

 

- Financial assets for trading (except Derivatives)

 

Financial assets for trading are assets held by the Organization for the purpose of trading them in the short term or maintaining them as part of a managed portfolio in order to obtain short-term profit or to take positions. Derivative financial instruments are also classified as held for trading.

 

Financial assets held for trading are initially recognized and measured at fair value on the balance sheet, and transaction costs are recorded directly in the statement of income for the period.

 

Realized and unrealized gains and losses arising from changes in the fair value of non-derivative financial assets are recognized directly in the income statement under "Gains and losses net of financial assets for trading". Interest income on financial assets held for trading is recognized in "Net interest income".

 

 

·  

Available-for-sale financial assets

 

Available-for-sale financial assets are non-derivative financial assets, for which it is intended to be held for an indefinite period of time, and which may be sold in response to changes in interest rates, foreign exchange rates, prices of equity securities or liquidity needs or that are not classified as held-to-maturity, loans and receivables or at fair value through profit or loss.

 

They are initially recognized at fair value, which corresponds to the amount paid including transaction costs and is subsequently measured at fair value with gains and losses recognized in equity, other comprehensive income, except for impairment losses recoverable from exchange gains and losses until the financial asset is no longer recognized. If an available-for-sale financial asset presents a loss due to impairment, the accumulated loss recorded in other comprehensive income is recognized in the statement of income.

 

Interest income is recognized in the income statement using the effective interest rate method. Dividend income is recognized in the consolidated statement of income when the Organization becomes entitled to the dividend. Foreign exchange gains and losses on investments in debt securities classified as available for sale are recognized in the consolidated statement of income.

 

 

·  

Held-to-maturity investments

 

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Organization has the intention and ability to hold to maturity and which are not designated at the initial recognition as at fair value through profit or loss, or as available for sale and that do not meet the definition of loans and receivables.

 

They are initially recognized at fair value including direct and incremental costs and are subsequently accounted for at amortized cost using the effective interest rate method.

 

 

Bradesco      27


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Interest on investments held to maturity is included in the consolidated statement of income as "Interest and similar income". In the event of impairment, the impairment loss is recognized as a deduction from the carrying amount of the investment and is recognized in the consolidated statement of income.

 

 

·  

Loans and receivables

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market that have not been designated as "available for sale" or "at fair value through profit or loss" and that the Organization does not intends to sell immediately or in the short term.

 

They are initially measured at fair value plus direct transaction costs and subsequently measured at amortized cost using the effective interest rate method.

 

Loans and receivables are recognized in the balance sheet as loans and advances to financial institutions or to customers. Interest on loans is included in the income statement as "Interest and similar income". In the event of impairment, the impairment loss is reported as a reduction in the book value of loans and advances and is recognized in the statement of income as "Impairment losses on loans and advances".

 

iii. Financial liabilities

 

The Organization classifies its financial liabilities in the following categories: measured at fair value through profit or loss and at amortized cost.

 

 

·  

Measured at fair value through profit or loss

 

They are recorded and valued at fair value, and the respective changes in fair value are recognized immediately in profit or loss. These liabilities can be subdivided into two distinct classifications: financial liabilities designated at fair value through profit or loss and financial liabilities for trading.

 

- Financial liabilities at fair value through profit or loss

 

The Organization does not have any financial liabilities designated at fair value through profit or loss.

 

- Financial liabilities for trading

 

The financial liabilities for trading recognized by the Organization are derivative financial instruments.

 

 

·  

Financial liabilities at amortized cost

 

These are financial liabilities that are not measured at fair value through profit or loss. They are initially recorded at fair value and subsequently measured at amortized cost. They include, among others, resources from financial and client institutions, debt securities issuance and subordinated debt securities.

 

iv. Deposits, securities issued and subordinated liabilities

 

Deposits, securities issued and subordinated liabilities are the main funding sources used by the Organization to finance its operations.

 

 

       28     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

They are initially measured at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest rate method.

 

v. Derivative financial instruments and hedge operations

 

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair values ​​with the changes being recognized in the statement of income under "Gains and losses on financial assets held for trading".

 

Fair values ​​are derived from quoted market prices in active markets (for example, exchange traded options), including recent market transactions and valuation techniques (eg, swaps and currency transactions), discounted cash and option pricing models, as appropriate. In determining the fair value, the credit risk of the counterparty and the entity itself is considered.

 

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those in the main contract and the contract is not accounted for at fair value through profit or loss. These embedded derivatives are recorded separately at fair values, with changes in fair values ​​being included in the consolidated income statement.

 

vi. Impairment of financial assets

 

 

a)

Financial assets recognized at amortized cost

 

At each balance sheet date, the Organization assesses whether there is objective evidence that the carrying amount of the financial assets is impaired. Impairment losses are only recognized if there is objective evidence that a loss occurs after the initial recognition of the financial asset and that the loss has an impact on the future cash flows of the financial asset or group of financial assets , which can be estimated reliably.

 

The criteria that the Organization uses to determine whether there is objective evidence of a impairment loss include:

 

- Relevant financial difficulty of the issuer or borrower;

- A breach of contract, such as default or delays in the payment of interest or principal;

- Economic or legal reasons related to the financial difficulty of the borrower, guarantees to the borrower a concession that the creditor would not consider;

- When it becomes probable that the policyholder declares bankruptcy or other financial reorganization;

- The disappearance of an active market for that financial asset due to financial difficulties; or

- Observable data indicating that there is a measurable reduction in estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the loss event can not yet be identified at the level of the individual financial assets in the portfolio, including:

 

(i) adverse changes in the payment situation of the borrowers of the assessed group; and

(ii) national or local economic conditions that correlate with default on assets.

 

The Organization considers evidence of impairment for both individually significant assets and for assets at the collective level. All significant financial assets are valued for specific losses.

 

 

 

Bradesco      29


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

All significant assets that the evaluation indicates are not specifically impaired are evaluated collectively to detect any impairment losses incurred but not yet identified. Financial assets, accounted for at amortized cost, which are not individually significant, are evaluated collectively to detect impairment losses, grouping them according to similar risk characteristics. Financial assets, which are individually assessed for impairment and a loss is recognized, are not included in the collective assessment of impairment.

 

The amount of the loss is measured as the difference between the book value of the assets and the present value of the estimated future cash flows (excluding future credit losses that were not incurred) discounted at the original interest rate of the financial assets. The book value of the asset is reduced through provisions and the amount of the loss is recognized in the statement of income.

 

The calculation of the present value of the estimated future cash flows of a guaranteed financial asset reflects the cash flows, which may result from the asset's execution, less the costs of obtaining and selling the guarantee.

 

For the purposes of a collective assessment of impairment, financial assets are grouped based on similar credit risk characteristics (ie, based on the process, the Organization classifies the type of product, business segments, location geographical, type of guarantee, maturity and other related factors). These characteristics are relevant for estimating future cash flows for groups of such assets as they are indicative of the borrower's ability to pay all amounts owed in accordance with the contractual terms of the assets to be valued.

 

Future cash flows in a group of financial assets, tested together to determine if there is any impairment, are estimated based on the contracted cash flows of a group of assets and the history of losses for assets with risk characteristics similar to those of the group of assets. Loss history is adjusted according to current observable data to reflect the effects of current conditions that did not affect the period in which the loss history is based and to disregard the effects of the conditions existing in the historical period that do not currently exist.

 

The methodology and assumptions used to estimate future cash flows are reviewed regularly to reduce any differences between the loss estimates and the actual loss.

 

After the impairment loss, financial income is recognized using the effective interest rate, which was used to discount future cash flows in order to measure the impairment loss.

 

When it is not possible to receive a credit, it is written off against the respective provision for impairment. These credits are written off after the completion of all necessary recovery procedures for the determination of the loss amount. Subsequent recoveries of amounts previously written off are credited to the income statement.

 

 

b)

Financial assets classified as available for sale

 

The Organization shall assess, at the end of each reporting period, whether there is objective evidence that a financial asset or group of financial assets is deteriorating. For debt instruments, the Organization uses the criteria mentioned in item (a) above in order to identify a loss event.

 

In the case of equity instruments classified as available for sale, a material or prolonged decline in the fair value of the security below its cost is considered as evidence that impairment losses have been incurred.

 

 

       30     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

If any such evidence exists for available for sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value less any impairment loss on the previously recognized financial asset - is written off recognized in the statement of income.

 

If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event that occurred after the impairment loss was recognized, the reduction is reversed from the income statement. Impairment losses on capital instruments recognized in the statement of income are not reversed. Increase in fair value of equity instruments after impairment is recognized directly in equity in other comprehensive income.

 

 

e)     Non-current assets held for sale

 

Under certain circumstances, property is repossessed following foreclosure of loans that are in default. Repossessed properties are measured at the lower of their carrying amount and fair value less the costs to sell – whichever is the lowest – and are included within “Non-current assets held for sale”.

 

f)    Property and equipment

 

i.    Recognition and valuation

 

Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses (see Note 2(i) below), if any. The cost includes expenses directly attributable to the acquisition of an asset.

 

The cost of assets internally produced includes the cost of materials and direct labor, as well as any other costs that can be directly allocated and that are necessary for them to function. Software acquired for the operation of the related equipment is recorded as part of the equipment.

 

When parts of an item have different useful lives, and separate control is practical, they are recorded as separate items (main components) comprising the property and equipment.

 

 

Bradesco      31


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Useful lives and residual values are reassessed at each reporting date and adjusted, if appropriate.

 

Gains and losses from the sale of property and equipment are determined by comparing proceeds received with the carrying amount of the asset and are recorded in the consolidated income statement under the heading “Other operating income/(expenses)”.

 

ii.   Subsequent costs

 

Expenditure on maintenance and repairs of property and equipment items is recognized as an asset when it is probable that future economic benefits associated with the items will flow to the Organization for more than one year and the cost can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance costs are charged to the consolidated statement of income during the reporting period in which they are incurred.

 

iii.  Depreciation

 

Depreciation is recognized in the consolidated statement of income using the straight-line basis and taking into consideration the estimated useful economic life of the assets. The depreciable amount is the gross-carrying amount, less the estimated residual value at the end of the useful economic life. Land is not depreciated. Useful lives and residual values are reassessed at each reporting date and adjusted, if appropriate.

 

g)    Intangible assets

 

Intangible assets comprise separately identifiable non-monetary items, without physical substance due to business combinations, such as goodwill and other purchased intangible assets, computer software and other such intangible assets. Intangible assets are recognized at cost. The cost of an intangible asset, acquired in a business combination, is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized over their estimated useful economic life. Intangible assets with an indefinite useful life are not amortized.

 

Generally, the identified intangible assets of the Organization have a definite useful life. At each reporting date, intangible assets are reviewed for indications of impairment or changes in estimated future economic benefits – see Note 2(i) below.

 

i.    Goodwill

 

Goodwill (or bargain purchase gain) arises on the acquisition of subsidiaries, associates and joint ventures.

 

Goodwill reflects the excess of the cost of acquisition in relation to the Organization’s share of the fair value of net identifiable assets or liabilities of an acquired subsidiary, associate or joint venture on the date of acquisition. Goodwill originated from the acquisition of subsidiaries is recognized as “Intangible Assets”, and the goodwill from acquisition of associates and joint ventures is included in the carrying amount of the investment. When the difference between the cost of acquisition and the Organization’s share of the fair value of net identifiable assets or liabilities is negative (bargain purchase gain), it is immediately recognized in the consolidated statement of income as a gain on the acquisition date.

 

Goodwill is tested annually, as well as whenever a trigger event has been observed, for impairment (see Note 2(i) below). Gains and losses realized in the sale of an entity include consideration of the carrying amount of goodwill relating to the entity sold.

 

ii.   Software

 

Software acquired by the Organization is recorded at cost, less accumulated amortization and accumulated impairment losses, if any.

 

       32     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Internal software-development expenses are recognized as assets when the Organization can demonstrate its intention and ability to complete the development, and use the software in order to generate future economic benefits. The capitalized costs of internally developed software include all costs directly attributable to development and are amortized over their useful lives. Internally developed software is recorded at its capitalized cost less amortization and impairment losses (see Note 2(i) below).

 

Subsequent software expenses are capitalized only when they increase the future economic benefits incorporated in the specific asset to which it relates. All other expenses are recorded as expenses as incurred.

 

Amortization is recognized in the consolidated statement of income using the straight-line method over the estimated useful life of the software, beginning on the date that it becomes available for use. The estimated useful life of software is from two to five years. Useful life and residual values are reviewed at each reporting date and adjusted, if necessary.

 

iii.  Other intangible assets

 

Other intangible assets refer basically to the customer portfolio and acquisition of banking service rights. They are recorded at cost less amortization and impairment losses, if any, and are amortized for the period in which the asset is expected to contribute, directly or indirectly, to the future cash flows.

 

These intangible assets are reviewed annually, or whenever events or changes in circumstances occur which could indicate that the carrying amount of the assets cannot be recovered. If necessary, the write-off or impairment (see Note 2(i) below) is immediately recognized in the consolidated statement of income.

 

h)        Leasing

 

The Organization has both operating and finance leases and operates as a lessee and a lessor.

 

Leases in which a significant part of the risks and benefits of the asset is borne by the lessor are classified as operating leases. For leases in which a significant part of the risks and benefits of the asset is borne by the lessee, the leases are classified as financial lease.

 

Leases under the terms of which the Organization assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

 

As a lessee, the Organization classifies its leasing operations mainly as operating leases, and the monthly payments are recognized in the financial statements using the straight-line method over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.

 

When an operating lease is terminated before the contract expires, any payment that may be made to the lessor in the form of a penalty is recognized as an expense for the period.

 

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.

 

 

Bradesco      33


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

As a lessor, the Organization has substantial finance lease contracts, in value and total number of contracts.

 

i.    Finance Leases

 

Finance lease assets in the consolidated statement of financial position are initially recognized in the “loans and advances to customers” account at an amount equal to the net investment in the lease.

 

The initial direct costs generally incurred by the Organization are included in the initial measurement of the lease receivable and recognized as part of the effective interest rate of the contract, decreasing the amount of income recognized over the lease term. These initial costs include amounts for commissions, legal fees and internal costs. The costs incurred in relation to the negotiation, structuring and sales of leases are excluded from the definition of initial direct costs and therefore are recognized as expenses at the beginning of the lease term.

 

Recognition of financial revenue reflects a constant rate of return on the net investment made by the Organization.

 

The estimated non-guaranteed residual values used in the calculation of the gross investment of the lessor in the lease are reviewed at least annually. If there is a decrease in the estimated non-guaranteed residual value, the income allocated over the period of the lease is also reviewed periodically and any decrease in relation to the accumulated values is immediately recognized in the consolidated statement of income.

 

The lease receivables are subject to the requirements of Write-off and credit Losses expected, described in the topic above, financial assets and liabilities, items v and viii, respectively.

 

ii.   Operating leases

 

The assets leased under operating leases, where the Organization acts as lessor, are recognized in the consolidated statement of financial position as property and equipment according to the nature of the item leased.

 

The initial direct costs incurred by the Organization are added to the carrying amount of the leased asset and are recognized as expenses over the period of the lease and on the same basis as the income recognition.

 

Revenue from lease is recognized using the straight-line method over the term of the lease, even if the payments are not made on the same basis. Costs, including depreciation and maintenance, incurred in the generation of income are recognized as expenses.

 

The depreciation policy for leased assets is the same as the depreciation policy used by the Organization for similar assets.

 

i)        Impairment losses on non-financial assets (except for deferred tax assets)

 

Assets that have an indefinite useful life such as goodwill are not subject to amortization and are tested, at least, annually at the same date to verify the existence of impairment.

 

Assets, which are subject to amortization or depreciation, are reviewed to verify impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized based on the excess the carrying amount of the asset or the cash generating unit (CGU) over its estimated recoverable amount. The recoverable amount of an asset or CGU is the greater of its fair value, less costs to sell, and its value in use.

 

 

       34     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

For the purpose of impairment testing, the assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to a ceiling of the operating segments, for the purpose of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to CGU or groups of CGUs that are expected to benefit from the synergies of the combination.

 

When assessing the value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects the current market conditions of the time value of money and the specific risks of the asset or CGU.

 

The Organization’s corporate assets do not generate separate cash inflows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

 

Impairment losses are recognized in the consolidated Statement of Income. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (or group of CGUs) on a pro rata basis.

 

An impairment of goodwill cannot be reversed. With regard to other assets, an impairment loss recognized in previous periods is reassessed at each reporting date for any indications that the impairment has decreased or no longer exists. An impairment loss will be reversed if there has been a change in the estimates used to determine the recoverable amount or to the extent that the carrying amount of the asset does not exceed the carrying amount that would have been determined, net of depreciation and amortization, if no impairment had been recognized.

 

j)     Provisions, contingent assets and liabilities and legal obligations

 

A provision is recognized when, as a result of a past event, the Organization has a present legal or constructive obligation that can be reliably estimated and it is probable that an outflow of resources will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

 

Provisions were established by Management whenever it considers that there is a probable loss taking into account the opinion of their legal advisors; the nature of the actions; the similarity to previous suits; the complexity and the positioning of the Courts.

 

Contingent liabilities are not recognized, since their existence will only be confirmed by the occurrence or not of one or more future and uncertain events that are not totally under the control of the Management. Contingent liabilities do not meet the criteria for recognition, since they are considered as possible losses and should only be disclosed in explanatory notes, when relevant. Obligations classified as remote are neither provisioned nor disclosed.

 

Contingent assets are recognized only when there are actual guarantees or definitive favorable court rulings, over which there are no more resources, characterizing the gain as practically certain. Contingent assets, whose expectation of success is probable, are only disclosed in the financial statements, when relevant.

 

Legal obligations arise from legal proceedings, the object of which is its legality or constitutionality, which, independently of the assessment of the likelihood of success, have their amounts fully recognized in the financial statements.

 

k)     Classification of insurance contracts and investments

 

An insurance contract is a contract in which the Organization accepts a significant insurance risk from the policy holder by agreeing to compensate the policyholder if a specific, uncertain, future event adversely affects the policy holder. Reinsurance contracts are also treated as insurance contracts because they transfer significant insurance risk. Contracts in the Insurance segment classified as investment contracts are related to our capitalization bonds, which do not transfer significant insurance risk and are accounted for as financial liabilities in accordance with IFRS 9 – Financial Instruments.

 

 

Bradesco      35


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

l)   Insurance and pension plan technical provisions

 

i.    Property damage

 

The Provision for Unearned Premiums (PPNG) is calculated on a daily pro-rata basis using premiums net of coinsurance premiums, including amounts ceded through reinsurance operations, and the value registered in the consolidated statement of financial position corresponds to the unexpired risk period of the insurance contracts less initial contracting costs. The portion of these reserves corresponding to the estimate for risks in effect but not yet issued is designated PPNG-RVNE.

 

The Provision for Claims Incurred But Not Reported (IBNR) is constituted based on the claims incurred and not yet paid (IBNP), subtracting the balance of the Provision for Claims to be settled (PSL) at the base date of calculation. To calculate the IBNP, the final estimate of claims that have not yet been paid based on semiannual run-off triangles, which consider the historical development of the claims paid in the last 10 semesters for the branches of damages and the last 11 quarters for the extended guarantee business, in order to establish a future projection by period of occurrence and also considers the estimate of Claims Incurred But Not Enough Reported (IBNER), reflecting the expectation of alteration of the provisioned amount throughout the regulation process.

 

The Provision for Claims to be Settled (PSL) is determined based on the indemnity payment estimates, considering all administrative and judicial claims existing at the reporting date, restated monetarily, net of salvage and payments expected to be received.

 

The Provision for Related Expenses (PDR) is recorded on a monthly basis to cover expenses related to estimated claims and benefits. It covers both costs that can be individually allocated to each claim as well as claims costs not discriminated, meaning those incurred at the portfolio level.

 

The Complementary Provision for Coverage (PCC) shall be established when there is insufficiency of the technical provisions required under the legislation, as determined in the Liability Adequacy Test (see Note 2(l)(vi) below). At the reporting date management did not identify the need for PCC on property damage contracts.

 

Other Technical Provisions (OPT) correspond to the Provision for Administrative Expenses (PDA) arising on the Mandatory Insurance For Personal Injury Caused by Motor Vehicles (DPVAT) insurance operations.

 

ii.   Life insurance, excluding life insurance with survival coverage (VGBL product)

 

The Provision for Unearned Premiums (PPNG) is calculated on a daily pro-rata basis using premiums net of coinsurance premiums, but including amounts ceded through reinsurance operations, and the value registered in the consolidated statement of financial position corresponds to the unexpired risk period of the insurance contracts. The portion of these reserves corresponding to the estimate for risks in effect but not yet issued is designated PPNG-RVNE.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) is calculated by the difference between the present value of the future benefits and the present value of the future contributions to be received for these benefits.

 

The Provision for Redemptions and other Amounts to be Settled (PVR) comprises amounts related to redemptions to settle, premium refunds owed and portability (transfer-outs) requested but not yet transferred to the recipient insurer.

 

The Provision for Claims Incurred But Not Reported (IBNR) is calculated based on semiannual run-off triangles, which consider the historical development of claims paid and outstanding in the last 10 semesters, to establish a future projection per period of occurrence. A residual cauda study is carried out to forecast the claims reported after 10 semesters of the date of occurrence.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The Provision for Claims to be Settled (PSL) considers the expected amounts to be settled from all claim notifications received up to the end of the reporting period. The provision covers administrative and judicial claims indexed to inflation and with interest in the event of judicial claims.

 

The Complementary Provision for Coverage (PCC) refers to the amount necessary to complement technical reserves, as calculated through the liability adequacy test (TAP). TAP is prepared using statistical and actuarial methods based on realistic considerations, taking into account the biometric table BR-EMS of both genders, adjusted by longevity development criteria compatible with the latest published versions (improvement), claims, administrative and operating expenses and using a risk free forward interest rate structures (ETTJ) which was approved by SUSEP. The improvement rate is calculated from automatic updates of the biometric table, considering the expected increase in future life expectancy.

 

The Technical Surplus Provision (PET) corresponds to the difference between the value of the expected cost and the actual cost of claims that occurred during the period for contracts of individual life insurance with rights to participate in technical surplus.

 

The Provision of Related Expenses (PDR) is recorded to cover expenses related to estimated claims and benefits. For products structured in self-funding and partially regimes, the reserve covers claims incurred. For products structured under a capitalization regime, the reserve covers the expected expenses related to incurred claims and also claims expected to be incurred in the future.

 

iii.  Health and Dental Insurance

 

The Provision for Claims Incurred But Not Reported (IBNR) is calculated from the final estimate of claims already incurred and still not reported, based on monthly run-off triangles that consider the historical development of claims reported in the last 12 months for health insurance and 18 months for dental insurance, to establish a future projection per period of occurrence

 

The Provision for Claims to be Settled (PSL) is based on claims received up to the reporting date, including judicial claims and related costs adjusted for inflation.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) whose calculation methodology considers, in addition to the discount rate of 4% per year (4.5% in 2017), the difference between the present value of the future benefits and the present value of the future contributions, corresponding to the assumed obligations.

 

The mathematical reserve for vested benefits relates to the individual health care plan portfolio and accounts for the risk related to the cover of the holder’s dependents for five years following the death of the holder. It is calculated using: a 4% annual discount rate (4.51% in 2017); the period over which holders are expected to remain in the plan up to their death; and the projected costs of the five-year-period cover in which no premiums will be received.

 

The Mathematical Provision for Benefits Granted (PMBC-GBS) is constituted by the obligations arising from the contractual clauses of remission of installments in cash, regarding the coverage of health assistance and by the premiums through payment of insured persons participating in the Bradesco Saúde insurance – "GBS Plan", and considering a discount rate of 4% per annum (4.5% in 2017).

 

The Unearned Premium or Contribution Provision (PPCNG) is calculated on the currently effective contracts on a daily pro-rata basis based on the portion of health insurance premiums corresponding to the remaining period of coverage.

 

The other technical provisions for the individual health portfolio are constituted to cover differences between the expected present value of claims and related future costs and the expected present value of future premiums, considering a discount rate of 4% per year (4.5% in 2017).

 

Bradesco      37


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

iv.  Operations with DPVAT Insurance

 

Revenues from DPVAT premiums and the related technical reserves are recorded gross, based on reports received from Seguradora dos Consórcios do Seguro DPVAT S.A. (Seguradora Líder) in proportion to the percentage of Bradesco’s stake in the consortium. It is the function of the Seguradora Líder to collect the premiums, coordinate policy issuance, settle claims and manage the administrative costs within the consortium, in accordance with the CNSP Resolution No. 332/15. As defined in the regulations of the consortium, 50% of the monthly net income is distributed to the consortium’s members in the following month. The remaining 50% of the monthly income is retained by the lead insurer over the year and transferred to the members of the consortium at the start of the following year.

 

v.   Open pension plans and life insurance with survival coverage (VGBL product)

 

The Provision for Unearned Premiums (PPNG) is calculated on a daily pro-rata basis, using net premiums and is comprised of the portion corresponding to the remaining period of coverage.  The portion of these reserves corresponding to the estimate for risks in effect but not yet issued is designated PPNG-RVNE.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) is constituted to the participants who have not yet received any benefit. In defined benefit pension plans, the provision represents the difference between the present value of future benefits and the present value of future contributions, corresponding to obligations assumed in the form of retirement, disability, pension and annuity plans. The provision is calculated using methodologies and assumptions set forth in the actuarial technical notes.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) related to life insurance with survival coverage and unrestricted benefit pension plans (VGBL and PGBL), and defined contribution plans, includes the contributions, received from participants, net of costs and other contractual charges, plus the financial return generated through the investment of these amounts in units of specially constituted investment funds (FIE).

 

The Provision for Redemptions and other Amounts to be Settled (PVR) comprises amounts related to redemptions to settle, premium refunds owed and portability (transfer-outs) requested but not yet transferred to the recipient insurer.

 

The Mathematical Provision for Benefits Granted (PMBC) is recognized for participants already receiving benefits and corresponds to the present value of future obligations related to the payment of those on-going benefits.

 

The Complementary Provision for Coverage (PCC) refers to the amount necessary to complement technical reserves, as calculated through the Liability Adequacy Test (see Note 2(l)(vi)). TAP is prepared using statistical and actuarial methods based on realistic considerations, taking into account the biometric table BR-EMS of both genders, adjusted by longevity development criteria compatible with the latest published versions (improvement), claims, administrative and operating expenses and using a risk free forward interest rate structures (ETTJ) which was approved by SUSEP. The improvement rate is calculated from automatic updates of the biometric table, considering the expected increase in future life expectancy.

 

The Provision of Related Expenses (PDR) is recorded to cover expenses related to estimated claims and benefits. For products structured in self-funding and partially regimes, the provision covers claims incurred. For plans structured under a capitalization regime, the provision is made to cover the expected expenses related to incurred claims and also claims expected to be incurred in the future. The projections are performed through the passive adequacy test (TAP).

 

The Financial Surplus Provision (PEF) corresponds to the financial result, which exceeds the guaranteed minimum profitability of contracts with a financial surplus participation clause.

 

       38     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The Provision for IBNR is calculated based on semiannual run-off triangles, which consider the historical development of claims paid and outstanding in the last 16 semesters to establish a future projection by period of occurrence.

 

The Provision for Claims to be Settled (PSL) considers the expected amounts to be settled from all claim notifications received up to the end of the reporting period. The provision covers administrative and judicial claims indexed to inflation and with interest in the event of judicial claims.

 

The provision "Other technical provisions (OPT)" comprises the mathematical provisions of benefits to be granted and benefits granted to this accounting line, as required by SUSEP. This amount refers to the difference between the calculation of mathematical provisions, carried out with realistic premises at the time, approved by the autarchy in 2004, and the calculation with the technical bases defined in the technical notes of the product.

 

The financial charges credited to technical provisions, and the recording and/or reversal of the financial surplus, are classified as financial expenses, and are presented under “Net income from insurance and pension plans”.

 

vi.  Liability Adequacy Test (TAP)

 

The Organization conducted the liability adequacy test for all the contracts that meet the definition of an insurance contract according to IFRS 4 and which are in force on the date of execution of the test. This test is conducted every six months and the liability of insurance contracts, gross of reinsurance, is calculated as the sum of the carrying amount, deducting the deferred acquisition costs and the related intangibles. This is compared to the expected cash flows arising from the obligations under commercialized contracts and certificates.

 

The test considerers projections of claims and benefits that have occurred and are to occur, administrative expenses, allocable expenses related to the claims, intrinsic options and financial surpluses, salvage and recoveries and other income and expense directly related to the insurance contracts.

 

To calculate the present value of projected cash flows, the Organization used the risk free forward (ETTJ) rate which was approved by SUSEP.

 

The test was segmented between life insurance and pension products and property coverage, and liabilities related to DPVAT insurance were not included in the adequacy test.

 

     Life and pension products

 

For private pension products and Life Insurance with Coverage for Survival, the contracts are grouped based on similar risks or when the insurance risk is managed jointly by the Management.

 

The projected average loss ratio was 44.6% for individual and collective individuals segments, obtained from analysis based on triangles for the development of Company claims generated with information from January 2007.

 

The result of the liability adequacy test for life insurance was fully recognized in the income statement.

 

     Property Coverage

 

The expected present value of cash flows relating to claims incurred – primarily claims costs and salvage recoveries – was compared to the technical provisions for claims incurred – PSL and IBNR.

 

The expected present value of cash flows relating to claims to be incurred on the policies in force, plus any administrative expenses and other expenses relating to products in run-off, was compared to the sum of the related technical provisions – PPNG and PPNG-RVNE.

 

 

Bradesco      39


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The projected average loss ratio was 10.10% for the Extended Guarantee segment and 52.8% for the elementary lines, including in this calculation the estimate of the future premium of the housing insurance portfolio, which is characterized by low loss ratio and long terms, since it accompanies the period of financing of the property.

 

The average reinsurance projected in the study, calculated on the basis of reported claims was 5.66%.

 

The result of the liability adequacy test, for property coverage, did not present insufficiency and, consequently, no additional PCC provisions were recorded.

 

m)    Reinsurance contracts

 

Reinsurance contracts are used in the normal course of operations with the purpose of limiting potential losses, by spreading risks. Liabilities relating to contracts that have been reinsured are presented gross of their respective recoveries, which are booked as assets since the existence of the reinsurance contract does not nullify the Organization’s obligations with the insured parties.

 

As required by the regulators, reinsurance companies with headquarters abroad must have a minimum rating, assessed by a credit rating agency, to operate in the country, whereby all other reinsurance operations must be performed with local reinsurers. This is how Management understands that the impairment risks are reduced. If there are indications that the amounts recorded will not be realized by its carrying amount, these assets will be adjusted for impairment.

 

n)    Deferred acquisition costs

 

These comprise deferred acquisition costs including commissions and brokers’ fees related to the sale of insurance policies. Deferred commissions are recognized in the consolidated statement of income over the life of the respective policies and pension plan contracts or over an average period of 12 months. Expenses relating to insurance agency operations relating to the sale of health plans are amortized over a 24 month period and life assurance costs are appropriated within 12 months.

 

o)    Employee benefits

 

Bradesco recognizes (in accordance with IAS 19), prospectively the surplus or deficit of its defined benefit plans and post-retirement plans as an asset or an obligation in its consolidated statement of financial position, and must recognize the changes in the financial condition during the year in which the changes occurred, in profit or loss.

 

i.    Defined contribution plan

 

Bradesco and its subsidiaries sponsor pension plans for their employees and Management. Contribution obligations for defined contribution pension plans are recognized as expenses in profit or loss as incurred. Once the contributions are paid, Bradesco, in the capacity of employer, has no obligation to make any additional payment.

 

ii.   Defined benefit plans

 

The Organization’s net obligation, in relation to the defined benefit plans, refers exclusively to institutions acquired and is calculated separately for each plan, estimating the future defined benefit that the employees will be entitled to after leaving the Organization or at the time of retirement.

 

Bradesco’s net obligation for defined benefit plans is calculated on the basis of an estimate of the value of future benefits that employees receive in return for services rendered in the current and prior periods. This value is discounted at its current value and is presented net of the fair value of any plan assets.

 

       40     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The calculation of the obligation of the defined benefit plan is performed annually by a qualified actuary, using the projected unit credit method, as required by accounting rule.

 

Remeasurement of the net obligation, which include: actuarial gains and losses, the return of the assets of the plan other than the expectation (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income.

 

Net interest and other expenses related to defined benefit plans are recognized in the income statement.

 

iii.  Termination benefits

 

Severance benefits are required to be paid when the employment relationship is terminated by the Organization before the employee’s normal date of retirement or whenever the employee accepts voluntary redundancy in return for such benefits.

 

Benefits which are payable 12 months or more after the reporting date are discounted to their present value.

 

iv.  Short-term benefits

 

Benefits such as wages, salaries, social security contributions, paid annual leave and paid sick leave, profit sharing and bonuses (if payable within 12 months of the reporting date) and non-monetary benefits such as health care, etc. are recorded as expenses in the consolidated statement of income, without any discount to present value, if the Organization has a present legal or constructive obligation to pay the amount as a result of past service provided  by the employee and the obligation can be reliably estimated.

 

p)    Capitalization bonds

 

The liability for capitalization bonds is registered in the line “Other liabilities”. Financial liabilities and revenues from capitalization bonds are accrued at the time bonds are issued.

 

Bonds are issued according to the types of payments, monthly or single payment. Each bond bears a nominal value and the deposit portion of each payment is remunerated at the referential rate (TR) plus 0.5% per month, which is used to determine the liability.

 

Capitalization bond beneficiaries are eligible for a prize draw. At the end of a certain period that is determined at the time the capitalization bond is issued, a beneficiary may redeem the nominal value paid plus the referential rate (TR), even if they have not won in the draw. These products are regulated by the insurance regulator in Brazil; however, they do not meet the definition of an insurance contract in accordance with IFRS 4 and, therefore, are classified as financial liabilities in accordance with IFRS 9.

 

Unclaimed amounts from “capitalization plans” are derecognized when the obligation legally expires, in accordance with IFRS 9 as it relates to the derecognition of a financial liability.

 

Expenses for placement of “capitalization plans”, are recognized as they are incurred.

 

q)     Interest

 

Income from financial assets measured at amortized cost and at VJORA, except instruments of equity and interest costs from liabilities classified at amortized cost are recognized on an accrual basis in the consolidated statement of income using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash payments and receipts throughout the expected life of the financial asset or liability (or, when appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective rate, the Organization estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

 

Bradesco      41


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The calculation of the effective interest rate includes all commissions, transaction costs, discounts or bonuses which are an integral part of such rate. Transaction costs are incremental costs directly attributable to the acquisition, issuance or disposal of a financial asset or liability.

 

r)     Fees and commissions

 

Fees and commission income and expense which are part of and are directly allocable to the effective interest rate on a financial asset or liability are included in the calculation of the effective interest rate.

 

Other fee and commission income, substantially composed by account service fees, asset management fees, credit card annual charges, and collection and consortium fees are recognized, according to the requirements of IFRS 15, to the extent that the obligations of performance are fulfilled. The price is allocated to the provision of the monthly service, and the revenue is recognized in the result in the same manner. When a loan commitment is not expected to result in the drawdown of a loan, the related commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commissions expense relate mainly to transaction as the services are received.

 

s)     Net insurance income

 

Insurance and coinsurance premiums, net of premiums transferred through coinsurance and reinsurance and related commissions, are recognized as income upon issuance of the respective policies/ certificates/ endorsements and invoices, or at the beginning of the risk period for cases in which the cover begins before issue date, and accounted for on a straight-line basis, over the duration of the policies, through the upfront recognition and subsequent reversal of the provision for unearned premiums and the deferred acquisition costs. Income from premiums and the acquisition costs related to risks already assumed whose respective policies have not yet been issued are recognized in the consolidated statement of income at the start of the risk coverage period on an estimated basis.

 

The health insurance premiums are recorded in the premium account (result) or Unearned Premium or Contribution Provision (PPCNG), according to the coverage period of the contracts in effect at the balance sheet date.

 

Revenues and expenses related to “DPVAT” insurance operations are recorded on the basis of information received from the Seguradora Líder dos Consórcios do Seguro DPVAT S.A.

 

Accepted co-insurance contracts and retrocession operations are recorded on the basis of information received from the lead co-insurer and IRB - Brasil Resseguros S.A. (IRB), respectively.

 

Reinsurance operations are recorded based on the provision of accounts, which are subject to review by reinsurers. The deferral of these operations is carried out in a manner consistent with the related insurance premium and/or reinsurance contract.

 

The receipts from insurance agency operations are deferred and recognized in income linearly, for a period of 24 months in health insurance operations and by the term of 12 months in the other operations.

 

Contributions to pension plans and life insurance premiums with survivor coverage are recognized in income upon their effective receipt.

 

The management fee income is appropriated to the income on an accrual basis, according to contractually established rates.

 

 

 

       42     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

t)    Income tax and social contribution

 

Income tax and social contribution deferred tax assets, calculated on income tax losses, social contribution losses and temporary differences, are recorded in “Assets - Deferred Taxes” and the deferred tax liabilities on tax differences in lease depreciation (applicable only for income tax),
mark-to-market adjustments on securities, restatement of judicial deposits, among others, are recorded in “Liabilities - Deferred Taxes”.

 

Deferred tax assets on temporary differences are realized when the difference between the accounting treatment and the income tax treatment reverses. Deferred tax assets on income tax and social contribution losses are realizable when taxable income is generated, up to the 30% limit of the taxable profit for the period. Deferred tax assets are recorded based on current expectations of realization considering technical studies and analyses carried out by Management.

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. For financial companies, financial company equivalent and of the insurance industry, the social contribution on the profit was calculated until August 2015, considering the rate of 15%. For the period between September 2015 and December 2018, the rate was changed to 20%, according to Law No. 13,169/15, and returned at the rate of 15% as from January 2019. For the other companies, the social contribution is calculated considering the rate of 9%.

 

Tax expense comprises current and deferred tax. Current and deferred tax are recorded in the consolidated statement of income except when the result of a transaction is recognized directly in equity, in which case the related tax effect is also recorded in equity or in other comprehensive income.

