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Banco Bradesco S.A. Value Stock - Dividend - Research Selection

Bank bradesco

ISIN: BRBBDCACNPR8 , WKN: 896694

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Internet


Description of the company

We are a sociedade anônima organized under the laws of Brazil. Our headquarters are in Cidade de Deus, Vila Yara, 06029‑900, Osasco, São Paulo, Brazil, and our telephone number is (55-11) 3684-4011. Our New York Branch is located at 450 Park Avenue, 32nd and 33rd floors, New York 10022.

 

We were founded in 1943 as a commercial bank under the name "Banco Brasileiro de Descontos S.A." In 1948, we began a period of aggressive expansion, which led to our becoming the largest private‑sector (non‑government‑controlled) commercial bank in Brazil by the end of the 1960s. We expanded our activities nationwide during the 1970s and became well established in both urban and rural markets in Brazil. In 1988 we merged with our real estate finance, investment bank and consumer credit subsidiaries to become a multiple service bank and changed our name to “Banco Bradesco S.A.”

 

Since 2009, we operate in all Brazilian municipalities, and our large banking network enables us to be closer to our customers, thereby enabling our managers to develop knowledge as to economically active regions and other important conditions for our business. This knowledge helps us assess and mitigate risks in credit transactions, among other risks, as well as to meet the specific needs of our customers.

 

Currently, we are one of the largest banks in Brazil in terms of total assets. We offer a wide range of banking and financial products and services in Brazil and abroad to individuals, large, mid‑sized, small and micro enterprises and major local and international corporations and institutions. Our products and services comprise of banking operations such as loans and advances and deposit‑taking, credit card issuance, purchasing consortiums, insurance, leasing, payment collection and processing, pension plans, asset management and brokerage services.

 

As of December 31, 2017, we had, on a consolidated basis:

 

· R$1.2 trillion in total assets;

 

· R$373.8 billion in total loans and advances to customers;

 

· R$265.2 billion in total deposits;

 

· R$117.7 billion in equity, including non-controlling interest;

 

· R$239.1 billion in technical reserves for our insurance and pension plan business;

 

· R$51.3 billion in foreign trading financing;

 

· 47.6 million insurance policyholders;

 

· 25.8 million checking account holders;

 

· 63.4 million savings accounts;

 

· 2.9 million capitalization bonds holders;

 

· 2.8 million pension plan holders;

 

· 2,198 Brazilian corporate groups and multinational companies in Brazil as ”Corporate” customers;

 

an average of 43.8 million daily transactions, including 1.4 million in our 4,749 branches and 42.4 million through Digital Channels, such as Bradesco Celular, Internet, Automatic Teller Machines, or ATMs, and telephone (Fone Fácil);

 

· a nationwide network consisting of 4,749 branches and 4,827 service centers and electronic in-company service centers, 35,590 active ATMs of our own network, and 21,259 ATMs available under the Banco24Horas brand for cash withdrawals, account balance information, obtaining statements and, take out loans, perform collections, transfers between Bradesco accounts, DOC/TED (types of bank transfer), pre-paid card and “proof of life” to INSS (physical proof of the existence of the old age pensioner or survivor to maintain the right to the social benefit) and services such as scheduled withdrawals via mobile apps, the purchase of foreign currency and immediate deposit (which makes the funds immediately available);

 

· 98,808 employees. For more information on our employees, see “Item 6.D. Employees”; and

 

· a total of three branches and nine subsidiaries located in New York, London, the Cayman Islands, Buenos Aires, Luxembourg, Hong Kong and Mexico.

 

Recent acquisitions

In July 2016, we announced to the market the acquisition of 100% of the share capital of HSBC Brasil.

In July 2015, we signed a purchase contract for the acquisition of 100% of the share capital of HSBC Brasil. The acquisition was approved by the Central Bank in December 2015 and by the Administrative Council for Economic Defense (“CADE”) in June 2016, subject to an Agreement on Concentration Control, and therefore approved by all relevant regulatory bodies. The purchase was completed in July 2016, for R$16 billion. In October 2016, a Shareholders’ Meeting approved the spin-off of HSBC Brasil and the integration of its staff and operational and technological platforms, resulting in the replacement of the HSBC brand in then-existing service network and providing greater synergy in its operations.

With the acquisition, we took over all operations of HSBC in Brazil, including retail, insurance and asset management, as well as all branches and clients. The acquisition allowed us to grow in scale and optimize our platforms, while increasing national coverage, consolidating our leadership in a number of branches in several states, and strengthening our presence in the high-income segment. The acquisition also enabled us to expand our operations, increasing the range of products offered in Brazil, especially in the insurance, credit card and asset management segments.

Other strategic alliances

In July 2017, we announced that Bradesco Seguros S.A. (“Bradesco Seguros”) and Swiss Re Corporate Solutions Ltd. (“Swiss Re Corso”) completed the transaction announced in October 2016, by signing a shareholders' agreement pursuant to which: (i) Swiss Re Corporate Solutions Brasil Seguros S/A (“Swiss Re Corporate Solutions Brasil”) assumed part of the insurance operations of Bradesco Seguros, the property and casualty (P&C) and the transport (together "Large Risk Insurance"), having exclusive access to Bradesco clients to market Large Risk Insurance solutions; and (ii) Bradesco Seguros became the holder of 40.0% of Swiss Re Corporate Solutions Brasil's shares and the other 60% remained with its controller Swiss Re Corso. The transaction was approved by the SUSEP, by the CADE and by the Central Bank.

 

In May 2017, Bradesco Seguros, together with the other shareholders of IRB Brasil RE ("IRB"), authorized IRB to request to the CVM: (i) registration as a publicly-traded company and authorization to conduct the Initial Public Offer (IPO) of IRB, in accordance with CVM Instructions No. 400/03 and No. 480/09; and (ii) registration to perform a secondary offering of common shares, in accordance with CVM Instruction No. 400/03. In July 2017, the book building procedure of the offer ended and Bradesco sold part of its shares. Bradesco Seguros now holds 15.23% stake in the share capital of IRB (stake calculated excluding shares held in treasury).

 

In June 2017, Bradesco entered into agreements with Banco do Brasil S.A., Banco Santander (Brasil) S.A., Caixa Econômica Federal and Itaú Unibanco S.A. to create a company to manage credit intelligence ("GIC"). The company will develop a database to add, reconcile and handle the profile and credit information of individuals and legal entities who authorize their inclusion in the database, as required by the applicable rules. The control of the company will be shared between the banks and each of them will hold 20% of its share capital.

 

BRAM has developed important alliances as part of its internationalization strategy, expanding the number of platforms through which its investment funds are offered in the European, Latin American and Asian markets. Through personal management and investment advisory agreements, we offer Brazilian investors the opportunity to invest in global equity funds, with a focus on the U.S., Europe and Asia, besides the global funds. In Europe, BRAM offers to overseas investors funds domiciled in Luxemburg with different strategies under the Bradesco Global Funds family, launched in 2009. In Japan, Mitsubishi Kosukai UFJ Asset Management (“MUKAM”), our partner, offers fixed income funds and equity funds managed by BRAM since 2008 to retail investors wishing to invest in the Brazilian market. In Chile our partner Larrain Vial offers to Chilean investors a variable income fund managed by BRAM since 2008.