 

Current tax assets are amounts of taxes to be recovered through restitution or offset with taxes due from excess of taxes paid in relation to the current and/or previous period.

 

Current tax expenses are the expected amounts payable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends.

 

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amount used for taxation purposes. Deferred tax is not recognized for:

 

·

temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;
 

· temporary differences related to investments in subsidiaries, associates and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and
 
·

taxable temporary differences arising on the initial recognition of goodwill.

 

Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

 

In determining the amount of current and deferred tax the Organization takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Organization believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of various factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve judgments about future events. New information may become available that causes the Organization to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made.

 

 

Bradesco      43


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

 

Additional taxes that arise from the distribution of dividends by the Bank are recognized at the same time as the liability to pay the related dividend is recognized.

 

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

u)     Segment reporting

 

Information for operating segments is consistent with the internal reports provided to the Executive Officers (being the Chief Operating Decision Makers), which are comprised by the Chief Executive Officer, Executive Vice-Presidents, Managing Officers and Deputy Officers. The Organization operates mainly in the banking and insurance segments. The banking operations include operations in retail, middle market and corporate activities, lease, international bank operations, investment banking and private banking. The Organization’s banking activities are performed through its own branches located throughout the country, in branches abroad and through subsidiaries, as well as by means of our shareholding interest in other companies. The insurance segment consists of insurance operations, supplementary pension plans and capitalization plans which are undertaken through a subsidiary, Bradesco Seguros S.A., and its subsidiaries.

 

v)    Shareholders’ Equity

 

Preferred shares have no voting rights, but have priority over common shares in reimbursement of capital, in the event of liquidation, up to the amount of the capital represented by such preferred shares, and the right to receive a minimum dividend per share that is ten percent (10%) higher than the dividend distributed per share to the holders of common shares.

 

-            Share issue costs

 

Incremental costs directly attributable to the issuance of shares are shown net of taxes in shareholders’ equity, thus reducing the initial share value.

 

-            Earnings per share

 

The Organization presents basic and diluted earnings per share data. Basic earnings per share is calculated by allocating the net income attributable to shareholders between that attributable to common shareholders and that attributable to preferred shareholders and dividing this by the weighted average number of common and preferred shares, respectively, outstanding during the year, excluding the average number of shares purchased by the Organization and held as treasury shares. Diluted earnings per share are the same as basic earnings per share, as there are no potentially dilutive instruments.

 

-            Dividends payable

 

Dividends on shares are paid and provisioned during the year. In the Shareholders’ Meeting are destined at least the equivalent of 30% of the annual adjusted net income, in accordance with the Company’s Bylaws. Dividends approved and declared after the reporting date of the financial statements, are disclosed in the notes as subsequent events.

 

-            Capital transactions

 

Capital transactions are transactions between partners qualified as investment owners. These transactions modify the equity held by the controlling shareholder in a subsidiary. Since there is no loss of control, the difference between the amount paid and the fair value of the transaction is recognized directly in the shareholders’ equity.

 

       44     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

3)    Risk Management

 

Risk management structure

 

The risk and capital management structure is made up of committees, which assist the Board of Directors, the CEO and the Board of Executive Officers in their strategic decision-making process.

 

The Organization has a committee known as the Integrated Risk Management and Capital Allocation Committee (COGIRAC), whose duty is to assure the fulfillment of the Organization’s risk management processes and policies and advise the Board of Directors in performing its duties in risk management, capital and control.

 

This committee is assisted by the Capital Management Executive Committee, and Risk Management Executive Committees in managing a) Credit risk, b) Market and Liquidity risk, c) Operational and Social and Environmental risk and d) Grupo Bradesco Seguros and BSP Empreendimentos Imobiliários. In addition, it also has the support of the Products and Services Executive Committee and the Executive Committees in business areas, which, among other duties, suggest exposure thresholds to their respective risks and prepare mitigation plans to be submitted to the Integrated Risk Management and Capital Allocation Committee and the Board of Directors.

 

To comply with Resolution No. 4,557/17 of February 23, 2017, of the National Monetary Council (CMN), the Risk Committee was implemented in order to represent an advisory forum to the Board of Directors for the performance of its assignments related to risk and capital management, and the position of Chief Risk Officer (CRO) was formalized, which, among other responsibilities, exercises the supervision of the development, implementation and performance of the risk management structure, including its improvement, on independent basis and reporting to the Risk Committee, CEO and Board of Directors.

 

The Integrated Risk Control Department (DCIR), whose mission is to promote and to implementing risk control and capital allocation through robust practices and certification of existence, execution and effectiveness of controls which assure acceptable risk levels in the Organization’s processes, independently, consistently, on a transparent and integrated manner. This Department is also responsible for complying with the Central Bank of Brazil rules for risk management activities.

 

Risk appetite

 

The risk appetite refers to the types and levels of risks that the Organization is willing to accept in the conduct of its business and purposes. The Risk Appetite Statement – RAS is an important instrument that summarizes the risk culture of the Organization, and guides the strategic and business plans, driving the budget planning and allowing Senior Management to optimize the allocation of capital at acceptable risk levels and types, considering the markets and the regulatory environment in which it operates.

 

At the same time, RAS emphasizes the existence of an efficient process of assignments in the operational risk management and in the performance of control functions, as well as for mitigation and disciplinary actions and processes of scheduling and reporting to Senior Management upon breach of the risk limits or control processes established.

 

The Risk Appetite Statement is reviewed on annual basis, or whenever necessary, by the Board of Directors and permanently monitored by forums of the Senior Management and business and control areas.

 

RAS reinforces the dissemination of the risk culture by disclosing the main aspects of risk appetite of the Organization to all its members.

 

For the many types of risks, whether measurable or not, the Organization established control approaches, observing the main global dimensions:

 

 

Bradesco      45


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

·

Capital: to maintain a proper capital level, even on prospective basis, to cover unexpected losses, situations of stress and business opportunities, in compliance with regulatory requirements, thus ensuring the soundness of the Organization;
 

·

Profitability: to remunerate its capital on sustainable basis, seeking to cover the remuneration expectation of its shareholders in relation to the risks assumed in their business;
 

·

Liquidity: to maintain diversified and low cost sources of funding through interconnected network and dynamic and proper segmentation to provide a cash structure compatible with the size of its obligations; thus, ensuring survival even in adverse scenarios;
 

·

Loan: to focus on domestic clients, on diversified and dispersed manner, in terms of products and segments, aiming at the security and quality of the portfolio, with guarantees consistent with the risks assumed, considering the amounts, purposes and terms of loans granted and maintaining proper levels of provisions and low levels of concentrations;
 

·

Market: to align the exposures to the strategic guidelines, with specific limits established on independent basis and with risks mapped, measured and classified as to the probability and magnitude; and
 

· Operational: to provide assurance with regard to appropriately carrying out the Organization’s business in accordance with laws regulations and policies, ensuring that processes are covered by controls that mitigate operational risks.

 

Stress Test Program

 

The risk management structure has a stress test program defined as a coordinated set of processes and routines, containing own methodologies, documentation and governance, whose principal purpose is to identify potential vulnerabilities of the institution. Stress tests are exercises of prospective evaluation of the potential impacts of adverse events and circumstances on capital, on liquidity or on the value of a portfolio of the Organization.

 

In the Program of Stress Tests, the scenarios are designed by the Department of Research and Economic Studies – DEPEC and discussed with the Business areas, Integrated Risk Control Department – DCIR, Department of Planning, Budgeting and Control – DPOC, among other areas. Both scenarios and results are discussed and approved by a specific Collegiate Body. Subsequently, they are submitted to the Executive Committee and Board of Directors, that, in addition to the scenarios and results of stress tests are also responsible for the approval of the program and guidelines to be followed.

 

Stress tests are used as a tool for managing risks: in its identification, measurement, evaluation, monitoring, control and mitigation of risks of the institution. The results of stress tests are used for evaluation of capital and liquidity levels of the institution, for preparation of the respective contingency plans, for evaluation of the capital adequacy and for the recovery plan. Similarly, the results are considered in the decisions related to strategic guidelines, definition of the levels and limits of risk appetite applied to the management of risks and capital, as well as in the definition of governance actions aimed at mitigation of risks identified by aligning them to the risk appetite of the Organization.

 

3.1.    Credit risk

 

Credit risk refers to the possibility of losses associated with the borrower’s or counterparty’s failure to comply with their financial obligations under the terms agreed, as well as the fall in value of loan agreements resulting from deterioration in the borrower’s risk rating, the reduction in gains or remunerations, benefits granted to borrowers in renegotiations, recovery costs and other costs related to the counterparty’s noncompliance with the financial obligations.

 

       46     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Credit risk management in the Organization is a continuous and evolving process of mapping, development, assessment and diagnosis through the use of models, instruments and procedures that require a high degree of discipline and control during the analysis of transactions in order to preserve the integrity and autonomy of the processes.

 

The Organization controls the exposure to credit risk which comprises mainly loans and advances, securities and derivatives. There is also the credit risk in financial obligations relating to commitments on loan or financial guarantees.

 

With the objective of not compromising the quality of the portfolio, all aspects inherent to credit concession, concentration, guarantee requirements and terms, among others, are observed.

 

The Organization continuously maps all the activities that could possibly generate exposure to credit risk, classifying them by their probability and magnitude, identifying their managers and mitigation plans.

 

Counterparty Credit Risk

 

The counterparty credit risk to which the Organization is exposed includes the possibility of losses due to the non-compliance by counterparties with their obligations relating to the settlement of financial asset trades, including the settlement of derivative financial instruments. Counterparty credit risk also includes the risk related to a downgrade in the counterparty’s credit standing.

 

The Organization exercises complete control over its net position (the difference between purchase and sale agreements) and potential future exposures from operations where there is counterparty risk. Each counterparty’s exposure to risk is treated in the same way and is part of general credit limits granted by the Organization’s to its customers.

 

The Counterparty Credit Risk management covers the modeling and monitoring (i) of the consumption of the credit limit of the counterparties, (ii) of the portion of the adjustment at fair value of the portfolio of credit derivatives (CTF – Credit Value Adjustment) and (iii) of the respective regulatory and economic capital. The methodology adopted by the Organization establishes that the credit exposure of the portfolio to certain counterparty can be calculated based on the Replacement Cost (RC) of its operations in different scenarios of the financial market, which is possible through the Monte Carlo simulation process.

 

Regarding the forms of mitigating the Counterparty credit risk that the Organization is exposed to, the most usual is the composition of guarantees as margin deposits and disposal of public securities, which are made by the counterparty with the Organization or with other trustees, whose counterparty’s risks are also appropriately evaluated.

 

Credit Concession

 

Under the responsibility of the Credit Department, lending procedures are based on the Organization's credit policy emphasizing the security, quality and liquidity of the lending. The process is guided by the risk management governance and complies with the rules of the Central Bank of Brazil.

 

The methodologies adopted value business agility and profitability, with targeted and appropriate procedures oriented to the granting of credit transactions and establishment of operating limits.

 

In the evaluation and classification of customers or economic groups, the quantitative (economic and financial indicators) and qualitative (personal data and behaviors) aspects associated with the customers capacity to honor their obligations are considered.

 

All business proposals are subject to operational limits, which are included in the Loan Guidelines and Procedures. At branches, the delegation of power to grant a loan depends on its size, the total exposure to the Organization, the guarantees offered, the level of restriction and their credit risk score/rating. Business proposals with risks beyond these limits are subject to technical analysis and approval of by the Credit Department.

 

 

Bradesco      47


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

In its turn, the Executive Credit Committee was created to decide, within its authority, on queries about the granting of limits or loans proposed by business areas, previously analyzed and with opinion from the Credit Department. According to the size of the operations/limits proposed, this Committee, may then submit the proposal for approval by the Board of Directors.

 

Loan proposals pass through an automated system with parameters set to provide important information for the analysis, granting and subsequent monitoring of loans, minimizing the risks inherent in the operations.

 

There are exclusive Credit and Behavior Scoring systems for the assignment of high volume, low principal loans in the Retail segment, meant to provide speed and reliability, while standardizing the procedures for loan analysis and approval.

 

Business is diversified wide-spread and aimed at individuals and companies with a proven payment capacity and solvency, seeking to support them with guarantees that are adequate to the risk assumed, considering the amounts, objectives and the maturities of loan granted.

Credit Risk Rating

 

The credit risk assessment methodology, in addition to providing data to establish the minimum parameters for lending and risk management, also enables the definition of Special Credit Rules and Procedures according to customer characteristics and size. Thus, the methodology provides the basis not only for the correct pricing of operations, but also for defining the appropriate guarantees.

 

The methodology used also follows the requirements established by CMN Resolution No. 4,327/14 and includes analysis of social and environmental risk in projects, aimed at evaluating customers’ compliance with related laws and the Equator Principles, a set of rules that establish the minimum social and environmental criteria which must be met for lending.

 

In accordance with its commitment to the continuous improvement of methodologies, the credit risk rating of the Organization’s economic groups/customers uses an eighteen-level scale, in which fourteen levels represent performing loan operations.

 

Risk ratings for economic groups (legal entities) are based on standardized statistical and judgmental procedures, and on quantitative and qualitative information. Classifications are carried out in a corporate manner and periodically monitored in order to preserve the quality of the credit portfolio.

 

For individuals, in general, credit ratings are based on personal data variables, such as income, assets, restrictions and indebtedness, in addition to the history of their relationship with the Organization, and statistical credit evaluation models.

 

The criteria regulated by Resolution No. 2,682 of the National Monetary Council are maintained for the constitution of the applicable provisions, according to the equivalence of the ratings shown in the table above.

 

The risk classification adopted on the basis of the customers' capacity of honoring their commitments is shown below:

 

       48     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Internal Rating

 

Organization classification

1

AA1

 

 

 

2

AA2

     

3

AA3

     

4

A1

     

5

A2

 

Low risk

6

A3

     

7

B1

   

8

B2

     

9

B3

     

10

C1

     

11

C2

     

12

C3

 

 

 

13

C4

 

Medium risk

14

D

 

15

E

   

16

F

 

High risk

17

G

     

18

H

 

 

 

 

Credit-Risk Management Process

 

The credit risk management process is conducted in a corporation-wide manner. This process involves several areas with specific duties, ensuring an efficient structure. Credit risk measurement and control are conducted in a centralized and independent manner.

 

The credit risk monitoring area actively participates in improving the customer risk rating models, following up large risks by periodically monitoring major delinquencies and the provisioning levels for expected and unexpected losses.

 

This area continuously reviews the internal processes, including the roles and responsibilities and it training and requirements, as well as conducts periodical reviews of risk evaluation processes to incorporate new practices and methodologies.

 

Control and Monitoring

 

The credit risk of the Organization has its control and corporate follow-up performed in the credit risk area of the Integrated Risk Control Department – DCIR. The Department advises the Executive Committee on Credit Risk Management, where methodologies for measuring credit risk are discussed and formalized. Significant issues discussed in this committee are reported to the COGIRAC, which is subordinate to the Board of Directors.

 

In addition to committee meetings, the area holds monthly meetings with all product and segment executives and officers, with a view to inform them about the evolution of the loan portfolio, delinquency, credit recoveries, gross and net losses, limits and concentrations of portfolios, allocation of economic and regulatory capital, among others. This information is also reported to the Audit Committee on a monthly basis.

 

The area also monitors any internal or external event that may cause a significant impact on the Organization’s credit risk, such as spin-offs, bankruptcies and crop failures, in addition to monitoring economic activity in the sectors to which the company has significant risk exposures.

 

Both the governance process and existing limits are sanctioned by the Integrated Risk Management and Capital Allocation Committee, which are submitted for the approval of the Board of Directors, being reviewed at least once a year.

 

 

Bradesco      49


 
 

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Internal Report

 

Credit risk is monitored on a daily basis in order to maintain the risk levels within the limits established by the Organization. Managerial reports on risk control are provided to all levels of business, from branches to Senior Management.

 

With the objective of highlighting the risk situations that could result in the customers' inability to honor its obligations as contracted, the credit risk monitoring area provides daily reports, to the branches, business segments, as well as the lending and loan recovery areas. This system provides timely information about the loan portfolios and credit bureau information of customers, in addition to enabling comparison of past and current information, highlighting points requiring a more in-depth analysis by managers.

 

The Organization also has an electronic corporate system of credit risk indicators to provide the lending and loan recovery areas, business areas, regional managers and branches with information on assets by segment, product, region, risk classification, delinquency and expected and unexpected losses, among others. This electronic system provides both a macro-level and detailed view of the information, and also enables a specific loan operation to be viewed.

 

The information is viewed and delivered via dashboards, allowing queries at several levels such as business segment, divisions, managers, regions, products, employees and customers, and under several aspects (asset, delinquency, provision, write-off, restriction levels, guarantees, portfolio quality by rating, among others).

 

Measurement of credit risk

 

Periodically, the Organization evaluates the expected losses of the exposures subject to credit risk by means of statistical models and internal processes, considering the historical loss experience, which comprises approximately 8 years, as well as the current quality and characteristics of clients and operations, including their guarantees. Macroeconomic Information is also used in the measurement by means of econometric models that incorporate the current and prospective effects of economic variables in the estimates of expected loss. The main macroeconomic variables used in this process are tied to interest rates, inflation rates and internal and external economic activity indexes.

 

The Organization uses different indicators for classification in stages, according to the profile of the client and the operation. Below we present the breakdown of segments, according with stages and indictors.

 

Retail Segment:

 

·       Stage 1: up-to-date exposure or 30 days in arrears;

·       Stage 2: exposure between 31 and 90 days in arrears, except for residential real estate financing that is between 31 and 180 days, or classification to internal ratings framed as medium or high risk;

·       Stage 3 (Non-compliance or "impaired"): exposure due over 90 days, except for residential real estate financing that is above180 days.

 

Wholesale Segment:

 

·       Stage 1: up-to-date exposure or 30 days in arrears;

·       Stage 2: exposure due between 31 and 90 days, except for residential real estate financing that is between 31 and 180 days, or classification to internal ratings framed as medium or high risk;

·       Stage 3 (Non-compliance or "impaired"): material exposure due beyond 90 days, except for financing residential real estate, which is due over 180 days and/or that showed signs that they would not be honored in the agreed conditions without the execution of guarantees, such as: failing events, judicial recovery and restructuring of debts.

 

       50     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The expected losses are based on the multiplication of credit risk parameters: Probability of noncompliance (PD), Loss due to noncompliance (LGD) and Exposure to noncompliance (EAD).

 

The PD parameter refers to the probability of noncompliance perceived by the Organization regarding the client, according to the internal models of evaluation, which, in retail, use statistical methodologies based on the characteristics of the client, such as the internal rating and segment, and the operation, such as product and warranty and, in the case of wholesale, they use specialist models based on financial information and qualitative analyses.

 

The LGD refers to the percentage of loss in relation to exposure in case of noncompliance, considering all the efforts of recovery, according to the internal model of evaluation that uses statistical methodologies based on the characteristics of the operation, such as product and warranty. Clients with significant exposure have estimates based on individual analyses, which are based on the structure of the operation and expert knowledge, aiming to capture the complexity and the particularities of each operation.

 

EAD refers to the exposure (book value) of the client in relation to the Organization at the time of estimation of the expected loss. In the case of commitments or financial guarantees provided, the EAD will have the addition of the expected value of the commitments or financial guarantees provided that they will be converted into credit in case of noncompliance of the client.

 

 

Bradesco      51


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Credit Risk Exposure

 

We present below the credit risk exposure of the financial instruments:

 

 

R$ thousand

On December 31, 2018

 

Gross value

Expected loss

Book value

Financial assets

 

 

 

Cash and balances with banks (Note 20)

107,209,743

107,209,743

Financial assets at fair value through profit or loss (Note 21)

246,161,150

246,161,150

Financial assets at fair value through other comprehensive income (Note 24)

178, 050,536

(337,506)

178,050,536

Loans and advances to banks (Note 26)

105,250,928

(1,978)

105,248,950

Loans and advances to customers (Note 27)

411,492,655

(31,105,579)

380,387,076

Securities at amortized cost (Note 28)

143,626,776

(3,022,038)

140,604,738

Other financial assets (Note 35)

43,893,309

43,893,309

Provision for Expected Loss

 

 

 

Loan Commitments (Note 27)

(2,551,676)

(2,551,676)

Financial guarantees (Note 27)

(719,216)

(719,216)

Items not recorded in the balance sheet (Note 46)

301,345,624

301,345,625

Total risk exposure

1,537, 030,721

(37,737,993)

1,499,630,235

 

The Organization's maximum credit risk exposure was R$1,499,630,235 thousand in 2018, which was an increase of 8.4% compared to 2017.

 

Of this exposure, R$107,209,743 thousand, or 7.1% is related to cash and bank deposits composed mainly of funds deposited with the Central Bank of Brazil that are assessed to have low credit risk.

 

Financial assets at fair value through profit or loss (16.4% of total exposure) are mostly low credit risk, composed mainly of Brazilian government securities at fair value and also include derivative financial instruments.

 

Financial assets at fair value through other comprehensive income amounted to R$178,050,536 thousand (11.9% of total exposure), are recorded at fair value with changes in ECL recognized in profit or loss and are represented mostly by Brazilian government securities, for details of these assets , see note 24.

 

Loans and advances to financial institutions, which are 7.0% of the total, consist basically of repurchase agreements which have a low credit risk.

 

Loans and advances to customers represent 25.4% of the total exposure, for details of these assets and the expected loss, see note 27 for details.

 

Financial assets at amortized cost represent 9.4% of the total, for details of these assets, see note 28.

 

Operations classified as "Other financial assets" represent 2.9% of the total and are basically comprised of foreign exchange operations and escrow deposits.

 

In 2018, items not recorded in the consolidated balance sheet (recorded in clearing accounts) totaled R$301,345,625, representing 20.1% of total exposure.

 

 

       52     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Loans and advances to customers

 

Concentration of credit risk

 

 

On December 31

2018

2017

Largest borrower

2.2%

2.5%

10 largest borrowers

9.1%

8.2%

20 largest borrowers

12.9%

12.2%

50 largest borrowers

18. 6%

17.8%

100 largest borrowers

22.9%

22.2%

                                                                                                                           

By Economic Activity Sector

 

The credit-risk concentration analysis presented below is based on the economic activity sector in which the counterpart operates.

 

On December 31 - R$ thousand

2018

%

2017

%

Public sector

9,259,368

2.3

9,676,927

2.6

Oil, derivatives and aggregate activities

9,092,151

2.2

9,410,382

2.5

Production and distribution of electricity

1,829

1,322

Other industries

165,388

265,223

0.1

Private sector

402,233,287

97.7

364,136,738

97.4

Companies

209,365,567

50.9

190,148,345

50.9

Real estate and construction activities

25,267,761

6.1

29,383,442

7.9

Retail

32,472,286

7.9

23,935,638

6.4

Services

19,086,508

4.6

17,996,533

4.8

Transportation and concession

17,261,369

4.2

14,190,284

3.8

Automotive

11,284,972

2.7

10,014,454

2.7

Food products

12,040,631

2.9

8,866,028

2.4

Wholesale

11,467,168

2.8

9,045,916

2.4

Production and distribution of electricity

4,784,015

1.2

7,360,804

2.0

Siderurgy and metallurgy

7,698,444

1.9

7,001,290

1.9

Sugar and alcohol

6,907,858

1.7

7,042,811

1.9

Other industries

61,094,555

14.8

55,311,145

14.8

Individuals

192,867,720

46.9

173,988,393

46.5

Total portfolio

411,492,655

100.0

373,813,665

100.0

Impairment of loans and advances

(31,105,579)

 

(27,055,566)

 

Total of net loans and advances to customers

380,387,076

 

346,758,099

 

 

 

 

 

Bradesco      53


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Credit Risk Mitigation

 

Potential credit losses are mitigated by the use of a variety of types of collateral formally stipulated through legal instruments, such as conditional sales, liens and mortgages, by guarantees such as third-party sureties or guarantees, and also by financial instruments such as credit derivatives. The efficiency of these instruments is evaluated considering the time to recover and realize an asset given as collateral, its market value, the guarantors’ counterparty risk and the legal safety of the agreements. The main types of collaterals include: term deposits; financial investments and securities; residential and commercial properties; movable properties such as vehicles, aircraft. Additionally, collateral may include commercial bonds such as invoices, checks and credit card bills. Sureties and guarantees may also include bank guarantees.

 

The table below shows the financial effect of the guarantee on credit and financial lease transactions.

 

 

R$ thousand

2018

Book value

Fair Value Guarantees

Individuals

192,867,720

121,318,093

Stage 1

165,031,788

109,456,403

Stage 2

15,354,577

8,925,277

Stage 3

12,481,355

2,936,413

 

 

 

Companies

218,624,935

77,161,470

Stage 1

177,191,748

61,244,814

Stage 2

21,750,673

7,374,186

Stage 3

19,682,514

8,542,470

Total

411,492,655

198,479,563

(1) Of the total balance of credit operations, R$284,373,526 thousand refers to operations without guarantees.

 

3.2.    Market risk

 

Market risk is represented by the possibility of financial loss due to fluctuating prices and interest rates of the Organization’s financial instruments, such as its asset and liability transactions that may have mismatched maturities, currencies and indexes.

 

Market risk is identified, measured, mitigated, controlled and reported. The Organization’s exposure to market risk profile is in line with the guidelines established by the governance process, with limits monitored on a timely basis independently of the business areas.

 

All transactions that expose the Organization to market risk are mapped, measured and classified according to probability and magnitude, and the whole process is approved by the governance structure.

 

The risk management process relies on the participation of all levels of the Organization, from the business areas to the Board of Directors.

 

In compliance with the best Corporate Governance practices, to preserve and strengthen the management of market risk in the Organization, as well as to meet the requirements of Resolution No. 4,557/17, of CMN, the Board of Directors approved the Market and Liquidity Risk Management Policy, which is reviewed at least annually by the relevant Committees and by the Board of Directors itself, and provides the main guidelines for acceptance, control and management of market risk.

 

In addition to the policy, the Organization has specific rules to regulate the market risk management process, as follows:

 

·       Classification of Operations;

·       Reclassification of Operations;

·       Trading of Public or Private Securities;

·       Use of Derivatives; and

·       Hedging.

 

       54     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Market Risk Management Process

 

The market risk management process is a corporation wide process, comprising from business areas to the Board of Directors; it involves various areas, each with specific duties in the process, thereby ensuring an efficient structure. The measurement and control of market risk is conducted in a centralized and independent manner. This process permits that the Organization be the first financial institution in the country authorized by the Central Bank of Brazil to use its internal market risk models to calculate regulatory capital requirements since January 2013. This process, is also revised at least once a year by the Committees and approved the Board itself.

 

Determination of Limits

 

Proposed market-risk limits are validated by specific Committees and submitted for approval by the Integrated Risk Management and Capital Allocation Committee, and then for approval by the Board of Directors. Based on the business’ characteristics, they are segregated into the following Portfolios:

 

Trading Portfolio: it comprises all operations involving financial instruments, held-for-trading, including derivatives, or used to hedge other instruments in the Trading Portfolio, which have no trading restrictions. Held-for-trading operations are those intended for resale, to obtain benefits from actual or expected price variations, or for arbitrage.

 

The Trading Portfolio is monitored with the following limits:

 

·       Value at Risk (VaR);

·       Stress;

·       Income;

·       Financial Exposure / Concentration.

 

Banking Portfolio: it comprises operations not classified in the Trading Portfolio, arising from Organization’s other businesses and their respective hedges.

 

The Banking Portfolio is monitored with the following limits:

 

·       Interest rate risk limit.

 

Market-Risk Measurement Models

 

Market risk is measured and controlled using Stress, Value at Risk (VaR), Economic Value Equity (EVE) and Sensitivity Analysis methodologies, as well as limits for the Management of Results and Financial Exposure. Using several methodologies to measure and evaluate risks is of great importance, because they can complement each other and their combination allows for analysis of different scenarios and situations.

 

Trading and Regulatory Portfolio

 

Trading Portfolio risks are controlled by the Stress and VaR methodologies. The Stress methodology quantifies the negative impact of economic shocks and events that are financially unfavorable to the Organization’s positions. The analysis uses stress scenarios prepared by the Market Risk area and the Organization’s economists based on historical and prospective data for the risk factors in which the Organization portfolio.

 

The methodology adopted to calculate VaR is the Delta-Normal, with a confidence level of 99% and considering the number of days necessary to unwind the existing exposures. The methodology is applied to the Trading and Regulatory Portfolio (Trading Portfolio positions plus Banking Portfolio foreign currency and commodities exposures). It should be noted that for the measurement of all the risk factors of the portfolio of options are applied the historical simulation models and Delta-Gama-Vega, prevailing the most conservative between the two. A minimum 252-business-day period is adopted to calculate volatilities, correlations and historical returns.

 

 

Bradesco      55


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

For regulatory purposes, the capital requirements relating to shares held in the Banking Portfolio of Prudential Conglomerate (includes, in its consolidation basis, entities located in the country and abroad, financial institutions, similar to financial institutions over which the institution has direct or indirect control, in addition to investment funds pursuant to CMN Resolution No. 4,280/13) are determined on a credit risk basis, as per Central Bank of Brazil resolution, i.e., are not included in the market risk calculation.

Risk of Interest Rate in the Banking Portfolio

 

The measurement and control of the interest-rate risk in the Banking Portfolio area is based on the Economic Value of Equity (EVE) methodology, which measures the economic impact on the positions, according to scenarios prepared by the Organization’s economists. These scenarios determine the positive and negative movements of interest rate curves that may affect Organization’s investments and capital-raising.

 

The EVE methodology consists of repricing the portfolio exposed to interest rate risk, taking into account the scenarios of increases or decreases of rates, by calculating the impact on present value and total term of assets and liabilities. The economic value of the portfolio is estimated on the basis of market interest rates on the analysis date and of scenarios projected. The difference between the values obtained for the portfolio will be EVE, that is, the interest-rate risk applicable to the Banking Portfolio.

 

To measure the Banking Portfolio interest rate risk, the premise of prepayment of loans is not used. For demand and savings deposits with undetermined maturity, their historical behaviors and the possibility of maintaining them are studied. After all the deductions related to demand and savings deposits, for example, the required compulsory deposits held at Central Bank of Brazil, the remaining balance (free funds) is allocated in accordance with the maturity flows of fixed-rate lending operations, and in the case of savings, the risk factor considered for its mapping is the TR coupon.

 

Financial Instrument Pricing

 

To adopt the best market prices related to the assessment of financial instruments’ market value, the Market and Liquidity Risk Management Executive Committee (CEGRIMEL) established the Mark-to-Market Commission (CMM), which is responsible for approving or submitting mark-to-market models to GEGRIMEL. CMM is composed of business, back-office and risk representatives. The risk area is responsible for the coordination of the Commission and for the submission the matters to the CEGRIMEL for reporting or approval, whichever is the case.

 

Whenever possible, the Bank uses prices and quotes from by the securities, commodities and futures exchange and the secondary markets. Failing to find such market references, prices made available by other sources (such as Bloomberg, Reuters and Brokerage Firms) are used. As a last resort, proprietary models are used to price the instruments, which also follow the same CMM approval procedure and are submitted to the Organization’s validation and assessment processes.

 

Mark-to-market criteria are periodically reviewed, according to the governance process, and may vary due to changes in market conditions, creation of new classes of instruments, establishment of new sources of data or development of models considered more appropriate.

 

The financial instruments to be included in the Trading Portfolio must be approved by the Treasury Executive Committee or the Product and Service Executive Committee and their pricing criteria must be defined by the CMM.

 

The following principles for the mark-to-market process are adopted by the Organization:

 

·         Commitment: the Organization is committed to ensuring that the prices used reflect the market value of the operations. Should information not be found, the Organization uses its best efforts to estimate the market value of the financial instruments;

 

       56     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

·         Frequency: the formalized mark-to-market criteria are applied on a daily basis;

·         Formality: the CMM is responsible for ensuring the methodological quality and the formalization of the mark-to-market criteria;

·         Consistency: the process to gather and apply prices should be carried out consistently, to guarantee equal prices for the same instrument within the Organization; and

·         Transparency: the methodology must be accessible by the Internal and External Audit, Independent Model Validation Areas - AVIM and by Regulatory Agencies.

 

In December 2014, the National Monetary Council published Resolution No. 4,389/14, which amended Resolution No. 4,277. These resolutions set forth the basic procedures that entities must follow in pricing financial instruments valued at market value and guidelines for the application of prudential adjustments for such instruments. The Organization aligned with these resolutions’ guidelines, including applying due prudential adjustments required by the regulation.

 

Control and Follow-Up

 

Market risk is controlled and monitored by an independent area, the DCIR, which, on a daily basis, measures the risk of outstanding positions, consolidates results and prepares reports required by the existing governance process.

 

In addition to daily reports, Trading Portfolio positions are discussed once every fifteen days by the Treasury Executive Committee, while Banking Portfolio positions and liquidity reports are examined by the Asset and Liability Management Treasury Executive Committee.

 

At both meetings, results and risks are assessed and strategies are discussed. Both the governance process and the existing thresholds are ratified by the Integrated Risk Management and Capital Allocation Committee and submitted to approval of the Board of Directors, and they are revised at least once a year.

 

Should any threshold controlled by the Integrated Risk Control Department – DCIR be exceeded, the head of the business area responsible for the position is informed that threshold was reached, and the Integrated Risk Management and Capital Allocation Committee is called in timely fashion to make a decision. If the Committee decides to raise the threshold and/or maintain the positions, the Board of Directors is called to approve the new threshold or revise the position strategy.

 

Internal Communication

 

The market risk department provides daily managerial control reports on the positions to the business areas and Senior Management, in addition to weekly reports and periodic presentations to the Board of Directors.

 

Reporting is conducted through an alert system, which determines the addressees of risk reports as previously determined risk threshold percentage is reached; therefore, the higher the risk threshold consumption, more Senior Management members receive the reports.

 

Hedging and Use of Derivatives

 

In order to standardize the use of financial instruments as hedges of transactions and the use of derivatives by the Treasury Department, the Organization created specific rules that were approved by the competent Committees.

 

The hedge transactions executed by Bradesco’s Treasury Department must necessarily cancel or mitigate risks related to unmatched quantities, terms, currencies or indexes of the positions in the Treasury books, and must use assets and derivatives authorized to be traded in each of their books to:

 

·    control and classify the transactions,  respecting the exposure and risk limits in effect;

 

Bradesco      57


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

·    alter, modify or revert positions due to changes in the market and to operational strategies; and

·    reduce or mitigate exposures to transactions in inactive markets, in conditions of stress or of low liquidity.

 

For derivatives classified in the "hedge accounting" category, there is a monitoring of their effectiveness, as well as their accounting implications.

 

Cash flow Hedge

 

On December 31, 2018, Bradesco maintained cash flow hedges. See more details in Note 23.

 

Standardized and “Continuous Use” Derivatives

 

Organization’s Treasury Department may use standardized (traded on an exchange) and “continuous use” (traded over-the-counter) derivatives for the purpose of obtaining income or as hedges. The derivatives classified as “continuous use” are those habitually traded over-the-counter, such as vanilla swaps (interest rates, currencies, CDS – Credit Default Swap, among others), forward operations (currencies, for example) and vanilla options (currency, Bovespa Index), among others. Non-standardized derivatives that are not classified as “continuous use” or structured operations cannot be traded without the authorization of the applicable Committee.

 

Evolution of Exposures

 

In this section are presented the evolution of financial exposure, the VaR calculated using the internal model and its backtesting and the Stress Analysis.

 

Financial Exposure – Trading Portfolio (Fair value)

 

Risk factors

R$ thousand

On December 31

2018

2017

Assets

Liabilities

Assets

Liabilities

Fixed rates

8,131,939

6,081,794

11,614,849

6,184,099

IGP-M (General Index of market pricing) / IPCA (Consumer price index)

249,922

191,486

1,053,893

532,957

Exchange coupon

1,090,277

785,578

1,808,598

1,658,084

Foreign Currency

1,471,956

1,611,049

1,808,598

2,103,715

Equities

776,376

776,735

461,957

468,911

Sovereign/Eurobonds and Treasuries

3,805,259

1,099,612

560,619

360,252

Other

685,724

31,729

257,537

98,517

Total

16,211,453

10,577,983

17,566,051

11,406,535

 

 

VaR Internal Model – Trading Portfolio

 

The 1-day VaR of Trading Portfolio net of tax effects in end of 2018 was R$5,776 thousand, with the interest rate risk Sovereign/Eurobonds and Treasuries as the largest participation of the portfolio.

 

Risk factors

R$ thousand

On December 31

2018

2017

Fixed rates

850

8,956

IGPM/IPCA

264

2,751

Exchange coupon

142

48

Foreign Currency

712

2,925

Sovereign/Eurobonds and Treasuries

3,770

826

Equities

655

289

Other

1,597

1

Correlation/diversification effect

(2,214)

(1,379)

VaR at the end of the year

5,776

14,417

 

 

 

Average VaR in the year

21,624

24,024

Minimum VaR in the year

4,316

5,499

Maximum VaR in the year

76,935

100,640

 

 

       58     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Risk factors

R$ thousand

On December 31

2018

2017

     

VaR at the end of the year

5,776

14,417

 

 

 

Average VaR in the year

21,624

24,024

Minimum VaR in the year

4,316

5,499

Maximum VaR in the year

76,935

100,640

 

VaR Internal Model – Regulatory Portfolio

 

The capital is calculated by the normal delta VaR model based in Regulatory Portfolio, composed by Trading Portfolio and the Foreign Exchange Exposures and the Commodities Exposure of the Banking Portfolio. In addition, the historical simulation and the Delta–Gama–Vega models of risk are applied to measure all risk factors to an options portfolio, whichever is the most conservative, whereby this risk of options is added to the VaR of the portfolio. In this model, risk value is extrapolated to the regulatory horizon(1) (the highest between 10 days and the horizon of the portfolio)  by the ‘square root of time’ method. VaR and Stressed VaR shown below refer to a ten-day horizon and are net of tax effects.

 

Risk factors

R$ thousand

On December 31

2018

2017

VaR

Stressed

VaR

Stressed

Interest rate

8,131

47,851

37,659

48,400

Exchange rate

5,666

20,959

7,715

17,300

Commodity price (Commodities)

8,194

14,704

1,110

200

Equities

3,355

4,844

2,065

7,400

Correlation/diversification effect

(7,569)

33,180

36,429

240

VaR at the end of the year

17,777

121,538

84,978

73,540

 

 

 

 

 

Average VaR in the year

69,852

117,946

87,358

107,059

Minimum VaR in the year

17,777

57,523

24,945

26,803

Maximum VaR in the year

252,797

231,080

369,342

236,895

Note: Ten-day horizon VaR net of tax effects.

 

To calculate regulatory capital requirement according to the internal model, it is necessary to take into consideration the rules described by Central Bank Circular Letters No. 3,646/13 and No. 3,674/13, such as the use of VaR and Stressed VaR net of tax effects, the average in the last 60 days and its multiplier.

 

VaR Internal Model – Backtesting

 

The risk methodology applied is continuously assessed using backtesting techniques, which compare the one-day period VaR with the hypothetic P&L, obtained from the same positions used in the VaR calculation, and with the effective P&L, also considering the intraday operations for which VaR was estimated.

 

The main purpose of backtesting is to monitor, validate and assess the adherence of the VaR model, and the number of exceptions that occurred must be compatible with the number of exception accepted by the statistical tests conducted and the confidence level established. Another objective is to improve the models used by the Organization, through analyses carried out with different observation periods and confidence levels, both for Total VaR and for each risk factor.

 

Daily hypothetical and effective P&L over the last 250 business days surpassed their respective VaR four times, with a confidence level of 99%.


(1)  The maximum amount between the book’s holding period and ten days, which is the minimum regulatory horizon required by Central Bank of Brazil, is adopted.

 

 

Bradesco      59


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

According to the document published by the Basel Committee on Banking Supervision(2), exceptions are classified as being due to “either bad luck or the markets did not behave as expected by the model”, i.e. volatility was significantly higher than expected and, in certain situations, the correlations differed from those forecast by the model.

 

Stress Analysis – Trading Portfolio

 

The Organization also assesses on a daily basis, the possible impacts on positions in stress scenarios for the next 20 business days, with limits established in the governance process. Thus, considering the effect of diversification between the risk factors and the tax effects, the average of the possible loss estimates in a stress situation would be R$185,192 thousand in 2018 (2017 – R$168,751 thousand), and the maximum estimated loss in the year of 2018 would be R$419,677 thousand (2017 – R$387,884 thousand).

 

 

R$ thousand

On December 31

2018

2017

At the end of the year

59,489

103,949

Average in the year

185,192

168,751

Minimum in the year

52,716

53,426

Maximum in the year

419,677

387,884

Note: Values net of tax effects.

 

Sensitivity Analysis

 

The Trading Portfolio is also monitored daily by sensitivity analyses that measure the effect of movements of market and price curves on our positions. Furthermore, a sensitivity analysis of the Organization’s financial exposures (Trading and Banking Portfolios) is performed on a quarterly basis, in compliance with CVM Rule No. 475/08.

 

The sensitivity analyses were carried out based on the scenarios prepared for the respective dates, always taking into consideration market inputs available at the time and scenarios that would adversely impact our positions, in accordance with the scenarios below:

 

Scenario 1: Based on market information (B3, Anbima, etc.), stresses were applied for 1 basis point on the interest rate and 1.0% variation on prices. For example: for a Real/US dollar exchange rate of R$3.87 a scenario of R$3.91 was used, while for a 1-year fixed interest rate of 6.55%, a scenario of 6.56% was applied;

 

Scenario 2: 25.0% stresses were determined based on market information. For example: for a Real/US dollar exchange rate of R$3.87 a scenario of R$4.84 was used, while for a 1-year fixed interest rate of 6.55%, a 8.18% scenario was applied. The scenarios for other risk factors also accounted for 25% stresses in the respective curves or prices; and

 

Scenario 3: 50.0% stresses were determined based on market information. For example: for a Real/US dollar quote of R$3.87 a scenario of R$5.81 was used, while for a 1-year fixed interest rate of 6.55%, a 9.82% scenario was applied. The scenarios for other risk factors also account for 50.0% stresses in the respective curves or prices.

 

The results show the impact for each scenario on a static portfolio position. The dynamism of the market and portfolios means that these positions change continuously and do not necessarily reflect the position demonstrated here. In addition, the Organization has a continuous market risk management process, which is always searching for ways to mitigate the associated risks, according to the strategy determined by Management. Therefore, in cases of deterioration indicators in a certain position, proactive measures are taken to minimize any potential negative impact, aimed at maximizing the risk/return ratio for the Organization.

 


(2) Supervisory Framework for the use “Backtesting” in Conjunction with the Internal Models Approach to Market Risk Capital Requirements (January 1996).

 

 

       60     IFRS – International Financial Reporting Standards – 2018


 

 

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Sensitivity Analysis – Trading Portfolio

 

 

R$ thousand

Trading Portfolio (1)

On December 31

2018

2017

Scenarios

Scenarios

1

2

3

1

2

3

Interest rate in Reais

Exposure subject to variations in fixed interest rates and interest rate coupons

(67)

(11,474)

(22,374)

(359)

(61,497)

(120,385)

Price indexes

Exposure subject to variations in price index coupon rates

(22)

(2,462)

(4,706)

(147)

(17,576)

(33,298)

Exchange coupon

Exposure subject to variations in foreign currency coupon rates

(3)

(236)

(460)

(9)

(420)

(839)

Foreign currency

Exposure subject to exchange rate variations

(331)

(8,265)

(16,529)

(1,629)

(40,736)

(81,473)

Equities

Exposure subject to variation in stock prices

(88)

(2,195)

(4,389)

(1,215)

(30,378)

(60,757)

Sovereign/Eurobonds and Treasuries

Exposure subject to variations in the interest rate of securities traded on the international market

(315)

(93,073)

(129,865)

(2,469)

(61,730)

(123,461)

Other

Exposure not classified in other definitions

(37)

(73)

Total excluding correlation of risk factors

(826)

(117,742)

(178,396)

(5,828)

(212,337)

(420,213)

Total including correlation of risk factors

(429)

(93,092)

(130,432)

(3,448)

(131,662)

(259,684)

 (1) Values net of taxes.

 

Bradesco      61


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Presented below, the Sensitivity Analysis – Trading and Banking Portfolios.

 

Sensitivity Analysis – Trading and Banking Portfolios

 

 

R$ thousand

Trading and Banking Portfolios (1)

On December 31

2018

2017

Scenarios

Scenarios

1

2

3

1

2

3

Interest rate in Reais

Exposure subject to variations in fixed interest rates and interest rate coupons

(16,141)

(2,973,012)

(5,760,223)

(12,579)

(2,339,939)

(4,560,181)

Price indexes

Exposure subject to variations in price index coupon rates

(8,410)

(913,671)

(1,630,441)

(512)

(56,130)

(107,716)

Exchange coupon

Exposure subject to variations in foreign currency coupon rates

(1,368)

(119,441)

(229,387)

(1,575)

(80,110)

(158,548)

Foreign currency

Exposure subject to exchange rate variations

(407)

(10,119)

(20,238)

(600)

(15,004)

(30,008)

Equities

Exposure subject to variation in stock prices

(21,229)

(530,729)

(1,061,459)

(16,289)

(407,237)

(814,475)

Sovereign/Eurobonds and Treasuries

Exposure subject to variations in the interest rate of securities traded on the international market

(1,762)

(92,193)

(184,758)

(4,978)

(205,764)

(406,054)

Other

Exposure not classified in other definitions

(412)

(10,298)

(20,596)

(12)

(307)

(613)

Total excluding correlation of risk factors

(49,729)

(4,649,463)

(8,907,102)

(36,545)

(3,104,491)

(6,077,595)

Total including correlation of risk factors

(37,535)

(3,905,602)

(7,499,908)

(26,956)

(2,678,101)

(5,232,466)

 

(1) Values net of taxes.

 

 

 

       62     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

3.3.    Liquidity risk

 

The Liquidity Risk is represented by the possibility of the institution not being able to efficiently meet its obligations, without affecting its daily operations and incurring significant losses, as well as the possibility of the institution to fail to trade a position at market price, due to its larger size as compared to the volume usually traded or in view of any market interruption.

 

The understanding and monitoring of this risk are crucial to enable the Organization to settle operations in a timely manner.

 

Management Process for Liquidity Risk

 

The management of liquidity risk is a group-wide process. This process involves several areas with specific responsibilities. The measurement and control of liquidity risk are conducted in a centralized and independent manner, including the daily monitoring of available funds, the compliance with the liquidity level according to the risk appetite defined by the board, as well as the contingency plan and recovery for possible stress situations.

 

The Organization has a Liquidity Risk Management Policy approved by the Board of Directors, which has as one of its objectives to ensure the existence of norms, criteria and procedures for the correct monitoring of this type of risk, as well as the existence of a strategy and of action plans for liquidity crisis situations. The policy and controls established fully comply with the provisions of CMN Resolution No. 4,557/17.

 

Control and Monitoring

 

Liquidity risk management is carried out by the Treasury Department, based on the positions available, by independent area. The DCIR is responsible for the measurement methodology, control of the limits established by type of currency and company (including non-financial), review of policies, standards, criteria and procedures and studies for new recommendations.

 

Liquidity risk is monitored daily by the business and control areas and at the meetings of the Asset and Liability Management Treasury Executive Committee, which manages liquidity reserves, with term and currency mismatches. Monitoring is also handled by the Risk Committee and the Integrated Risk Management and Capital Allocation Committee and the Board of Directors.

 

Since October 2017, the Organization adopted as metric also for internal management, Short-Term Liquidity indicator (liquidity coverage ratio), as provided by CMN Resolution No. 4,401/15 of Central Bank Circular Letter No. 3,749/15.

 

Bradesco      63


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

LCR - Liquidity Coverage Ratio

 

The Liquidity Coverage Ratio (LCR) is designed to ensure that the Organization maintains a sufficient level of liquid assets to cover liquidity needs in an eventual stress scenario. The LCR is the ratio between the stock of High Quality Liquid Assets (HQLA) and total net cash outflow, calculated based on a generic stress scenario. The formula shows the main components of the indicator as follows:

 

In accordance with the LCR implantation schedule, the level of the ratio between HQLA and total net cash outflows must comply with the following schedule:

 

Year

2016

2017

2018

As of 2019

% Required

70%

80%

90%

100%

 

The stress scenarios parameterization was conducted by the Regulator to capture idiosyncratic and market shocks, considering the period of 30 days. The items below show some of the shocks included in the methodology:

 

·    the partial loss of retail and uncollateralized wholesale funding, as well as short-term funding capacity;

·    the additional outflow of funds, contractually foreseen, due to the downgrading of the institution’s credit rating by up to three levels, including eventual additional collateral requirements;

·    an increase in the volatility of factors that impact collateral quality or the potential future exposure of derivative positions, resulting in the application of larger collateral discounts or a call for additional collateral or in other liquidity requirements;

·    withdrawals of higher than expected amounts from credit/liquidity lines granted; and

·    the potential need to repurchase debt or honor non-contractual obligations in order to mitigate reputational risk.

 

High Quality Liquid Assets (HQLA)

 

HQLA are assets that maintain their market liquidity in periods of stress and that meet the minimum requirements established by the Central Bank of Brazil, such as, among others, being free of any legal impediment or restriction; suffering little or no loss in market value when converted into cash; having a low credit risk; easy and accurate pricing; and being traded in an active and important market, with little difference between the purchase and sale price, high traded volume and a large number of participants. These assets are subject to weighting factors which may reduce their value, for example, in accordance with the risk rating of their issuer or the historic variation in their market price, among other requirements.

 

Cash Outflows and Inflows

 

Cash outflows are the result of a reduction in deposits and funding; the maturity of securities issued; scheduled contractual obligations for the next 30 days; margin adjustments and calls in derivative operations; the utilization/withdrawal of credit and liquidity lines granted by the Bank; and contingent cash outflows.

 

Cash inflows for the next 30 days correspond to the expected receipt of loans and financings; deposits; securities; and margin adjustments and easing in derivative operations.

 

 

       64     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The table below shows the average LCR Prudential Conglomerate:

R$ thousand

Information on the Liquidity Coverage Ratio (LCR)

 

 

On December 31 (1)

On December 31 (2)

2018

2017

Average Amount (3)

Weighted Average Amount (4)

Average Amount (3)

Weighted Average Amount (4)

Number of Line

High Quality Liquid Assets (HQLA)

 

 

 

 

1

Total High Quality Liquid Assets (HQLA)

 

140,377,669

 

125,596,242

Number of Line

Cash Outlows

 

 

 

 

2

Ratail funding:

235,539,799

21,919,302

210,005,411

17,749,477

3

Stable funding

119,809,242

5,990,462

135,661,528

6,783,076

4

Less stable funding

115,730,557

15,928,840

74,343,883

10,966,401

5

Non-collateralized wholesale funding:

125,136,835

50,927,871

112,474,083

50,716,519

6

Operating deposits (all counterparties) and affiliated cooperative deposits

8,648,728

432,436

8,152,936

407,647

7

Non-operating deposits (all counterparties)

115,864,088

49,871,416

103,275,838

49,263,563

8

Other non-collateralized wholesale funding

624,019

624,019

1,045,309

1,045,309

9

Collateralized wholesale funding

5,361,781

6,656,909

10

Additional requirements:

104,341,246

14,181,343

97,751,894

13,746,422

11

Related to exposure to derivatives and other collateral requirements

14,419,270

6,741,269

15,192,265

7,089,564

12

Related to funding losses through the issue of debt instruments

554,811

554,811

345,574

345,574

13

Related to lines of credit and liquidity

89,367,165

6,885,263

82,214,055

6,311,284

14

Other contractual obligations

33,875,647

31,857,396

30,492,461

28,811,462

15

Other contingent obligations

122,319,336

4,915,397

131,133,680

5,160,312

16

Total cash outflows

129,163,091

-

122,841,100

Number of Line

Cash Inflows

 

 

 

 

17

Collateralized loans

95,238,798

161,500,640

18

Outstanding loans whose payments are fully up-to-date

30,039,902

16,950,831

32,424,050

21,009,387

19

Other cash inflows

37,235,944

30,511,989

24,624,328

21,429,233

20

Total cash inflows

162,514,644

47,462,820

218,549,018

42,438,620

 

 

 

Total Adjusted Amount (5)

 

Total Adjusted Amount (5)

21

Total HQLA

 

140,377,669

 

125,596,242

22

Total net cash outflow

 

81,700,271

 

80,402,480

23

LCR (%) (5)

 

171.8%

 

156.2%

 

(1) Calculated based on the simple daily average of the months that compose the quarter (61 observations);

(2) Calculated based on the simple average of the closing of the months that compose the quarter (3 observations);

(3) Corresponds to the total balance related to the item of cash inflows or outflows;

(4) Corresponds to the value after application of the weighting factors; and

(5) Corresponds to the calculated value after the application of weighting factors and limits.

 

The amount of net assets (HQLA) consists, in addition to the compulsory returns and reserves at the Central Bank of Brazil, mainly of federal government securities. These net assets resulted in R$140,377,668 thousand, the average of the fourth quarter of 2018.

 

Related to the cash outflows, based on the regulatory stress scenario (line 16), about 56.0% are redemptions and non-renewals retail and wholesale funding without collateral (unsecured), as shown on the lines 2 and 5 of the table.

 

Another relevant group refers to the item "Other contractual obligations" (line 14), which mainly includes the output streams of onlending operations, credit cards and trade finance.

 

Regarding cash inflows, corresponding to R$47,462,820 thousand in the average of the fourth quarter of 2018, stand out the receipts of loans operations (partial renewal), the inflows of Trade Finance operations, cash and cash equivalents and redemptions of securities in addition to the inflow of transfer and credit card operations.

 

Bradesco      65


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Net Stable Funding

 

The Net Stable Funding (NSFR) aims to asses if the Organization is financing its activities (assets) from more stable sources of funding (liabilities). The NSFR corresponds to the ratio between the Available Stable Funding (ASF) and the Required Stable Funding (RSF), which are defined according to the structures of assets and liabilities of the institution that are weighted according to the definitions of the Regulator.

 

The following figure shows the main components of the indicator:


 

Available Stable Funding (ASF)

 

The available stable funding is represented by the Liabilities and Shareholders’ Equity, which are weighted according to their stability, in which the resources considered as more stable are determined mainly by behavioral aspects of the clients, also considering their relationship with the institution, legal aspects and other variables implied.

 

Required Stable Funding (RSF)

 

The required stable funding shall be determined according to the assets in the balance sheet and other financial instruments, for example, credit limits provided and guarantees given, which are weighted by aspects related to the type of operation, maturity, and counterparty, among others.

 

The following table shows the NSFR of December of the Prudential Conglomerate:

 

R$ thousand

Information on the Long-term Indicator (NSFR)

   

On December 31, 2018 (1)

Weighted Average (2)

Amount per effective term of residual maturity

Without expiration

Less than 6 months

Greater than or equal to 6 months and less than one year

Greater than or equal to one year

Line Number

Available stable funding (ASF)

 

 

 

 

 

1

Capital

         121,289,750

                          -  

                          -  

           47,181,305

      168,471,055

2

Reference Equity, gross of regulatory deductions

         121,289,750

                          -  

                          -  

                          -  

      121,289,750

3

Other instruments not included in line 2

                          -  

                          -  

                          -  

           47,181,305

        47,181,305

4

Retail Funding, of which:

         125,747,484

         121,158,206

                928,202

             3,531,590

      232,929,002

5

Stable funding

           80,033,425

           46,858,729

                  46,015

                       467

      120,591,728

6

Less stable fundraising

           45,714,059

           74,299,478

                882,187

             3,531,123

      112,337,274

7

Wholesale Funding, of which:

           22,215,270

         360,387,800

           37,722,267

         113,139,255

      203,870,597

8

Operating deposits and deposits of affiliated cooperatives

             9,164,749

                          -  

                          -  

                          -  

          4,157,051

9

Other wholesale fundings

           13,050,521

         360,387,800

           37,722,267

         113,139,255

      199,713,546

10

Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations, even if contingent

                          -  

           26,014,027

                  20,575

                203,130

                       -  

11

Other liabilities, of which:

           67,588,097

           16,123,614

                          -  

                          -  

          2,394,664

12

Derivatives whose replacement value is less than zero

 

           16,123,614

                          -  

                          -  

 

13

Other liabilities or shareholders' equity not included in the previous items

           67,588,097

                          -  

                          -  

                          -  

          2,394,664

14

Total Available Stable Funding (ASF)

 

 

 

 

      607,665,317

 

       66     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

 

R$ thousand

Line Number

Required Stable Funding (ASF)

15

Total High Liquidity Assets (HQLA)

 

 

 

 

  10,978,040

16

Operating deposits held in other financial institutions

  -  

  -  

  -  

  -  

  -  

17

Securities, securities and transactions with financial institutions, non-financial institutions and central banks, of which:

4,981,329

   208,163,497

  51,172,541

   237,826,970

   281,492,138

18

Transactions with financial institutions collateralized by Level 1 HQLA

  -  

5,583,766

  -  

  -  

558,377

19

Transactions with financial institutions collateralized by HQLA Level 2A, Level 2B or without collateral

  -  

   100,234,344

2,463,757

2,351,303

5,077,176

20

Loans and financing granted to wholesale, retail, central government and central bank operations, of which:

  -  

  96,715,762

  46,251,306

   142,375,233

   195,963,868

21

Operations with a Risk Weighting Factor (FPR) of less than or equal to 35%, pursuant to Circular No. 3644, of 2013

  -  

  -  

  -  

  -  

  -  

22

Residential real estate financing, of which:

  -  

904,499

892,290

  30,708,792

  20,859,110

23

Operations that comply with the provisions of Circular No. 3644, of 2013, art. 22

  -  

904,499

892,290

  30,708,792

  20,859,110

24

Securities not eligible for HQLA, including shares traded on the stock exchange

4,981,329

4,725,126

1,565,188

  62,391,642

  59,033,607

25

Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations, even if contingent

  -  

  28,233,429

4,997,705

231,882

  -  

26

Other assets, of which:

   190,860,571

  14,761,798

1,377,311

  26,863,862

   178,448,718

27

Operations with gold and commodities, including those with a forecast of physical settlement

  -  

 

 

 

  -  

28

Assets provided as a result of the deposit of initial guarantee margin in operation with derivatives and participation in mutualized guarantee funds of clearing houses and clearing and settlement service providers that are interposed as central counterparty

-

  -  

  -  

9,091,888

7,728,105

29

Derivatives whose replacement value is greater than or equal to zero

-

  -  

  -  

  14,140,931

  -  

30

Derivatives whose replacement value is less than zero, gross of the deduction of any guarantee provided as a result of the margin deposit

-

  -  

  -  

  -  

806,181

31

Other assets not included in the previous lines

   190,860,571

  14,761,798

1,377,311

3,631,043

   169,914,433

32

Transactions not recorded in the balance sheet

-

   305,134,878

  -  

  -  

  11,028,648

33

Total Required Stable Funding (RSF)

 

 

 

 

   481,947,545

34

NSFR (%)

 

 

 

 

126,1%


(1) Corresponds to the balance-sheet total; quarter (61 comments); and
(2) Corresponds to the value after applying the weighting factors.

   

 

 

The NSFR long term indicator presented a volume weighted for available stable funding resources much higher to that of required stable funding resources, with a surplus weighted balance of approximately R$126 billion, resulting in an indicator of 126.1%.

 

The amount of available stable funding (ASF) is formed largely by the funding of clients considering the level of stability as the main factor for the contribution of the ASF. The calculation of December 2018 for the ASF presented a participation of 38% from the funding of Retail and 34% from the funding of Wholesale.

 

The values of required stable funding (RSF) are constituted by the Asset items and by items not recognized on the balance sheet. These balance sheets are weighted according to their respective liquidity profile, therefore, the items related to loans and other assets, with low or no liquidity, feature prominently in the RSF (high weighting factors), while highly liquid assets, such as, for example unpledged federal public securities, receive low weighting factors. For the month of December 2018 the loan operations (item 20) accounted for 41% of the total RSF, while other assets (item 31) participated in 35% of the RSF.

 

Bradesco      67


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Internal Communication

 

In the process of liquidity risk management, reports are distributed daily to the areas involved in management and control, as well as to Management. This process includes the use of several analysis instruments to monitor liquidity, such as:

 

·       Daily distribution of liquidity control instruments;

·       Automatic intra-day update of the liquidity reports for appropriate management by the Treasury Department;

·       Preparation of reports with past behavior and future simulations based on scenarios;

·       Daily verification of compliance with minimum liquidity levels;

·       Elaboration of complementary reports where the concentrations of funding by type of product, term and counterparty are presented; and

·       Weekly reports to the Senior Management, showing the behavior and expectations related to the liquidity situation.

 

The liquidity risk management process also has an alert system that selects the appropriate reporting level according to the percentage of the established limit utilized. Thus, the lower the liquidity ratios, the higher the number and echelon of Senior Management members who receive the reports.

 

Undiscounted cash flows of financial liabilities

 

The table below presents the cash flows payable for non-derivative financial liabilities, covering the remaining contractual period to maturity as from the date of the consolidated statement of financial position. The values disclosed in this table represent the undiscounted contractual cash flows.

 

 

R$ thousand

On December 31, 2018

Up to 1 month

From 1 to 3 months

From 3 months to 1 year

From 1 to 5 years

More than 5 years

Total

Deposits from banks

187,971,161

11,043,189

31,568,186

18,339,106

6,278,070

255,199,712

Deposits from customers

154,751,012

8,321,457

51,709,653

142,724,058

86,171

357,592,351

Funds from issuance of securities

2,715,463

7,704,113

57,416,558

110,993,400

2,819,759

181,649,293

Subordinated debt

303,419

83,095

6,290,777

25,122,764

43,080,703

74,880,758

Other financial liabilities (1)

38,764,438

11,790,526

4,717,811

3,672,499

3,652,961

62,598,235

Total liabilities

384,505,493

38,942,380

151,702,985

300,851,827

55,917,664

931,920,349

 

       68     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

R$ thousand

On December 31, 2017

Up to 1 month

From 1 to 3 months

From 3 months to 1 year

From 1 to 5 years

More than 5 years

Total

Deposits from banks

197,275,471

17,199,209

47,240,285

25,251,295

6,593,477

293,559,737

Deposits from customers

141,846,015

7,519,939

16,476,264

106,861,185

117,268

272,820,671

Funds from issuance of securities

3,346,915

13,222,173

69,548,689

77,143,455

1,503,901

164,765,133

Subordinated debt

896,349

3,705,136

6,942,643

27,064,409

33,166,577

71,775,114

Other financial liabilities (1)

43,606,124

8,785,744

2,290,146

3,711,492

4,046,006

62,439,512

Total liabilities

386,970,874

50,432,201

142,498,027

240,031,836

45,427,229

865,360,167

 (1) Include, mainly, credit card transactions, foreign exchange transactions, negotiation and intermediation of securities, finance lease and capitalization bonds.

 

The assets available to meet all the obligations and cover the outstanding commitments include cash and cash equivalents, financial assets, loans and advances. Management may also cover unexpected cash outflows by selling securities and by having access to sources of additional funds, such as asset-backed-markets.

 

The previous table shows the undiscounted contractual cash flows of the financial liabilities of the Organization. The cash flows that the Organization estimates for these instruments may vary significantly from those presented. For example, it is expected that demand deposits of customers will maintain a stable or increasing balance, and it is not expected that these deposits will be withdrawn immediately.

 

The gross cash outflows presented in the previous table refer to the undiscounted contractual cash flow related to the financial liability.

 

In the Organization, liquidity-risk management involves a series of controls, mainly related to the establishment of technical limits, with the ongoing evaluation of the positions assumed and the financial instruments used.

 

Undiscounted cash flows for derivatives

 

All the derivatives of the Organization are settled at net value, and include:

 

·       Foreign currency derivatives – over-the-counter currency options, currency futures, and currency options traded on an exchange; and

·       Interest rate derivatives – interest rate swaps, forward rate contracts, interest rate options, other interest rate contracts, interest rate futures traded on an exchange and interest rate options traded on an exchange.

 

Bradesco      69


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The table below analyzes the derivative financial liabilities that will be settled at net value, grouped based on the period remaining from the reporting date to the respective maturity date. The values disclosed in the table are undiscounted cash flows.

 

 

R$ thousand

On December 31, 2018

Up to 1 month

From 1 to 3 months

From 3 months to 1 year

From 1 to 5 years

More than 5 years

Total

Differential of swaps payable

1,302,578

464,191

6,428,914

6,266,955

350,374

14,813,012

Non-deliverable forwards

96,680

141,438

250,176

25,676

637

514,607

• Purchased

14,062

17,695

101,869

18,090

637

152,353

• Sold

82,618

123,743

148,307

7,586

362,254

Premiums of options

1,001,464

20,355

127,983

123,491

372,057

1,645,350

Adjustment payables - future

21,283

21,283

Total of derivative liabilities

2,422,005

625,984

6,807,073

6,416,122

723,068

16,994,252

 

 

R$ thousand

On December 31, 2017

Up to 1 month

From 1 to 3 months

From 3 months to 1 year

From 1 to 5 years

More than 5 years

Total

Differential of swaps payable

279,134

125,468

536,406

12,169,717

166,038

13,276,763

Non-deliverable forwards

201,115

95,761

147,710

66,682

737

512,005

• Purchased

73,599

53,513

90,914

65,640

737

284,403

• Sold

127,516

42,248

56,796

1,042

227,602

Premiums of options

551,220

13,510

34,443

63,052

303,200

965,425

Adjustment payables - future

155,305

155,305

Total of derivative liabilities

1,186,774

234,739

718,559

12,299,451

469,975

14,909,498

 

       70     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Statement of financial position by maturities

 

The tables below show the financial assets and liabilities of the Organization segregated by maturities used for the management of liquidity risks, in accordance with the remaining contractual maturities on the reporting date:

 

 

R$ thousand

On December 31, 2018

Current

Non-current

Total

1 to 30 days

31 to 180 days

181 to 360 days

1 to 5 years

More than 5 years

No stated maturity

Assets

 

 

 

 

 

 

 

Cash and balances with banks

107,209,743

107,209,743

Financial assets at fair value through profit or loss

3,129,166

3,917,446

5,425,013

164,553,949

61,990,603

7,144,973

246,161,150

Financial assets at fair value through other comprehensive income

17,262,976

44,288,649

14,212,201

67,290,177

24,067,050

10,929,483

178,050,536

Loans and advances to customers, net of impairment

62,060,766

92,247,120

52,642,217

124,423,414

49,013,559

380,387,076

Loans and advances to banks, net of impairment

32,770,492

68,354,830

1,831,146

2,292,482

105,248,950

Securities, net of provision for losses

1,040,454

2,361,956

855,476

91,922,854

44,423,998

140,604,738

Other financial assets (1)

29,524,094

134,393

131,233

11,910,297

2,193,292

43,893,309

Total financial assets

252,997,691

211,304,394

75,097,286

462,393,173

181,688,502

18,074,456

1,201,555,502

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Financial liabilities at amortized cost

 

 

 

 

 

 

 

Deposits from banks

193,135,637

20,377,472

13,489,852

15,646,679

4,664,339

247,313,979

Deposits from customers (2)

154,046,665

15,639,175

42,076,109

128,959,777

26,470

340,748,196

Funds from issuance of securities

2,598,083

29,410,415

34,192,057

81,108,678

719,785

148,029,018

Subordinated debt

7,059

149,894

6,305,187

22,492,556

15,434,005

9,254,743

53,643,444

Other financial liabilities (3)

38,764,438

11,790,526

4,717,811

3,672,499

3,652,961

62,598,235

Financial liabilities at fair value through profit or loss

15,066,551

373,896

162,153

177,029

372,458

16,152,087

Provision for Expected Loss

 

 

 

 

 

 

 

Loan Commitments

2,551,676

2,551,676

Financial guarantees

719,216

719,216

Insurance technical provisions and pension plans (2)

216,282,259

2,347,327

939,034

32,009,667

251,578,287

Total financial liabilities

619,900,692

80,088,705

101,882,203

287,337,777

24,870,018

9,254,743

1,123,334,138

 

 

Bradesco      71


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

R$ thousand

On December 31, 2017

Current

Non-current

Total

1 to 30 days

31 to 180 days

181 to 360 days

1 to 5 years

More than 5 years

No stated maturity

Assets

 

 

 

 

 

 

 

Cash and balances with banks

81,742,951

81,742,951

Financial assets held for trading

15,181,714

10,934,575

5,501,249

146,527,365

56,173,284

7,391,854

241,710,041

Financial assets available for sale

2,422,266

9,392,915

19,351,886

83,816,085

33,391,763

11,037,807

159,412,722

Investments held to maturity

7,753

2,454

19,205

10,284,940

28,691,766

39,006,118

Financial assets pledged as collateral

25,977,537

111,922,357

2,543,922

40,965,417

2,565,940

183,975,173

Loans and advances to banks

23,136,673

3,544,426

3,387,187

1,754,483

424,955

32,247,724

Loans and advances to customers

55,830,036

80,715,548

51,526,092

114,151,120

44,535,303

346,758,099

Other financial assets (1)

25,375,820

1,340,567

1,807,856

11,322,882

1,872,358

41,719,483

Total financial assets

229,674,750

217,852,842

84,137,397

408,822,292

167,655,369

18,429,661

1,126,572,311

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits from banks

197,177,061

29,640,587

31,589,994

22,221,075

5,328,751

285,957,468

Deposits from customers (2)

142,525,722

11,400,607

10,531,633

97,523,112

27,371

262,008,445

Financial liabilities held for trading

13,552,386

201,643

81,073

134,649

305,248

14,274,999

Funds from issuance of securities

3,422,727

31,299,770

48,540,240

51,142,979

768,374

135,174,090

Subordinated debt

738,929

9,428,997

640,536

20,767,242

18,603,697

50,179,401

Insurance technical provisions and pension plans (2)

207,499,559

2,411,996

939,034

28,239,001

239,089,590

Other financial liabilities (3)

43,606,124

8,785,744

2,290,146

3,711,492

4,046,006

62,439,512

Total financial liabilities

608,522,508

93,169,344

94,612,656

223,739,550

29,079,447

1,049,123,505

(1) Includes mainly foreign exchange transactions, debtors for guarantee deposits and negotiation and intermediation of securities;

(2) Demand and savings deposits and technical provisions for insurance and pension plans comprising VGBL and PGBL products are classified as up to 30 days, without considering average historical turnover; and

(3) Includes mainly credit card transactions, foreign exchange transactions, negotiation and intermediation of securities, finance lease and capitalization bonds.

 

       72     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The tables below show the assets and liabilities of the Organization segregated by current and non-current, in accordance with the remaining contractual maturities on the reporting date:

 

   

R$ thousand

On December 31, 2018

Current

Non-current

Total

Assets

 

 

 

Total financial assets

539,399,371

662,156,131

1,201,555,502

Non-current assets held for sale

1,353,330

1,353,330

Investments in associated companies

8,125,799

8,125,799

Premises and equipment

8,826,836

8,826,836

Intangible assets and goodwill, net of accumulated amortization

16,128,548

16,128,548

Taxes to be offset

3,683,210

9,815,054

13,498,264

Deferred income tax assets

48,682,569

48,682,569

Other assets

5,443,840

1,929,026

7,372,866

Total non-financial assets

10,480,380

93,507,832

103,988,212

Total assets

549,879,751

755,663,963

1,305,543,714

 

 

 

 

Liabilities

 

 

 

Total financial liabilities

801,871,600

321,462,538

1,123,334,138

Other reserves

1,846,682

17,955,489

19,802,171

Current income tax liabilities

2,373,261

2,373,261

Deferred income tax assets

48,925

1,151,664

1,200,589

Other liabilities

32,630,277

1,527,158

34,157,435

Total non-financial liabilities

36,899,145

20,634,311

57,533,456

Total equity

124,676,120

124,676,120

Total liabilities

838,770,745

466,772,969

1,305,543,714

 

  

R$ thousand

On December 31, 2017

Current

Non-current

Total

Assets

 

 

 

Total financial assets

531,664,989

594,907,322

1,126,572,311

Non-current assets held for sale

1,520,973

1,520,973

Investments in associated companies

8,257,384

8,257,384

Premises and equipment

8,432,475

8,432,475

Intangible assets and goodwill, net of accumulated amortization

16,179,307

16,179,307

Taxes to be offset

4,589,981

5,934,594

10,524,575

Deferred income tax assets

43,731,911

43,731,911

Other assets

6,602,669

2,531,835

9,134,504

Total non-financial assets

12,713,623

85,067,506

97,781,129

Total assets

544,378,612

679,974,828

1,224,353,440

 

 

 

 

Liabilities

 

 

 

Total financial liabilities

796,304,508

252,818,997

1,049,123,505

Other reserves

1,349,366

17,141,361

18,490,727

Current income tax liabilities

2,416,345

2,416,345

Deferred income tax assets

36,344

1,215,503

1,251,847

Other liabilities

33,460,225

1,917,087

35,377,312

Total non-financial liabilities

37,262,280

20,273,951

57,536,231

Total equity

117,693,704

117,693,704

Total liabilities

833,566,788

390,786,652

1,224,353,440

 

 

Bradesco      73


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

3.4.   Fair value of financial assets and liabilities

 

The Organization applies IFRS 13 for financial instruments measured in the consolidated statement of financial position at fair value, which requires disclosure of fair-value measurements according to the following fair-value hierarchy of fair value measurement:

 

·       Level 1

 

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active market, as well as Brazilian government securities that are highly liquid and are actively traded in over-the-counter markets.

 

·       Level 2

 

Valuation uses observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data, including but not limited to yield curves, interest rates, volatilities, equity or debt prices and foreign exchange rates.

 

·       Level 3

 

Valuation uses unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities normally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant Management judgment or estimation. This category generally includes certain corporate and bank debt securities and certain derivative contracts.

 

To fair value securities which have no consistent, regulatory updated, public price source, Bradesco uses models defined by the mark-to-market Commission and documented in the mark-to-mark manual for each security type. Through the use of methods and both mathematical and financial models which capture the effects and variations in the prices of marked-to-market assets, or similar instruments, Bradesco is able to ascertain in a clear and consistent manner the determination of fair value of its Level 3 assets and liabilities.

 

 

       74     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The tables below present the composition of the financial assets and liabilities measured at fair value, classified using the hierarchical levels:

 

 

R$ thousand

On December 31, 2018

Level 1

Level 2

Level 3

Fair Value

Brazilian government securities

202,199,216

4,556,831

3

206,756,050

Corporate debt and marketable equity securities

3,678,532

5,206,852

418,558

9,303,942

Bank debt securities

1,554,257

8,610,197

10,164,454

Mutual funds

3,657,393

3,657,393

Foreign governments securities

849,114

849,114

Brazilian sovereign bonds

659,603

659,603

Financial assets at fair value through profit or loss

212,598,115

18,373,880

418,561

231,390,556

Derivative financial instruments (assets)

34,752

14,699,247

36,595

14,770,594

Derivative financial instruments (liabilities)

(32,434)

(16,095,752)

(23,901)

(16,152,087)

Derivatives

2,318

(1,396,505)

12,694

(1,381,493)

Brazilian government securities

150,778,773

39,982

150,818,755

Corporate debt securities

3,761,191

1,759,544

454,459

5,975,194

Bank debt securities

5,715,372

205,704

5,921,076

Brazilian sovereign bonds

1,564,667

1,564,667

Mutual funds

2,841,361

2,841,361

Marketable equity securities and other stocks

5,266,028

2,649,350

3,014,105

10,929,483

Financial assets at fair value through other comprehensive income

169,927,392

4,614,598

3,508,546

178,050,536

Total

382,527,825

21,591,973

3,939,801

408,059,599

 

Bradesco      75


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

  

R$ thousand

On December 31, 2017

Level 1

Level 2

Level 3

Fair Value

Brazilian government securities

198,273,452

3,975,816

4

202,249,272

Corporate debt and marketable equity securities

3,716,053

8,271,295

352,442

12,339,790

Bank debt securities

1,952,015

6,396,254

8,348,269

Mutual funds

4,377,508

4,377,508

Foreign governments securities

528,010

528,010

Brazilian sovereign bonds

307

307

Trading securities

208,847,345

18,643,365

352,446

227,843,156

Derivative financial instruments (assets)

46,601

13,814,312

5,972

13,866,885

Derivative financial instruments (liabilities)

(14,264,124)

(10,875)

(14,274,999)

Derivatives

46,601

(449,812)

(4,903)

(408,114)

Brazilian government securities

103,237,635

44,123

103,281,758

Corporate debt securities

4,786,078

31,740,856

3,451,696

39,978,630

Bank debt securities

1,086,454

97,399

1,183,853

Brazilian sovereign bonds

728,127

728,127

Foreign governments securities

3,202,547

3,202,547

Marketable equity securities and other stocks

4,380,606

3,261,732

3,395,469

11,037,807

Available-for-sale securities

117,421,447

35,099,987

6,891,288

159,412,722

Brazilian government securities

53,841,066

53,841,066

Corporate debt securities

825,287

825,287

Bank debt securities

4,904,070

4,904,070

Brazilian sovereign bonds

713,555

713,555

Financial assets pledged as collateral

60,283,978

60,283,978

Total

386,599,371

53,293,540

7,238,831

447,131,742

 

Derivative Assets and Liabilities

 

The Organization’s derivative positions are determined using quantitative models that require the use of multiple inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors. The majority of market inputs are observable and can be obtained, from B3 (principal source) and the secondary market. Exchange traded derivatives valued using quoted prices are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; those are classified as Level 2 or Level 3.