 

Business strategy

 

The key elements of our strategy are: (i) consolidating and expanding our position as one of the leading financial institutions and insurance providers in Brazil; (ii) maximizing shareholder value; and (iii) maintaining high corporate responsibility and sustainability standards.

 

We intend to pursue the following strategies to reach these goals:

 

Consolidate and build upon our service network and brand as one of the leading financial institutions and insurance providers in Brazil, which offers a complete portfolio of products and services to all levels of society.

We believe that our position as one of the leading financial institutions in Brazil, with a presence in all Brazilian regions through a broad network of distribution channels and with exposure to individuals of all income levels as well as large, mid‑sized and small businesses, will allow us to maintain the organic growth strategy. We will also continue to expand the insurance, pension and capitalization bonds business segment, in order to consolidate our leadership in this sector. As part of this strategy, we intend to increase the sales of our traditional banking, insurance, pension and capitalization bonds products through our wide branch network, our internet distribution services and other distribution channels. We are committed to investing significantly in our IT platform to support such growth. In addition, we intend to continue to leverage our relationships with corporate clients and high-income individuals to further develop our investment banking, private banking and asset management operations through Bradesco BBI, Banco Bradesco Europa, Bradesco Securities and other subsidiaries in Brazil and other key financial centers such as London, New York and Hong Kong.

 

Maintain asset quality and operational risk levels.

We are focused on sustainable growth to ensure our standards in relation to our asset quality and risk levels. We intend to maintain the quality of our loan portfolio by continuously improving our delinquency risk models, ensuring better results in credit granting and appropriate provisions for incurred losses. Our strategy involves maintaining our existing policy for our insurance business of careful evaluation of risk spreads through robust actuarial analysis, while entering into reinsurance agreements with well-known reinsurers to reduce exposure to large risks.

 

With respect to risk management, we intend to continue our integrated approach that utilizes a centralized method for identifying, measuring, controlling, monitoring and mitigating credit, market, liquidity and operational risks. We intend to continue to use specialized risk management committees in relation to the adoption of institutional policies, operational guidelines and the establishment of limits for risk exposure in accordance with best international practices, with the aim of maintaining operational risk levels within adequate boundaries.

 

Complement organic growth with strategic alliances and pursue selective acquisitions.

To complement our organic growth strategy, we constantly seek opportunities for strategic alliances and selective acquisitions to consolidate our position as one of the leading financial institutions in Brazil and to expand our presence in growth markets such as consumer financing, investment banking, broker dealing and insurance. The acquisition of HSBC Brasil was the largest ever in our history and we expect an expansion of our operations, in particular, of profitable businesses and with low capital needs. In addition, we believe our strategic partnership with Banco do Brasil and Caixa in relation to credit, debit and pre-paid cards for checking account holders and non-account holders is an example of such a growth opportunity. Similarly, our merger with Odontoprev S.A. has increased our presence in the segment of dental care plans enabling us to consolidate our leadership position in the insurance market. We will continue to focus on asset quality, potential operating synergies, sale and acquisition of know-how to maximize return for our shareholders.

 

Business Overview

 

We operate and manage our business through two segments: (i) the banking segment; and (ii) the insurance, pension plans and capitalization bond segment.

 

The data for these segments was compiled from reports prepared for Management to assess performance and make decisions on allocating funds for investments and other purposes. Management uses various data, including financial data in conformity with BR GAAP and non-financial metrics compiled on different bases. For further information on differences between the results on a consolidated basis and by segment, see "Item 5.A. Operating Results - Results of operations for the year ended December 31, 2017 compared with the year ended December 31, 2016” and "Item 5.A. Operating Results - Results of operations for the year ended December 31, 2016 compared with the year ended December 31, 2015.”

 

As of December 31, 2017, according to the sources cited in parentheses below, we were:

 

· one of the leading banks in terms of savings deposits, with R$103.3 billion, accounting for 18.3% of Brazil's total savings deposits (Central Bank);

 

· one of the leaders in BNDES onlendings, with R$5.9 billion in disbursements (BNDES);

 

· one of the leaders in automobile financing loans, with a market share of 13.8% (Central Bank);

 

· the leading bank in benefit payments from the INSS, with over 10.7 million INSS retirees, beneficiaries and other pensioners, accounting for 30.9% of the total number of INSS beneficiaries (INSS);

 

· one of the leaders in leasing transactions in Brazil, with an outstanding amount of R$2.2 billion; through our subsidiary Bradesco Leasing S.A. Arrendamento Mercantil, or “Bradesco Leasing” (ABEL);

 

· Brazil’s largest private fund and investment manager, through our subsidiary BRAM, with R$666.6 billion in assets under management (ANBIMA), taking into account managed portfolios;

 

· one of the leaders in the third-party asset management business, with R$591.5 billion in managed assets, in addition to R$222.2 billion in assets managed though our subsidiary and BEM, specialized in trust, custody and controllership of asset management services (ANBIMA);

 

· the leader in number of outstanding purchasing consortium quotas, through our subsidiary Bradesco Administradora de Consórcios Ltda., or “Bradesco Consórcios,” with 1,410,736 quotas in three segments, including: (i) automobiles and motorcycles, with 1,113,860 quotas; (ii) real estate, with 249,893 quotas; and (iii) trucks/tractors/machinery and equipment, with 46,983 quotas (Central Bank); and

 

· the largest company operating in the Brazilian insurance market, operating in all lines of this segment, with a 25.9% market share (SUSEP/ANS), through Grupo Bradesco Seguros, which mainly comprises: Bradesco Seguros S.A., or “Bradesco Seguros” and its subsidiaries: (i) Bradesco Vida e Previdência S.A., or “Bradesco Vida e Previdência;” (ii) Bradesco Capitalização S.A., or “Bradesco Capitalização;” (iii) Bradesco Auto/RE Companhia de Seguros S.A., or “Bradesco Auto/RE;” and (iv) Bradesco Saúde S.A., or “Bradesco Saúde.” The Group’s

 

 

Table of Contents

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

4

 

FORWARD‑LOOKING STATEMENTS

 

5

 

PART I

 

6

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

6

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

6

 

ITEM 3. KEY INFORMATION

 

6

 

3.A. SELECTED FINANCIAL DATA

 

6

 

3.B. CAPITALIZATION AND INDEBTEDNESS

 

9

 

3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS

 

9

 

3.D. RISK FACTORS

 

9

 

ITEM 4. INFORMATION ON THE COMPANY

 

23

 

4.A. HISTORY AND DEVELOPMENT OF THE COMPANY

 

23

 

4.B. BUSINESS OVERVIEW

 

26

 

4.C. ORGANIZATIONAL STRUCTURE

 

107

 

4.D. PROPERTY, PLANTS AND EQUIPMENT

 

107

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

107

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

107

 

5.A. OPERATING RESULTS

 

107

 

5.B. LIQUIDITY AND CAPITAL RESOURCES

 

133

 

5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

 

145

 

5.D. TREND INFORMATION

 

145

 

5.E. OFF-BALANCE SHEET ARRANGEMENTS

 

145

 

5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

145

 

5.G. SAFE HARBOR

 

145

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

145

 

6.A. BOARD OF DIRECTORS AND BOARD OF EXECUTIVE OFFICERS

 

145

 

6.B. COMPENSATION

 

157

 

6.C. BOARD PRACTICES

 

157

 

6.D. EMPLOYEES

 

161

 

6.E. SHARE OWNERSHIP

 

162

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

163

 

7.A. MAJOR SHAREHOLDERS

 

163

 

7.B. RELATED PARTY TRANSACTIONS

 

166

 

7.C. INTERESTS OF EXPERTS AND COUNSEL

 

167

 

ITEM 8. FINANCIAL INFORMATION

 

167

 

8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

167

 

8.B. SIGNIFICANT CHANGES

 

169

 

ITEM 9. THE OFFER AND LISTING

 

169

 

9.A. OFFER AND LISTING DETAILS

 

169

 

9.B. PLAN OF DISTRIBUTION

 

172

 

9.C. MARKETS

 

172

 

9.D. SELLING SHAREHOLDERS

 

174

 

9.E. DILUTION

 

174

 

9.F. EXPENSES OF THE ISSUE

 

174

 

ITEM 10. ADDITIONAL INFORMATION

 

174

 

10.A. SHARE CAPITAL

 

174

 

10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION

 

174

 

10.C. MATERIAL CONTRACTS

 

182

 

10.D. EXCHANGE CONTROLS

 

182

 

10.E. TAXATION

 

183

 

10.F. DIVIDENDS AND PAYING AGENTS

 

189

 

10.G. STATEMENT BY EXPERTS

 

189

 

10.H. DOCUMENTS ON DISPLAY

 

189

 

10.I. SUBSIDIARY INFORMATION

 

189

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

189

 

 

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

192

 

12.A. DEBT SECURITIES

 

192

 

12.B. WARRANTS AND RIGHTS

 

192

 

12.C. OTHER SECURITIES

 

193

 

12.D. AMERICAN DEPOSITARY SHARES

 

193

 

PART II

 

193

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

193

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

193

 

ITEM 15. CONTROLS AND PROCEDURES

 

193

 

ITEM 16. [RESERVED]

 

194

 

16.A. AUDIT COMMITTEE FINANCIAL EXPERT

 

194

 

16.B. CODE OF ETHICS

 

194

 

16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

194

 

16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

195

 

16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

195

 

16.F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT

 

196

 

16.G. CORPORATE GOVERNANCE

 

196

 

PART III

 

198

 

ITEM 17. FINANCIAL STATEMENTS

 

198

 

ITEM 18. FINANCIAL STATEMENTS

 

198

 

ITEM 19. EXHIBITS

 

198

 

SIGNATURES

 

197

 

 

 

 

 

Table of Contents

 

 

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

 

 

Form 20-F

 

 

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report, the terms "Bradesco," the "Company," the "Bank," the "Bradesco Group," "we,” the “Organization,” “our” and "us" refer to Banco Bradesco S.A., a sociedade anônima organized under the laws of Brazil and, unless otherwise indicated, its consolidated subsidiaries.

 

All references herein to "real," "reais" or "R$" refer to the Brazilian Real, the official currency of Brazil. References herein to "U.S. dollars," "dollar" and "US$" refer to United States dollars, the official currency of the United States of America (USA).

 

Our audited consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015 and the corresponding notes, which are included under "Item 18. Financial Statements" of this annual report, were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

We use accounting practices adopted in Brazil for financial institutions authorized to operate by the Central Bank of Brazil (Banco Central do Brasil), or the "Central Bank," for certain purposes, such as performance assessment, decision-making, preparation of reports for Brazilian shareholders, filings with the Brazilian Securities and Exchange Commission (CVM) and determining dividend and federal income tax payments.

 

Some data related to economic sectors presented in this annual report was obtained from the following sources: B3 (Brasil, Bolsa, Balcão) or (“B3”); Brazilian Association of Credit Card Companies and Services (Associação Brasileira das Empresas de Cartão de Crédito e Serviços), or ("ABECS"); Brazilian Association of Leasing Companies (Associação Brasileira de Empresas de Leasing), or ("ABEL"); Brazilian Association of Financial and Capital Markets Entities (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais), or ("ANBIMA"); Brazilian Health Insurance Authority (Agência Nacional de Saúde Suplementar), or ("ANS"); Central Bank; Brazilian Bank of Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social), or ("BNDES"); National Association of Private Pension Plans and Life (Federação Nacional de Previdência Privada e Vida), or ("FENAPREVI"); Getulio Vargas Foundation (Fundação Getulio Vargas), or ("FGV"); and Private Insurance Superintendence (Superintendência de Seguros Privados), or ("SUSEP").

 

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

 

References in this annual report to the “common shares” and “preferred shares” are to our common shares and preferred shares, respectively, and together our "shares." References to “preferred share ADSs” in this annual report are to preferred share American Depositary Shares, each representing one preferred share. The preferred share ADSs are evidenced by preferred share American Depositary Receipts, or preferred share ADRs, issued pursuant to an Amended and Restated Deposit Agreement, dated as of December 11, 2015, by and among us, The Bank of New York Mellon, as depositary, and the holders and beneficial owners of preferred share ADSs evidenced by preferred share ADRs issued thereunder (the “Preferred Share ADS Deposit Agreement”).

 

References to "common share ADSs" in this annual report are related to common share American Depositary Shares, with each common share ADS representing one common share. The common share ADSs are evidenced by common share American Depositary Receipts, or common share ADRs, issued pursuant to an Amended and Restated Deposit Agreement dated as of December 11, 2015, by and among us, The Bank f New York Mellon, as depositary, and the holders and beneficial owners of common share ADSs evidenced by common share ADRs issued thereunder (the "Common Share ADS Deposit Agreement" and, together with the “Preferred Share ADS Deposit Agreement,” the "Deposit Agreements").

 

References throughout this annual report to "ADSs" are to our preferred share ADSs and common share ADSs, together.

 

Throughout this annual report, we may indicate that certain information is available at different websites operated by us. None of the information on the websites referred to or mentioned in this annual report is part of or is incorporated by reference herein.

 

This annual report translates certain real amounts ‎into U.S. dollars solely for the convenience of the reader. Unless otherwise noted in this annual report, all such real amounts have been translated at the ‎rate of R$3.3238 per US$1.00, which was the Central Bank rate published on March 29, 2018. Such conversion

 

4 Bradesco

 

 

 

 

 

Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

 

 

Form 20-F

 

 

 

 

 

should not be ‎construed as a representation that the real amounts correspond to, or have been or could be converted into, U.S. ‎dollars at that rate or any other rate.