 

The yield curves are used to determine the fair value by the method of discounted cash flow, for currency swaps and swaps based on other risk factors. The fair value of futures and forward contracts is also determined based on quoted markets prices on the exchanges for exchanges-traded derivatives or using similar methodologies to those described for swaps. The fair value of options is determined using external quoted prices or mathematical models, such as Black-Scholes, using yield curves, implied volatilities and the fair value of the underlying asset. Current market prices are used to determine the implied volatilities. The majority of these models do not contain a high level of subjectivity as the methodologies used in the models do not require significant judgment and inputs to the model are readily observable from active quoted markets. Such instruments are generally classified within Level 2 of the valuation hierarchy. The fair values of derivative assets and liabilities also include adjustments for market liquidity, counterparty credit quality and other specific factors, where appropriate.

 

Derivatives that are valued based on mainly unobservable market parameters and that are not actively traded are classified within Level 3 of the valuation hierarchy. Level 3 derivatives include credit default swaps which have corporate debt securities as underlyings.

 

 

       76     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years 2018 and 2017:

 

 

R$ thousand

Financial assets at fair value through profit or loss

Financial assets at fair value through other comprehensive income

Derivatives

Total

Balance on December 31,  2016

287,224

5,013,353

(8,617)

5,291,960

Included in the statement of income and other comprehensive income

15,868

(735,002)

(719,134)

Acquisitions

74,908

4,019,844

3,714

4,098,466

Write-offs

(25,554)

(1,406,907)

(1,432,461)

Balance on December 31,  2017

352,446

6,891,288

(4,903)

7,238,831

Included in the statement of income and other comprehensive income

24,142

(374,664)

(350,522)

Acquisitions

150,950

91,668

17,597

260,215

Write-offs

(22,262)

(939)

(23,201)

Transfer with categories (1)

(3,419,149)

(3,419,149)

Transfer levels

(86,715)

320,342

233,627

Balance on December 31,  2018

418,561

3,508,546

12,694

3,939,801

 (1) With the adoption of IFRS 9, a significant portion of the debentures that were in the category of available for sale are now measured at amortized cost.

 

The tables below show the gains/(losses) due to changes in fair value, including the realized and unrealized gains and losses, recorded in the consolidated statement of income for Level 3 assets and liabilities during the years 2018, 2017 and 2016:

 

 

R$ thousand

Year ended December 31, 2018

Financial assets at fair value through profit or loss

Financial assets at fair value through other comprehensive income

Total

Interest and similar income

8,415

79,579

87,994

Net trading gains/(losses) realized and unrealized

15,727

(454,243)

(438,516)

Total

24,142

(374,664)

(350,522)

 

 

R$ thousand

Year ended December 31, 2017

Financial assets held for trading

Financial assets available for sale

Total

Interest and similar income

25,967

182,269

208,236

Net trading gains/(losses) realized and unrealized

(10,099)

(917,271)

(927,370)

Total

15,868

(735,002)

(719,134)

 

 

R$ thousand

Year ended December 31, 2016

Financial assets held for trading

Financial assets available for sale

Total

Interest and similar income

16,518

207,164

223,682

Net trading gains/(losses) realized and unrealized

(3,363)

(1,381,389)

(1,384,752)

Total

13,155

(1,174,225)

(1,161,070)

 

 

Bradesco      77


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

 

 

Sensitivity analysis for financial assets classified as Level 3

 

 

R$ thousand

On December 31, 2018

Impact on income (1)

Impact on shareholders’ equity (1)

1

2

3

1

2

3

Interest rate in Reais

(7)

(1,491)

(2,669)

(102)

(20,473)

(36,901)

Price indexes

(16)

(1,750)

(3,296)

Equities

(1,748)

(43,705)

(87,410)

(15,987)

(399,669)

(799,338)

 

 

R$ thousand

On December 31, 2017

Impact on income (1)

Impact on shareholders’ equity (1)

1

2

3

1

2

3

Interest rate in Reais

(8)

(1,931)

(3,482)

(63)

(14,873)

(26,345)

Price indexes

(10)

(1,269)

(2,394)

Equities

(1,351) 

(33,783) 

(67,567) 

(17,825)

(445,615)

(891,231)

 (1) Values net of taxes.

 

       78     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The sensitivity analyses were carried out based on the scenarios prepared for the dates shown, always taking into consideration market inputs available at the time and scenarios that would adversely impact our positions, in accordance with the scenarios below:

 

Scenario 1: Based on market information (B3, Anbima, etc.), stresses were applied for 1 basis point on the interest rate and 1.0% variation on prices. For example: for a Real/US dollar exchange rate of R$3.87 a scenario of R$3.91 was used, while for a 1-year fixed interest rate of 6.55%, a 6.56% scenario was applied;

 

Scenario 2: 25.0% stresses were determined based on market information. For example: for a Real/US dollar exchange rate of R$3.87 a scenario of R$4.84 was used, while for a 1-year fixed interest rate of 6.55%, a 8.18% scenario was applied. The scenarios for other risk factors also had 25.0% stresses in the respective curves or prices; and

 

Scenario 3: 50.0% stresses were determined based on market information. For example: for a Real/US dollar quote of R$3.87 a scenario of R$5.81 was used, while for a 1-year fixed interest rate of 6.55%, a 9.82% scenario was applied. The scenarios for other risk factors also had 50.0% stresses in the respective curves or prices.

 

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Financial instruments not measured at fair value

 

The table below summarizes the carrying amounts and the fair values of the financial assets and liabilities that were not presented in the consolidated statements of financial position at their fair value, classified using the hierarchical levels:

 

 

R$ thousand

On December 31, 2018

Fair Value

Book value

Level 1

Level 2

Level 3

Total

Financial assets (1)

 

 

 

 

 

Loans and receivables

 

 

 

 

 

·  Banks

105,248,950

105,248,950

105,248,950

·  Customers

381,797,390

381,797,390

380,387,076

Securities at amortized cost

90,337,827

50,758,010

5,827,822

146,923,659

140,604,738

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

Deposits from banks

248,216,967

248,216,967

247,313,979

Deposits from customers

340,512,921

340,512,921

340,748,196

Funds from issuance of securities

147,572,438

147,572,438

148,029,018

Subordinated debt

54,081,544

54,081,544

53,643,444

 

 

R$ thousand

On December 31, 2017

Fair Value

Book value

Level 1

Level 2

Level 3

Total

Financial assets

 

 

 

 

 

Financial assets pledged as collateral

 

 

 

 

 

·  securities purchased under agreements to resell

123,691,195

123,691,195

123,691,195

Held to maturity

29,182,489

11,963,782

41,146,271

39,006,118

Loans and receivables

 

 

 

 

 

·  Banks (1)

32,247,724

32,247,724

32,247,724

·  Customers (1)

346,633,592

346,633,592

346,758,099

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

Deposits from banks

285,716,505

285,716,505

285,957,468

Deposits from customers

261,760,442

261,760,442

262,008,445

Funds from issuance of securities

134,890,631

134,890,631

135,174,090

Subordinated debt

51,012,436

51,012,436

50,179,401

 (1)  Amounts of loans and receivables are presented net of the provision for impairment losses.

 

Below we list the methodologies used to determine the fair values presented above:

 

Loans and receivables

 

Fair values were estimated for groups of similar loans based upon type of loan, credit quality and maturity. Fair value for fixed-rate transactions was determined by discounted cash flow estimates using interest rates approximately equivalent to our rates for new transactions based on similar contracts. Where credit deterioration has occurred, estimated cash flows for fixed and floating-rate loans have been reduced to reflect estimated losses.

 

The fair values for performing loans are calculated by discounting scheduled principal and interest cash flows through maturity using market discount rates and yield curves that reflect the credit and interest rate risk inherent to the loan type at each reporting date.

 

The fair values for impaired loans are based on discounting cash flows or the value of underlying collateral.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The non-performing loans were allocated into each loan category for purposes of calculating the fair-value disclosure. Assumptions regarding cash flows and discount rates are based on available market information and specific borrower information.

 

Bonds and securities at amortized cost

 

Financial assets are carried at amortized cost. Fair values are estimated according to the assumptions described in Note 2(d). See Note 28 and 29 for further details regarding the amortized cost and fair values of held-to-maturity securities.

 

Deposits from banks and customers

 

The fair value of fixed-rate deposits with stated maturities was calculated using the contractual cash flows discounted with current market rates for instruments with similar maturities and terms. For floating-rate deposits, the carrying amount was considered to approximate fair value.

 

Funds from securities issued

 

The carrying values of funds from securities issued approximate the fair values of these instruments.

 

Subordinated debt

 

Fair values for subordinated debts were estimated using a discounted cash flow calculation that applies interest rates available in the market for similar maturities and terms.

 

3.5.   Independent Model Validation

 

The main purpose of the Independent Model Validation Area – AVIM is to verify if the models operate according to the objectives envisaged, as well as if its results are suitable for the uses for which they are intended.

 

The Independent Model Validation adopts a methodology that includes quantitative and qualitative dimensions, assessing the adequacy of processes of governance, construction of models and their assumptions, and use and monitoring of the models, which are:

 

Qualitatives

 

·   Scope of the Model: scope or coverage of the model, which encompasses the purpose for which it is intended, the type of risk involved, the companies exposed to this risk, the portfolios, products, segments, channels, etc.;
 
· Application of the Model: aspects relating to the use of the model, which includes the definition of the model, the reasonableness in the use of the factors of the model, and the flow and timeliness of information for decision making; and
 
· Technological Environment and Consistency of Data: structure of systems and controls involved in the calculations performed by the model and the process in which the model is inserted. It also encompasses the consistency of data, considering the features of version control and access, backup, traceability, changes of parameters, quality of data, contingency of systems and automated controls.

             

Quantitatives

 

 

· Measuring System: challenge to the procedures for measurement of risk, both basis and stress, encompassing the definition, implementation and validation of the method, consisting of the methodology, assumptions, parameters, calculation routine, input data and results; and
 
· Backtesting: statistical procedure used to assess the adherence of the model by comparing the values estimated by the model and the values observed over a period of time, previously defined. It includes methodological aspects of formalization and use for the improvement of the model.

 

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

    

For the implementation of its activities, the AVIM may use structures already deployed and ingrained in the Organization with the aim of avoiding the overlap of functions. Its results are reported to the managers and to the Integrated Risk Management and Capital Allocation Committee.

 

3.6.   Capital management

 

Capital Management Corporate Process

 

The Capital Management provides the conditions required to meet the Organization's strategic goals to support the risks inherent to its activities. It includes the preparation of the capital plan, identifying the contingency actions to be considered in stress scenarios.

 

In line with the strategic guidelines, the Organization manages capital, involving the control and business areas, in accordance with the guidelines of the Board of Executive Officers and Board of Directors.

 

The governance structure for the capital management and the Internal Capital Adequacy Assessment Process (ICAAP) is composed by Committees and its highest level body is the Board of Directors. The most important is the Planning, Budget and Control Department – DPOC, whose mission is to provide the efficient and effective management of the business through strategic management and planning. The DPOC supports the Senior Management by providing analyses and projections of capital requirements and availability, identifying threats and opportunities that help plan the sufficiency and optimization of capital levels. The Department is responsible for complying with the provisions of Central Bank of Brazil regarding capital management activities.

 

Capital Adequacy

 

The RC adequacy is verified daily to ensure that the Organization maintains a solid capital base in normal situations or in extreme market conditions and complying with regulatory requirements.    

 

The determination of the Central Bank of Brazil is that the financial institutions permanently maintain capital and additional Common Equity Tier I (Conservation, Countercyclical and Systemic) compatible with the risks from their activities. The risks are represented by Risk-Weighted Asset (RWA), which is calculated based on, at least, the sum of Credit, market and operational risk components.

 

Additionally, the Organization must maintain enough capital to meet the interest rate risk from operations not included in the trading portfolio (Banking Portfolio’s interest rate risk), calculated using the EVE (Economic Value Equity) method.

 

Analysis of Reference Equity (PR)

 

Following is the detailed information on the Organization's Capital, in compliance with the Prudential Conglomerate:

 

Calculation basis - Basel Ratio

R$ thousand

Basel III

On December 31

2018

2017

Prudential

Tier I capital

90,322,147

80,084,744

Common equity

81,090,060

75,079,777

Shareholders’ equity

121,120,869

110,457,476

Minority / Other

169,606

68,072

Prudential adjustments (1)

(40,200,415)

(35,445,771)

Additional Capital (3)

9,232,087

5,004,967

Tier II capital

27,618,026

24,588,090

Subordinated debts (Resolution No. 4.192/13)

22,416,933

16,947,024

Subordinated debts (prior to Resolution No. 4.192/13)

5,201,093

7,641,066

Reference Equity (a)

117,940,173

104,672,834

 

 

 

- Credit risk

598,057,619

554,928,771

- Market risk

10,407,258

8,908,205

- Operational risk

53,150,786

47,605,162

Risk-weighted assets – RWA (b)

661,615,663

611,442,138

Banking Book's Interest Rate Risk

5,180,343

3,527,467

Margin (Capital Buffer) (2)

34,911,835

34,226,583

Basel ratio (a/b)

17.8%

17.1%

Tier I capital

13.7%

13.1%

- Principal capital

12.3%

12.3%

- Additional capital

1.4%

0.8%

Tier II capital

4.2%

4.0%

(1) As from January 2018, the factor applied to prudential adjustments went from 80% to 100%, according to the timeline for application of deductions of prudential adjustments, defined in Article 11 of Resolution No. 4,192/13. Includes the positive effects of Resolution No. 4,680/18, reducing the impact of deferred tax assets arising from tax losses;
(2) Margin: Minimum (PR - PRE; PR Level I - RWA*6%; PR - RWA*4.5%) - Additional Common Equity; and
(3) Authorization of subordinated debts to compose Tier I in the amount of R$4,719 thousand (R$1,737 thousand in December 2018 and R$2,442 thousand in January 2019).

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Breakdown of Risk-Weighted Assets (RWA)

 

Below is the detailed comparison of the risk-weighted assets (RWA) of the Prudential Conglomerate, regulatory approach:

 

RWA

R$ thousand

On December 31

2018

2017

Prudential

Credit risk

598,057,619

554,928,771

Risk Weight of 0%

Risk Weight of 2%

83,052

314,012

Risk Weight of 20%

3,229,634

2,224,147

Risk Weight of 35%

11,393,716

10,208,602

Risk Weight of 50%

32,072,200

25,635,506

Risk Weight of 75%

130,208,551

114,553,059

Risk Weight of 85%

115,191,858

105,938,759

Risk Weight of 100%

265,578,016

261,909,360

Risk Weight of 250%

30,408,772

28,139,531

Risk Weight of 300%

6,634,117

2,920,531

FORMULA (1)

3,250,205

Risk Weight up to 1,250%

7,498

3,085,264

Market Risk (2)

10,407,258

8,908,205

Fixed-rate in Reais

3,621,542

5,696,584

Foreign Currency Coupon

6,949,809

838,259

Price Index Coupon

1,399,478

1,756,973

Equities

1,087,814

637,924

Commodities

757,438

449,546

Exposure to Gold, Foreign Currencies and Exchange

4,424,487

3,657,957

Operational Risk

53,150,786

47,605,162

Corporate Finance

1,655,552

1,369,491

Trading and Sales

2,443,551

1,667,449

Retail

10,032,258

9,308,681

 Commercial

23,508,471

21,518,843

Payment and Settlement

6,834,660

6,132,749

Financial Agent Services

4,055,903

3,628,257

Asset Management

4,465,702

3,827,848

Retail Brokerage

154,689

151,844

Total Risk Weighted Assets

661,615,663

611,442,138

Total Capital Requirement

(57,064,351)

(56,558,398)

Banking Book's Interest Rate Risk

(5,180,343)

(3,527,467)

 

 

 

Additional Common equity (ACPS) (3)

15,713,372

9,171,632

ACP Conservation

12,405,294

7,643,027

ACP Systemic

3,308,078

1,528,605

(1) For purposes of calculation of the market risk, Circular Letters No. 3,848 (DLO accounts 535,01 and 530,22) and No. 3,849 (DLO accounts 530,22) of Central Bank of Brazil were used;
(2) For purposes of calculation of the market risk, the capital requirement will be the maximum between the internal model and 80% of the standard model, pursuant to Circular Letters No. 3,646 and 3,674 of the Central Bank of Brazil; and
(3) In 2018, the value of the conservation ACP represents 1.875% of the amount of RWA. The systemic ACP represents 0.50% of the amount of RWA Systemic Relevance Factor determined according to Circular Letter No. 3,768 of the Central Bank of Brazil - Total Exposure and GDP of the year before last in relation to the base date: R$1.1 trillion and R$6.3 trillion, respectively. The contracyclical ACP remained at 0% of the amount of RWA, pursuant to Communication No. 32,139 of Central Bank of Brazil, where the RWA of the loan risk to the non-banking private sector (RWACPrNB) is R$528.3 billion in Brazil.

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Capital Sufficiency

 

The capital management process is aligned with the strategic planning and is forward looking, anticipating any changes in the economic and commercial environment conditions in which we operate.

 

The Organization’s capital management aims to ensure, in a permanently, solid capital composition to support the development in its activities and ensure appropriate coverage of all risks involved. The Organization maintains a managerial capital margin (buffer), which is added to the minimum regulatory requirements.

 

The management buffer is defined according to the leading practices and regulatory requirements, observing aspects such as additional impacts generated by stress scenarios, qualitative risks and risks not captured by the regulatory model.

 

The Organization considers it comfortable to maintain a Tier I Capital margin of at least 25% in relation to the minimum capital requirements in the medium and long term, pursuant to the schedule established by the Central Bank of Brazil for the full adoption of Basel III guidelines.

 

The Organization’s regulatory capital sufficiency can be seen by calculating the capital adequacy ratio which in this period was 17.8%, of which 13.7% and 12.3% was Tier I Capital and Common Equity respectively. In terms of margin, the amount totaled R$34,911,835 thousand, which would allow for an increase of up to R$557,737,318 thousand in loan operations (considering the current composition of the portfolio).

 

It is important to highlight that since January 2015, according to the CMN Resolution No. 4,192/13 which deals with the methodology for calculating the ratios of Common Equity, Tier 1 and Reference Equity, the regulatory scope became the Prudential Conglomerate.

 

Capital Forecast

 

The capital management area is responsible for making simulations and projections of the Organization’s capital, in accordance with the strategic guidelines, the impacts arising from variations and trends of the economic and business environment as well as regulatory changes. The results from the projections are submitted to the Senior Management, pursuant to the governance established.

 

The projections for the next three years present adequate levels of Capital indices, considering the incorporation of net profits and increase of regulatory requirements according to the timeline defined by CMN Resolution 4,193 for subsequent periods, also contemplating the additional common equity.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

   

 

3.7.    Insurance risk/subscription risk

 

Insurance risk is the risk  related to a possible loss event that may occur in the future and for which there is uncertainty over the amount of damages that result from it. A component of insurance risk is underwriting risk, which arises from an adverse economic situation not matching the Organization's expectations at the time of drafting its underwriting policy and calculating insurance premiums. In short, it refers to the risk of the frequency or severity of loss events or benefits exceeding the Organization's estimates.

 

Underwriting risk is managed by the Technical Department. Underwriting and risk acceptance policies are periodically evaluated by working groups. In addition, one of the main tasks of the Board of Risk Management, Internal Controls and Compliance, an integral part of the structure of risk management, is the calculation of regulatory capital for these businesses and certifies studies on the pricing of new products.

 

The management process seeks to diversify insurance operations, aiming to excel at balancing the portfolio, and is based on the grouping of risks with similar characteristics in order to reduce the impact of individual risks.

 

Uncertainties over estimated future claim payments

 

Claims are due as they occur. The Organization must indemnify all covered events that occurred during the policy period, even if a loss is discovered after coverage ends. As a result, claims are reported over a period and a significant portion are accounted for in the Provisions for Claims Incurred but Not Reported (IBNR). The estimated cost of claims includes direct expenses to be incurred when settling them.

 

Giving the uncertainties inherent to the process for estimating claims provisions, the final settlement may be different than the original provision.

 

Asset and liability management (ALM)

 

The Organization periodically analyzes future cash flows on assets and liabilities held in portfolio (ALM - Asset Liability Management). The method used for ALM analysis is to observe the sufficiency or insufficiency of the present value of the stream of assets in relation to the present value of the stream of liabilities, and the duration of assets in relation to that of liabilities. The aim is to verify that the situation of the portfolio of assets and liabilities is balanced in order to honor the Organization's future commitments to its participants and insured persons.

 

The actuarial assumptions used to generate the flow of liabilities are in line with actuarial practices and also with the characteristics of the Organization's product portfolio.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Risk management by product

 

Monitoring the insurance contract portfolio enables us to track and adjust premiums practiced, as well as assess the need for alterations. Other monitoring tools in use include: (i) sensitivity analysis, and (ii) algorithmic checks and corporate system notifications (underwriting, issuance and claims).

 

The main risks associated with property insurance

 

·       Oscillations in the incidence, frequency and severity of the claims and the indemnifications of claims in relation to the expectations;

·       Unpredictable claims arising from an isolated risk;

·       Inaccurate pricing or inadequate underwriting of risks;

·       Inadequate reinsurance policies or risk transfer techniques; and

·       Insufficient or excessive technical provisions.

 

Generally the property insurance underwritten is of short duration.

 

The underwriting strategies and goals are adjusted by management and informed through internal guidelines and practice and procedure manuals.

 

The risks inherent to the main property insurance business lines are summarized as follows:

 

 

· Auto insurance includes, among other things, physical damage to the vehicle, loss of the insured vehicle, third-party liability insurance for vehicles and personal accident for passengers; and
· Business, home and miscellaneous insurance includes, among other things, fire risks (e.g. fire, explosion and business interruption), natural disasters (earthquakes, storms and floods), engineering lines (explosion of boilers, breakdown of machinery and construction) and marine (cargo and hull) as well as liability insurance.

 

Property insurance risk management

 

The Organization monitors and evaluates risk exposure and undertakes the development, implementation and revision of guidelines related to underwriting, treatment of claims, reinsurance and constitution of technical provisions. The implementation of these guidelines and the management of these risks are supported by the technical departments of each risk area.

 

The Technical Department has developed mechanisms, e.g. risk grouping by CPF, CNPJ (Individual and Corporate Taxpayer’s ID) and risky addresses, that identify, quantify and manage accumulated exposures in order to keep them within the limits defined in the internal guidelines.

 

The main risks associated with life insurance and private pension plans

 

Life insurance and private pension plans are long-term in nature and, accordingly, various actuarial assumptions are used to manage and estimate the risks involved, such as: assumptions about returns on investments, longevity, mortality and persistence rates in relation to each business unit. Estimates are based on historical experience and on actuarial expectations.

 

The risks associated with life insurance and private pension plans include:

 

 

·

Biometric risks, which includes mortality experience, adverse morbidity, longevity and disability. The mortality risk may refer to policyholders living longer than expected (longevity) or passing away before expected. This is because some products pay a lump sum if the person dies, and others pay regular amounts while the policyholder is alive;

·  Policyholder’s behavior risks, which includes persistence rate experience. Low persistence rates for certain products may result in less policies/private pension plan agreements remaining contracted to help cover fixed expenses and may reduce future positive cash flows of the underwritten business. A low persistence rate may affect liquidity of products which carry a redemption benefit;

      

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

· Group life-insurance risk results from exposure to mortality and morbidity rates and to operational experience worse than expected on factors such as persistence levels and administrative expenses; and
·

Some Life and Pension Plan products have pre-defined yield guarantees, and thereby face risk from changes in financial markets, returns on investments and interest rates that are managed as a part of market risk.

     

Life insurance and private pension plan risk management

 

·  The Organization monitors and assesses risk exposure and is responsible for developing, implementing and reviewing policies relating to underwriting, processing claims, and technical reserves for insurance purposes. Implementation of these policies and management of these risks are supported by the Technical Department;
· The Technical Department has developed mechanisms, such as statistical reports and performance by type that identify, quantify and manage accumulated exposures to keep them within limits defined by internal policies;
· Longevity risks are carefully monitored in relation to the most recent data and to the trends in the environments in which the Organization operates. Management monitors exposure to this risk and the capital implications of it in order to manage the possible impacts, as well as to ensure that business has the capital that it may require. The Management adopts improvement assumptions in its calculation of technical provisions in order  to predict and thus be covered for possible impacts generated by the improvement in life expectancy of the insured/assisted population;
· Mortality and morbidity risks are partially mitigated through reinsurance contracts for catastrophes;
· Persistency risk is managed through frequent monitoring of the Organization’s experience. Management has also defined rules on the management and monitoring of persistence and the implementation of specific initiatives to improve the renewal of policies that expire; and
· The risk of a high level of expenses is primarily monitored through the evaluation of the profitability of the business units and the frequent monitoring of expense levels.

     

The main risks associated with health insurance

 

·

Variations in cause, frequency and severity of indemnities of claims compared to expectations;

·

Unforeseen claims resulting from isolated risk;

·

Incorrect pricing or inadequate subscription of risks; and

·

Insufficient or overvalued technical provisions.

 

For individual health insurance, for which certain provisions are calculated based on expected future cash flows (difference between expected future claims and expected future premiums), there are a number of risks, in addition to those cited above, such as biometric risk, including mortality and longevity experience and the insured's behavioral risk, which covers persistency experience, as well as interest-rate risk that is managed as a part of market risk.

 

Management of health insurance risk

 

· The Organization monitors and evaluates risk exposure and is responsible for the development, implementation and review of policies that cover subscription, treatment of claims and technical insurance provisions. The implementation of these policies and management of risks are supported by the Superintendent of Actuary and Statistics;
·  The Superintendent of Actuary and Statistics has developed mechanisms, such as statistical reports and performance by type that identify, quantify and manage accumulated exposure in order to keep it within the limits defined by internal policies;
· Longevity risk is carefully monitored using the most recent data and tendencies of the environment in which the Organization operates. Management monitors exposure to this risk and its capital implications in order to manage possible impacts, as well as the funding that the future business needs;
· Persistency risk is managed through the frequent management of the Organization’s experience. Management has also established guidelines for the management of persistency in order to monitor and implement specific initiatives, when necessary, to improve retention of policies; and

 

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

·

The risk of elevated expenses is primarily monitored through the evaluation of the profitability of business units and the frequent monitoring of expense levels.

 

Results of sensitivity analysis - Property, Life and Health Insurance and Life with Survival and Welfare Coverage and Individual Life Insurance

 

Some test results are shown below. For each sensibility scenario the impact is shown in the income and shareholders' equity after taxes and contributions, in a reasonable and possible change in just a single factor. We emphasize that the insurance operations are not exposed to significant currency risk.

 

Sensitivity factor

Description of sensitivity factor applied

Interest rate

Effect of lowering the risk free forward yield curve rate

Loss events

Impact on the business of increased loss events and claims

Longevity (improvement)

Impact of an improved survival estimates on annuity contracts

Conversion to income

Impact on annuity contracts of a higher rate of conversion to income

 

The sensitivity test for Life Insurance with Survival, Welfare Coverage and Individual Life Insurance was made considering the same bases and groupings of the TAP test with variation in the assumptions listed below:

 

 

R$ thousand

On December 31, 2018

Interest rate

Longevity

Conversion to income

Percentage adjustment to each assumption:

Variation of -5%

0.2%

+ 5 b.p.

Traditional plans (contributing period)

(2,306)

(263)

(4,882)

PGBL and VGBL (contributing period)

(7,502)

(1,166)

(27,316)

All plans(retirement benefit period)

(125,864)

(46,742)

Total

(135,672)

(48,171)

(32,198)

 

For property, life and health insurance, except individual life, the table below shows increase in the events/claims were to rise 1 percentage point over the 12 months from the calculation base date.

 

 

R$ thousand

Gross of reinsurance

Net of reinsurance

On December 31

On December 31

2018

2017

2018

2017

Auto

(21,721)

(22,347)

(21,721)

(22,347)

RE (Elementary branch)

(8,366)

(9,940)

(7,980)

(8,893)

Life

(29,633)

(28,146)

(29,541)

(28,050)

Dental

(3,941)

(3,495)

(3,941)

(3,495)

Health

(104,574)

(97,923)

(104,574)

(97,923)

 

Limitations of sensitivity analysis

 

Sensitivity analyses show the effect of a change in an important premise while other premises remain unchanged. In real situations, premises and other factors may be correlated. It should also be noted that these sensitivities are not linear and therefore greater or lesser impacts should not be interpolated or extrapolated from these results.

 

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Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Sensitivity analyses do not take account of the fact that assets and liabilities are managed and controlled. Additionally, the Organization’s financial position may vary with any movement occurring in the market. For example, the risk management strategy aims to manage exposure to fluctuations in the market. As investment markets move through various levels, management initiatives may include sales of investments, altered portfolio allocations, and other protective measures.

 

Other limitations of the sensitivity analyses include the use of hypothetical market movements to show the potential risk, which only represents Management’s view of possible market changes in the near future, which cannot be foreseen with certainty, and they also assume that all interest rates move in the same manner.

 

 

Risk concentration

 

Potential exposures are monitored, analyzing certain concentrations in some type of insurance. The table below shows risk concentration by type of insurance (except health and dental), based on net premiums, net of reinsurance:

 

Premium issued by branch, net of cancellation

R$ thousand

On December 31

2018

2017

Auto

3,987,645

4,086,705

RE (Elementary branch)

1,485,537

1,525,848

Traditional plans

1,892,855

1,788,420

Life insurance

7,041,906

6,904,576

VGBL

23,492,119

28,650,153

PGBL

2,461,808

3,301,623

 

Credit risk of insurance

 

Credit risk consists of the possible incurrence of losses associated with non-performance, by the borrower or counterparty, of its financial obligations according to agreed terms, as well as the fall in value of any credit agreement as a result of deterioration in the risk classification of the borrower, and other losses related to any non-performance of financial obligations by the counterparty.

 

Reinsurance policy

 

No matter how conservative and selective insurers are in the choice of their partners, the purchase of reinsurance presents, naturally embedded in its operation, a credit risk. However, in Brazil this risk has relatively decreased due to current legal laws and regulations, once insurers should operate with reinsurers registered with SUSEP, that are classified as local, admitted or occasional. Reinsurers classified as admitted and occasional, headquartered abroad, must meet specific minimum requirements set forth in current legislation.

 

The Bradesco Organization’s policy for purchasing reinsurance and approval of reinsurers are the responsibility of the Board of Executive Officers, observing to the minimum legal requirements and regulations, some of them aimed at minimizing the credit risk intrinsic to the operation, and considering the shareholders' equity consistent with amounts transferred.

 

Another important aspect of managing reinsurance operations is the fact that the Organization aims to work within its contractual capacity, thereby avoiding the frequent purchases of coverages in optional agreements and higher exposures to the credit risk.

 

Practically, all property damage portfolios, except automotive, are hedged by reinsurance which, in most cases, is a combination of proportional and non-proportional plans by risk and/or by event.

 

Currently, part of the reinsurance contracts (proportional and non-proportional) are transferred to IRB Brasil Resseguros S.A. Some admitted reinsurers participate with lower individual percentages, but all have minimum capital and rating higher than the minimum established by the Brazilian legislation, which, in Management's judgment, reduces the credit risk.

 

Bradesco      89


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Credit risk management

 

Credit risk management in the Organization is a continuous and evolving process including the mapping, development, evaluation and diagnosis of existing models, instruments and procedures that requires a high level of discipline and control in the analysis of operations to preserve the integrity and independence of processes.

 

As noted above, credit risk is managed at the corporate level using structured, independent internal procedures based on proprietary documentation and reports, duly assessed by the risk management structures of Organization, and based on the gradual deployment of internal models for the determination, measurement and calculation of capital.

 

Exposure to insurance credit risk

 

Management believes that maximum exposure to credit risk arising from premiums to be paid by insured parties is low, since, in some cases, coverage of claims may be canceled (under Brazilian regulations), if premiums are not paid by the due date. Exposure to credit risk for premium receivables differs between risks yet to be incurred and risks incurred, since there is higher exposure on incurred-risk lines for which coverage is provided in advance of payment of the insurance premium.

 

The Organization is exposed to concentrations of risk with individual reinsurance companies, due to the nature of the reinsurance market and strict layer of reinsurance companies with acceptable loan ratings. The Organization manages the exposures of its reinsurance counterparties, limiting the reinsurance companies that may be used, and regularly assessing the default impact of the reinsurance companies.

 

4)    Estimates and judgments

 

The Organization makes estimates and judgments that can affect the reported amount of assets and liabilities within the next financial year. All estimates and judgments required in conformity with IFRS are best estimates undertaken in accordance with the applicable standard. Such estimates and judgments are continually evaluated and based in our historical experience and a number of other factors including future event expectations, regarded as reasonable, under the current circumstances.

 

The estimates and judgments that have a significant risk and might have a relevant impact on the amounts of assets and liabilities within the next financial year are disclosed below. The actual results may be different from those established by these estimates and premises.

 

Fair value of financial instruments

 

Financial instruments recognized at fair value in our consolidated financial statements consist primarily of financial assets measured at fair value through profit or loss, including derivatives and financial assets classified as measured at fair value through other comprehensive income. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participant at the management date.

 

These financial instruments are categorized within a hierarchy based on the lowest level of input that is significant to the fair value measurement. For instruments classified as level 3, we have to apply a significant amount of our own judgment in arriving at the fair value measurement. We base our judgment decisions on our knowledge and observations of the markets relevant to the individual assets and liabilities, and those judgments may vary based on market conditions. In applying our judgment, we look at a range of third-party prices and transaction volumes to understand and assess the extent of market benchmarks available and the judgments or modeling required in third-party processes. Based on these factors, we determine whether the fair values are observable in active markets or whether the markets are inactive.

 

       90     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Imprecision in estimating unobservable market inputs can impact the amount of revenue or loss recorded for a particular position. Furthermore, while we believe our valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value on the reporting date. For a detailed discussion of the determination of fair value of financial instruments, see Note 3.4.

 

Expected credit loss

 

The measurement of the provision for losses on loans expected for financial assets measured at amortized cost and VJORA requires the use of complex models and significant assumptions about future economic conditions and loan behavior.

 

The explanation of assumptions and estimation techniques used in the measurement of expected loan loss is further detailed in Note 3.1.

 

Several significant judgments are also required to apply the accounting requirements for the measurement of the credit loss expected, such as:

 

 

·

Determine the criteria for the significant increase of credit risk;

·

Choice of models and assumptions suitable for the measurement of expected credit loss;

·

Establish the number and weighting factors on the prospective scenarios, for each type of product and market, related to the credit loss expected; and

·

Establish a group of similar financial assets for purposes of measuring the expected credit loss.

 

The process to determine the level of provision for expected credit loss requires estimates and the use of judgment; it is possible that actual losses presented in subsequent periods will differ from those calculated according to current estimates and assumptions.

 

Impairment of goodwill

 

The Organization analyzes, at least annually, whether the current carrying value of goodwill is impaired. The first step of the process requires the identification of independent Cash-Generating Units and the allocation of goodwill to these units. The carrying amount of the CGU, including the allocated goodwill, is compared to its recoverable amount to determine whether any impairment exists. If the value in use of a cash-generating unit is less than its carrying value, goodwill will be impaired. Detailed calculations may need to be carried out taking into consideration changes in the market in which a business operates (e.g. competitive activity, regulatory change). The value in use is based upon discounting expected pre-tax cash flows at a risk-adjusted interest rate appropriate to the operating unit, the determination of both requires one to exercise one’s judgment. While forecasts are compared with actual performance and external economic data, expected cash flows naturally reflect the Organization’s view of future performance.

 

Income tax

 

The determination of the amount of our income tax liability is complex, and our assessment is related to our analysis of our deferred tax assets and liabilities and income tax payable. In general, our evaluation requires that we estimate future amounts of current and deferred taxes. Our assessment of the possibility that deferred tax assets are realized is subjective and involves assessments and assumptions that are inherently uncertain in nature. The realization of deferred tax assets is subject to changes in future tax rates and developments in our strategies. The underlying support for our assessments and assumptions could change over time as a result of unforeseen events or circumstances, affecting our determination of the amount of our tax liability.

 

Significant judgment is required in determining whether it is more likely than not that an income tax position will be sustained upon examination, even after the outcome of any related administrative or judicial proceedings based on technical merits. Further judgment is then required to determine the amount of benefit eligible for recognition in our consolidated financial statements.

 

In addition, we have monitored the interpretation of tax laws by, and decisions of, the tax authorities and Courts so that we can adjust any prior judgment of accrued income taxes. These adjustments may also result from our own income tax planning or resolution of income tax controversies, and may be material to our operating results for any given period. For additional information about income tax, see Note 18.

 

Bradesco      91


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Technical insurance provisions

 

Insurance technical provisions (reserves) are liabilities representing estimates of the amounts that will become due at a future date, to or on behalf of our policyholders – see Note 2(l). Expectations of loss ratio, mortality, longevity, length of stay and interest rate are used. These assumptions are based on our experience and are periodically reviewed against industry standards to ensure actuarial credibility.

 

Contingent liabilities

 

The Provisions are regularly reviewed and constituted, where the loss is deemed probable, based on the opinion of the legal counsel, the nature of the lawsuit, similarity to previous lawsuits, complexity and the courts standing. Contingencies classified as Probable Loss are recorded in the Consolidated Statements of Financial Position under "Other Provisions".

 

5)    Operating segments

 

The Organization operates mainly in the banking and insurance segments. Our banking operations include operations in the retail, middle-market and corporate sectors, lease, international bank operations, investment bank operations and as a private bank. The Organization also conducts banking segment operations through its branches located throughout the country, in branches abroad and through subsidiaries as well as by means of shareholding interests in other companies. Additionally we are engaged in insurance, supplemental pension plans and capitalization bonds through our subsidiary, Bradesco Seguros S.A. and its subsidiaries.

 

The following segment information was prepared based on reports made available to Management to evaluate performance and make decisions regarding the allocation of resources for investments and other purposes. Our Management uses a variety of accounting information, which includes the proportional consolidation of associates and joint ventures. Accordingly, the information of the segments shown in the following tables was prepared in accordance with the specific procedures and other provisions of the Financial Institutions Accounting Plan and the total amounts, which correspond to the consolidated information, were prepared in accordance with IFRS, issued by the IASB .

 

The main assumptions for the segmentation of income and expenses include (i) surplus cash invested by the entities operating in insurance, supplemental pension and capitalization bonds are included in this segment, resulting in an increase in net interest income; (ii) salaries and benefits and administrative costs included in the insurance, supplemental pension and capitalization bonds segment consist only of cost directly related to these operations, and (iii) costs incurred in the banking operations segment related to the infrastructure of the branch network and other general indirect expenses have not been allocated between segments.

 

Information by operating segment, reviewed by the Organization and corresponding to the years 2018, 2017 and 2016, is shown below:

 

 

 

       92     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

 

R$ thousand

 

Year ended December 31, 2018

 

Banking

Insurance, pension and capitalization bonds

Other operations (1), adjustments and eliminations

Total

 

Net interest income

53,582,872

12,291,357

934,241

66,808,470

Net fee and commission income

25,496,171

600,510

(2,265,091)

23,831,590

Net gains/(losses) on financial assets and liabilities at fair value through profit or loss

(11,676,573)

(11,676,573)

Net gains/(losses) on financial instruments classified as held for trading

(6,217,370)

(5,459,203)

11,676,573

 

R$ thousand

Net gains/(losses) on financial assets at fair value through other comprehensive income

1,073,563

1,073,563

Net gains/(losses) on financial instruments classified as available for sale

625,159

738,063

(1,363,222)

Net gains/(losses) on foreign currency transactions

1,096,826

1,096,826

Net income from insurance and pension plans

7,656,872

7,656,872

Other operating income/(loss)

(4,495,385)

2,935,732

(289,659)

(1,849,312)

Expected loss on loans and advances

(11,078,383)

(4,013,592)

(15,091,975)

Expected loss on other financial assets

(1,172,860)

(1,172,860)

Personnel expenses

(17,369,813)

(1,643,734)

142,085

(18,871,462)

Other administrative expenses

(16,290,073)

(1,609,750)

1,025,861

(16,873,962)

Depreciation and amortization

(5,495,057)

(411,875)

1,098,677

(4,808,255)

Other operating income/(expenses)

(11,674,110)

(1,442,157)

(1,094,327)

(14,210,594)

Other operating expense

(63,080,296)

(5,107,516)

(2,841,296)

(71,029,108)

Income before income taxes and share of profit of associates and joint ventures

11,114,478

10,565,497

(3,918,335)

17,761,640

Share of profit of associates and joint ventures

1,410,004

206,272

64,099

1,680,375

Income before income taxes

12,524,482

10,771,769

(3,854,236)

19,442,015

Income tax and social contribution

(206,385)

(4,382,847)

1,895,656

(2,693,576)

Net income for the year

12,318,097

6,388,922

(1,958,580)

16,748,439

Attributable to controlling shareholders

12,317,763

6,224,398

(1,958,246)

16,583,915

Attributable to non-controlling interest

334

164,524

(334)

164,524

Total assets

1,057,484,986

305,112,189

(57,053,461)

1,305,543,714

Investments in associates and joint ventures

6,235,329

1,837,899

52,571

8,125,799

Total liabilities

934,863,960

271,320,375

(25,316,741)

1,180,867,594

 

Bradesco      93


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

R$ thousand

 

Year ended December 31, 2017

 

Banking

Insurance, pension and capitalization bonds

Other operations (1), adjustments and eliminations

Total

Net interest income

46,997,327

1,857,926

1,787,660

50,642,913

Net fee and commission income

24,143,561

787,014

(2,181,747)

22,748,828

Net gains/(losses) on financial instruments classified as held for trading

6,011,351

3,641,626

(29,869)

9,623,108

Net gains/(losses) on financial instruments classified as available for sale

(685,560)

713,425

542,493

570,358

Net gain / (loss) on held-to-maturity investments

(54,520)

(54,520)

Net gains/(losses) on foreign currency transactions

1,422,957

1,422,957

Net income from insurance and pension plans

6,239,990

6,239,990

Other operating income/(loss)

6,694,228

10,595,041

512,624

17,801,893

Impairment of loans and advances

(17,895,929)

1,035,094

(16,860,835)

Personnel expenses

(19,261,590)

(1,589,077)

127,402

(20,723,265)

Other administrative expenses

(17,175,352)

(1,391,439)

1,684,330

(16,882,461)

Depreciation and amortization

(5,555,033)

(393,618)

1,380,083

(4,568,568)

Other operating income/(expenses)

(9,282,411)

(889,065)

38,119

(10,133,357)

Other operating expense

(69,170,315)

(4,263,199)

4,265,028

(69,168,486)

Income before income taxes and share of profit of associates and joint ventures

8,664,801

8,976,782

4,383,565

22,025,148

Share of profit of associates and joint ventures

1,497,268

217,035

4,108

1,718,411

Income before income taxes

10,162,069

9,193,817

4,387,673

23,743,559

Income tax and social contribution

(887,289)

(4,156,153)

(1,385,514)

(6,428,956)

Net income for the year

9,274,780

5,037,664

3,002,159

17,314,603

Attributable to controlling shareholders

9,272,962

4,812,425

3,003,977

17,089,364

Attributable to non-controlling interest

1,818

225,239

(1,818)

225,239

Total assets

988,063,541

295,699,951

(59,410,052)

1,224,353,440

Investments in associates and joint ventures

6,364,246

1,847,099

46,039

8,257,384

Total liabilities

875,887,257

257,329,282

(26,556,803)

1,106,659,736

 

 

       94     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

R$ thousand

 

Year ended December 31, 2016

 

Banking

Insurance, pension and capitalization bonds

Other operations (1), adjustments and eliminations

Total

Net interest income

49,156,109

5,374,229

2,132,651

56,662,989

Net fee and commission income

20,696,785

651,482

(1,007,216)

20,341,051

Net gains/(losses) on financial instruments classified as held for trading

14,918,934

1,250,639

233,197

16,402,770

Net gains/(losses) on financial instruments classified as available for sale

(1,417,647)

805,051

(728,804)

(1,341,400)

Net gains/(losses) on foreign currency transactions

150,757

150,757

Net income from insurance and pension plans

4,155,763

4,155,763

Other operating income/(loss)

13,652,044

6,211,453

(495,607)

19,367,890

Impairment of loans and advances

(18,829,460)

3,479,182

(15,350,278)

Personnel expenses

(15,733,611)

(1,387,935)

117,763

(17,003,783)

Other administrative expenses

(14,979,689)

(1,331,349)

161,475

(16,149,563)

Depreciation and amortization

(3,786,599)

(365,656)

493,842

(3,658,413)

Other operating income/(expenses)

(14,421,152)

243,631

173,359

(14,004,162)

Other operating expense

(67,750,511)

(2,841,309)

4,425,621

(66,166,199)

Income before income taxes and share of profit of associates and joint ventures

15,754,427

9,395,855

5,055,449

30,205,731

Share of profit of associates and joint ventures

1,538,058

168,691

(7,024)

1,699,725

Income before income taxes

17,292,485

9,564,546

5,048,425

31,905,456

Income tax and social contribution

(7,995,420)

(3,915,822)

(2,001,488)

(13,912,730)

Net income for the year

9,297,065

5,648,724

3,046,937

17,992,726

Attributable to controlling shareholders

9,293,766

5,550,662

3,049,821

17,894,249

Attributable to non-controlling interest

3,299

98,062

(2,884)

98,477

Total assets

921,916,290

266,642,197

3,471,169

1,192,029,656

Investments in associates and joint ventures

5,512,372

1,416,617

73,789

7,002,778

Total liabilities

821,182,152

266,143,979

(775,682)

1,086,550,449

 (1) Other operation represents less than 1% of total assets/liabilities and the net income for the year. The main adjustments from the information disclosed in segments columns are related to the difference between the IFRS and the Segment Report Information as impairment for loans and advance, effective interest rate and proportional consolidation.

 

Our operations are substantially conducted in Brazil. Additionally, as of December 31, 2018, we have one branch in New York, one branch in Grand Cayman, and one branch in London, mainly to complement our banking services and assist in import and export operations for Brazilian customers. Moreover we also have subsidiaries abroad, namely: Banco Bradesco Argentina S.A.U. (Buenos Aires), Banco Bradesco Europe S.A. (Luxembourg), Bradesco North America LLC (New York), Bradesco Securities, Inc. (New York), Bradesco Securities UK Limited (London), Cidade Capital Markets Ltd. (Grand Cayman), Bradesco Securities Hong Kong Limited (Hong Kong), Bradesco Trade Services Limited (Hong Kong) and Bradescard Mexico, Sociedad de Responsabilidad Limitada (Mexico).

 

No income from transactions with a single customer or counterparty abroad represented 10% of the Organization’s income in the period of 2018, 2017 and 2016.

 

All transactions between operating segments are conducted on an arm's length basis, with intra-segment revenue and costs being eliminated in "Other operations, adjustments and eliminations". Income and expenses directly associated with each segment are included in determining business-segment performance.

 

 

Bradesco      95


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

6)    Net interest income

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Interest and similar income

 

 

 

Loans and advances to banks

12,874,946

5,073,435

8,689,348

Loans and advances to customers:

 

 

 

- Loans

61,949,949

64,767,081

69,530,396

- Leases

250,791

254,009

343,626

Financial assets:

 

 

 

- At fair value through profit or loss

12,150,146

- Fair value through other comprehensive income

16,666,298

- At amortized cost

14,180,881

- For trading

13,684,574

23,576,526

- Available for sale

11,351,320

11,572,618

- Held to maturity

4,883,103

6,514,933

Pledged as collateral

21,268,934

21,739,202

Compulsory deposits with the Central Bank

3,916,299

4,881,319

5,667,516

Other financial interest income

63,829

68,553

66,210

Total

122,053,139

126,232,328

147,700,375

 

 

 

 

Interest and similar expenses

 

 

 

Deposits from banks:

 

 

 

- Interbank deposits

(137,154)

(152,550)

(127,617)

- Funding in the open market

(15,094,786)

(22,564,515)

(26,767,039)

- Borrowings and onlending

(3,176,469)

(3,068,552)

(3,865,411)

Deposits from customers:

 

 

 

- Savings accounts

(4,646,528)

(5,730,457)

(6,712,509)

- Time deposits

(6,252,440)

(7,536,161)

(8,746,203)

Funds from issuance of securities

(9,054,699)

(13,262,613)

(17,124,502)

Subordinated debt

(3,517,067)

(5,100,017)

(6,298,555)

Insurance technical provisions and pension plans

(13,365,526)

(18,174,550)

(21,395,550)

Total

(55,244,669)

(75,589,415)

(91,037,386)

 

 

 

 

Net interest income

66,808,470

50,642,913

56,662,989

 

 

 

       96     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

7)    Net fee and commission income

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Fee and commission income

 

 

 

Credit cards

6,951,609

6,848,855

6,251,963

Current accounts

7,165,667

6,652,711

6,030,640

Collections

1,982,037

1,965,601

1,777,515

Guarantees

1,463,423

1,570,522

1,438,409

Asset management

1,525,280

1,463,469

1,079,653

Consortium management

1,683,942

1,526,660

1,278,753

Custody and brokerage services

916,083

754,966

618,750

Underwriting/ Financial Advisory Services

815,242

801,219

733,530

Payments

448,416

409,267

373,639

Other

879,891

755,558

758,199

Total

23,831,590

22,748,828

20,341,051

 

 

 

 

Fee and commission expenses

 

 

 

Financial system services

(36)

Total

(36)

 

 

 

 

Net fee and commission income

23,831,590

22,748,828

20,341,051

 

8)    Net gains/(losses) on financial assets and liabilities at fair value through profit or loss

 

 

R$ thousand

Year ended December 31

2018

Fixed income securities

(1,360,349)

Derivative financial instruments

(10,543,169)

Equity securities

226,945

Total

(11,676,573)

 

9)    Net gains/(losses) on financial instruments classified as held for trading

 

 

R$ thousand

Years ended December 31

2017

2016

Fixed income securities

9,862,617

4,654,959

Derivative financial instruments

(1,426,160)

10,887,800

Equity securities

1,186,651

860,011

Total

9,623,108

16,402,770

 

10)   Net gains/(losses) on financial assets at fair value through other comprehensive income

 

  

R$ thousand

Year ended December 31

2018

Fixed income securities

345,987

Equity securities

677,312

Dividends received

50,264

Total

1,073,563

Bradesco      97


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

11)   Net gains/(losses) on financial instruments classified as available for sale

 

  

R$ thousand

Years ended December 31

2017

2016

Fixed income securities (1)

49,963

(1,918,595)

Equity securities (1)

437,054

459,223

Dividends received

83,341

117,972

Total

570,358

(1,341,400)

 (1) In 2017, includes impairment losses of R$1,729,039 thousand and, in 2016, R$2,106,107 thousand.

 

12)   Net gains/(losses) on foreign currency transactions

 

Net gains and losses on foreign currency transactions primarily consists of gains or losses from currency trading and translation of monetary items from a foreign currency into the functional currency.

 

13)   Net income from insurance and pension plans

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Written premiums

62,736,288

65,864,591

62,470,571

Supplemental pension plan contributions

4,441,813

5,090,043

3,679,922

Granted coinsurance premiums

(47,232)

(49,715)

(70,862)

Refunded premiums

(769,311)

(667,196)

(746,244)

Net written premiums earned

66,361,558

70,237,723

65,333,387

Reinsurance premiums paid

(91,463)

(191,088)

(306,265)

Premiums retained from insurance and pension plans

66,270,095

70,046,635

65,027,122

 

 

 

 

Changes in the provision for insurance

(25,837,488)

(30,435,868)

(29,729,884)

Changes in the provision for private pension plans

(3,571,734)

(4,369,903)

(3,052,034)

Changes in the insurance technical provisions and pension plans

(29,409,222)

(34,805,771)

(32,781,918)

 

 

 

 

Reported indemnities

(26,463,800)

(25,924,687)

(24,877,804)

Claims expenses

(67,298)

(36,068)

(119,201)

Recovery of ceded coinsurance

117,703

35,332

65,285

Recovery of reinsurance

18,786

116,913

141,711

Salvage recoveries

491,559

488,057

451,930

Changes in the IBNR provision

(121,320)

(274,509)

(204,354)

Retained claims

(26,024,370)

(25,594,962)

(24,542,433)

 

 

 

 

Commissions on premiums

(2,655,101)

(2,700,131)

(2,696,002)

Recovery of commissions

12,411

19,334

29,927

Fees

(353,139)

(403,835)

(489,279)

Brokerage expenses - private pension plans

(125,770)

(153,552)

(167,654)

Changes in deferred commissions

(58,032)

(167,728)

(224,000)

Selling expenses for insurance and pension plans

(3,179,631)

(3,405,912)

(3,547,008)

 

 

 

 

Net income from insurance and pension plans

7,656,872

6,239,990

4,155,763

 

 

       98     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

14)   Personnel expenses

 

  

R$ thousand

Years ended December 31

2018

2017

2016

Salaries

(8,350,461)

(9,170,556)

(8,236,617)

Benefits

(4,383,644)

(5,385,133)

(3,625,796)

Social security charges

(2,997,889)

(3,505,290)

(2,862,067)

Employee profit sharing

(1,682,868)

(1,572,472)

(1,451,310)

Provision for labor claims

(1,289,664)

(927,136)

(663,124)

Training

(166,936)

(162,678)

(164,869)

Total (1)

(18,871,462)

(20,723,265)

(17,003,783)

 (1) In 2017, includes the effects of the Special Voluntary Termination Plan.

 

15)   Other administrative expenses

 

   

R$ thousand

Years ended December 31

2018

2017

2016

Outsourced services

(4,598,748)

(4,748,308)

(4,871,194)

Communication

(1,541,742)

(1,684,153)

(1,653,055)

Data processing

(2,398,676)

(2,117,085)

(1,612,454)

Advertising and marketing

(1,136,062)

(942,851)

(1,124,659)

Asset maintenance

(1,112,508)

(1,158,840)

(1,060,856)

Financial system

(1,009,209)

(1,033,017)

(1,047,618)

Rental

(1,142,408)

(1,142,166)

(1,027,561)

Security and surveillance

(748,577)

(818,221)

(736,547)

Transport

(749,685)

(782,444)

(719,842)

Water, electricity and gas

(412,789)

(405,515)

(384,069)

Advances to FGC (Deposit Guarantee Association)

(408,335)

(418,670)

(355,540)

Supplies

(216,768)

(263,527)

(321,509)

Travel

(286,731)

(261,911)

(174,772)

Other

(1,111,724)

(1,105,753)

(1,059,887)

Total

(16,873,962)

(16,882,461)

(16,149,563)

 

16)   Depreciation and amortization

 

  

R$ thousand

Years ended December 31

2018

2017

2016

Amortization expenses

(3,348,242)

(3,331,240)

(2,516,777)

Depreciation expenses

(1,460,013)

(1,237,328)

(1,141,636)

Total

(4,808,255)

(4,568,568)

(3,658,413)

 

17)   Other operating income/(expenses)

 

  

R$ thousand

Years ended December 31

2018

2017

2016

Tax expenses

(6,096,899)

(5,960,618)

(6,331,651)

Legal provision

(1,836,429)

(1,238,057)

(2,927,734)

Variation in monetary liabilities

(147,642)

31,710

(699,719)

Income from sales of non-current assets, investments, and property and equipment, net

(614,895)

(412,957)

(467,042)

Other (1)

(5,514,729)

(2,553,435)

(3,578,016)

Total

(14,210,594)

(10,133,357)

(14,004,162)

 (1) Includes: (i) the effect of the (additions)/reversal of provision for tax contingency in 2018 – R$(21,188) thousand (2017 – R$(487,269) thousand; 2016 - R$(484,227) thousand); (ii) impairment losses in the amount of 2018 – R$571,321 thousand (2017 – R$185,188 thousand; 2016 – R$31,256 thousand); and (iii) operating expense related of insurance operation in 2018 – R$1,976,347 thousand (2017 – R$1,354,719 thousand and 2016 - R$1,388,645 thousand).

 

Bradesco      99


 

 

 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

18)   Income tax and social contribution

 

a)   Calculation of income tax and social contribution charges

 

  

R$ thousand

Years ended December 31

2018

2017

2016

Income before income tax and social contribution

19,442,015

23,743,559

31,905,456

Total burden of income tax and social contribution at the current rates (1)

(8,748,907)

(10,684,602)

(14,357,455)

Effect of additions and exclusions in the tax calculation:

 

 

 

Earnings (losses) of associates and joint ventures

756,169

773,285

764,876

Interest on shareholders’ equity (paid and payable)

3,284,368

3,241,955

3,139,102

Other amounts (2)

2,014,794

240,406

(3,459,253)

Income tax and social contribution for the period

(2,693,576)

(6,428,956)

(13,912,730)

Effective rate

13.9%

27.1%

43.6%

(1) Current rates: (i) 25% for income tax; (ii) 20% for the social contribution to financial and equated companies, and the insurance industry, and 9% for the other companies (Note 2t); and

(2) Primarily, includes: (i) the exchange rate variation of assets and liabilities, derived from investments abroad; (ii) the equalization of the effective rate in relation to the rate of 45%, shown; and (iii) the deduction incentives.

 

b)   Composition of income tax and social contribution in the consolidated statement of income

 

  

R$ thousand

Years ended December 31

2018

2017

2016

Current taxes:

 

 

 

Income tax and social contribution payable

(5,657,841)

(8,788,060)

(8,852,947)

Deferred taxes:

 

 

 

Net Addition/(realization) of temporary differences

1,288,642

2,950,961

(4,106,008)

Use of opening balances of:

 

 

 

Social contribution loss

(313,223)

(430,584)

(647,282)

Income tax loss

(343,791)

(331,512)

(879,276)

Addition on:

 

 

 

Social contribution loss

870,717

150,371

234,730

Income tax loss

1,461,920

19,868

338,053

Total deferred tax expense

2,964,265

2,359,104

(5,059,783)

Income tax and social contribution

(2,693,576)

(6,428,956)

(13,912,730)

 

c)   Deferred income tax and social contribution presented in the consolidated statement of financial position

 

 

R$ thousand

Balance on December 31, 2017

Amount recorded

Realized / Decrease

Balance on December 31, 2018

Provisions of impairment of loans and advances

26,503,863

11,554,370

(6,415,433)

31,642,800

Provision for contingencies

7,226,483

1,835,387

(1,527,145)

7,534,725

Adjustment to market value of securities

3,943,875

960,026

(2,599,972)

2,303,929

Other

5,809,566

2,881,845

(3,571,427)

5,119,984

Total tax assets on temporary differences (2)

43,483,787

17,231,628

(14,113,977)

46,601,438

Income tax and social contribution losses in Brazil and abroad (2)

5,003,872

2,332,637

(657,014)

6,679,495

Total deferred tax assets (1)

48,487,659

19,564,265

(14,770,991)

53,280,933

Deferred tax liabilities (1)

6,007,595

2,231,551

(2,440,193)

5,798,953

Net deferred taxes (1)

42,480,064

17,332,714

(12,330,798)

47,481,980

 

       100     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

   

R$ thousand

Balance on December 31, 2016

Amount recorded

Realized / Decrease (3)

Balance on December 31, 2017

Provisions of impairment of loans and advances

23,011,653

12,264,028

(8,771,818)

26,503,863

Provision for contingencies

7,351,234

1,782,500

(1,907,251)

7,226,483

Adjustment to market value of securities

5,488,482

1,724,016

(3,268,623)

3,943,875

Other

4,681,457

4,773,082

(3,644,973)

5,809,566

Total tax assets on temporary differences (2)

40,532,826

20,543,626

(17,592,665)

43,483,787

Income tax and social contribution losses in Brazil and abroad (2)

5,595,729

170,239

(762,096)

5,003,872

Adjustment to market value of available for sale (2)

493,168

576,732

(1,069,900)

Total deferred tax assets (1)

46,621,723

21,290,597

(19,424,661)

48,487,659

Deferred tax liabilities (1)

3,267,808

3,557,618

(817,831)

6,007,595

Net deferred taxes (1)

43,353,915

17,732,979

(18,606,830)

42,480,064

(1) Deferred income and social contribution tax assets and liabilities are offset in the balance sheet by taxable entity, and were R$4,598,364 thousand in 2018 and R$4,755,748 thousand in 2017;

(2) Deferred tax assets of financial and insurance companies were established considering the increase of the social contribution rate, determined by Law No. 11,727/08(Note 2t); and

(3) Includes a write-off of tax credits, in 2017, in the amount of R$150,040 thousand.

 

d)   Expected realization of deferred tax assets on temporary differences, tax loss and negative basis of social contribution

 

 

R$ thousand

Temporary differences

Income tax and social contribution losses

Total

Income tax

Social contribution

Income tax

Social contribution

2019

8,608,743

5,151,718

173,339

116,422

14,050,222

2020

7,446,071

4,453,270

209,055

125,180

12,233,576

2021

6,271,093

3,750,046

373,951

222,054

10,617,144

2022

4,666,854

2,793,181

693,635

412,132

8,565,802

2023

1,865,064

1,078,151

1,958,633

1,198,738

6,100,586

After 2023

323,314

193,933

327,524

868,832

1,713,603

Total

29,181,139

17,420,299

3,736,137

2,943,358

53,280,933

 

e)   Deferred tax liabilities

 

  

R$ thousand

On December 31

2018

2017

Timing differences of depreciation – finance leasing

242,571

283,231

Adjustment to market value of securities

1,200,453

1,215,588

Judicial deposit and others

4,355,929

4,508,776

Total

5,798,953

6,007,595

 

The deferred tax liabilities of companies in the financial and insurance sectors were established considering the increased social contribution rate, established by Law No. 11,727/08 (Note 2t).

 

 

Bradesco      101


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

f)    Income tax and social contribution on adjustments recognized directly in equity

 

 

R$ thousand

On December 31, 2018

On December 31, 2017

On December 31, 2016

Before tax

Tax (expense)/ benefit

Net of tax

Before tax

Tax (expense)/ benefit

Net of tax

Before tax

Tax (expense)/ benefit

Net of tax

Financial assets at fair value through other comprehensive income

(512,397)

215,482

(296,915)

Financial assets recorded as available for sale

3,418,567

(1,231,202)

2,187,365

6,298,103

(2,587,076)

3,711,027

Exchange differences on translations of foreign operations

113,198

113,198

23,010

5,992

29,002

(194,566)

87,555

(107,011)

Other

(154,607)

61,843

(92,764)

Total

(553,806)

277,325

(276,481)

3,441,577

(1,225,210)

2,216,367

6,103,537

(2,499,521)

3,604,016

 

g)   Taxes to be offset

 

Refers basically to amount of income tax and social contribution to be offset.

 

 

       102     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

19)   Earnings per share

 

a)   Basic earnings per share

 

The basic earnings per share was calculated based on the weighted average number of common and preferred shares outstanding, as shown in the calculations below:

 

  

Years ended December 31

2018

2017 (1)

2016 (1)

Net earnings attributable to the Organization’s common shareholders (R$ thousand)

7,916,635

8,157,920

8,542,147

Net earnings attributable to the Organization’s  preferred shareholders (R$ thousand)

8,667,280

8,931,444

9,352,102

Weighted average number of common shares outstanding (thousands)

3,354,990

3,354,990

3,354,990

Weighted average number of preferred shares outstanding (thousands)

3,339,188

3,339,188

3,339,188

Basic earnings per share attributable to common shareholders of the Organization (in Reais)

2.36

2.43

2.55

Basic earnings per share attributable to preferred shareholders of the Organization (in Reais)

2.60

2.67

2.80

(1) All share amounts presented for prior periods have been adjusted to reflect the stock split approved at the Special Shareholders’ Meeting held on March 12, 2018, in the proportion of one new share for every 10 shares held.

 

b)   Diluted earnings per share

 

Diluted earnings per share are the same as basic earnings per share since there are no potentially dilutive instruments.

 

20)   Cash and cash equivalents

 

a)  Cash and balances with banks

 

  

R$ thousand

On December 31

2018

2017

Cash and due from banks in domestic currency

14,734,228

12,939,852

Cash and due from banks in foreign currency

4,877,776

2,088,498

Compulsory deposits with the Central Bank (1)

87,596,916

66,714,226

Investments in gold

823

375

Total

107,209,743

81,742,951

(1) Compulsory deposits with the Central Bank of Brazil refer to a minimum balance that financial institutions must maintain at the Central Bank of Brazil based on a percentage of deposits received from third parties.

 

 

Bradesco      103


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

b)  Cash and cash equivalents

 

    

R$ thousand

On December 31

2018

2017

Cash and due from banks in domestic currency

14,734,228

12,939,852

Cash and due from banks in foreign currency

4,877,776

2,088,498

Interbank investments (1)

90,612,803

141,025,717

Investments in gold

823

375

Total

110,225,630

156,054,442

(1) Refers to operations with maturity date on the effective date of investment equal to or less than 90 days and insignificant risk of change in the fair value. Of this amount, R$60,443,537 thousand (2017 – R$123,691,195 thousand) refers to Financial assets pledged as collateral.

 

21)   Financial assets and liabilities at fair value through profit or loss

 

a)     Financial assets at fair value through profit or loss

 

 

R$ thousand

On December 31

2018

Financial assets (1)

 

Brazilian government securities

206,756,050

Bank debt securities

10,164,454

Corporate debt and marketable equity securities

9,303,942

Mutual funds

3,657,393

Brazilian sovereign bonds

659,603

Foreign governments securities

849,114

Derivative financial instruments

14,770,594

Total

246,161,150

 (1) In 2018, no reclassifications were made of Financial Assets at fair value through profit or loss for other categories of financial assets.

 

b)    Maturity

 

 

R$ thousand

On December 31

2018

Maturity of up to one year

12,471,625

Maturity of one to five years

164,553,949

Maturity of five to 10 years

56,868,688

Maturity of over 10 years

5,121,915

Maturity not stated

7,144,973

Total

246,161,150

 

The financial instruments pledged as collateral classified as “Financial assets at fair value through profit or loss”, totalled R$6,481,098 thousand as at December 31, 2018, being composed primarily of Brazilian government bonds.

 

The Organization maintained a total of R$6,220,609 thousand pledged as collateral for liabilities in 2018.

 

Unrealized net gains/ (losses) included in securities and trading securities totaled R$(1,066,594) thousand as at December 31, 2018. Net variation in unrealized gains/ (losses) from securities and trading securities totaled R$3,679,294 in 2018.

 

 

 

       104     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

c)     Liabilities at fair value through profit or loss

 

  

R$ thousand

On December 31

2018

Derivative financial instruments

16,152,087

Total

16,152,087

 

22)   Financial assets and liabilities held for trading

 

a)     Financial assets held for trading

 

 

R$ thousand

On December 31

2017

Financial assets

 

Brazilian government securities

202,249,272

Bank debt securities

8,348,269

Corporate debt and marketable equity securities

12,339,790

Mutual funds

4,377,508

Brazilian sovereign bonds

307

Foreign governments securities

528,010

Derivative financial instruments

13,866,885

Total

241,710,041

 

b)    Maturity

 

 

R$ thousand

On December 31

2017

Maturity of up to one year

31,617,538

Maturity of one to five years

146,527,365

Maturity of five to 10 years

53,763,561

Maturity of over 10 years

2,409,723

Maturity not stated

7,391,854

Total

241,710,041

 

Financial instruments provided as collateral classified as "Financial assets held for trading”, totaled R$801,182  thousand in 2017, as disclosed in Note 30 "Financial assets pledged as collateral”.

 

The total assets held for trading pledged as collateral for liabilities was R$5,874,620 thousand in 2017.

 

Unrealized gains/(losses) on securities and trading securities totaled R$(4,745,888) thousand in 2017 (2016 – R$(9,404,052) thousand). Net variation in unrealized gains/(losses) from securities and trading securities totaled R$(4,658,164) thousand in 2017 (2016 – R$(1,978,490) thousand).

 

c)     Financial liabilities held for trading

 

  

R$ thousand

On December 31

2017

Derivative financial instruments

14,274,999

Total

14,274,999

 

Bradesco      105


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

23)   Derivative financial instruments

 

The Organization enters into transactions involving derivative financial instruments with a number of customers for the purpose of mitigating their overall risk exposure as well as managing risk exposure. The derivative financial instruments most often used are highly-liquid instruments traded on the futures market (B3).

 

(i)    Swap contracts

 

Foreign currency and interest rate swaps are agreements to exchange one set of cash flows for another and result in an economic exchange of foreign currencies or interest rates (for example fixed or variable) or in combinations (i.e. foreign currency and interest rate swaps). There is no exchange of the principal except in certain foreign currency swaps. The Organization’s foreign currency risk reflects the potential cost of replacing swap contracts and whether the counterparties fail to comply with their obligations. This risk is continually monitored in relation to the current fair value, the proportion of the notional value of the contracts and the market liquidity. The Organization, to control the level of credit risk assumed, evaluates the counterparties of the contracts using the same techniques used in its loan operations.

 

(ii)   Foreign exchange options

 

Foreign exchange options are contracts according to which the seller (option issuer) gives to the buyer (option holder) the right, but not the obligation, to buy (call option) or sell (put option) on a certain date or during a certain period, a specific value in foreign currency. The seller receives from the buyer a premium for assuming the exchange or interest-rate risk. The options can be arranged between the Organization and a customer. The Organization is exposed to credit risk only on purchased options and only for the carrying amount, which is the fair market value.

 

(iii)  Foreign currency and interest rate futures

 

Foreign currency and interest rate futures are contractual obligations for the payment or receipt of a net amount based on changes in foreign exchange and interest rates or the purchase or sale of a financial instrument on a future date at a specific price, established by an organized financial market. The credit risk is minimal, since the future contracts are guaranteed in cash or securities and changes in the value of the contracts are settled on a daily basis. Contracts with a forward rate are interest-rate futures operations traded individually which require settlement of the difference between the contracted rate and the current market rate over the value of the principal to be paid in cash at a future date.

 

 

       106     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

(iv)  Forward transactions

 

A forward operation is a contract of purchase or sale, at a fixed price, for settlement on a certain date. Because it is a futures market, in which the purchase of the share will only be made on the date of maturity, a margin deposit is necessary to guarantee the contract. This margin can be in cash or in securities. The value of the margin varies during the contract according to the variation of the share involved in the operation, to the changes of volatility and liquidity, besides the possible additional margins that the broker could request.

 

The breakdown of the notional and/or contractual values and the fair value of derivatives held for trading by the Organization is as follows:

 

   

R$ thousand

Notional amounts

Asset/(liability)

On December 31

On December 31

2018

2017

2018

2017

Futures contracts

 

 

 

 

•     Interest rate futures

 

 

 

 

Purchases

183,952,954

96,081,180

8,902

3,586

Sales

129,207,143

132,837,699

(19,133)

(154,188)

•     In foreign currency

 

 

 

 

Purchases

53,491,092

48,376,597

3,174

1,243

Sales

65,531,388

67,238,635

(1,911)

(1,003)

•     Other

 

 

 

 

Purchases

300,160

163,224

257

162

Sales

288,801

113,772

(239)

(114)

 

 

 

 

 

Options

 

 

 

 

•     Interest rates

 

 

 

 

Purchases

37,543,735

10,663,668

560,812

101,214

Sales

37,032,836

9,616,129

(1,031,343)

(535,748)

•     In foreign currency

 

 

 

 

Purchases

15,102,480

7,335,027

898,751

605,028

Sales

11,637,761

10,274,094

(571,867)

(409,587)

•     Other

 

 

 

 

Purchases

830,352

443,443

51,704

34,013

Sales

723,729

228,141

(42,140)

(20,188)

 

 

 

 

 

Forward operations

 

 

 

 

•     Interest rates

 

 

 

 

Purchases

213,196

15,577

•     In foreign currency

 

 

 

 

Purchases

12,488,149

10,372,477

135,002

218,019

Sales

18,609,950

14,947,271

(188,372)

(358,995)

•     Other

 

 

 

 

Purchases

896,288

114,020

580,566

497,987

Sales

603,890

635,522

23,990

(147,138)

 

 

 

 

 

Swap contracts

 

 

 

 

•     Asset position

 

 

 

 

Interest rate swaps

57,751,559

56,636,856

10,413,068

11,065,095

Currency swaps

15,551,428

6,161,641

1,758,178

1,340,538

•     Liability position

 

 

 

 

Interest rate swaps

32,737,145

31,454,647

(10,250,643)

(11,030,003)

Currency swaps

23,368,049

14,288,568

(3,725,826)

(1,618,035)

 

 

Bradesco      107


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Swaps are contracts of interest rates, foreign currency and cross currency and interest rates in which payments of interest or the principal or in one or two different currencies are exchanged for a contractual period. The risks of swap contracts refer to the potential inability or unwillingness of the counterparties to comply with the contractual terms and the risk associated with changes in market conditions due to changes in the interest rates and the currency exchange rates.

 

The interest rate and currency futures and the forward contracts of interest rates call for subsequent delivery of an instrument at a specific price or specific profitability. The reference values constitute a nominal value of the respective instrument whose variations in price are settled daily. The credit risk associated with futures contracts is minimized due to these daily settlements. Futures contracts are also subject to risk of changes in interest rates or in the value of the respective instruments.

 

Credit Default Swap – CDS

 

In general, these represent a bilateral contract in which one of the counterparties buys protection against a credit risk of a particular financial instrument (its risk is transferred). The counterparty that sells the protection receives a remuneration that is usually paid linearly over the life of the operation.

 

In the event of a default, the counterparty who purchased the protection will receive a payment, the purpose of which is to compensate for the loss of value in the financial instrument. In this case, the counterparty that sells the protection normally will receive the underlying asset in exchange for said payment.

 

 

On December 31 - R$ thousand

2018

2017

Risk received in credit Swaps:

3,330,639

584,987

- Debt securities issued by companies

749,735

468,214

- Bonds of the Brazilian public debt

2,574,317

116,773

- Bonds of foreign public debt

6,587

Risk transferred in credit Swaps:

(271,236)

- Brazilian public debt derivatives

(96,870)

- Foreign public debt derivatives

(174,366)

Total net credit risk value

3,059,403

584,987

Effect on Shareholders' Equity

61,551

49,162

Remuneration on the counterparty receiving the risk

(7,372)

195

 

The contracts related to credit derivatives transactions described above are due in 2025. There were no credit events, as defined in the agreements, during the period.

 

The Organization has the following economic hedging transactions:

 

Fair-value hedge of interest rate risk

 

The Organization uses interest rate swaps to protect its exposure to changes in the fair value of its fixed income issuances and certain loans and advances. The interest rate swaps are matched with specific issuances or fixed income loans.