 

FORWARD‑LOOKING STATEMENTS

This annual report contains forward‑looking statements as defined in Section 27A of the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act." These statements are based mainly on our current expectations and projections of future events and financial trends that affect or might affect our business. In addition to the items discussed in other sections of this annual report, there are many significant factors that could cause our financial condition and results of operations to differ materially from those set out in our forward-looking statements, including, but not limited to, the following:

 

· current weakness in Brazilian macroeconomic conditions;

 

· global economic conditions;

 

· economic, political and business conditions in Brazil and in the other markets in which we operate;

 

· risks of lending, credit, investments and other activities;

 

· our level of capitalization;

 

· cost and availability of funds;

 

· higher levels of delinquency by borrowers, credit delinquency and other delinquency events leading to higher impairment of loans and advances;

 

· the synergies of the business that we acquired from HSBC Bank Brasil and HSBC Serviços e Participações (“HSBC Brasil”);

 

· loss of customers or other sources of income;

 

· our ability to execute our investment strategies and plans as well as to maintain and improve our operating performance;

 

· our revenues from new products and businesses;

 

· adverse claims, legal or regulatory disputes or proceedings;

 

· inflation, fluctuations in the value of the real and/or interest rates, which could adversely affect our margins;

 

· competitive conditions in the banking, financial services, credit card, asset management, insurance sectors and related industries;

 

· the market value of securities, particularly government securities; and

 

· changes by the Central Bank and others in laws and regulations, applicable to us and our activities, including, but not limited to, those affecting tax matters.

 

Words such as "believe," "expect," "continue," "understand," "estimate," "will," "may," "anticipate," "should," "intend," and other similar expressions identify forward‑looking statements. These statements refer only to the date on which they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or any other event.

 

In light of these risks and uncertainties, the forward‑looking statements, events and circumstances discussed in this annual report may not be accurate, and our actual results and performance could differ materially from those anticipated in our forward-looking statements. Investors should not make investment decisions based solely on the forward-looking statements in this annual report.

 

 

 

5 Form 20-F – December 2017

 

 

 

 

 

Table of Contents

 

 

 

PART I

 

 

 

Form 20-F

 

 

 

PART I

 

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

 

 

3.A. Selected Financial Data

We present below our selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB and audited by KPMG Auditores Independentes, an independent registered public accounting firm. The data as of and for the years ended December 31, 2017, 2016 and 2015 is derived from our consolidated financial statements included in this annual report. The data for the years ended December 31, 2014 and 2013 is derived from our consolidated financial statements, which are not included herein.

 

The following selected financial data should be read together with the "Presentation of Financial and Other Information" and "Item 5. Operating and Financial Review and Prospects."

 

Selected Financial Data

 

 

 

Year ended December 31,

 

US$ in

thousands (1)

 

R$ in thousands

 

2017

 

2017

 

2016

 

2015

 

2014

 

2013

 

Data from the Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and similar income

 

37,978,316

 

126,232,328

 

147,700,375

 

127,048,252

 

103,893,096

 

90,682,625

 

Interest and similar expenses

 

(22,741,866)

 

(75,589,415)

 

(91,037,386)

 

(71,412,210)

 

(53,847,329)

 

(41,382,142)

 

Net interest income

 

15,236,450

 

50,642,913

 

56,662,989

 

55,636,042

 

50,045,767

 

49,300,483

 

Fee and commission income

 

6,844,223

 

22,748,828

 

20,341,087

 

17,856,873

 

16,759,980

 

14,535,723

 

Fee and commission expenses

 

-

 

-

 

(36)

 

(36,203)

 

(20,724)

 

(36,041)

 

Net fee and commission income

 

6,844,223

 

22,748,828

 

20,341,051

 

17,820,670

 

16,739,256

 

14,499,682

 

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

 

2,895,213

 

9,623,108

 

16,402,770

 

(8,252,055)

 

(1,933,003)

 

(5,790,089)

 

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

 

171,598

 

570,358

 

(1,341,400)

 

(671,810)

 

(991,894)

 

(6,100,782)

 

Losses on investments held-to-maturity

 

(16,403)

 

(54,520)

 

-

 

-

 

-

 

-

 

Net gains/(losses) on foreign currency transactions

 

428,111

 

1,422,957

 

150,757

 

(3,523,095)

 

(1,244,680)

 

(1,093,597)

 

Net income from insurance and pension plans

 

1,877,366

 

6,239,990

 

4,155,763

 

5,497,505

 

5,411,845

 

6,933,680

 

Impairment of loans and advances

 

(5,072,759)

 

(16,860,835)

 

(15,350,278)

 

(14,721,152)

 

(10,291,386)

 

(9,623,870)

 

Personnel expenses

 

(6,234,811)

 

(20,723,265)

 

(17,003,783)

 

(14,058,047)

 

(13,667,639)

 

(12,354,418)

 

Other administrative expenses

 

(5,079,265)

 

(16,882,461)

 

(16,149,563)

 

(13,721,970)

 

(12,971,521)

 

(12,151,537)

 

Depreciation and amortization

 

(1,374,501)

 

(4,568,568)

 

(3,658,413)

 

(2,942,003)

 

(2,932,687)

 

(2,740,830)

 

Other operating income/(expenses)

 

(3,048,726)

 

(10,133,357)

 

(14,004,162)

 

(12,988,553)

 

(10,223,083)

 

(7,622,240)

 

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

 

6,626,496

 

22,025,148

 

30,205,731

 

8,075,532

 

17,940,975

 

13,256,482

 

Share of profit of associates and joint ventures

 

517,002

 

1,718,411

 

1,699,725

 

1,528,051

 

1,389,816

 

1,062,687

 

Income before income taxes

 

7,143,498

 

23,743,559

 

31,905,456

 

9,603,583

 

19,330,791

 

14,319,169

 

Income tax and social contribution

 

(1,934,219)

 

(6,428,956)

 

(13,912,730)

 

8,634,322

 

(3,914,313)

 

(1,833,031)

 

Net income for the year

 

5,209,279

 

17,314,603

 

17,992,726

 

18,237,905

 

15,416,478

 

12,486,138

 

Attributable to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Controlling shareholders

 

5,141,514

 

17,089,364

 

17,894,249

 

18,132,906

 

15,314,943

 

12,395,920

 

Non-controlling interest

 

67,766

 

225,239

 

98,477

 

104,999

 

101,535

 

90,218

 

(1) Amounts stated in U.S. dollars have been translated from Brazilian reais at an exchange rate of R$3.3238 per US$1.00, the Central Bank exchange rate on March 29, 2018. Such translations should not be construed as a representation that the Brazilian real amounts presented were or could be converted into U.S. dollars at that rate.