 

Cash Flow Hedge

 

The financial instruments classified in this category, aims to reduce exposure to future changes in interest rates, which impact the operating results of the Organization. The effective portion of the valuations or devaluations of these instruments is recognized in a separate account of shareholders' equity, net of tax effects and is only transferred to income in two situations: (i) in case of ineffectiveness of the hedge; or (ii) the realization of the hedge object. The ineffective portion of the respective hedge is recognized directly in the income statement.

 

 

       108     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Strategy

On December 31 - R$ thousand

Hedge instrument nominal value

Hedge object accounting value

Fair Value Accumulated Adjustments in shareholders' equity (gross of tax effects)

Fair Value Accumulated Adjustments in shareholders' equity (net of tax effects)

Hedge of interest receipts from investments in securities (1)

9,784,183

8,048,943

Hedge of interest payments on funding (2)

8,285,152

8,054,345

(140,745)

(84,447)

Total in 2018

18,069,335

16,103,288

(140,745)

(84,447)

*

 

 

 

 

Hedge of interest receipts from investments in securities (1)

16,030,487

14,708,544

40,060

24,036

Hedge of interest payments on funding (2)

6,769,979

6,671,048

(84,044)

(50,426)

Total in 2017

22,800,466

21,379,592

(43,984)

(26,390)

 

(1) Referring to the DI interest rate risk, using DI Futures contracts in B3, with the maturity in 2019, making the cash flow fixed; and

(2) Referring to the DI interest rate risk, using DI Futures contracts in B3, with maturity dates in 2020, making the cash flow fixed.

The effectiveness of the hedge portfolio is in accordance with accounting standards.

 

For the next 12 months, the gains/(losses) related to the cash flow hedge, which we expect to recognize in the income statement, amount to R$(33,690) thousand.

 

The gains/(losses) related to the cash flow hedge recorded in the income statements in the year ended on December 31, 2018 were R$22,970 thousand (2017 – R$13,944 thousand).

 

Market risk hedge

 

The gains and losses, realized or not, of the financial instruments classified in this category, are recorded in the Statement of Income.

 

Hedge of investments abroad

 

The financial instruments classified in this category, have the objective of reducing the exposure to foreign exchange variation of investments abroad, whose functional currency is different from the national currency, which impacts the result of the Organization. The effective portion of the valuations or devaluations of these instruments is recognized in a separate account of shareholders' equity, net of tax effects and is only transferred to income in two situations: (i) hedge ineffectiveness; or (ii) in the disposal or partial sale of the foreign operation. The ineffective portion of the respective hedge is recognized directly in the income statement.

 

Strategy

On December 31 - R$ thousand

Hedge instrument nominal value

Hedge object accounting value

Fair Value Accumulated Adjustments in shareholders' equity (gross of tax effects)

Fair Value Accumulated Adjustments in shareholders' equity (net of tax effects)

Hedge of exchange variation on future cash flows (1)

1,375,232

755,611

(269,039)

(161,423)

Total in 2018

1,375,232

755,611

(269,039)

(161,423)

*

 

 

 

 

Hedge of exchange variation on future cash flows (1)

1,110,888

582,567

(59,739)

(35,843)

Total in 2017

1,110,888

582,567

(59,739)

(35,843)

(1) Whose functional currency is different from the Real, using Forward contracts, with the object of hedging the foreign investment referenced to MXN (Mexican Peso).

The effectiveness of the hedge portfolio is in accordance with accounting standards .

 

For the next 12 months, the gains/(losses) related to the hedge of investments abroad, which we expect to recognize in the result, amount to R$4,775 thousand.

 

 

Bradesco      109


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Gains/(losses) related to the hedge of investments abroad recorded in income accounts in the year ended on December 31, 2018 were R$(7,943) thousand (2017 – R$(359) thousand).

 

Other derivatives designated as hedges

 

The Organization uses this category of instruments to manage its exposure to currency, interest rate, equity market and credit risks. Instruments used include interest-rate swaps, interest-rate swaps in foreign currency, forward contracts, futures, options, credit swaps and stock swaps.

 

Unobservable gains on initial recognition

 

When the valuation depends on unobservable data any initial gain or loss on financial instruments is deferred over the life of the contract or until the instrument is redeemed, transferred, sold or the fair value becomes observable. All derivatives which are part of the hedge relationships are valued on the basis of observable market data.

 

The nominal values do not reflect the actual risk assumed by the Organization, since the net position of these financial instruments arises from compensation and/or combination thereof. The net position is used by the Organization especially to protect interest rates, the price of the underlying assets or exchange risk. The result of these financial instruments are recognized in “Net gains and losses of financial assets held for trading”, in the consolidated statement of income.

 

Offsetting of financial assets and liabilities

 

In accordance with IFRS 7, Bradesco must present the amounts related to financial instruments subject to master clearing agreements or similar agreements. In accordance with IAS 32, a financial asset and a financial liability are offset and their net value presented in the Consolidated Balance Sheet when, and only when, there is a legally enforceable right to offset the amounts recognized and the Bank intends to settle them in a liquid basis, or to realize the asset and settle the liability simultaneously.

 

The table below presents financial assets and liabilities subject to compensation:

 

    

R$ thousand

On December 31, 2018

Amount of financial assets, gross

Related amount offset in the Balance Sheet

Net amount

Interbank investments

60,443,537

60,443,537

Derivative financial instruments

14,770,594

14,770,594

 

  

R$ thousand

On December 31, 2018

Amount of financial liabilities, gross

Related amount offset in the Balance Sheet

Net amount

Securities sold under agreements to repurchase

190,911,877

190,911,877

Derivative financial instruments

16,152,087

16,152,087

 

  

R$ thousand

On December 31, 2017

Amount of financial assets, gross

Related amount offset in the Balance Sheet

Net amount

Interbank investments

123,691,195

123,691,195

Derivative financial instruments

13,866,885

13,866,885

 

 

       110     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

   

R$ thousand

On December 31, 2017

Amount of financial liabilities, gross

Related amount offset in the Balance Sheet

Net amount

Securities sold under agreements to repurchase

233,467,544

233,467,544

Derivative financial instruments

14,274,999

14,274,999

 

On December 31, 2018 and 2017, Bradesco does not have financial instruments in its balance sheet as a result of failing to meet the IAS 32 compensation criteria, or because it has no intention to liquidate them on a net basis, or to realize the assets and settle the liabilities simultaneously.

 

24)   Financial assets at fair value through other comprehensive income

 

a)     Financial assets at fair value through other comprehensive income

 

 

R$ thousand

Amortized cost

Gross unrealized gains

Gross unrealized losses

Fair value

Brazilian government securities

146,656,888

4,251,206

(89,339)

150,818,755

Corporate debt securities

5,932,857

187,874

(145,537)

5,975,194

Bank debt securities

6,371,576

117,435

(567,935)

5,921,076

Brazilian sovereign bonds

1,573,965

28,832

(38,130)

1,564,667

Mutual funds

2,856,590

1,742

(16,971)

2,841,361

Marketable equity securities and other stocks

11,685,525

682,783

(1,438,825)

10,929,483

Balance on December 31, 2018 (1)

175,077,401

5,269,872

(2,296,737)

178,050,536

(1) In June 2018, the Management decided to reclassify the Securities measured at fair value through other comprehensive income to be measured at amortized cost, in the amount of R$17,022,922 thousand. This reclassification was the result of the alignment of risk and capital management. Without considering this reclassification of the securities it would have been recognized in other comprehensive income fair value changes, in the amount of R$581,991 thousand.

 

b)    Maturity

 

 

R$ thousand

On December 31, 2018

Amortized cost

Fair value

Due within one year

75,814,113

75,763,826

From 1 to 5 years

65,896,910

67,290,177

From 5 to 10 years

6,189,446

6,441,750

Over 10 years

15,491,407

17,625,300

No stated maturity

11,685,525

10,929,483

Total

175,077,401

178,050,536

 

The financial instruments pledged as collateral, classified as Financial assets at fair value through other comprehensive income, totalled R$88,969,378 thousand in 2018, being composed mostly of Brazilian government bonds.

 

The Organization maintained a total of R$2,099,991 thousand in financial assets at fair value through other comprehensive income pledged as collateral for liabilities in 2018.

 

c)     Investments in equity instruments designated at fair value through other comprehensive income

 

 

R$ thousand

Cost

Adjustments to Fair Value

Expected loss

Fair Value

Marketable equity securities and other stocks

11,685,525

(756,042)

10,929,483

Total

11,685,525

(756,042)

10,929,483

 

Bradesco      111


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The Organization adopted the option of designating equity instruments at fair value through other comprehensive income due to the particularities of a given market.

                                                                            

d)    Reconciliation of expected losses of financial assets at FVOCI:

 

 

R$ thousand

Stage 1

Stage 2

Stage 3

Total (1)

Expected loss of financial assets at VJORA on January 1, 2018

21,370

44,482

55,714

121,566

Transferred to Stage 3

(748)

(748)

Out of Stage 1

748

748

Assets constituted/reversed

(5,910)

117,579

104,271

215,940

Expected loss of financial assets at VJORA as of December 31, 2018

14,712

162,061

160,733

337,506

(1)  The expected loss balance is recorded as "Expected Loss on Other Financial Assets" in the Consolidated Statement of Income.

      

25) Financial assets available for sale

 

a)     Available for sale

 

  

R$ thousand

Amortized cost

Gross unrealized gains

Gross unrealized losses

Fair value

Brazilian government securities

101,822,760

1,881,077

(422,079)

103,281,758

Corporate debt securities

40,875,928

836,715

(1,734,013)

39,978,630

Bank debt securities

1,251,066

169,142

(236,355)

1,183,853

Brazilian sovereign bonds

719,494

27,326

(18,693)

728,127

Foreign governments securities

3,210,554

175

(8,182)

3,202,547

Marketable equity securities and other stocks

11,302,834

620,896

(885,923)

11,037,807

Balance on December 31, 2017

159,182,636

3,535,331

(3,305,245)

159,412,722

 

b)    Maturity

 

 

R$ thousand

On December 31, 2017

Amortized cost

Fair value

Due within one year

31,635,369

31,167,067

From 1 to 5 years

83,579,399

83,816,085

From 5 to 10 years

16,004,079

16,363,350

Over 10 years

16,660,955

17,028,413

No stated maturity

11,302,834

11,037,807

Total

159,182,636

159,412,722

 

Financial instruments pledged as collateral and classified as available for sale, totaled R$59,482,796 thousand in 2017, as disclosed in Note 30 "Financial Assets Pledged as Collateral".

 

In 2017, the Organization maintained a total of R$4,391,259 thousand financial assets available for sale pledged as collateral for liabilities.

 

In 2017 there was impairment in financial assets available for sale in the amount of R$1,729,039 thousand.

 

 

       112     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

26)   Loans and advances to financial institutions

 

    

R$ thousand

On December 31

2018

2017

Repurchase agreements (1)

96,304,582

21,045,591

Loans to financial institutions

8,946,346

11,207,614

Impairment of loans and advances

(1,978)

(5,481)

Total

105,248,950

32,247,724

 (1) In 2018, it included investments in repo operations given in guarantee.

 

27)   Loans and advances to customers

 

  

R$ thousand

On December 31

2018

2017

Working capital

55,922,505

52,700,584

Personal credit (1)

68,142,457

60,570,146

Housing loans

60,594,386

59,963,375

Financing and export

47,718,443

38,272,982

Onlending BNDES/Finame

25,170,115

30,655,666

Credit card

39,553,374

37,568,984

Vehicle loans

31,075,027

24,741,298

Rural loans

13,353,943

13,642,478

Import

6,886,356

5,318,042

Overdraft for corporates

7,058,014

6,587,239

Receivable insurance premiums

4,427,560

4,301,472

Overdraft for individuals

4,764,293

3,582,020

Leases

2,089,862

2,249,859

Other

44,736,320

33,659,520

Total portfolio

411,492,655

373,813,665

Impairment of loans and advances

(31,105,579)

(27,055,566)

Total of net loans and advances to customers

380,387,076

346,758,099

(1) It included, in 2018, R$51,284,334 thousand related to consigned credit (2017 – R$43,968,511 thousand).

 

Financial Leases Receivables

 

Loans and advances to customers include the following financial lease receivables.

 

  

R$ thousand

On December 31

2018

2017

Gross investments in financial leases receivable:

 

 

Up to one year

929,858

1,118,286

From one to five years

1,128,477

1,082,149

Over five years

31,527

49,424

Impairment loss on finance leases

(128,564)

(146,812)

Net investment

1,961,298

2,103,047

 

 

 

Net investments in finance leases:

 

 

Up to one year

884,853

1,034,188

From one to five years

1,045,773

1,021,089

Over five years

30,672

47,770

Total

1,961,298

2,103,047

 

Bradesco      113


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

Loans and advances to customers with expected loss

The total balance of “Loans and advances to customers with expected loss” includes renegotiated loans and advances to customers. Such loans contemplate extension of loan payment terms, grace periods, reductions in interest rates, and/or, in some cases, the forgiveness (write-off) of part of the loan principal amount.

Renegotiations may occur after debts are past due or when the Company has information about a significant deterioration in the client’s creditworthiness. The purpose of such renegotiations is to adapt the loan to reflect the client’s actual payment capacity.

The following table shows changes made and our analysis of our portfolio of renegotiated loans and advances to customers:

 

R$ thousand

On December 31

2018

2017

Opening balance

17,183,869

17,501,423

Additional renegotiated amounts, including interest

15,193,567

16,185,863

Payments received

(9,472,888)

(10,108,040)

Write-offs

(5,761,336)

(6,395,377)

Closing balance

17,143,212

17,183,869

Expected loss on loans and advances

(7,015,820)

Impairment of loans and advances

(10,853,777)

Total renegotiated loans and advances to customers, net of impairment at the end of the year

10,127,392

6,330,092

 

 

 

Impairment on renegotiated loans and advances as a percentage of the renegotiated portfolio

40.9%

63.2%

Total renegotiated loans and advances as a percentage of the total loan portfolio

4.2%

4.6%

Total renegotiated loans and advances as a percentage of the total loan portfolio, net of impairment

2.7%

1.8%

At the time a loan is modified, Management considers the new loan's conditions and renegotiated maturity and it is no longer considered past due. From the date of modification, renegotiated interest begins to accrue, using the effective interest rate method, taking into consideration the customer’s capacity to pay the loan based on the analysis made by Management. If the customer fails to maintain the new negotiated terms, management considers ceasing accrual from that point.

Additionally, any balances related to renegotiated loans and advances to customers that have already been written off and recorded in off-balance sheet accounts, as well as any gains from renegotiations, are recognized only when received.

Reconciliation of the gross book value of loans and advances to clients

 

R$ thousand

Stage 1

Stage 2

Stage 3

Total

Loans and advances to customers on January 1, 2018

301,561,502

42,535,223

29,716,940

373,813,665

Transferred to Stage 1

(3,099,627)

(153,138)

(3,252,765)

Transferred to Stage 2

(8,547,801)

(169,851)

(8,717,652)

Transferred to Stage 3

(4,206,794)

(6,078,158)

(10,284,952)

Out of Stage 1

8,547,801

4,206,794

12,754,595

Out of Stage 2

3,099,627

6,078,158

9,177,785

Out of Stage 3

153,138

169,851

322,989

Assets originated/Assets settled or amortized

47,475,424

(4,969,841)

13,921,048

56,426,631

Write-offs

(18,747,641)

(18,747,641)

Loans and advances to customers in December 31, 2018

339,535,096

37,105,249

34,852,310

411,492,655

 

 

       114    IFRS – International Financial Reporting Standards – 2018

 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Reconciliation of expected losses from loans and advances to clients

 

 

R$ thousand

Stage 1

Stage 2

Stage 3

Total (1)

Expected loss on January 1, 2018

6,221,935

6,898,383

17,764,723

30,885,041

Transferred to Stage 1

(462,869)

(119,825)

(582,694)

Transferred to Stage 2

(275,265)

(100,420)

(375,685)

Transferred to Stage 3

(301,168)

(1,211,992)

(1,513,160)

Out of Stage 1

275,265

301,168

576,433

Out of Stage 2

462,869

1,211,993

1,674,862

Out of Stage 3

119,825

100,420

220,245

Constitution/(Reversion)

1,799,929

(1,219,485)

21,658,626

22,239,070

Write-offs

(18,747,641)

(18,747,641)

Expected loss on December 31, 2018

8,028,125

4,379,722

21,968,624

34,376,471

(1) Consider expected losses on loans, commitments to be released and financial guarantees provided.

 

 

R$ thousand

2017

Balance on December 31,  2016

24,780,839

Impairment of loans and advances

16,860,835

Recovery of credits charged-off as losses

7,034,857

Write-offs

(21,620,965)

Balance on December 31,  2017 (1)

27,055,566

(1) Does not include the effects of the initial adoption of IFRS 9, in the amount of R$3,829,475 thousand.

 

ALL expense with expected net loss of recoveries

 

 

Years ended December 31 - R$ thousand

2018

2017

Amount recorded

22,239,070

23,895,692

Amount recovered

(7,147,095)

(7,034,857)

Allowance for Loan Losses expense net of amounts recovered

15,091,975

16,860,835

 

 

28)   Bonds and securities at amortized cost

 

 

R$ thousand

Amortized cost

Gross unrealized gains

Gross unrealized losses

Fair value

Securities:

 

 

 

 

Brazilian government securities

82,661,682

7,677,826

(1,681)

90,337,827

Corporate debt securities

57,943,056

598,676

(1,955,900)

56,585,832

Balance on December 31, 2018 (1)

140,604,738

8,276,502

(1,957,581)

146,923,659

(1) In 2018, no reclassifications were made of Financial Assets at amortized cost – Bonds and securities for other categories of financial assets; and

(2) The balance in question is not accounted.

 

Maturity

 

  

R$ thousand

On December 31, 2018

Amortized cost

Fair value

Due within one year

4,257,886

4,213,891

From 1 to 5 years

91,922,854

94,608,001

From 5 to 10 years

16,437,110

16,307,290

Over 10 years

27,986,888

31,794,477

Total

140,604,738

146,923,659

 

 

Bradesco   115


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The financial instruments pledged as collateral, classified as financial assets at amortized cost, totalled R$22,475,483 thousand in 2018, being composed mostly of Brazilian government bonds.

 

The Organization maintained a total of R$2,134 thousand in financial assets at amortized cost pledged as collateral for liabilities in 2018.

Reconciliation of expected losses of financial assets at amortized cost

 

 

R$ thousand

Stage 1

Stage 2

Stage 3

Total (1)

Expected loss of financial assets at amortized cost on January 1, 2018

91,223

505,955

1,467,942

2,065,120

Transferred to Stage 1

(1,372)

(49,146)

(50,518)

Transferred to Stage 2

(39,578)

(114,523)

(154,101)

Transferred to Stage 3

(30,374)

(30,374)

Out of Stage 1

39,578

39,578

Out of Stage 2

1,372

30,374

31,746

Out of Stage 3

49,146

114,523

163,669

Assets constitued/reversed

76,044

160,711

720,164

956,919

Expected loss of financial assets at amortized cost on December 31, 2018

178,207

789,021

2,054,811

3,022,039

(1)  The expected loss balance is recorded as "Expected Loss on Other Financial Assets" in the Consolidated Statement of Income.

 

29)   Investments held to maturity

 

 

R$ thousand

Amortized cost

Gross unrealized gains

Gross unrealized losses

Fair value

Securities:

 

 

 

 

Brazilian government securities

26,738,940

2,442,844

(6,489)

29,175,295

Corporate debt securities

12,259,564

126,092

(421,874)

11,963,782

Brazilian sovereign bonds

7,614

(420)

7,194

Balance on December 31, 2017

39,006,118

2,568,936

(428,783)

41,146,271

 

Maturity

 

  

R$ thousand

On December 31, 2017

Amortized cost

Fair value

Due within one year

29,412

28,998

From 1 to 5 years

10,284,940

11,070,179

From 5 to 10 years

1,933,866

1,840,428

Over 10 years

26,757,900

28,206,666

Total

39,006,118

41,146,271

 

The Organization maintained a total of R$2,005 thousand in assets held to maturity pledged as collateral for liabilities in 2017.

 

In 2017 there was impairment in investments held to maturity to the amount of R$54,520 thousand.

 

30)   Financial assets granted as collateral

 

  

R$ thousand

On December 31

2017

Held for trading

801,182

Brazilian government securities

801,182

Available for sale (1)

59,482,796

Brazilian government securities

53,039,884

Corporate debt securities

825,287

Bank debt securities

4,904,070

Brazilian sovereign bonds

713,555

Loans and advances to banks

123,691,195

Interbank investments (2)

123,691,195

Total

183,975,173

(1) In 2017, it included unrealized gains in the amount of R$3,246,351 thousand and unrealized losses in the amount of R$557,974 thousand; and

(2) Refers to the repo operations in which the ballast was subsequently given in another repo operation.

 

       116     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Collateral are conditional commitments to ensure that the contractual clauses of a funding in the open market are complied with. In these collateral, the amount of R$178,964,158 thousand may be repledged and R$5,011,015 thousand sold or repledged.

 

31)   Non-current assets held for sale

 

  

R$ thousand

On December 31

2018

2017

Assets not for own use

 

 

Real estate

1,120,434

1,250,380

Vehicles and similar

231,105

262,774

Machinery and equipment

585

2,037

Other

1,206

5,782

Total

1,353,330

1,520,973

 

The properties or other non-current assets received in total or partial settlement of the payment obligations of debtors are considered as non-operating assets held for sale in auctions, which normally occur in up to one year. Therefore, non-current assets held for sale include the book value of the items the Organization intends to sell, which in their current condition is highly probable and expected to occur within a year.

 

 

Bradesco   117


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

32)   Investments in associates and joint ventures

 

a)  Breakdown of investments in associates and joint ventures

 

Companies

R$ thousand

Equity interest

Shareholding interest with voting rights

Investment book value

Equity in net income (loss)

Associates and joint ventures current assets

Associates and joint ventures non - current assets

Associates and joint ventures current liabilities

Associates and joint ventures non - current liabilities

Revenue (1)

Associates and joint ventures net income (loss) for the year

Cielo S.A. (2)

30.06%

30.06%

4,679,589

1,011,125

65,967,300

16,595,791

56,802,838

10,890,157

1,883,033

3,341,909

IRB - Brasil Resseguros S.A. (3) (4)

15.23%

15.23%

606,161

174,277

10,265,219

5,417,377

10,845,420

873,938

7,036,160

1,139,542

Fleury S.A. (3) (5)

16.28%

16.28%

699,927

38,805

1,510,304

2,482,580

640,899

1,570,942

2,642,751

238,558

Aquarius Participações S.A. (6)

49.00%

49.00%

43,030

130,769

19,096

86,626

17,907

266,876

Haitong Banco de Investimento do Brasil S.A.

20.00%

20.00%

100,597

602

2,587,712

1,503,374

2,210,690

1,880,396

6,362,896

3,010

Cia. Brasileira de Gestão e Serviços S.A.

41.85%

41.85%

127,677

8,895

230,503

100,052

22,207

3,258

174,816

21,254

NCR Brasil Indústria de Equipamentos para Automação S.A. (3)

49.00%

49.00%

52,571

6,689

305,278

30,249

207,894

9,601

13,651

Tecnologia Bancária S.A. (3)

24.32%

24.32%

115,433

(8,492)

471,119

1,488,542

511,883

1,035,574

2,225,362

(34,918)

Swiss Re Corporate Solutions Brasil (3) (8)

40.00%

40.00%

345,036

(10,998)

2,110,050

1,479,827

2,509,280

246,060

973,422

(27,494)

Gestora de Inteligência de Crédito S.A. (3)

20.00%

20.00%

59,098

(6,466)

165,299

173,083

42,894

13,726

(32,330)

Other (3)

-

-

35,083

33,788

Total investments in associates

 

 

6,864,202

1,378,994

83,631,880

29,357,501

73,811,912

16,500,325

21,321,767

4,930,058

 

 

 

 

 

 

 

 

 

 

 

Elo Participações S.A. (9)

50.01%

50.01%

1,191,343

288,938

718,623

1,981,596

170,683

8,220

28,938

573,968

Crediare S.A. – Crédito, Financiamento e Investimento

50.00%

50.00%

70,254

12,473

330,042

66,980

161,458

136,193

24,946

MPO - Processadora de Pagamentos Móveis S.A.

50.00%

50.00%

(30)

2,284

1,696

4,112

154

(60)

Total investments in joint ventures

 

 

1,261,597

301,381

1,050,949

2,050,272

336,253

8,220

165,285

598,854

Total on December 31, 2018

 

 

8,125,799

1,680,375

84,682,829

31,407,773

74,148,165

16,508,545

21,487,052

5,528,912

 
 

       118     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Companies

R$ thousand

Equity interest

Shareholding interest with voting rights

Investment book value

Equity in net income (loss)

Associates and joint ventures current assets

Associates and joint ventures non - current assets

Associates and joint ventures current liabilities

Associates and joint ventures non - current liabilities

Revenue (1)

Associates and joint ventures net income (loss) for the year

Cielo S.A. (2)

30.06%

30.06%

4,832,660

1,219,202

76,403,596

13,151,540

71,020,292

6,833,491

2,561,394

4,056,077

IRB - Brasil Resseguros S.A. (3) (4)

15.23%

15.23%

543,025

182,432

8,512,491

6,124,173

10,138,711

947,514

3,550,438

1,197,846

Fleury S.A. (3) (5)

16.28%

16.28%

692,380

46,791

1,389,026

2,224,500

615,510

1,263,331

2,609,717

287,414

Aquarius Participações S.A.

49.00%

49.00%

263,630

116,070

242,617

532,707

237,305

38

236,878

Haitong Banco de Investimento do Brasil S.A.

20.00%

20.00%

105,649

(22,637)

3,588,848

1,283,453

3,565,394

726,468

5,432,770

(113,185)

Cia. Brasileira de Gestão e Serviços S.A.

41.85%

41.85%

118,781

16,530

285,871

118,394

33,305

8,320

61,185

39,498

NCR Brasil Indústria de Equipamentos para Automação S.A. (3) (8)

49.00%

49.00%

46,039

4,108

221,809

28,788

141,520

1,270

8,384

Tecnologia Bancária S.A. (3)

24.32%

24.32%

108,752

10,209

242,480

75,702

590,872

496,090

2,534,235

41,973

Swiss Re Corporate Solutions Brasil (3)

40.00%

40.00%

463,400

(26,437)

2,178,209

1,511,924

2,411,600

437,278

490,079

(66,093)

Gestora de Inteligência de Crédito S.A. (3)

20.00%

20.00%

29,513

(4,642)

118,961

43,253

18,594

(23,210)

Other (3)

-

-

7,129

2,361

-

-

-

-

-

-

Total investments in associates

 

 

7,210,958

1,543,987

93,183,908

25,094,434

88,773,103

10,712,492

17,241,126

5,665,582

 

 

 

 

 

 

 

 

 

 

 

Elo Participações S.A.

50.01%

50.01%

978,195

162,070

420,804

1,776,837

96,763

3,967

18,708

324,075

Crediare S.A. – Crédito, Financiamento e Investimento

50.00%

50.00%

68,231

12,393

339,236

119,406

324,764

161,107

24,786

MPO - Processadora de Pagamentos Móveis S.A.

50.00%

50.00%

(39)

2,198

1,612

2

3,881

227

(78)

Total investments in joint ventures

 

 

1,046,426

174,424

762,238

1,897,855

421,529

7,848

180,042

348,783

Total on December 31, 2017

 

 

8,257,384

1,718,411

93,946,146

26,992,289

89,194,631

10,720,340

17,421,168

6,014,365

 

Bradesco   119


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Companies

R$ thousand

Equity interest

Shareholding interest with voting rights

Investment book value

Equity in net income (loss)

Associates and joint ventures current assets

Associates and joint ventures non - current assets

Associates and joint ventures current liabilities

Associates and joint ventures non - current liabilities

Revenue (1)

Associates and joint ventures net income (loss) for the year

Cielo S.A. (2)

30.06%

30.06%

4,108,743

1,204,520

13,699,378

10,654,621

15,004,712

392,167

4,007,233

IRB - Brasil Resseguros S.A. (3) (4)

20.51%

20.51%

662,460

132,668

8,484,793

5,828,133

10,238,221

844,876

3,185

646,823

Fleury S.A. (3) (5)

16.39%

16.39%

651,906

17,506

1,343,162

2,021,981

429,411

1,166,607

2,045,898

106,829

Aquarius Participações S.A. (6)

49.00%

49.00%

263,632

73,640

150,233

538,267

150,474

150,286

Haitong Banco de Investimento do Brasil S.A.

20.00%

20.00%

127,922

1,596

8,187,596

493,325

8,041,309

4,243,442

7,980

Cia. Brasileira de Gestão e Serviços S.A.

41.85%

41.85%

102,251

18,517

247,475

109,390

44,890

22,642

44,246

Tecnologia Bancária S.A. (3)

24.32%

24.32%

98,543

71,232

193,546

1,117,398

499,341

406,459

686,800

292,862

NCR Brasil Indústria de Equipamentos para Automação S.A. (3)

49.00%

49.00%

73,789

(7,024)

171,823

27,780

111,755

330,985

(14,335)

Empresa Brasileira de Solda Elétrica S.A. (3) (8)

-

-

3,168

Total investments in associates

 

 

6,089,246

1,515,823

32,478,006

20,790,895

34,520,113

2,417,942

7,725,119

5,241,924

 

 

 

 

 

 

 

 

 

 

 

Elo Participações S.A.

50.01%

50.01%

849,355

198,457

352,179

1,596,527

107,627

18,879

396,835

Crediare S.A. – Crédito, Financiamento e Investimento

50.00%

50.00%

64,174

8,721

443,978

3,883

317,298

164,026

17,442

MPO - Processadora de Pagamentos Móveis S.A.

50.00%

50.00%

3

(49)

3,538

3,532

256

(98)

Leader S.A. Adm. de Cartões de Crédito (3) (7)

-

-

(23,227)

 

Total investments in joint ventures

 

 

913,532

183,902

799,695

1,600,410

428,457

183,161

414,179

Total on December 31, 2016

 

 

7,002,778

1,699,725

33,277,701

22,391,305

34,948,570

2,417,942

7,908,280

5,656,103

 

(1) Revenues from financial intermediation or services;

(2) Brazilian company, services provider related to credit and debit cards and other means of payment. In 2018, the Organization received R$1,204,069 thousand of dividends and interest on capital of this investment. In its financial statements, Cielo S.A. presented R$6,948 thousand of other comprehensive income;

(3) Companies for which the equity accounting adjustments are calculated using statements of financial position and statements of income with lag in relation to the reporting date of these consolidated financial statements;

(4) Bradesco has a board member at IRB-Brasil with voting rights, which results in significant influence;

(5) Participation in Fleury S.A. (i) company considered using equity method as Bradesco has significant influence due its participation on the Board of the Directors and other Committees;

(6) In 2018, occurred the partial spin-off and consolidation of Fidelity Processadora S.A., controlled by Aquarius Participações S.A.;

(7) In April 2016, it was consolidated after acquisition of 50% of the company;

(8) In 2018, impairment losses were recorded in "associates and jointly controlled entities" in the amount of R$107,000 thousand. In 2017, it was recorded, in the amount of R$31,868 thousand, on the investment in NCR Brasil S.A. (In 2016, R$37,122 thousand on the investment in EBSE – Empresa Brasileira de Solda Elétrica S.A.); and

(9) Brazilian company, holding company that consolidates joint business related to electronic means of payment. In 2018, the Organization received R$38,278 thousand of dividends from this investment. In its financial statements, Elo Participações S.A. presented R$44 thousand of other comprehensive income.

 

 

       120     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

In 2018, with the exception of Cielo S.A., IRB – Brasil Resseguros S.A. (IRB) and Fleury S.A., the other investments mentioned in the table above were not traded regularly on any stock exchange. The market value of these investments totaled R$12,240,547 thousand (2017 – R$22,340,660 thousand). The Organization does not have any contingent liability for investments in Associates, in which it is responsible for, in part or in full.

 

b)  Changes in associates

 

 

R$ thousand

2018

2017

Initial balances

8,257,384

7,002,778

Acquisitions (1)

54,019

524,155

Spin-off of associates (2)

(1,175)

(170,006)

Transfer (3)

(338,315)

5,953

Equity in net income of associates

1,680,375

1,718,411

Dividends/Interest on capital

(1,385,537)

(802,662)

Impairment (4)

(107,000)

(31,868)

Other

(33,952)

10,623

At the end of the year

8,125,799

8,257,384

(1) In 2017, it includes the acquisition of interest in (i) Swiss Re Corporate Solutions Brasil; and in (ii) GIC - Gestora de Inteligência de Crédito;

(2) In 2017, there was partial sale of the IRB (Note 43-6);

(3) In 2018, the partial spin-off and consolidation of Fidelity Processadora S.A., controlled by Aquarius Participações S.A.; and

(4) In 2018, there were losses on impairment in associates, in the amount of R$107,000 thousand (2017 – R$31,868 thousand).

 

33)   Property and equipment

 

a)  Composition of property and equipment by class

 

 

R$ thousand

Annual depreciation rate

Cost

Accumulated depreciation

Net

Buildings

4%

2,611,299

(480,093)

2,131,206

Land

-

976,869

976,869

Installations, properties and equipment for use

10%

6,324,483

(3,161,651)

3,162,832

Security and communication systems

10%

379,099

(236,293)

142,806

Data processing systems

20%

4,231,789

(2,677,882)

1,553,907

Transportation systems

20%

92,403

(60,760)

31,643

Financial leases of data processing systems

20%

3,474,958

(2,647,385)

827,573

Balance on December 31, 2018

 

18,090,900

(9,264,064)

8,826,836

 

 

 

 

 

Buildings

4%

2,153,407

(483,266)

1,670,141

Land

-

982,720

982,720

Installations, properties and equipment for use

10%

5,450,939

(2,667,455)

2,783,484

Security and communication systems

10%

349,228

(213,879)

135,349

Data processing systems

20%

3,950,625

(2,329,028)

1,621,597

Transportation systems

20%

86,705

(48,246)

38,459

Financial leases of data processing systems

20%

3,431,868

(2,231,143)

1,200,725

Balance on December 31, 2017

 

16,405,492

(7,973,017)

8,432,475

 

Depreciation charges in 2018 amounted to R$1,460,013 thousand (2017 – R$1,237,328 thousand).

 

We enter into finance lease agreements as a lessee for data processing equipment, which are recorded as leased equipment in property and equipment. According to this accounting method, both the asset and the obligation are recognized in the consolidated financial statements and the depreciation of the asset is calculated based on the same depreciation policy as for similar assets. See Note 43 for disclosure of the obligation.

 

Bradesco   121


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

b)    Change in property and equipment by class

 

 

R$ thousand

Buildings

Land

Installations, properties and equipment for use

Security and communications systems

Data processing systems (1)

Transportation systems

Total

Balance on December 31, 2017

1,670,141

982,720

2,783,484

135,349

2,822,322

38,459

8,432,475

Additions

766,074

143,103

1,045,155

39,005

390,398

5,698

2,389,433

Write-offs

(12,168)

(278,602)

(160,587)

(6,141)

(1,924)

(459,422)

Impairment

(60,371)

(653)

(30,670)

(91,694)

Depreciation

(111,274)

(512,825)

(24,754)

(798,646)

(12,514)

(1,460,013)

Transfer

(121,196)

129,648

8,452

Balance from an acquired institution

7,605

7,605

Balance on December 31, 2018

2,131,206

976,869

3,162,832

142,806

2,381,480

31,643

8,826,836

 

 

 

 

 

 

 

 

Balance on December 31, 2016

1,698,925

1,027,535

2,872,445

132,861

2,618,745

46,605

8,397,116

Additions

117,888

41,777

754,606

31,134

947,314

4,926

1,897,645

Write-offs

(53,151)

(86,592)

(323,217)

(2,540)

(86,469)

(100)

(552,069)

Impairment

(73,568)

(502)

(1,836)

(3,288)

(79,194)

Depreciation

(28,840)

(521,663)

(24,270)

(649,583)

(12,972)

(1,237,328)

Transfer

8,887

1,815

(4,397)

6,305

Balance on December 31, 2017

1,670,141

982,720

2,783,484

135,349

2,822,322

38,459

8,432,475

 (1) Includes financial lease of data processing systems.

 

 

       122     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements


34)  Intangible assets and goodwill

 

a)   Change in intangible assets and goodwill by class

 

 

R$ thousand

Goodwill

Intangible Assets

Acquisition of financial service rights (1)

Software (1)

Customer portfolio (1)

Other (1)

Total

Balance on December 31, 2017

4,945,313

4,051,898

3,790,418

3,358,689

32,989

16,179,307

Additions/(reductions)

630,755

1,859,905

1,198,396

(5,146)

3,683,910

Impairment (2)

(162)

(386,265)

(386,427)

Amortization

(1,116,505)

(1,361,269)

(864,686)

(5,782)

(3,348,242)

Balance on December 31, 2018

5,576,068

4,795,136

3,241,280

2,494,003

22,061

16,128,548

 

 

 

 

 

 

 

Balance on December 31, 2016

4,945,313

2,503,457

3,945,244

4,358,923

44,589

15,797,526

Additions/(reductions)

2,549,335

1,203,313

(8,944)

3,743,704

Impairment (2)

(30,683)

(30,683)

Amortization

(1,000,894)

(1,327,456)

(1,000,234)

(2,656)

(3,331,240)

Balance on December 31, 2017

4,945,313

4,051,898

3,790,418

3,358,689

32,989

16,179,307

(1) Rate of amortization: acquisition of banking rights – in accordance with contract agreement; software – 20%; Customer portfolio – up to 20%; and others – 20%; and

(2) Impairment losses were recognized in the consolidated statement of income, within “Other operating income/(expenses)”.

 

 

 

Bradesco   123


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

b)  Composition of goodwill by segment

 

  

R$ thousand

On December 31

2018

2017

Banking

5,083,686

4,651,347

Insurance , pension and capitalization bonds

492,382

293,966

Total

5,576,068

4,945,313

 

The Cash Generation Units allocated to the banking segment and the insurance, pension and capitalization bonds segment are tested annually for impairment of goodwill. We did not incur any goodwill impairment losses in 2018, 2017 and 2016.

 

The recoverable amount from the Banking Segment has been determined based on a value-in-use calculation. The calculation uses cash-flow predictions based on financial budgets approved by Management, with a terminal growth rate of 6.9% p.a. (7.1% p.a. in 2017). The forecast cash flows have been discounted at a rate of 12.0% p.a. (13.6% p.a. in 2017).  

 

The key assumptions described above may change as economic and market conditions change. The Organization estimates that reasonably possible changes in these assumptions within the current economic environment are not expected to cause the recoverable amount of either unit to decline below the carrying amount.

 

35)   Other assets

 

 

R$ thousand

On December 31

2018

2017

Financial assets (4) (5)

43,893,309

41,719,483

Foreign exchange transactions (1)

20,179,828

17,279,327

Debtors for guarantee deposits (2)

18,729,321

17,840,698

Securities trading

2,582,663

1,741,524

Trade and credit receivables

664,274

3,016,225

Receivables

1,737,223

1,841,709

Other assets

7,372,866

9,134,504

Deferred acquisition cost (insurance) – Note 40f

925,884

1,070,108

Other debtors

2,728,746

3,736,743

Prepaid expenses

741,087

1,244,602

Interbank and interdepartmental accounts

1,427,359

1,480,291

Other (3)

1,549,790

1,602,760

Total

51,266,175

50,853,987

(1) Mainly refers to purchases in foreign currency made by the institution on behalf of customers and rights in the institution’s domestic currency, resulting from exchange sale operations;

(2) Refers to deposits resulting from legal or contractual requirements, including guarantees provided in cash, such as those made for the filing of appeals in departments or courts and those made to guarantee services of any nature;

(3) Includes basically trade and credit receivables, material supplies, other advances and payments to be reimbursed;

(4) Financial assets are recorded at amortized cost; and

(5) In 2018, there were no losses for impairment of other financial assets.

 

       124     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

  

36) Deposits from banks

 

Financial liabilities called “Deposits from banks” are initially measured at fair value and, subsequently, at amortized cost, using the effective interest rate method.

 

Composition by nature

 

 

R$ thousand

On December 31

2018

2017

Demand deposits

1,139,729

1,030,292

Interbank deposits

410,975

2,168,625

Securities sold under agreements to repurchase

190,911,877

233,467,544

Borrowings

29,681,340

18,521,713

Onlending

25,170,058

30,769,294

Total

247,313,979

285,957,468

 

37)   Deposits from customers

 

Financial liabilities called “Deposits from customers” are initially measured at fair value and subsequently at amortized cost, using the effective interest rate method.

 

Composition by nature

 

 

R$ thousand

On December 31

2018

2017

Demand deposits

34,178,563

33,058,324

Savings deposits

111,170,912

103,332,697

Time deposits

195,398,721

125,617,424

Total

340,748,196

262,008,445

 

38)   Funds from securities issued

 

a)     Composition by type of security issued and location

 

 

R$ thousand

On December 31

2018

2017

Instruments Issued – Brazil:

 

 

Real estate credit notes

25,381,719

27,020,911

Agribusiness notes

13,108,595

10,973,682

Financial bills

104,005,236

93,570,141

Letters of credit property guaranteed (1)

476,332

Subtotal

142,971,882

131,564,734

Securities – Overseas:

 

 

Euronotes (2)

1,270,409

634,549

Securities issued through securitization – (item (b))

3,130,111

2,606,322

Subtotal

4,400,520

3,240,871

Structured Operations Certificates

656,616

368,485

Total

148,029,018

135,174,090

(1) Funding is secured by the Real Estate Credit Portfolio, for the amount of R$549,665 thousand, which meets all Central Bank (BACEN) Resolution No. 4,598/17 requirements: 115.38% sufficiency (including fiduciary agent remuneration), liquidity; the asset portfolio's weighted average tenor being 309 months, issuing LIGs (secured real estate notes or 'covered bonds') with tenor 35 months, none due within 180 days, receivables corresponding to 0.05% of total assets and 61.46% of the properties' guarantee amount. The credit portfolio’s guarantor assets are mostly rated AA and A (66% and 23% respectively). In addition, the LIG Issue and the asset portfolio management policy, as required by Article 11 of BACEN Resolution No. 4,598/17, are located at the following address https://banco.bradesco/html/prime/produtos-servicos/investimentos/letra-imobiliaria-garantida.shtm; and

(2) Issuance of securities in the foreign market to fund customers’ foreign exchange operations, export pre-financing, import financing and working capital financing, substantially in the medium and long terms.

 

Bradesco   125


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

b)    Securities issued through securitization

 

Since 2003, the Organization uses certain arrangements to optimize its activities of funding and liquidity management by means of an Specific Purpose Entity (SPE). This SPE, which is called International Diversified Payment Rights Company, is financed with long-term bonds which are settled with the future cash flow of the corresponding assets, basically comprising current and future flow of payment orders sent by individuals and legal entities abroad to beneficiaries in Brazil for whom Bradesco acts as payer.

 

The long-term instruments issued by the SPE and sold to investors will be settled with funds from the payment orders flows. The Organization is required to redeem the instruments in specific cases of default or upon closing of the operations of the SPE.

 

The funds deriving from the sale of current and future payment orders flows, received by the SPE, must be maintained in a specific bank account until they reach a given minimum level.

 

We show below the amounts of the securities issued by the SPE, which appear in the “Funding from issuance of securities” line item:

 

 

R$ thousand

 

Date of Issue

Nominal amount

Maturity

On December 31

 

2018

2017

Securitization of the future flow of payment orders received from abroad

19.12.2008

1,168,500

20.02.2019

84

348,524

17.12.2009

89,115

20.02.2020

29,635

49,594

16.11.2011

88,860

20.11.2018

26,068

16.11,2011

133,290

22.11.2021

124,949

139,678

23.12.2015

390,480

21.11.2022

318,115

330,311

23.12.2015

390,480

20.11.2020

246,995

318,934

02.02.2016

889,725

22.02.2021

713,740

871,260

30.03.2016

533,835

22.02.2021

423,304

521,953

12.05.2018

1,121,100

22.02.2021

1,273,289

Total

 

4,805,385

 

3,130,111

2,606,322

 

c)     Net financial activity in the issuance of securities

 

 

R$ thousand

2018

2017

Opening balance on December 31

135,174,090

151,101,938

Issuance

85,963,195

62,237,380

Interest

9,054,699

13,262,613

Settlement and interest payments

(82,973,990)

(91,324,496)

Exchange variation and others

811,024

(103,345)

Closing balance on December 31

148,029,018

135,174,090

 

       126     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

39)   Subordinated debt

 

a)   Composition of subordinated debt

 

Maturity

On December 31 - R$ thousand

Original term in years

Nominal amount

2018

2017

In Brazil:

 

 

 

 

Subordinated CDB:

 

 

 

 

2019

10

20,000

69,851

62,303

Financial bills:

 

 

 

 

2018 (1)

6

10,130,108

2019

6

21,858

39,261

36,139

2018 (1)

7

316,757

2019

7

3,172,835

3,490,180

3,436,734

2020

7

1,700

3,038

2,801

2022

7

4,305,011

6,010,103

5,597,559

2023

7

1,359,452

1,829,083

1,699,872

2024

7

67,450

80,479

73,861

2025 (2)

7

5,425,906

5,578,707

2018 (1)

8

119,417

2019

8

12,735

31,742

28,184

2020

8

28,556

59,398

54,383

2021

8

1,236

2,192

2,027

2023

8

1,706,846

2,464,978

2,265,488

2024

8

136,695

172,590

159,205

2025

8

6,193,653

6,427,806

6,624,611

2026 (2)

8

870,300

894,417

2021

9

7,000

14,064

13,125

2024

9

4,924

7,444

6,611

2025

9

400,944

491,031

457,679

2027 (2)

9

144,900

149,211

2021

10

19,200

44,962

40,429

2022

10

54,143

108,467

99,338

2023

10

688,064

1,146,189

1,070,085

2025

10

284,137

451,136

392,376

2026

10

361,196

480,443

438,776

2027

10

258,743

295,946

273,498

2028 (2)

10

248,300

257,524

2026

11

3,400

4,622

4,271

2027

11

47,046

58,346

53,996

2028

11

74,764

84,304

77,079

Perpetual (2)

 

9,201,200

9,254,743

5,004,967

Subtotal in Brazil

 

 

40,002,257

38,541,679

Overseas:

 

 

 

 

2019

10

1,333,575

2,953,103

2,520,963

2021

11

2,766,650

6,355,614

3,697,115

2022

11

1,886,720

4,332,470

5,419,644

Subtotal overseas

 

 

13,641,187

11,637,722

Total

 

 

53,643,444

50,179,401

(1) Subordinated debt transactions that matured in 2018; and

(2) Issuance of subordinated financial letters, under the heading “Subordinated debt”.

 

 

Bradesco   127


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

b)   Net movement of subordinated debt

 

 

R$ thousand

2017

2016

Initial balances

52,611,064

50,282,936

Balance originating from an acquired institution

1,401,348

Issuances

6,594,610

3,787,207

Interest

5,100,017

6,298,555

Payments and other

(14,126,290)

(9,158,982)

At the end of the year

50,179,401

52,611,064

 

       128     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

40)   Insurance technical provisions and pension plans

 

a)     Technical provisions by account

 

 

R$ thousand

Insurance (1)

Life and Pension (2)(3)

Total

On December 31

On December 31

On December 31

2018

2017

2018

2017

2018

2017

Current and long-term liabilities

 

 

 

 

 

 

Mathematical reserve for unvested benefits

1,218,860

1,051,507

217,884,791

207,818,859

219,103,651

208,870,366

Mathematical reserve for vested benefits

343,852

265,727

8,489,312

9,367,712

8,833,164

9,633,439

Reserve for claims incurred but not reported (IBNR)

3,401,781

3,159,967

931,154

1,030,107

4,332,935

4,190,074

Unearned premium reserve

4,283,281

4,068,716

647,709

567,369

4,930,990

4,636,085

Reserve for unsettled claims

4,472,929

4,291,432

1,345,596

1,588,489

5,818,525

5,879,921

Reserve for financial surplus

549,135

514,199

549,135

514,199

Other technical provisions

2,186,799

1,996,206

5,823,088

3,369,300

8,009,887

5,365,506

Total reserves

15,907,502

14,833,555

235,670,785

224,256,035

251,578,287

239,089,590

(1) “Other technical provisions” - Insurance includes the Provision for Insufficient Premiums (PIP) of R$ 2,133,130 thousand and the Reserve for Related Expenses of R$ 37,577 thousand;

(2) The "Other technical provisions" line of Life and Pension Plan includes "Provision for redemptions and other amounts to be settled" in the amount of R$2,248,238 thousand, "Provision for related expenses" in the amount of R$520,613 thousand, “Complementary Reserve for Coverage (PCC)” in the amount of R$1,010,035 thousand and" Other technical provisions", which includes the transfer of R$2,007,136 thousand of the mathematical provisions of benefits to be granted and benefits granted, subject to authorization by SUSEP; and

(3) Includes the unearned Premium Reserve of risks covered not yet issued (PPNG-RVNE) in the amount of R$ 158,535 thousand.

 

Bradesco   129


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

b)    Technical provisions by product

 

 

R$ thousand

Insurance

Life and pension plans (1)

Total

On December 31

On December 31

On December 31

2018

2017

2018

2017

2018

2017

Health

10,391,680

9,754,024

10,391,680

9,754,024

Auto / Liability Insurance

3,209,143

3,156,847

3,209,143

3,156,847

DPVAT (Personal Injury Caused by Automotive Vehicles)

601,114

506,161

2,756

3,100

603,870

509,261

Life

310,829

10,964,900

10,018,884

11,275,729

10,018,884

RE (Elementary branch)

1,394,736

1,416,523

1,394,736

1,416,523

Free Benefits Generating Plan - PGBL

36,188,888

35,087,618

36,188,888

35,087,618

Free Benefits Generating Life - VGBL

166,104,340

158,746,205

166,104,340

158,746,205

Traditional plans

22,409,901

20,400,228

22,409,901

20,400,228

Total technical provisions

15,907,502

14,833,555

235,670,785

224,256,035

251,578,287

239,089,590

 (1) Includes personal and pension insurance operations.

 

c)     Technical provisions by aggregated products

 

 

R$ thousand

On December 31

2018

2017

Insurance – Vehicle, Elementary Lines, Life and Health

26,875,158

24,855,539

Insurance and Pensions - Life with Survival Coverage (VGBL)

166,104,340

158,746,205

Pensions – PGBL and Traditional Plans

49,527,947

47,623,322

Pensions – Risk Traditional Plans

9,070,842

7,864,524

Total

251,578,287

239,089,590

 

 

       130     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

d)  Changes in the insurance and pension technical provisions

 

(i)      Insurance – Vehicle, General, Life, Health and Pension

 

 

R$ thousand

Years ended December 31

2018

2017

At the beginning of the year

32,720,063

31,611,733

(-) DPVAT insurance

(508,098)

(473,579)

Subtotal at beginning of the year

32,211,965

31,138,154

Additions, net of reversals

29,425,077

28,542,623

Payment of claims, benefits and redemptions

(27,922,007)

(27,156,197)

Adjustment for inflation and interest

1.628.123

648,898

Partial spin-off of large risk portfolio

-

(961,513)

Subtotal at end of the period

35,343,158

32,211,965

(+) DPVAT insurance

602,842

508,098

At the end of the year

35,946,000

32,720,063

 

(ii)     Insurance – Life with Survival Coverage (VGBL)

 

  

R$ thousand

Years ended December 31

2018

2017

At the beginning of the year

158,746,205

138,670,739

Receipt of premiums net of fees

23,715,609

28,577,437

Payment of benefits

(30,563)

(28,758)

Payment of redemptions

(21,008,985)

(18,985,242)

Adjustment for inflation and interest

8,017,088

13,468,401

Others

(3,335,014)

(2,956,372)

At the end of the year

166,104,340

158,746,205

 

(iii)    Pensions – PGBL and Traditional Plans

 

 

R$ thousand

Years ended December 31

2018

2017

At the beginning of the year

47,623,322

45,557,528

Receipt of premiums net of fees

2,683,007

3,446,148

Payment of benefits

(858,454)

(759,949)

Payment of redemptions

(2,615,186)

(2,962,505)

Adjustment for inflation and interest

3,232,938

3,656,452

Others

(537,680)

(1,314,352)

At the end of the year

49,527,947

47,623,322

Bradesco   131


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

e)     Guarantees for the technical provisions

 

 

R$ thousand

Insurance

Life and pension plans

Total

On December 31

On December 31

On December 31

2018

2017

2018

2017

2018

2017

Total technical provisions

15,907,502

14,833,555

235,670,785

224,256,035

251,578,287

239,089,590

(-) Commercialization surcharge – extended warranty

(54,183)

(138,780)

(54,183)

(138,780)

(-) Portion corresponding to contracted reinsurance

(125,032)

(153,137)

(9,859)

(14,123)

( 134,532 891)

(167,260)

(-) Receivables

(1,043,400)

(925,999)

(1,043,400)

(925,999)

(-) Unearned premium reserve – Health and dental insurance (1)

(1,381,574)

(1,268,243)

(1,381,574)

(1,268,243)

(-) Reserves from DPVAT agreements

(597,398)

(502,491)

(597,398)

(502,491)

To be insured

12,705,915

11,844,905

235,660,926

224,241,912

248,366,841

236,086,817

 

 

 

 

 

 

 

Investment fund quotas (VGBL and PGBL) (2)

198,748,039

190,639,798

198,748,039

190,639,798

Investment fund quotas (excluding VGBL and PGBL)

5,155,446

5,076,006

23,230,004

21,639,087

28,385,450

26,715,093

Government securities

10,164,283

9,011,657

19,534,894

18,608,194

29,699,177

27,619,851

Private securities

15,378

18,203

151,681

164,338

167,059

182,541

Shares

2,935

3,227

1,238,716

1,716,401

1,241,651

1,719,628

Total technical provision guarantees

15,338,042

14,109,093

242,903,334

232,767,818

258,241,376

246,876,911

(1) Deduction provided for in Article 4 of ANS Normative Resolution No. 392/15; and

(2) The investment funds "VGBL" and "PGBL" were consolidated in the financial statements.

 

 

       132     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

f)   Changes in deferred acquisition cost (insurance assets)

 

 

R$ thousand

Years ended December 31

2018

2017

At the beginning of the year

1,070,108

1,750,244

Additions

1,324,815

1,586,888

Reversals

(1,469,039)

(2,250,844)

Sale of large risk portfolio

-

(16,180)

At the end of the year

925,884

1,070,108

 

g)  Changes in reinsurance assets

 

  

R$ thousand

Years ended December 31

2018

2017

At the beginning of the year

219,214

1,186,194

Additions

245,957

186,867

Reversals

(239,049)

(139,641)

Recovered insurance losses

(37,369)

(259,433)

Reversal/Monetary update

(4,892)

(411)

Other (1)

(7,537)

(754,362)

At the end of the year

176,324

219,214

(1)    In 2017, includes the transfer of part of the operation sale of the large risk portfolio.

 

h)  Claim information

 

The purpose of the table below is to show the inherent insurance risk, comparing the insurance claims paid with their provisions. Starting from the year in which the claim was reported, the upper part of the table shows the changes in the provision over the years. The provision varies as more precise information concerning the frequency and severity of the claims is obtained. The lower part of the table shows the reconciliation of the amounts with the amounts presented in the financial statements.

 

Bradesco   133


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Insurance, Vehicle/RCF and Elementary Lines – Claims, gross reinsurance(1)

 

  

R$ thousand

Year claims were notified

Up to 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Total

Amount estimated for the claims:

 

 

 

 

 

 

 

 

 

 

 

 

·  In the year after notification

1,288,259

2,219,991

2,592,573

2,859,480

3,348,274

3,224,788

3,937,126

4,428,926

4,109,825

3,749,457

3,448,593

·  One year after notification

1,247,008

2,193,645

2,562,789

2,824,610

3,240,688

3,041,662

3,663,951

4,277,245

3,912,436

3,740,543

·  Two years after notification

1,230,236

2,179,949

2,561,264

2,809,879

3,233,150

3,009,371

3,671,822

4,232,474

3,923,389

·  Three years after notification

1,238,534

2,179,419

2,577,663

2,812,812

3,256,062

3,044,232

3,655,382

4,260,118

·  Four years after notification

1,247,341

2,210,909

2,595,369

2,811,587

3,292,376

3,034,096

3,669,868

·  Five years after notification

1,248,036

2,209,826

2,607,212

2,840,368

3,113,580

3,049,171

·  Six years after notification

1,274,168

2,222,800

2,611,105

2,837,693

3,128,386

·  Seven years after notification

1,290,615

2,240,171

2,599,521

2,850,912

·  Eight years after notification

1,307,505

2,228,954

2,608,176

·  Nine years after notification

1,299,124

2,234,024

·  Ten years after notification

1,296,266

Estimate of claims on the reporting date (2018)

1,296,266

2,234,024

2,608,176

2,850,912

3,128,386

3,049,171

3,669,868

4,260,118

3,923,389

3,740,543

3,448,593

34,209,446

Payments of claims

(1,180,848)

(2,216,199)

(2,580,422)

(2,812,101)

(3,076,245)

(2,992,353)

(3,593,585)

(4,155,367)

(3,806,909)

(3,599,748)

(2,718,950)

(32,732,727)

Outstanding Claims

115,418

17,825

27,754

38,811

52,141

56,818

76,283

104,751

116,480

140,795

729,643

1,476,719

 

 

 

       134     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Insurance, Vehicle/RCF and Elementary Lines – Claims, net reinsurance(1)

 

 

R$ thousand

Year claims were notified

Up to 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Total

Amount estimated for net claims for reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

·  In the year after notification

994,132

1,954,928

2,439,011

2,653,641

3,022,457

3,021,084

3,761,029

4,074,519

3,960,519

3,710,845

3,410,760

·  One year after notification

986,525

1,933,104

2,404,646

2,617,957

2,908,173

2,849,909

3,527,585

3,954,939

3,796,535

3,702,199

·  Two years after notification

979,044

1,931,327

2,406,805

2,609,034

2,915,173

2,832,016

3,539,989

3,900,981

3,803,980

·  Three years after notification

990,037

1,936,905

2,426,310

2,629,288

2,927,529

2,874,862

3,526,769

3,921,156

·  Four years after notification

996,755

1,960,500

2,445,507

2,639,629

2,957,403

2,868,888

3,539,721

·  Five years after notification

1,004,225

1,966,313

2,460,692

2,670,472

2,963,901

2,884,539

·  Six years after notification

1,017,179

1,980,991

2,472,476

2,673,132

2,978,029

·  Seven years after notification

1,025,547

1,994,592

2,471,407

2,686,379

·  Eight years after notification

1,035,528

1,990,902

2,479,351

·  Nine years after notification

1,038,489

1,994,494

·  Ten years after notification

1,090,755

Estimate of claims on the reporting date (2018)

1,090,755

1,994,494

2,479,351

2,686,379

2,978,029

2,884,539

3,539,721

3,921,156

3,803,980

3,702,199

3,410,760

32,491,363

Payments of claims

(1,037,194)

(1,978,504)

(2,454,468)

(2,647,785)

(2,926,963)

(2,828,093)

(3,465,828)

(3,820,923)

(3,691,990)

(3,562,902)

(2,698,387)

(31,113,037)

Liquid outstanding claims for reinsurance

53,561

15,990

24,883

38,594

51,066

56,446

73,893

100,233

111,990

139,297

712,373

1,378,326

 

Bradesco   135


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Life – Insurance claims, net reinsurance(1)

 

R$ thousand

Year claims were notified

Up to 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Total

Amount estimated for net claims for reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

·  In the year after notification

852,110

901,321

1,007,851

1,191,045

1,235,104

1,305,822

1,330,460

1,415,524

1,493,336

1,537,474

1,438,028

·  One year after notification

861,992

926,499

1,015,094

1,188,264

1,226,271

1,298,610

1,373,160

1,425,789

1,491,439

1,487,961

·  Two years after notification

878,363

943,781

1,021,283

1,188,774

1,236,289

1,326,512

1,368,575

1,403,515

1,468,731

·  Three years after notification

874,269

937,472

1,011,228

1,197,624

1,236,075

1,309,876

1,277,276

1,323,435

·  Four years after notification

872,339

944,170

1,022,136

1,195,079

1,234,363

1,296,147

1,242,937

·  Five years after notification

870,461

954,487

1,019,647

1,201,083

1,233,898

1,304,644

·  Six years after notification

871,248

951,993

1,017,766

1,200,703

1,239,976

·  Seven years after notification

872,001

944,581

1,009,936

1,209,690

·  Eight years after notification

875,280

944,664

1,017,016

·  Nine years after notification

870,736

950,290

·  Ten years after notification

940,357

Estimate of claims on the reporting date (2018)

940,357

950,290

1,017,016

1,209,690

1,239,976

1,304,644

1,242,937

1,323,435

1,468,731

1,487,961

1,438,028

13,623,065

Payments of claims

(874,391)

(933,233)

(983,539)

(1,159,655)

(1,194,341)

(1,237,017)

(1,124,959)

(1,143,581)

(1,296,273)

(1,285,409)

(1,047,827)

(12,280,225)

Liquid outstanding claims for reinsurance

65,966

17,057

33,477

50,035

45,635

67,627

117,978

179,854

172,458

202,552

390,201

1,342,840

 

(1) The “DPVAT” insurances were not considered in the claims development in the amount of R$71,212 thousand, "Retrocession" R$19,089 thousand, "Health and Dental" R$2,922,689 thousand, estimate of salvages and redresses in the amount of R$(155,016) thousand and incurred but not enough reported (IBNER) claims in the amount of R$136,529 thousand.

 

 

       136     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

41)   Supplemental pension plans

 

Bradesco and its subsidiaries sponsor a private defined contribution pension for employees and directors, that allows financial resources to be accumulated by participants throughout their careers by means of employee and employer contributions and invested in an Exclusive Investment Fund (FIE). The Plan is managed by Bradesco Vida e Previdência S.A. and BRAM – Bradesco Asset Management S.A. DTVM is responsible for the financial management of the FIEs funds.

 

The Supplementary Pension Plan counts on contributions from employees and Management of Bradesco and its subsidiaries equivalent to at least 4% of their salary and, from the company, 5% of the salary, plus the percentage allocated to covers of risk benefits (invalidity and death). Actuarial obligations of the defined contribution plan are fully covered by the plan assets of the corresponding FIE. In addition to the plan, in 2001, participants who chose to migrate from the defined benefit plan are guaranteed a proportional deferred benefit, corresponding to their accumulated rights in that plan. For the active participants, retirees and pensioners of the defined benefit plan, now closed to new members, in run-off, the present value of the actuarial obligations of the plan is completely covered by collateral assets.

 

Banco Alvorada S.A. (successor from the spin-off of Banco Baneb S.A.) maintains defined contribution and variable benefit retirement plans, to the former employees of Baneb, through Fundação Baneb de Seguridade Social – Bases.

 

Bradesco sponsors both defined benefit and variable contribution retirement plans, through Caixa de Assistência e Aposentadoria dos Funcionários do Banco do Estado do Maranhão (Capof), to employees originating from Banco BEM S.A.

 

Bradesco sponsors a defined benefit plan through Caixa de Previdência Privada Bec – Cabec, for former employees of Banco do Estado do Ceará S.A.

 

Kirton Bank Brasil S.A., Kirton Capitalização S.A., Kirton Corretora de Seguros S.A., Bradesco-Kirton Corretora de Câmbio S.A. and Kirton Seguros S.A. sponsor a defined benefit plan called APABA to employees originating from Banco Bamerindus do Brasil S.A., and Kirton Administração de Serviços para Fundos de Pensão Ltda. sponsors to its employees a defined contribution plan, known as the Kirton Prev Benefits Plan (Plano de Benefícios Kirton Prev), both managed by MultiBRA – Pension Fund.

 

Banco Losango S.A., Kirton Bank Brasil S.A. and Credival – Participações, Administração e Assessoria Ltda. sponsor three pension plans for its employees, which are Losango I Benefits Plan – Basic Part, in the defined benefit mode, Losango I – Supplementary Part and PREVMAIS Losango Plan, the last two in the form of contribution variable, all managed by MultiBRA – Settlor – Multiple Fund.

 

Bradesco took on the obligations of Kirton Bank S.A. – Banco Múltiplo with regard to Life Insurance, Health Insurance Plans, and Retirement Compensation for employees coming from Banco Bamerindus do Brasil S.A.

 

Risk factors

On December 31

2018

2017

Nominal discount rate

 8.8% - 9.31% a.a.

 8.5% - 10% p.a.

Nominal rate of minimum expected return on assets

 9.6% - 25.01% a.a.

 7.01% - 25.16% a.a.

Nominal rate of future salary increases

 4.0% a.a.

 4.3% p.a.

Nominal growth rate of social security benefits and plans

 4.0% a.a.

 4.3% p.a.

Initial rate of growth of medical costs

 8.16% - 9.72% a.a.

 10.51% a.a.

Inflation rate

 4.0% a.a.

 4.3% p.a.

Biometric table of overall mortality

 AT 2000 and BR-SEM

 AT 2000 and BR-SEM

Biometric table of entering disability

 Per plan

 Per plan

Expected turnover rate

-

-

Probability of entering retirement

 100% in the 1st eligibility to a benefit by the plan

 100% in the 1st eligibility to a benefit by the plan

 
 

Bradesco   137


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

Considering the above assumptions, in accordance with IAS 19, the present value of the actuarial obligations of the benefit plans and of its assets to cover these obligations, is represented below:

 

 

Years ended December 31 - R$ thousand

Retirement Benefits

Other post-employment benefits

2018

2017

2018

2017

(i) Projected benefit obligations:

 

 

 

 

At the beginning of the year

2,323,338

2,141,393

563,079

498,591

Cost of current service

151

186

215

Interest cost

219,239

227,980

54,654

54,230

Participant’s contribution

881

1,197

Actuarial gain/(loss)

179,851

144,624

87,962

39,303

Benefit paid

(192,870)

(192,042)

(36,602)

(29,260)

At the end of the year

2,530,590

2,323,338

669,093

563,079

 

 

 

 

 

(ii) Plan assets at fair value:

 

 

 

 

At the beginning of the year

2,375,529

2,127,872

-

-

Expected earnings

225,060

227,360

-

-

Actuarial gain/(loss)

(61,063)

196,186

-

-

Contributions received:

 

 

 

 

Employer

15,472

14,957

-

-

Employees

881

1,197

-

-

Benefit paid

(192,870)

(192,043)

-

-

At the end of the year

2,363,009

2,375,529

-

-

 

 

 

 

 

(iii) Changes in the unrecoverable surplus

 

 

 

 

At the beginning of the year

206,752

123,416

-

-

Interest on the irrecoverable surplus

20,327

13,730

-

-

Change in the unrecoverable surplus

(173,054)

69,606

-

-

At the end of the year

54,025

206,752

-

-

 

 

 

 

 

(iv) Financed position:

 

 

 

 

Plans in deficit

221,606

154,561

669,093

563,079

Net balance

221,606

154,561

669,093

563,079

 

The net cost/(benefit) of the pension plans recognized in the consolidated statement of income includes the following components:

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Projected benefit obligations:

 

 

 

Cost of service

151

401

(906)

Cost of interest on actuarial obligations

273,893

282,210

204,712

Expected earnings from the assets of the plan

(225,060)

(227,360)

(174,937)

Net cost/(benefit) of the pension plans

48,984

55,251

28,869

 

Maturity profile of the present value of the obligations of the benefit plans defined for the next years:

 

 

On December 31, 2018 - R$ thousand

Retirement Benefits

Other post-employment benefits

Weighted average duration (years)

9.86

15.00

2019

202,553

34,171

2020

208,484

35,379

2021

214,845

38,409

2022

220,785

41,560

2023

226,353

45,091

After 2023

1,209,851

278,367

 

 

 

       138     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

In 2019, contributions to defined-benefit plans are expected to total R$18,282 thousand.

 

The long-term rate of return on plan assets is based on the following:

 

- Medium- to long-term expectations of the asset managers; and

- Public and private securities, with short to long-term maturities which represent a significant portion of the investment portfolios of our subsidiaries, the return on which is higher than inflation plus interest.

 

The assets of pension plans are invested in compliance with the applicable legislation (government securities and private securities, listed company shares and real estate properties) and the weighted-average allocation of the pension plan's assets by category is as follows:

 

 

On December 31

Assets of the Alvorada Plan

Assets of the Bradesco Plan

Assets of the Kirton Plan

Assets of the Losango Plan

2018

2017

2018

2017

2018

2017

2018

2017

Asset categories

 

 

 

 

 

 

 

 

Equities

-

-

7.9%

4.7%

-

-

17.7%

17.3%

Fixed income

93.3%

92.7%

87.5%

90.6%

100.0%

100.0%

82.3%

82.7%

Real estate

5.4%

5.7%

2.5%

2.6%

-

-

-

-

Other

1.3%

1.6%

2.1%

2.1%

-

-

-

-

Total

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

 

Below is the sensitivity analysis of the benefits plan obligations, showing the impact on the actuarial exposure (8.5% - 10.0% p.a.) assuming a 1 b.p. change in the discount rate:

 

Rate

Discount rate/Medical inflation rate

Sensitivity Analysis

Effect on actuarial liabilities

Effect on the present value of the obligations

Discount rate

9.80% - 10.31%

Increase of 1 b.p.

reduction

(185,803)

Discount rate

7.80% - 8.31%

Decrease of 1 b.p.

increase

491,193

Medical Inflation

9.16% - 10.72%

Increase of 1 b.p.

increase

74,081

Medical Inflation

7.16% - 8.72%

Decrease of 1 b.p.

reduction

(62,077)

 

Total expenses related to contributions made during the year ended on December 31, 2018 totalled R$942,427 thousand (2017 – R$988,905 thousand).

 

In addition to this benefit, Bradesco and its subsidiaries offer other benefits to their employees and Management, including health insurance, dental care, life and personal accident insurance, and professional training. These expenses, including the aforementioned contributions, totaled, in December 31, 2018, R$4,550,580 thousand (2017 – R$5,594,368 thousand).

 

42)   Provisions, Contingents Assets and Liabilities and Legal Obligations – Tax and Social Security

 

a)     Contingent assets

 

Contingent assets are not recognized in the financial statements. However, there are ongoing proceedings where the chance of success is considered probable, such as: a) Social Integration Program (PIS), Bradesco has made a claim to offset PIS against Gross Operating Income, paid under Decree-Laws No. 2,445/88 and No. 2,449/88, regarding the payment that exceeded the amount due under Supplementary Law No. 07/70 (PIS Repique); and b) other taxes, the legality and/or constitutionality of which is being challenged, where the decision may lead to reimbursement of amounts paid.

 

 

 

Bradesco   139


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

b)    Provisions classified as probable losses and legal obligations – tax and social security

 

The Organization is a party to a number of labor, civil and tax lawsuits, arising from the normal course of business.

 

Management recorded provisions based on their opinion and that of their legal counsel, the nature of the lawsuit, similarity to previous lawsuits, complexity and the courts standing, where the loss is deemed probable.

 

Management considers that the provision is sufficient to cover losses generated by the respective lawsuits.

 

Liability related to litigation is held until the conclusion to the lawsuit, represented by judicial decisions, with no further appeals or due to the statute of limitation.

 

I -       Labor claims

These are claims brought by former employees and outsourced employees seeking indemnifications, most significantly for unpaid “overtime”, pursuant to Article 224 of the Consolidation of Labor Laws (CLT). In proceedings in which a judicial deposit is used to guarantee the execution of the judgment, the labor provision is made considering the estimated loss of these deposits. For proceedings with similar characteristics and for which there has been no official court decision, the provision is recorded based on the average calculated value of payments made for labor complaints settled in the past 12 months and for proceedings originating from acquired banks, with unique characteristics, the calculation and assessment of the required balance is conducted periodically, based on the updated recent loss history.

Overtime is monitored by using electronic time cards and paid regularly during the employment contract and, accordingly, the claims filed by former employees do not represent significant amounts.

II -       Civil proceedings

These are claims for pain and suffering and property damages, mainly relating to protests, returned checks, the inclusion of information about debtors in the credit restriction registry and the replacement of inflation adjustments excluded as a result of government economic plans. These lawsuits are individually controlled using a computer-based system and provisioned whenever the loss is deemed as probable, considering the opinion of Management and their legal counsel, the nature of the lawsuits, similarity with previous lawsuits, complexity and positioning of the courts.

Most of these lawsuits are brought to the Special Civil Court (JEC), in which the claims are limited to 40 times the minimum wage and do not have a significant impact on the Organization’s financial position.

In relation to the legal claims pleading alleged differences in adjustment for inflation on savings account balances due to the implementation of economic plans that were part of the federal government’s economic policy to reduce inflation in the ‘80s and ‘90s, although Bradesco complied with the law and regulation in force at the time, has provisioned these lawsuits, taking into consideration the claims where Bradesco is the defendant and the perspective of loss of each demand, in view of the decisions and subjects still under analysis in the Superior Court of Justice (STJ), such as, for example, the application of default interest in executions arising from Public Civil Actions, interest payments and succession.

 

In December 2017, with the mediation of the Attorney’s General Office (AGU), the entities representing the bank and the savings accounts, entered into an agreement related to litigation of economic plans, with the purpose of closing these claims, in which conditions and schedule were established for savings accounts holders may to accede the agreement. This agreement was approved by the Federal Supreme Court (STF) on March 1, 2018, the period of adhesion was approved by the Federal Supreme Court (STF) on March 1, 2018, the period of adhesion for interested parties is for two (02) years from this date. As this is a voluntary agreement, Bradesco is unable to predict how many savings account holders will choose to accept the settlement offer. It is important to note that Bradesco understands that the provisioning was made to cover the eligible proceedings to the related agreement. The proceedings that are not in the context of the agreement, including those related to incorporated banks are evaluated individually based on the procedural stage they are in.

 

       140     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Note that, regarding disputes relating to economic plans, the Federal Supreme Court (STF) suspended the prosecution of all lawsuits on cognizance stage, until the Court issues a final decision on the right under litigation.

III -       Provision for tax risks

 

The Organization is disputing the legality and constitutionality of certain taxes and contributions in court, for which provisions have been recorded in full, although there is good chance of a favorable outcome, based on the opinion of the legal counsel. The processing of these legal obligations and the provisions for cases for which the risk of loss is deemed as probable is regularly monitored. During or after the conclusion of each case, a favorable outcome may arise for the Organization, resulting in the reversal of the related provisions.

The main cases are:

- PIS and COFINS – R$2,562,453 thousand (2017 – R$2,489,247 thousand): a request for authorization to calculate and pay PIS and COFINS based on effective billing, as set forth in Article 2 of Supplementary Law No. 70/91, removing from the calculation base the unconstitutional inclusion of other revenues other than those billed;
 
- Pension Contributions – R$1,729,211 thousand (2017 – R$1,466,469 thousand): official notifications related to the pension contributions on financial contributions in private pension plans, considered by the authorities to be compensatory sums subject to the incidence of pension contributions and to an isolated fine for not withholding IRRF on the financial contributions;
 
- IRPJ/CSLL on losses of credits – R$1,461,621 thousand (2017 – R$1,614,663 thousand): we are requesting to deduct from income tax and social contributions payable (IRPJ and CSLL, respectively) amounts of actual and definite loan losses related to unconditional discounts granted during collections, regardless of compliance with the terms and conditions provided for in Articles 9 to 14 of Law No. 9,430/96 that only apply to temporary losses;
 
-

IRPJ/CSLL on MTM – R$607,258 thousand: IRPJ and CSLL deficiency note related to the exclusions of revenues from marking Securities at fair value in 2007;
 

- INSS of Autonomous – R$470,237 thousand (2017 – R$643,655 thousand): the Bradesco Organization is questioning the charging of social security contribution on remunerations paid to third-party service providers, established by Supplementary Law No. 84/96 and subsequent regulations/amendments, at 20.0% with an additional of 2.5%, on the grounds that services are not provided to insurance companies but to policyholders, thus being outside the scope of such a contribution as provided for in item I, Article 22 of Law No. 8,212/91, as new wording in Law No. 9,876/99; and
 
- INSS – Contribution to SAT – R$417,442 thousand (2017 – R$401,018 thousand): in an ordinary lawsuit filed by the Brazilian Federation of Banks – Febraban, since April 2007, on behalf of its members, is questioning the classification of banks at the highest level of risk, with respect to Work Accident Risk – RAT, which eventually raised the rate of the respective contribution from 1% to 3%, in accordance with Decree No. 6,042/07.