 

 

 

6 Bradesco

 

 

 

 

 

Table of Contents

 

 

3.A. Selected Financial Data

 

 

 

Form 20-F

 

 

 

 

 

 

 

Year ended December 31,

 

R$, except for number of shares

 

2017

 

2016

 

2015

 

2014

 

2013

 

Data on Earnings and Dividends per Share (1)

 

 

 

 

 

 

 

 

 

 

 

Earnings per share (2)

 

 

 

 

 

 

 

 

 

 

 

Common

 

2.67

 

2.80

 

2.84

 

2.39

 

1.94

 

Preferred

 

2.94

 

3.08

 

3.12

 

2.64

 

2.13

 

Dividends/interest on equity per share (3)

 

 

 

 

 

 

 

 

 

 

Common

 

1.13

 

1.09

 

0.95

 

0.79

 

0.65

 

Preferred

 

1.24

 

1.20

 

1.04

 

0.86

 

0.70

 

Weighted average number of outstanding shares (1)

 

 

 

 

 

 

 

 

 

 

 

Common

 

3,049,448,563

 

3,049,448,563

 

3,050,040,493

 

3,050,272,329

 

3,050,272,329

 

Preferred

 

3,035,625,047

 

3,035,625,047

 

3,035,625,047

 

3,041,434,763

 

3,043,058,970

 

(1) Adjusted for corporate events occurred in the periods. For more information about the company events, see "Item 9.A. Offer and Listing Details;"

 

(2) None of our outstanding liabilities are exchangeable for or convertible into equity securities. Therefore, our diluted earnings per share do not differ from our earnings per share. Accordingly, our basic and diluted earnings per share are equal in all periods presented; and

 

(3) Holders of preferred shares are entitled to receive dividends per share in an amount 10.0% greater than the dividends per share paid to common shareholders. For purposes of calculating earnings per share according to IFRS, we used the same criteria adopted for dividends per share. For a description of our two classes of shares. see "Item 10.B. Memorandum and Articles of Association."

 

 

 

 

 

Year ended December 31,

 

In US$

 

2017

 

2016

 

2015

 

2014

 

2013

 

Dividends/interest on equity per share (1)

 

 

 

 

 

 

 

 

 

 

 

Common

 

0.34

 

0.37

 

0.27

 

0.33

 

0.30

 

Preferred

 

0.38

 

0.41

 

0.29

 

0.36

 

0.33

 

(1) Amounts stated in U.S. dollars have been translated from Brazilian reais at the exchange rate disclosed by the Central Bank at the end of each fiscal year.

 

 

 

7 Form 20-F – December 2017

 

 

 

 

 

Table of Contents

 

 

 

3.A. Selected Financial Data

 

 

 

Form 20-F

 

 

 

As of December 31,

 

US$ in

thousands (1)

 

R$ in thousands

 

2017

 

2017

 

2016

 

2015

 

2014

 

2013

 

Data from the Consolidated Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

24,593,222

 

81,742,951

 

72,554,651

 

72,091,764

 

65,430,300

 

67,450,363

 

Financial assets held for trading

 

72,720,994

 

241,710,041

 

213,139,846

 

159,623,449

 

78,498,311

 

96,092,523

 

Financial assets available for sale

 

47,960,985

 

159,412,722

 

113,118,554

 

117,695,450

 

120,961,734

 

67,838,411

 

Investments held to maturity

 

11,735,399

 

39,006,118

 

43,002,028

 

40,003,560

 

25,071,031

 

23,069,026

 

Financial assets pledged as collateral

 

55,350,855

 

183,975,173

 

155,286,577

 

144,489,921

 

152,612,689

 

117,740,225

 

Loans and advances to banks, net of impairment

 

9,702,065

 

32,247,724

 

94,838,136

 

35,620,410

 

72,974,619

 

78,719,723

 

Loans and advances to customers, net of impairment

 

104,325,801

 

346,758,099

 

367,303,034

 

344,868,464

 

328,064,004

 

304,121,334

 

Non-current assets held for sale

 

457,601

 

1,520,973

 

1,578,966

 

1,247,106

 

1,006,461

 

832,546

 

Investments in associates and joint ventures

 

2,484,320

 

8,257,384

 

7,002,778

 

5,815,325

 

3,983,780

 

3,392,847

 

Premises and equipment

 

2,536,998

 

8,432,475

 

8,397,116

 

5,504,435

 

4,700,518

 

4,501,967

 

Intangible assets and goodwill, net of accumulated amortization

 

4,867,714

 

16,179,307

 

15,797,526

 

7,409,635

 

7,529,915

 

8,220,739

 

Taxes to be offset

 

3,166,428

 

10,524,575

 

7,723,211

 

6,817,427

 

6,130,191

 

5,293,116

 

Deferred income tax assets

 

13,157,203

 

43,731,911

 

45,116,863

 

45,397,879

 

28,388,183

 

25,661,079

 

Other assets

 

15,299,954

 

50,853,987

 

47,170,370

 

40,118,697

 

35,099,280

 

35,367,715

 

Total assets

 

368,359,540

 

1,224,353,440

 

1,192,029,656

 

1,026,703,522

 

930,451,016

 

838,301,614

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banks

 

86,033,296

 

285,957,468

 

301,662,682

 

293,903,391

 

279,940,227

 

243,100,373

 

Deposits from customers

 

78,827,982

 

262,008,445

 

232,747,929

 

194,510,100

 

210,031,505

 

216,218,057

 

Financial liabilities held for trading

 

4,294,783

 

14,274,999

 

13,435,678

 

19,345,729

 

3,315,573

 

1,826,382

 

Funds from issuance of securities

 

40,668,539

 

135,174,090

 

151,101,938

 

109,850,047

 

85,030,399

 

57,883,068

 

Subordinated debt

 

15,096,998

 

50,179,401

 

52,611,064

 

50,282,936

 

35,821,666

 

35,885,003

 

Technical provisions for insurance and pension plans

 

71,932,604

 

239,089,590

 

215,840,000

 

170,940,940

 

146,559,220

 

130,329,023

 

Other reserves

 

5,563,129

 

18,490,727

 

18,292,409

 

15,364,317

 

13,864,401

 

13,752,577

 

Current income tax liabilities

 

726,983

 

2,416,345

 

2,130,286

 

2,781,104

 

3,602,333

 

3,082,976

 

Deferred income tax assets

 

376,631

 

1,251,847

 

1,762,948

 

772,138

 

808,178

 

799,824

 

Other liabilities

 

29,429,215

 

97,816,824

 

96,965,515

 

78,038,058

 

69,185,709

 

63,321,405

 

Total liabilities

 

332,950,158

 

1,106,659,736

 

1,086,550,449

 

935,788,760

 

848,159,211

 

766,198,688

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

17,780,853

 

59,100,000

 

51,100,000

 

43,100,000

 

38,100,000

 

38,100,000

 

Treasury shares

 

(132,533)

 

(440,514)

 

(440,514)

 

(431,048)

 

(298,015)

 

(269,093)

 

Capital reserves

 

10,823

 

35,973

 

35,973

 

35,973

 

35,973

 

35,973

 

Profit reserves

 

14,886,945

 

49,481,227

 

50,027,816

 

49,920,020

 

43,765,349

 

34,122,503

 

Additional paid-in capital

 

21,209

 

70,496

 

70,496

 

70,496

 

70,496

 

70,496

 

Other comprehensive income

 

546,862

 

1,817,659

 

(398,708)

 

(4,002,724)

 

(659,501)

 

(1,102,887)

 

Retained earnings

 

2,208,012

 

7,338,990

 

4,907,381

 

2,096,710

 

1,153,439

 

927,314

 

Equity attributable to controlling shareholders

 

35,322,171

 

117,403,831

 

105,302,444

 

90,789,427

 

82,167,741

 

71,884,306

 

Non-controlling interest

 

87,211

 

289,873

 

176,763

 

125,335

 

124,064

 

218,620

 

Total equity

 

35,409,382

 

117,693,704

 

105,479,207

 

90,914,762

 

82,291,805

 

72,102,926

 

Total liabilities and equity

 

368,359,540

 

1,224,353,440

 

1,192,029,656

 

1,026,703,522

 

930,451,016

 

838,301,614

 

(1) Amounts stated in U.S. dollars have been translated from Brazilian reais at an exchange rate of R$3.3238 per US$ 1.00, the Central Bank exchange rate on March 29, 2018. Such translations should not be construed as a representation that the Brazilian real amounts presented have been or could be converted into U.S. dollars at that rate.