       

In general, the provisions relating to lawsuits are classified as long-term, due to the unpredictability of the duration of the proceedings in the Brazilian justice system. For this reason, the estimate has not been disclosed with relation to the specific year in which these lawsuits will be closed.

 

 

Bradesco   141


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

               IV -       Changes in other provision

 

 

R$ thousand

Labor

Civil

Tax (1)

Balance on December 31, 2017

5,554,796

5,346,563

7,589,368

Adjustment for inflation

677,970

508,399

386,671

Provisions, net of reversals and write-offs

1,289,664

912,287

531,052

Payments

(1,538,827)

(1,152,887)

(302,885)

Balance on December 31, 2018

5,983,603

5,614,362

8,204,206

 

 

 

 

Balance on December 31, 2016

5,101,732

5,003,440

8,187,237

Adjustment for inflation

637,263

484,447

500,719

Provisions, net of reversals and write-offs

1,002,559

830,642

(984,342)

Payments

(1,186,758)

(971,966)

(114,246)

Balance on December 31, 2017

5,554,796

5,346,563

7,589,368

 

(1) In 2017, there were reversals of provisions related to: (i) the PIS process, related to the remuneration of amounts unduly paid, in the amount of R$268,729 thousand; (ii) IRPJ/CSLL on credit losses, in the amount of R$408,730 thousand; and (iii) favorable decision in the process of social security contribution on the remuneration paid to accredited dentists (INSS of Autonomous), in the amount of R$348,820 thousand.

 

c)     Contingent liabilities classified as possible losses

 

The Organization maintains a system to monitor all administrative and judicial proceedings in which the institution is plaintiff or defendant and, based on the opinion of legal counsel, classifies the lawsuits according to the expectation of loss. Case law trends are periodically analyzed and, if necessary, the related risk is reclassified. In this respect, contingent lawsuits deemed to have a possible risk of loss are not recorded as a liability in the financial statements. The main proceedings in this category are the following:

 

-

IRPJ and CSLL – 2006 to 2013 – R$6,863,623 thousand (2017 – R$6,264,741 thousand), relating to goodwill amortization being disallowed on the acquisition of investments;
 

- COFINS – R$5,070,337 thousand (2017 – R$4,902,151 thousand): fines and disallowances of Cofins loan compensations, released after a favorable decision in a judicial proceeding, where the unconstitutionality of the expansion of the intended calculation base was discussed for revenues other than those from billing (Law No. 9,718/98);
 
-  Leasing companies’ Tax on Services of any Nature (ISSQN) – R$2,478,296 thousand (2017 – R$2,394,087 thousand) which relates to the municipal tax demands from municipalities other than those in which the company is located and where, under law, tax is collected;
 
- IRPJ and CSLL deficiency note – 2004 to 2012 – R$1,759,431 thousand (2017 – R$2,431,844 thousand): relating to disallowance of exclusions and expenses, differences in depreciation expenses, insufficient depreciation expenses, expenses with depreciation of leased assets, operating expenses and income and disallowance of tax loss compensation;
 
-

IRPJ and CSLL deficiency note – 2012 and 2013 – R$1,689,160 thousand: due to the disallowance of operating expenses (CDI), related to resources that were capitalized between the companies of the Organization;
 

- PIS and COFINS notifications and disallowances of compensations – R$1,445,126 thousand (2017 – R$1,399,506 thousand): related to the unconstitutional extension of the basis of calculation intended for other income other than the billing (Law No. 9,718/98), from acquired companies;

 

 

 

       142     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

-

IRPJ and CSLL deficiency note – R$859,049 thousand (2017 – R$969,713 thousand): relating to disallowance of exclusions with losses in collections; and
 

-

IRPJ and CSLL deficiency note – 2008 and 2009 – R$508,180 thousand (2017 – R$489,687 thousand): relating to profit of subsidiaries based overseas.

 

 

43)   Other liabilities

 

 

R$ thousand

On December 31

2018

2017

Financial liabilities

62,598,235

62,439,512

Credit card transactions (1)

22,887,885

26,163,066

Foreign exchange transactions (2)

19,801,468

17,085,029

Loan assignment obligations

8,058,619

8,454,076

Capitalization bonds

8,186,955

7,562,974

Securities trading

3,321,219

2,317,155

Liabilities for acquisition of assets – financial leases (Note 43a)

342,089

857,212

 

 

 

Other liabilities

34,157,435

35,377,312

Third party funds in transit (3)

7,135,635

7,211,038

Provision for payments

8,266,532

8,743,428

Sundry creditors

3,137,923

3,205,800

Social and statutory

4,966,975

4,524,457

Other taxes payable

1,757,283

1,466,306

Liabilities for acquisition of assets and rights

1,206,376

1,480,777

Other

7,686,711

8,745,506

Total

96,755,670

97,816,824

 

(1) Refers to amounts payable to merchants;

(2) Mainly refers to the institution’s sales in foreign currency to customers and its right’s in domestic currency, resulting from exchange sale operations; and

(3) Mainly refers to payment orders issued domestically and the amount of payment orders in foreign currency coming from overseas.

 

a)     Composition by maturity of financial leases and details of operating leases

 

 

R$ thousand

On December 31

2018

2017

Due within one year

296,691

564,337

From 1 to 2 years

45,398

256,327

From 2 to 3 years

36,548

Total

342,089

857,212

 

Total non-cancellable minimum future payments due on operating leases in 2018 is R$11,340,768 thousand, of which R$853,882 thousand are due within 1 year, R$3,250,392 thousand between 1-5 years and R$7,236,494 thousand with more than 5 years.

 

 

 

Bradesco   143


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

44)   Equity

 

a)   Capital and shareholders’ rights

 

i.    Composition of share capital in number of shares

 

The share capital, which is fully subscribed and paid, is divided into registered shares with no par value.

 

 

On December 31

2018

2017 (1)

Common

3,359,929,223

3,359,929,223

Preferred

3,359,928,872

3,359,928,872

Subtotal

6,719,858,095

6,719,858,095

Treasury (common shares)

(5,535,803)

(5,535,803)

Treasury (preferred shares)

(20,741,320)

(20,741,320)

Total outstanding shares

6,693,580,972

6,693,580,972

 

ii.   Changes in capital stock, in number of shares

 

 

Common

Preferred

Total

Number of shares outstanding on December 31, 2016 (1)

3,354,393,420

3,339,187,552

6,693,580,972

Number of shares outstanding on December 31, 2017 (1)

3,354,393,420

3,339,187,552

6,693,580,972

Number of shares outstanding on December 31, 2018

3,354,393,420

3,339,187,552

6,693,580,972

(1) All share amounts presented for prior periods have been adjusted to reflect the stock split approved at the Special Shareholders’ Meeting held on March 12, 2018 in proportion of one new share for every 10 shares held.

 

In the Special Shareholders’ Meeting held on March 10, 2017, the approval was proposed by the Board of Directors to increase the capital stock by R$8,000,000 thousand, increasing it from R$51,100,000 thousand to R$59,100,000 thousand, with a bonus in shares, through the capitalization of part of the balance of the account “Profit Reserves - Statutory Reserve”, in compliance with the provisions in Article 169 of Law No. 6,404/76, by issuing 555,360,173 new nominative-book entry shares, with no nominal value, whereby 277,680,101 are common shares and 277,680,072 are preferred shares, attributed free-of-charge to the shareholders as bonus, to the ratio of 1 new share for every 10 shares of the same type that they own on the base date.

 

In the Special Shareholders’ Meeting held on March 12, 2018, the approval was proposed by the Board of Directors to increase the capital stock by R$8,000,000 thousand, increasing it from R$59,100,000 thousand to R$67,100,000 thousand, with a bonus in shares, through the capitalization of part of the balance of the account “Profit Reserves - Statutory Reserve”, in compliance with the provisions in Article 169 of Law No. 6,404/76, by issuing 610,896,190 new nominative-book entry shares, with no nominal value, whereby 305,448,111 are common shares and 305,448,079 are preferred shares, attributed free-of-charge to the shareholders as bonus, to the ratio of 1 new share for every 10 shares of the same type that they own on the base date.

 

All of the shareholders are entitled to receive, in total, a mandatory dividend of at least 30% of Bradesco’s annual net income, as shown in the statutory accounting records, adjusted by transfers to reserves. The Organization has no obligation that is exchangeable for or convertible into shares of capital. As a result, its diluted earnings per share is the same as the basic earnings per share.

 

In occurring any operation that changes the number of shares, simultaneously with the transaction in the Brazilian Market, and with the same timeframes, an identical procedure is adopted in the International Market, for the ADRs/GDRs traded in New York, USA, and Madrid, Spain.

 

Treasury shares are recorded at cost, which is approximately equivalent to the market prices on the date they are acquired. Cancellation of treasury shares is recorded as a reduction of unappropriated retained earnings. Treasury shares are acquired for subsequent sale or cancellation.

 

 

       144     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

b)   Reserves

 

Capital reserves

 

The capital reserve consists mainly of premiums paid by the shareholders upon subscription of shares. The capital reserve is used for (i) absorption of any losses in excess of accumulated losses and revenue reserves, (ii) redemption, reimbursement of purchase of shares, (iii) redemption of founders’ shares, (iv) transfer to share capital, and (v) payment of dividends to preferred shares, when this privilege is granted to them.

 

Revenue reserves

 

In accordance with Corporate Legislation, Bradesco and its Brazilian subsidiaries must allocate 5% of their annual statutory net income, after absorption of accumulated losses, to a legal reserve, the distribution of which is subject to certain limitations. The reserve can be used to increase capital or to absorb losses, but cannot be distributed in the form of dividends.

 

The Statutory Reserve aims to maintain an operating margin that is compatible with the development of the Organization’s active operations and may be formed by up to 100% of net income remaining after statutory allocations if proposed by the Board of Executive Officers, approved by the Board of Directors and ratified at the Shareholders’ Meeting, with the accumulated value limited to 95% of the Organization’s paid-in capital share amount.

 

c)   Interest on own equity / Dividends

 

Interest on own equity are calculated on the net income as determined in the financial statements prepared in accordance with Brazilian generally accepted accounting principles (BR GAAP) applicable to financial institutions authorized to operate by the Central Bank of Brazil. The dividends are paid in Reais and can be converted into US dollars and remitted to shareholders abroad, provided that the equity participation of the non-resident shareholder is registered with the Central Bank of Brazil. Brazilian companies may pay interest on equity to shareholders based on the shareholders’ equity and treat these payments as deductible expenses in the Brazilian income tax and social contribution calculations. The interest cost is treated for accounting purposes as a deduction from shareholders’ equity in a manner similar to dividends. Withholding income tax is levied and paid at the time that the interest on own equity is paid to the shareholders.

 

In 2018, the Organization distributed interest on own equity of R$7,298,596 thousand, being attributed to the shareholders, the gross amount per share of R$1.04 for common shares and R$1.14 for preferred shares (2017 – R$7,204,344 thousand, R$1.03 for common shares and R$1.13 for preferred shares).

 

 

Bradesco   145


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

45)   Transactions with related parties

 

Related-party transactions (direct and indirect) are carried out according to IAS 24, the Organization has a Transaction Policy with related parties disclosed on the Investor Relations website. The transactions are carried out under conditions and at rates consistent with those entered into with third parties at that time. The transactions are as follows:

 

 

R$ thousand

Controllers (1)

Associates and Jointly controlled companies (2)

Key Management Personnel (3)

Total

On December 31

2018

2017

2018

2017

2018

2017

2018

2017

Assets

 

 

 

 

 

 

 

 

Loans and advances to banks

585,191

724,369

585,191

724,369

Securities and derivative financial instruments

16,015

19,267

35,282

Other assets

9

326,762

3,572

49,244

376,015

3,572

Liabilities

 

 

 

 

 

 

 

 

Customer and financial institution resources

2,899,619

903,590

1,098,865

347,816

120,586

97,309

4,119,070

1,348,715

Securities and subordinated debt securities

8,569,271

6,632,932

-

-

797,182

1,395,107

9,366,453

8,028,039

Other liabilities (4)

1,541,011

2,302,970

10,101,886

8,827,877

5,484

11,648,381

11,130,847

 

 

R$ thousand

Controllers (1)

Associates and Jointly controlled companies (2)

Key Management Personnel (3)

Total

Years ended December 31

2018

2017

2016

2018

2017

2016

2018

2017

2016

2018

2017

2016

Revenues and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

(778,829)

(887,059)

(1,129,931)

(11,814)

40,671

(41,814)

(55,045)

(84,818)

(108,333)

(845,688)

(931,206)

(1,280,078)

Other revenues

334

315,832

441,381

360,286

247

316,413

441,381

360,286

Other expenses

(50,745)

(2,652)

(2,391)

(2,635,494)

(289,100)

(224,444)

323,130

(2,363,109)

(291,752)

(226,835)

(1) Cidade de Deus Cia. Coml. de Participações, Fundação Bradesco, NCF Participações S.A., BBD Participações S.A. and Nova Cidade de Deus Participações S.A.;

(2) Companies listed in Note 32;

(3) Members of the Board of Directors and the Board of Executive Officers; and

(4) Includes interest on shareholders' equity and dividends payable.

 

 

       146     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

a)     Remuneration of key management personnel

 

The following is established each year at the Annual Shareholders’ Meeting:

 

· The annual grand total amount of management compensation, set forth at the Board of Directors’ Meeting, to be paid to Board members and members of the Board of Executive Officers, as determined by the Company’s Bylaws; and
 
·

The amount allocated to finance Management pension plans, within the Employee and Management pension plan of the Bradesco Organization.

 

For 2018, the maximum amount of R$530,689 thousand was set for Management compensation and R$534,780 thousand to finance defined contribution pension plans.

 

The current policy on Management compensation sets forth that 50% of net variable compensation, if any, must be allocated to the acquisition of PNB shares issued by BBD Participações S.A. and/or PN shares issued by Banco Bradesco S.A., which vest in three equal, annual and successive installments, the first of which is in the year following the payment date. This procedure complies with CMN Resolution No. 3,921/10, which sets forth a Management compensation policy for financial institutions.

 

Short-term benefits for Management

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Salaries

485,949

456,262

441,592

Total

485,949

456,262

441,592

 

Post-employment benefits

 

 

R$ thousand

Years ended December 31

2018

2017

2016

Defined contribution supplementary pension plans

474,378

473,663

251,250

Total

474,378

473,663

251,250

 

The Organization has no long-term benefits or for the termination of employment contracts or for remuneration based on shares for its key Management personnel.

 

Other information

 

a)     Under current law, financial institutions are not allowed to grant loans or advances to:

 

(i)      Officers and members of the advisory, administrative, fiscal or similar councils, as well as to their respective spouses and family members up to the second degree;

 

(ii)     Individuals or corporations that own more than 10% of their capital; and

 

(iii)    Corporations in which the financial institution itself, any officers or Management of the institution, as well as their spouses and respective family members up to the second degree own more than 10% of equity.

 

Therefore, no loans or advances are granted by the financial institutions to any subsidiary, members of the Board of Directors or the Board of Executive Officers and their relatives.

 

 

 

Bradesco   147


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

b)  Equity participation

 

Together directly, members of the Board of Directors and the Board of the Executive Officers had the following shareholding in Bradesco:

 

 

On December 31

2018

2017

Common shares

0.5%

0.5%

Preferred shares

1.1%

1.0%

Total shares (1)

0.8%

0.8%

(1) On December 31, 2018, direct and indirect shareholding of the members of the Board of Directors and the Board of Executive Officers in Bradesco totaled 2.6% of common shares, 1.1% of preferred shares and 1.9% of all shares (2017 – 2.3% of common shares, 1.1% of preferred shares and 1.7% of all shares).

 

46)   Off-balance sheet commitments

 

The table below summarizes the total risk represented by off-balance sheet commitments:

 

 

R$ thousand

On December 31

2018

2017

Commitments to extend credit (1)

228,113,067

203,927,816

Financial guarantees (2)

72,870,964

78,867,348

Letters of credit for imports

361,593

294,229

Total

301,345,624

283,089,393

(1) Includes available lines of credit, limits for credit cards, personal loans, housing loans and overdrafts; and

(2) Refers to guarantees mostly provided for Corporate customers.

 

Financial guarantees are conditional commitments for loans issued to ensure the performance of a customer in an obligation to a third party. There is usually the right of recourse against the customer to recover any amount paid under these guarantees. Moreover, we can retain cash or other highly-liquid funds to counter-guarantee these commitments.

 

The contracts are subject to the same credit evaluations as other loans and advances . Standby letters of credit are issued mainly to endorse public and private debt issue agreements including commercial paper, securities financing and similar transactions. The standby letters of credit are subject to customer credit evaluation by the Management.

 

We issue letters of credit in connection with foreign trade transactions to guarantee the performance of a customer with a third party. These instruments are short-term commitments to pay the third-party beneficiary under certain contractual terms for the shipment of products. The contracts are subject to the same credit evaluation as other loans and advances.

 

 

       148     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

47)   New standards and amendments and interpretations of existing standards

 

Standards, amendments and interpretations of existing standards for the year ended December 31, 2018

 

Transition to IFRS 9

 

·  IFRS 9 replaced the guidance in IAS 39 - Financial Instruments: Recognition and Measurement. IFRS 9 is applied for financial instruments and was adopted on the effective date of the standard on January 1, 2018. IFRS 9 includes: (i) new models for the classification and measurement of financial instruments; (ii) measurement of expected credit losses for financial assets; and (iii) new requirements on hedge accounting. The new standard maintains the principal existing guidance on the recognition and derecognition of financial instruments in IAS 39.

 

(i) Classification and Measurement – Financial assets

 

IFRS 9 contains a new approach for classification and measurement of financial assets, where the Organization is based on the business model for the management of financial assets, in order to generate cash flow, as well as the SPPI Test, which will assess the characteristic of the cash flow and guide the classification of financial assets.

 

Financial assets are classified into three categories, as shown below:

 

· 

Amortized cost: Financial assets that are held for collection of contractual cash flows, which represent only the payment of the principal and interest. These assets are adjusted by any expectation of credit loss.

· VJORA: Financial assets that are held for collection of contractual cash flows, which represent only the payment of the principal and interest, and also for sale. Changes in the fair value of these assets are recorded in other comprehensive income, except for the recognition of impairment, interest income, dividends and exchange rate variations that are recognized directly in the income statement for the fiscal year.
·

VJR: Financial assets that do not meet the criteria to be measured at amortize cost or at VJORA.

 

On December 31, 2017, the Organization had equity investments classified as available for sale with fair value of R$11,038 million which are held for long-term strategic purposes. Pursuant to IFRS 9, the Organization, on current best estimates, designated these instruments as VJORA. Thus, all fair value gains and losses should be recorded in other comprehensive income, with no impairment losses recognized in the income (loss) and no gain or loss is recycled to the income (loss) upon realization.

 

(ii) Impairment – Financial Assets

 

IFRS 9 replaced the model of “incurred losses” of IAS 39 with a prospective model of “expected losses”. This requires relevant judgment as to how changes in economic factors affect expected credit losses, which will be determined based on weighted probabilities.

 

The new model of expected losses applies to the financial instruments measured at amortized cost or VJORA (except for investments in equity instruments).

 

Expected loan losses were calculated based on experience of actual loan losses in the past years. The Organization calculated the rates of expected loan losses based on the features of each portfolio, that is, it used quantitative models for loans assessed in a group and a combination of quantitative and qualitative models for large companies.

 

 

Bradesco   149


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

The experience of actual loan losses was adjusted to reflect the differences between economic conditions during the period in which the historical data were collected, current conditions and the Organization’s view of future economic conditions.

In the prospective model of expected losses, financial assets are divided into three stages:

 

Stage 1: Financial instruments that do not present significant deterioration in credit quality;

 

Stage 2: Financial instruments that present significant deterioration in credit quality; and

 

Stage 3: Financial instruments that indicate that the obligation will not be fully honored.

 

The new model of calculation of credit losses expected based on the prospective parameter for loans and advances, commitments to loans, financial guarantees given and Private Debt Securities resulted in an increase in the provision for credit losses.

 

(iii) Classification – Financial liabilities

 

IFRS 9 maintains most part of the requirements of IAS 39 regarding the classification of financial liabilities.

 

But, pursuant to IAS 39, the fair value variations of liabilities designated as VJR are recognized in the income (loss), whereas pursuant to IFRS 9, these changes of fair value should be presented as follows:

 

· 

the fair value variation that is attributable to changes in the loan risk of financial liabilities should be presented in Other Comprehensive Income (OCI); and

· the remaining value of the fair value variation should be presented in the income (loss).

        

(iv) Hedge Accounting

 

Upon the first adoption, the Organization opted to continue to apply the requirements of IAS 39 for hedge accounting, as permitted by IFRS 9 until the conclusion by the IASB of the macro-hedge project and the finalization of the hedge accounting section.

 

IFRS 9 requires that the Organization ensures that the hedge accounting relations are aligned with its risk management purposes and strategies and that the Organization adopt a more qualitative and prospective approach to assess hedge effectiveness. IFRS 9 also introduces new requirements for re-balance of hedge relations and prohibits the voluntary discontinuance of the hedge accounting if inconsistent with the risk management strategies of the entity.

 

(v) Transition

 

Changes in accounting policies resulting from the adoption of IFRS 9 were applied retrospectively on the date of initial application.

 

− The Organization opted for the exemption under the Standard of not restating comparative information from prior periods derived from changes in the classification and measurement of financial instruments (including expected loan). The differences in the accounting balances of financial assets and liabilities resulting from the adoption of IFRS 9 were recognized in Retained Earnings on January 1, 2018.

 

 

 

       150     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Reconciliation of the shareholders’ equity in the transition from IAS 39 to IFRS 9:

 

 

 R$ mil

Shareholders' equity in accordance with IAS 39 as of December 31, 2017

      117,693,704

IFRS 9 adjustments

 

Expected credit loss for credit operations (1)

        (3,829,475)

Expected credit loss for other financial assets

           (743,048)

Remesuration of assets by virtue of the new classification of IFRS 9 (2)

            644,398

Other (3)

            366,102

Deferred income tax

         1,424,809

Shareholders' equity in accordance with IFRS 9 as of January 1, 2018

      115,556,490

(1) Includes financial guarantees given and loan commitments;

(2) Change of the measurement of financial assets in accordance with the new classification of IFRS 9; and

(3) Accounting adequacy as required by IFRS 9 in the reclassification of securities measured at fair value through other comprehensive income.

 

The table below presents the new reclassifications and measurements according to the IFRS 9.

 

 

R$ mil

IAS 39

Reclassifications (1)

Remeasurement

IFRS 9

Category

31/12/2017

Category

01/01/2018

Ativo

 

 

 

 

 

 

Cash and cash equivalents

 

81,742,951

                           -  

                           -  

 

       81,742,951

Financial assets at fair value through profit or loss

 

                   -  

          242,511,223

                           -  

At fair value through profit or loss

     242,511,223

Financial assets held for trading

Held for trading

241,710,041

         (241,710,041)

                           -  

 

                      -  

Financial assets at fair value through other comprehensive income

 

                   -  

          182,799,142

                           -  

Fair value through other comprehensive income

     218,860,066

Financial assets available for sale

Available for sale

159,412,722

         (159,412,722)

                           -  

 

                      -  

Financial assets at amortized cost

 

-

-

                           -  

 

                      -  

 - Loans and advances to banks, net of impairment

Loans and receivables

32,247,724

            123,473,446

                           -  

At amortized cost

155,721,170

 - Loans and advances to customers, net of impairment

Loans and receivables

346,758,099

          -

           (1,173,870)

At amortized cost

     345,584,229

 - Securities net of provision for losses

 

                   -  

            75,320,243

                 267,452

At amortized cost

       39,526,771

 - Other financial assets

 

                   -  

            39,877,774

                           -  

At amortized cost

       39,877,774

Investments held to maturity

Held to maturity

39,006,118

           (39,006,118)

                           -  

 

                      -  

Financial assets pledged as collateral

Other (2)

183,975,173

         (183,975,173)

                           -  

 

                      -  

Non-current assets held for sale

 

1,520,973

                           -  

                           -  

 

         1,520,973

Investments in associates and joint ventures

 

8,257,384

                           -  

                           -  

 

         8,257,384

Premises and equipment

 

8,432,475

                           -  

                           -  

 

         8,432,475

Intangible assets and goodwill

 

16,179,307

                           -  

                           -  

 

       16,179,307

Taxes to be offset

 

10,524,575

                           -  

                           -  

 

       10,524,575

Deferred taxes

 

43,731,911

                           -  

              1,424,809

 

       45,156,720

Other assets

 

50,853,987

           (39,877,774)

                           -  

 

       10,976,213

 
 

Bradesco   151


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

Total assets

 

1,224,353,440

                           -  

518,391

 

  1,224,871,831

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Liabilities at amortized cost

 

 

 

 

 

 

 - Deposits from banks

 

285,957,468

                           -  

                           -  

 

     285,957,468

 - Deposits from customers

 

262,008,445

                           -  

                           -  

 

     262,008,445

 - Funds from issuance of securities

 

135,174,090

                           -  

                           -  

 

     135,174,090

 - Subordinated debts

 

50,179,401

                           -  

                           -  

 

       50,179,401

 - Other financial liabilities

 

                   -  

            62,439,512

                           -  

 

       62,439,512

Financial liabilities at fair value through profit or loss

 

                   -  

            14,274,999

                           -  

 

       14,274,999

Financial liabilities held for trading

 

14,274,999

           (14,274,999)

                           -  

 

                      -  

Provision for Expected Loss

 

 

 

 

 

                      -  

- Loan Commitments

 

                   -  

                           -  

1,840,205

 

1,840,205  

- Financial guarantees

 

                   -

-  

815,400  

 

815,400  

Insurance technical provisions and pension plans

 

239,089,590

                           -  

                           -  

 

     239,089,590

Other reserves

 

18,490,727

                           -  

                           -  

 

       18,490,727

Current taxes

 

2,416,345

                           -  

                           -  

 

         2,416,345

Deferred taxes

 

1,251,847

                           -  

                           -  

 

         1,251,847

Other liabilities

 

97,816,824

           (62,439,512)

                           -  

 

       35,377,312

Total liabilities

 

1,106,659,736

                           -  

2,655,605  

 

1,109,315,341

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Capital

 

59,100,000

 

 

 

59,100,000

Treasury shares

 

        (440,514)

 

 

 

          (440,514)

Capital reserves

 

35,973

 

 

 

35,973

Profit reserves

 

49,481,227

 

 

 

49,481,227

Additional paid-in capital

 

70,496

 

 

 

70,496

Other comprehensive income

 

1,817,659

 

                   59,240

 

1,876,899

Retained earnings

 

7,338,990

 

            (2,196,454)

 

5,142,536

Equity attributable to controlling shareholders

 

117,403,831

                           -  

            (2,137,214)

 

115,266,617

Non-controlling interest

 

289,873

 

 

 

289,873

Total equity

 

117,693,704

                           -  

(2,137,214)

 

115,556,490

Total liabilities

 

1,224,353,440

                           -  

            518,391

 

1,224,871,831

(1) The main reclassifications are due to debentures, in the amount of R$35,600,087 thousand and promissory notes, in the amount of R$486,289 thousand that in accordance with IAS 39 were classified as available for sale and in accordance with IFRS 9 are measured at amortized cost; and

(2) The balances under the heading "Financial assets pledged as collateral" began to be submitted in accordance with the categories of IFRS 9, which are: R$123,691,195 thousand for "Loans and advances to financial institutions, net of provision for losses"; R$801,182 thousand for "Financial assets at fair value through profit or loss" and R$59,482,796 thousand for "Financial assets at fair value through other comprehensive income".

 

 

 

       152     IFRS – International Financial Reporting Standards – 2018


 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

·

IFRS 15 – Revenue from Contracts with Customers – requires that revenue is recognized so as to reflect the transfer of goods or services to the client for an amount that represents the company’s expectation of having rights to these goods or services by way of consideration. IFRS 15 replaced IAS 18, IAS 11, and related interpretations (IFRICs 13, 15 and 18), and was be applicable from January 2018. A study on the recognition of revenue from customer contracts was conducted and the conclusion was that there was no significant impact on the Organization.

 

Standards, amendments and interpretations of standards applicable to future periods

 

 

·

IFRS 16 – Leases. IFRS 16, issued in January 2016 in replacement to the standards IAS 17 Leasing Operations, IFRIC 4, SIC 15 and SIC 27 Complementary Aspects of Leasing Operations, establishes that the lessees account for all the leases according to a single model, similar to the accounting entry for finance leases according to IAS 17. IFRS 16 is mandatory for the fiscal years as per January 1, 2019.

 

At the beginning of a lease, the lessee should recognize a liability to make payments (a lease liability) and an asset representing the right to use object asset during the term of the lease (a right of use asset). The expenses with interest on the lease liability and expenses of depreciation of the right of use asset should be recognized separately.

 

The potential impact that the initial application of the new standard will have on the Consolidated Financial Statements of the Organization was evaluated, as described below. The actual impacts regarding the adoption may change due to certain assumptions still subject to refinement, which are:

·                     Use of the real or nominal discount rate; and

·                    Exclusion of certain taxes of the payment flows of the lease contracts.

 

 

1. Leases in which Banco Bradesco is a lessee

 

The Organization will recognize new assets and liabilities for its operating leases, mainly related to real estate and infrastructures in general. The nature of the expenditure related to such leases will change because the Organization will recognize a cost of depreciation of right of use assets and expense of interest on lease obligations, which were previously recognized as a linear expense of operating lease during the term of the lease.

 

Based on the information currently available, the Organization estimates that the impacts on the balance sheet opening on January 1, 2019 would lead to the recognition of right of use assets and lease liabilities between R$3,984,117 and R$4,518,042.

 

2. Leases in which Banco Bradesco is a lessor

 

There is no substantial change in the accounting for lessors based on IFRS 16 in relation to the current accounting in accordance with IAS 17. Thus, no significant impact is expected for leases in which the Organization is a lessor.

 

3. Transition

 

Banco Bradesco will adopt IFRS 16 on January 1, 2019, using the simplified and modified retrospective approach, which does not require the disclosure of comparative information.

 

The new standard will be adopted for contracts that were previously identified as leases that use IAS 17 and IFRIC 4 – Complementary Aspects of Leasing Operations. Therefore, the Organization does not apply the standard to contracts that have not previously been identified as contracts containing a lease under the terms of IAS 17 and IFRIC 4.

 

 

 

 

Bradesco   153


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

·

IFRS 17 - Insurance Contracts. Establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The purpose of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. The general model of IFRS 17 requires insurers and reinsurers to measure their insurance contracts at the initial time by the estimated total cash flow, adjusted for the time value of money and the explicit risk related to non-financial risk, in addition to of the contractual margin of the service. This estimated value is then remeasured at each base date. The unrealized profit (corresponding to "the contractual margin of the service) is recognized over the term of the contracted coverage. Apart from this general model, IFRS 17 provides, as a way of simplifying the process, the award allocation approach. This simplified model is applicable to certain insurance contracts, including those with coverage of up to one year. "This information provides a basis for accounting firm users to evaluate the effect that insurance contracts have on the financial position, financial performance and the Company's cash flows. IFRS 17 is effective for annual periods beginning on or after January 1, 2022. The Company is in the process of evaluating the new standard in the diagnostic phase.

·

IFRIC 23 - Applies to any situation where there is uncertainty as to whether an income tax treatment is acceptable under tax law. The scope of the Interpretation includes all taxes covered by IAS 12, that is, both current and deferred tax. However, it does not apply to uncertainty regarding taxes covered by other standards. IFRIC 23 becomes operative for financial periods beginning on or after January 1, 2019. A study was carried out on the effects of this standard and it was concluded that there were no impacts on the Organization.

 

 

48)   Other information

 

  1. On October 2, 2018, Bradesco formalized a strategic partnership with RCB Investimentos S.A. (“RCB”), one of the main credit management and recovery companies in Brazil, after the acquisition of 65% of its shares. Bradesco expects to add more efficiency to its credit recovery process, as well as actively participate in the credit acquisition market for recovery.

 

2.     Unconsolidated structured entities are unconsolidated entities that the Organization does not control, but which have a contractual and non-contractual involvement, and provide variability of returns arising from the performance. The Organization has an involvement with structured entities through management of investment funds and portfolios making management fees and consortium management.

 

The main unconsolidated structured entities are: (i) the investment funds managed by Organization, whose nature and involvement, generating management fees and investment in units for funds, the assets of managed funds and non-consolidated in 2018 were R$369,063,713 thousand (2017 – R$338,846,142 thousand) and revenues earned in 2018 were R$1,525,280 thousand (2017 – R$1,463,469 thousand) and (ii) the consortium which nature and involvement is related to generation management fees of consortium quotas, represented by groups of quotaholders formed to acquire specific goods, whose assets in 2018 were R$76,893,786 thousand (2017 – R$74,323,031 thousand) and the revenues were in 2018 R$1,683,942 thousand (2017 – R$1,526,660 thousand).

 

 

    154     IFRS – International Financial Reporting Standards – 2018


 
 

Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS)

 

Notes to the Consolidated Financial Statements

 

 

3.     On May 31, 2016, a lawsuit was filed against  three members of its Bradesco’s Executive Board of Directors by the Federal Police, in the scope of the so-called "Operation Zealots", which investigates the alleged improper performance of members of the CARF – Federal Administrative Tax Court. On July 28, 2016, the Federal Public Prosecution filed an accusation against all three members of the Board of Executive Officers and a former member of its Board of Directors, which was received by the Judge of the 10th Federal Court of Judicial Section of the Federal District. At present, two of the three members of our Organization remain defendants in the proceeding. The executives of Bradesco have already submitted their respective answers to the prosecution, pointing out the facts and evidence demonstrating their innocence.

 

The Company’s Management conducted a thorough internal evaluation of the records and documents related to the indictment and found no evidence of any unlawful conduct committed by its representatives. Bradesco provided all the information requested to the competent regulatory bodies, in Brazil and abroad.

 

The process has already had its investigation phase closed, now await the final allegations and sentence of the first degree trial.

 

Following news reports of the "Operation Zealots", a class action was filed against Bradesco and three members of its Board of Executive Officers in the District Court of New York, on June 3, 2016, asserting claims under Sections 10(b) and 20(a) of the U.S. Securities Exchange Act of 1934. The lawsuit alleges that investors who purchased preferred American Depositary Shares (“ADS”) of Bradesco between April 30, 2012 and July 27, 2016 suffered losses due to a supposed violation regarding the American law of capital markets. On September 29, 2017, the Court limited the proposed class to investors who purchased ADS preferred shares of Bradesco between August 8, 2014 and July 27, 2016, as well as excluding one of the executives. The Class Action is currently, in the phase of pre-trial Discovery and class certification. On September 14, 2018, the plaintiff presented a formal request to include another class representative that has already been objected by Bradesco, which is currently being analyzed by the judge.

 

Considering the stage that the demand is at, it is not possible to set the exposure of Bradesco’s business and there are insufficient elements to carry out a risk assessment.

 

Bradesco also was summoned by the General’s Office of the Ministry of Finance on the filing of an Administrative Proceeding ("PAR"). This process may entail the possibility of application of a fine and/or mention on public lists, which may eventually lead to restrictions on business with public agencies.

 

4.     On July 20, 2018, Odontoprev, a subsidiary of Bradesco Saúde S.A., informed the Market about the proposed acquisition of 100% of the share capital of Odonto System Planos Odontológicos Ltda., a company with head offices in Fortaleza/ Ceará, for the amount of R$201,637 thousand, in addition to this amount, the acquisition foresees a variable price for the future, related the achievement of the future targets of growth of the EBITDA for Odonto System of 2018 and 2019. This transaction was approved, with no restrictions, by the Agência Nacional de Saúde Suplementar – ANS (National Supplementary Health Agency), the Central Bank of Brazil – BACEN and the Administrative Council for Economic Defense – CADE. The transaction was approved by the shareholders of the Company, in the Shareholders’ Meeting held on August 6, 2018.

 

5.     On December 31, 2018, Bradesco and the Fidelity Group concluded the termination of its joint venture in Fidelity Processadora S.A. ("Processing Company"), whereby Bradesco will be the sole shareholder of the Processing Company, whose shareholders’ equity is composed exclusively of the assets and liabilities relating to the provision of credit card processing services to the Bradesco Organization. The operation (a) aims to reduce the costs of processing and the increase in the efficiency of the credit card business; (b) will not have any impact on the activities and clients of Bradesco; and (c) did not involve any financial values. The parties, Bradesco and Fidelity Group, will also maintain their association in Fidelity Serviços S.A., a company that provides call center services, collection, fraud prevention, support and other related services.

 

Bradesco 155


 

 

 

 

 

For further information, please contact:

 

 

 

 

 

Board of Executive Officers

 

 

 

 

Leandro de Miranda Araújo

 

Deputy Executive Officer and Investor Relations Officer

 

Phone: (11) 3684-4011

 

Fax: (11) 3684-4630

 

diretoria.executiva@bradesco.com.br

 

 

 

 

Market Relations Department

 Carlos Wagner Firetti

Phone: (11) 2194-0922

 

 

 

Cidade de Deus, s/nº - Prédio Vermelho - 3º andar

 

 

Osasco – SP

 Brazil

 

 

 

banco.bradesco/ri

 

 

  

 


 
 

 

 
SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 7, 2019
 
BANCO BRADESCO S.A.
By:
 
/S/Leandro de Miranda Araujo

    Leandro de Miranda Araujo
Executive Deputy Officer and
Investor Relations Officer.
 
 
FORWARD-LOOKING STATEMENTS

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.