 

 

 

Exchange Rate Information

 

Over the past years, the exchange rate between the real and the U.S. dollar has experienced significant variation:

 

In 2013, the real depreciated 14.6% against the U.S. dollar, reaching R$2.3426 as of December 31, 2013. In 2014, the real depreciated 13.4% against the U.S. dollar, reaching R$2.6562 as of December 31, 2014. In 2015, the real depreciated 47.0% against the U.S. dollar, reaching R$3.9048 as of December 31, 2015. In 2016, the real appreciated 16.5% against the U.S. dollar, reaching R$3.2591 as of December 31, 2016. In 2017, the real depreciated 1.5% against the U.S. dollar, reaching R$3.3080 as of December 31, 2017.

 

On March 29, 2018, the exchange rate was R$3.3238 per US$1.00, a depreciation of 0.5% of the real against the U.S. dollar, when compared to December 31, 2017. Under the current floating exchange-rate system, the real may be subject to fluctuations and depreciation or appreciation against the U.S. dollar and other currencies.

 

The following table sets forth the period‑end, average and high and low selling rates reported by the Central Bank at closing, for the periods and dates indicated:

 

8 Bradesco

 

 

 

 

 

Table of Contents

 

 

3.B. Capitalization and Indebtedness

 

 

 

Form 20-F

 

 

 

 

 

 

 

2017

 

Period

 

Period-End

 

Average (1)

 

High (1)

 

Low (1)

 

2013

 

2.3426

 

2.1641

 

2.3725

 

1.9754

 

2014

 

2.6562

 

2.3586

 

2.6562

 

2.2025

 

2015

 

3.9048

 

3.3314

 

3.9729

 

2.6562

 

2016

 

3.2591

 

3.4849

 

4.0428

 

3.1811

 

2017

 

 

 

 

 

 

 

October

 

3.2769

 

3.1933

 

3.3082

 

3.0993

 

November

 

3.2616

 

3.1990

 

3.3082

 

3.0993

 

December

 

3.3080

 

3.2074

 

3.3082

 

3.0993

 

2018

 

 

 

 

 

 

 

January

 

3.1624

 

3.2352

 

3.3080

 

3.1624

 

February

 

3.2449

 

3.2384

 

3.3080

 

3.1624

 

March

 

3.3238

 

3.2598

 

3.3238

 

3.1624

 

(1) Average, high and low month end rates from December of the previous period.

 

Source: Central Bank.

 

 

 

 

 

3.B. Capitalization and Indebtedness

Not applicable.

 

3.C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

3.D. Risk Factors

Macroeconomic risks

 

The current weakness in Brazilian macroeconomic conditions and the market perception of certain economic and political risks alongside uncertainties relating to Brazil, including high-profile anti-corruption investigations, may have a material adverse effect on our financial condition and on the results of operations.

 

The vast majority of our operations are conducted in Brazil and, accordingly, our results are significantly impacted by macroeconomic conditions in Brazil. The reorientation of the Brazilian economic policy, initiated in 2016, enabled the advancement of measures aimed at minimizing imbalances and raising the potential for growth. The anchoring of inflation expectations allowed the Central Bank to reduce the basic interest rate to the lowest level in history. From the fiscal perspective, despite advancements such as the approval of the Long Term Index (Taxa de Longo Prazo) or (“TLP”) and the recovery of revenues, concern regarding sustainability of Brazil’s national debt remained present, especially in light of the lack of progress in relation to pension reform.

 

The executive branch of the Brazilian government (or Federal Government) sought a vote on pension reform by Congress during the first half of 2018, which could only be achieved through an amendment to the Brazilian Federal Constitution (the "Brazilian Constitution"). However, due to the upcoming presidential, governors, senators and congressman elections in October 2018 and other political matters, the pension reform voting was postponed until after the elections or in 2019.

 

On February 16, 2018, President Michel Temer, by means of Decree No. 9,288/18 approved by the National Congress, determined a federal intervention in the State of Rio de Janeiro until December 31, 2018. The Brazilian Constitution cannot be amended during a federal intervention, pursuant to article 60, paragraph 1. On this basis, we believe that pension reform can only be voted on in 2019. However, it is important to highlight that, in accordance with the Brazilian Constitution, the intervention period may be reduced if the reasons for the intervention cease.

 

If pension reform is not voted by the end of 2018, we cannot predict if this will be pursued by the next president.

 

In 2014, the Brazilian Federal Police and the Prosecution Office commenced a series of anti-corruption investigations called "Operation Car Wash" ("Operação Lava Jato") in which, among other

 

9 Form 20-F – December 2017

 

 

 

 

 

Table of Contents

 

 

 

3.D. Risk Factors

 

 

 

Form 20-F

 

 

 

matters, certain officers and employees of Petróleo Brasileiro S.A. ("Petrobras"), a Brazilian state-controlled company, were accused of accepting illegal payments in order to wrongly influence commercial decisions of Petrobras. During the course of 2014, 2015 and 2016, these anti-corruption investigations have expanded and have given rise to various criminal proceedings involving not only senior officers and employees of Petrobras but also senior officers of companies in Brazil, notably in the construction sector and some politicians. In the U.S., the SEC and the Department of Justice are also conducting their own investigations into a number of these allegations. The high-profile nature of these investigations may have momentarily harmed the reputation of Brazil, which could reduce investor confidence, making it more difficult for companies located in Brazil to obtain funding. We cannot predict how long the anti-corruption investigations will continue, or how significant the effects of the anti-corruption investigations may be for the Brazilian economy. If uncertainty surrounding the Brazilian economy continues, or if there is a material reduction in investor confidence as a result of these investigations, the results of our operations may be adversely affected.

 

In addition, our subsidiary Banco Bradesco BBI S.A. (“Bradesco BBI”) is a party to certain legal and administrative proceedings filed against Petrobras and other defendants, due to its role as underwriter in a note offering of Petrobras. An agreement in principle was reached to settle those proceedings in January 2018, though it must be ratified by a judge before coming into effect. We or our subsidiaries may become a party to other legal and/or administrative proceedings against Petrobras or other companies which have not yet been filed. A negative outcome of these ongoing legal proceedings or any new legal proceedings may harm our reputation and may adversely affect our financial condition and our results of operations.

 

On December 2, 2015, the Brazilian House of Representatives opened impeachment proceedings against the then-President Dilma Rousseff, alleging non-compliance with the fiscal responsibility law. The Brazilian House of Representatives and the Brazilian Senate voted in favor of the admissibility of the impeachment proceedings on April 17, 2016 and on May 12, 2016, respectively. Due to the favorable vote of the Senate, President Rousseff was removed from the presidency for up to 180 days to defend herself in her impeachment trial. During the 180-day trial period, the Vice-President of Brazil acted as President. On August 10, 2016, the Brazilian Senate approved the report of its special impeachment committee which recommended that President Dilma Rousseff should be brought to trial by the upper house of the Brazilian legislature. On August 31, 2016, President Dilma Rousseff was found guilty, losing her mandate, and Vice-President Michel Temer took office for the remainder of the term until January 1, 2019. However, the resolution of the political and economic crisis in Brazil still depends on the outcome of the “Lava Jato” investigation and on the approval of reforms that are being promoted by the new President. Further, the initial mandate by Dilma Rousseff and Michel Temer following the general election in 2014 was under review by the Superior Election Tribunal (Tribunal Superior Eleitoral), but the charges against Michel Temer were dismissed. In May 2017, the Brazilian media revealed new allegations of corruption involving businessmen and certain high-profile political figures, including President Temer, which had a significant effect on the stock market and the value of the real. The Attorney-General presented two accusations against Mr. Temer before the Brazilian Supreme Court (Supremo Tribunal Federal), or ("STF"), on June 26, 2017 and on September 15, 2017, respectively. The Brazilian House of Representatives voted against the admissibility of both charges, on August 2, 2017 and on October 25, 2017, respectively. Approval of the Brazilian House of Representatives is a necessary requirement for the STF to judge a Brazilian President during his term in office. Any further allegations involving the President are yet to be confirmed through judicial and official investigations, however, they could lead to uncertainty regarding the possibility of Michel Temer facing judicial actions and/or an impeachment process. For instance, on February 27, 2018, the STF authorized an extension for 60 days of the investigation into whether Michel Temer accepted bribes to benefit companies in the Port of Santos, and on March 5, 2018 it authorized the disclosure of the President's banking information. The progress of this investigation and the possibility of new accusations may significantly change the Brazilian political climate.

 

The continuation of any of, or combination of, these factors may lead to a further slowdown in GDP growth, which may have an adverse effect on our financial condition and our results of operations.

 

The government exercises influence over the Brazilian economy, and Brazilian political and economic conditions have a direct impact on our business.

 

Our financial condition and results of operations are substantially dependent on Brazil’s economy, which in the past has been characterized by frequent and occasionally drastic intervention by the government and volatile economic cycles.

 

In the past, the Brazilian government has often changed monetary, fiscal, taxation and other policies to influence the course of Brazil’s economy. We have no control over, and cannot predict, what measures or

 

10 Bradesco

 

 

 

 

 

Table of Contents

 

3.D. Risk Factors

 

 

 

Form 20-F

 

 

 

 

 

policies the government may take in response to the current or future Brazilian economic situation or how government intervention and government policies will affect the Brazilian economy and our operations and revenues.

 

Our operations, financial condition and the market price of our shares, preferred share ADSs and common share ADSs may be adversely affected by changes in certain policies related to exchange controls, tax and other matters, as well as factors such as:

 

· exchange rate fluctuations;

 

· base interest rate fluctuations;

 

· domestic economic growth;

 

· political, social or economic instability;

 

· monetary policies;

 

· tax policy and changes in tax regimes;

 

· exchange controls policies;

 

· liquidity of domestic financial, capital and credit markets;

 

· our customers' capacity to meet their other obligations with us;

 

· decreases in wage and income levels;

 

· increases in unemployment rates;

 

· macroprudential measures;

 

· inflation;

 

· allegations of corruption against political parties, public officials, including allegations made in relation to the "Operation Car Wash" investigation, among others; and

 

· other political, diplomatic, social and economic developments within and outside of Brazil that affect the country.

 

Changes in, or uncertainties regarding, the implementation of the policies listed above could contribute to economic uncertainty in Brazil, thereby increasing the volatility of the Brazilian securities market and reducing the value of Brazilian securities traded internally or abroad.

 

Historically, the country’s political scenario has influenced the performance of the Brazilian economy and political crises have affected the confidence of investors and the general public, which resulted in economic deceleration and heightened volatility in the securities issued abroad by companies based in Brazil.

 

In October 2018, Brazil will have presidential elections and we cannot guarantee that the successor of President Michel Temer will maintain the same economic policies adopted by the previous management. If the Brazilian government decides to make significant changes in the economic policy, as from 2019, these changes may adversely affect our operating results and the market value of our shares, preferred shares ADSs and common shares ADSs, as well as the Brazilian economy in overall.

 

In addition, uncertainties about the current and future government can influence the perception of risk of Brazil among foreign investors, which can in turn adversely affect the market value of our shares, preferred shares ADSs and common shares ADSs. The market value of Brazilian companies became more volatile during the previous presidential elections.

 

Currency exchange variations may have an adverse effect on the Brazilian economy and on our results and financial condition.

 

Fluctuations in the value of the real may impact our business. After an extended period of appreciation, interrupted only in late 2008 as a result of the global crisis, the Brazilian real started to weaken in mid-2011. This trend accelerated during the following four years and was interrupted in 2016. Weaker currency periods make certain local manufacturers (particularly exporters) more competitive but also make managing economic policy, particularly inflation, increasingly difficult, even with a slowdown in growth. A weaker real also adversely impacts companies based in Brazil with U.S. dollar indexed to and/or denominated debt.

 

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As of December 31, 2017, the net exposure in relation to our assets and liabilities denominated in, or indexed to, foreign currencies (primarily U.S. dollars) was 4.4% of our total assets. If the Brazilian currency devaluates or depreciates, we risk losses on our liabilities denominated in, or indexed to, foreign currencies, such as our U.S. dollar denominated long term debt and foreign currency loans, and experience gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated into reais. Accordingly, if our liabilities denominated in, or indexed to, foreign currencies significantly exceed our monetary assets denominated in, or indexed to, foreign currencies, including any financial instruments entered into for hedging purposes, a large devaluation or depreciation of the Brazilian currency could materially and adversely affect our financial results and the market price of our shares, preferred share ADSs and common share ADSs, even if the value of the liabilities has not changed in their originated currency. In addition, our lending transactions depend significantly on our capacity to match the cost of funds indexed to the U.S. dollar with the rates charged to our customers. A significant devaluation or depreciation of the U.S. dollar may affect our ability to attract customers on such terms or to charge rates indexed to the U.S. dollar.

 

Conversely, when the Brazilian currency appreciates, we may incur losses on our monetary assets denominated in, or indexed to, foreign currencies, mainly, the U.S. dollar, and we may experience decreases in our liabilities denominated in, or indexed to, foreign currencies, as the liabilities and assets are translated into reais. Therefore, if our monetary assets denominated in, or indexed to, foreign currencies significantly exceed our liabilities denominated in, or indexed to, foreign currencies, including any financial instruments entered into for hedging purposes, a large appreciation of the Brazilian currency could materially and adversely affect our financial results even if the value of the monetary assets has not changed in their originated currency.

 

If Brazil experiences substantial inflation in the future, our revenues and our ability to access foreign financial markets may be reduced.

 

Brazil has, in the past, experienced extremely high rates of inflation. Inflation and governmental measures to combat inflation had significant negative effects on the Brazilian economy and contributed to increased economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets, which may have an adverse effect on us.

 

The memory of and potential for inflation, is still present, despite the monetary stability achieved in the mid-1990s, which intensified after 1999 as a result of the adoption of inflation targeting norms. There are still concerns that inflation levels might rise again in the future. Current economic policy in Brazil is premised on a monetary regime which the Central Bank oversees in order to assure that the effective rate of inflation keeps in line with a predetermined and previously announced target. In 2017, Brazil’s rates of inflation reached 3.0%, 6.3% in 2016 and 10.7% in 2015, as measured by the Extended Consumer Price Index - “IPCA” (Índice Nacional de Preços ao Consumidor Amplo).

 

The recent government measures to combat inflation include maintaining an expansive monetary policy to reduce the interest rates in order to increase the availability of credit and drive the economic growth. Decreases in the base interest rate (“SELIC”) set by the Central Bank Committee on Monetary Policy (Comitê de Política Monetária – “COPOM”) may have an adverse effect on us by reducing the interest income we receive from our interest-earning assets and lowering our revenues and margins. Increases in SELIC rate may also have an adverse effect on us by reducing the demand for our credit, and increasing our cost of funds, domestic debt expense and the risk of customer default.

 

Future government actions, including the imposition of taxes, intervention in the foreign exchange market and actions to adjust or fix the value of the real, as well as any GDP growth different from expected levels may trigger increases in inflation. If Brazil experiences fluctuations in rates of inflation in the future, our costs and net margins may be affected and, if investor confidence lags, the price of our securities may fall. Inflationary pressures may also affect our ability to access foreign financial and capital markets and may lead to counter-inflationary policies that may have an adverse effect on our business, financial condition, results of operations and the market value of our shares, preferred share ADSs and common share ADSs.

 

Changes in base interest rate by the Central Bank may materially adversely affect our margins and results of operations.

 

The stabilization of inflation allowed the Central Bank to reduce the basic interest rate to the lowest level in history. The base interest rate (SELIC) was 7.0%, 13.75% and 14.25% per annum (“p.a.”) as of December 31, 2017, 2016 and 2015, respectively. Changes in the base interest rate may adversely affect our results of operations as we have assets and liabilities indexed to the SELIC. At the same time, high base interest rates may increase the likelihood of customer delinquency, due to the deceleration in the

 

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economic activity. Similarly, low base interest rates may increase the leverage of borrowers, generating additional risk to financial system.

 

The COPOM adjusts the SELIC rate in order to keep inflation within the range of targets set by the National Monetary Council (CMN) to manage aspects of the Brazilian economy, including the protection of reserves and capital flows. We have no control over the SELIC rate or how often such a rate is adjusted.

 

Developments and the perception of risk in Brazil and other countries, especially emerging market countries, may adversely affect the market price of Brazilian securities, including our shares, preferred share ADSs and common share ADSs.

 

The market value of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors' reactions to developments in these other countries may have an adverse effect on the market value of securities of issuers based in Brazil. Crises in other emerging market countries may diminish investor interest in securities of issuers based in Brazil, including ours, which could adversely affect the market price of our shares, preferred share ADSs and common share ADSs.

 

The exit of the United Kingdom (the “U.K”) from the European Union could adversely impact global economic or market conditions.

 

On June 23, 2016, the U.K. electorate voted in a general referendum in favor of the U.K.’s exit from the European Union (so-called “Brexit”). On March 29, 2017, the U.K. gave formal notice under Article 50 of the Treaty on European Union of its intention to leave the European Union. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The ongoing process of negotiations between the U.K. and the European Union will determine the future terms of the U.K.’s relationship with the European Union, including access to European Union markets, either during a transitional period or more permanently. Brexit could lead to potentially divergent laws and regulations as the U.K. determines which European Union laws to replace or replicate. Uncertainty regarding the terms of Brexit, and its eventual effects once implemented, could adversely affect European or global economic or market conditions and investor confidence. This could, in turn, adversely affect our business and/or the market value of our shares, preferred share ADSs and common share ADSs.

 

Our investments in debts issued by the Brazilian government expose us to additional risks associated with Brazil.

 

We invest in debt securities issued by the Brazilian government. The trading price of these securities is affected by, among other things, market conditions in Brazil, the perception of Brazil and the related perception of the Brazilian government's ability to repay principal and/or make interest payments. Accordingly, adverse developments or trends in any of these areas could have a knock-on adverse effect on the value of our securities portfolio, thereby affecting our financial condition and results of operations.

 

Risks relating to us and the Brazilian banking industry

We may be subject to negative consequences of the judicial process arising from Operation Zelotes, including the filing of a class- action lawsuit.

 

On May 31, 2016, a lawsuit was filed against three members of our Diretoria Executiva, within the so-called "Operação Zelotes” or “Operation Zealots,” which investigates the alleged improper performance of members of the Federal Administrative Tax Court (Conselho Administrativo de Recursos Fiscais – "CARF"). On July 28, 2016, the Federal Public Prosecution Office pressed charges against three officers of our Diretoria Executiva and a former member of our Board of Directors. The charges were received for processing by the Judge of the Tenth Federal District Court of the Federal District of Brazil. The executives have already submitted their respective defenses in the criminal proceeding and moved to dismiss the charges against them. At present, two of the three members of our Organization remain defendants in the proceeding. The process went through discovery phase and the next step is the presentation of closing arguments by the parties. After that, the judge will give a decision on the merits.

 

Our Management conducted an internal evaluation of the records and documents related to the indictment and found no evidence of any unlawful conduct by our representatives. We provided all informations to the competent authorities and regulators in Brazil and abroad.

 

Following news reports of the Operation Zealots, a putative class-action lawsuit was filed in the US District Court for the Southern District 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. On October 21, 2016, the Court-appointed Lead

 

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Plaintiff submitted an Amended Class Action Complaint naming us and the three members of our Diretoria Executiva who were indicted. The lawsuit alleges that investors who purchased our preferred ADSs between April 30, 2012 and July 27, 2016 suffered damages due to a supposed violation of U.S. securities laws.

 

On September 29, 2017, the Court decided to limit the claim to investors who acquired preferred ADSs between August 8, 2014 and July 27, 2016. The discovery phase has started and, because the lawsuit is in a preliminary stage, it is not possible at present to estimate the exposure and not enough elements are available to conduct a risk assessment.

 

We were also summoned by the internal affairs committee of the Brazilian Ministry of Finance to follow an Administrative Procedure to Determine Liability (Processo Administrativo de Respons

The Finanzoo GmbH assumes no liability for the accuracy of the information! All information is provided without warranty. Sources:: www.bundesanzeiger.de, www.sec.gov,


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