20-F 1 bbdform20f_2015.htm FORM 20-F bbdform20f_2015.htm - Generated by SEC Publisher for SEC Filing  

 

 


 
 

 

Table of Contents

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

4

FORWARD‑LOOKING STATEMENTS

4

PART I

5

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

5

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

5

ITEM 3. KEY INFORMATION

5

3.A. Selected Financial Data  

6

3.B. Capitalization and Indebtedness

8

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

8

3.D. Risk Factors

8

ITEM 4. INFORMATION ON THE COMPANY

19

4.A. History and Development of the Company

19

4.B. Business Overview

22

4.C. Organizational Structure

103

4.D. Property, Plants and Equipment

103

ITEM 4A. UNRESOLVED STAFF COMMENTS

103

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

103

5.A. Operating Results

103

5.B. Liquidity and Capital Resources

130

5.C. Research and Development, Patents and Licenses

143

5.D. Trend Information

143

5.E. Off-balance sheet arrangements

143

5.F. Tabular Disclosure of Contractual Obligations

143

5.G. Safe Harbor

143

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

143

6.A. Board of Directors and Board of Executive Officers

143

6.B. Compensation

151

6.C. Board Practices

151

6.D. Employees

155

6.E. Share Ownership

156

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

157

7.A. Major Shareholders

157

7.B. Related Party Transactions

160

7.C. Interests of Experts and Counsel

161

ITEM 8. FINANCIAL INFORMATION

161

8.A. Consolidated Statements and other Financial Information

161

8.B. Significant Changes

163

ITEM 9. THE OFFER AND LISTING

163

9.A. Offer and Listing Details

163

9.B. Plan of Distribution

166

9.C. Markets

166

9.D. Selling Shareholders

168

9.E. Dilution

168

9.F. Expenses of the Issue

168

ITEM 10. ADDITIONAL INFORMATION

168

10.A. Share Capital

168

10.B. Memorandum and Articles of Association

168

10.C. Material contracts

176

10.D. Exchange controls

176

10.E. Taxation

177

10.F. Dividends and Paying Agents

182

10.G. Statement by Experts

182

10.H. Documents on Display

182

10.I. Subsidiary Information

182

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

182

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

186

12.A. Debt Securities

186

12.B. Warrants and Rights

186

 

 

 


 
 
 
 

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, 2015, 2014 and 2013 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 Brazilian Central Bank (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: 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 July 22, 2009, 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 a Deposit Agreement dated as of March 13, 2012, by and among us, The Bank of 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.

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 operation to differ materially from those set out in our forward-looking statements, including, but not limited to, the following:

4 Form 20-F – December 2015


 
 

Table of Contents

PART I 
Form 20-F 

·      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;

·      authorization from Brazilian anti-trust authorities for our acquisition of HSBC Brasil and the integration of the acquired business;

·      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.

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

 

 

5 Form 20-F – December 2015


 
 

Table of Contents


3.A. Selected Financial Data

Form 20-F 
 
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, 2015, 2014, 2013, 2012 and 2011, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and audited by KPMG Auditores Independentes, an independent registered public accounting firm. The data as of and for the years ended December 31, 2015, 2014 and 2013, is derived from our consolidated financial statements included in this annual report. The data for the years ended December 31, 2012 and 2011 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

2015

2015

2014

2013

2012

2011

Data from the Consolidated Statement of Income

 

 

 

 

 

 

Interest and similar income

35,698,742

127,048,252

103,893,096

90,682,625

83,031,854

82,152,096

Interest and similar expenses

(20,065,810)

(71,412,210)

(53,847,329)

(41,382,142)

(39,646,131)

(46,763,775)

Net interest income

15,632,932

55,636,042

50,045,767

49,300,483

43,385,723

35,388,321

Fee and commission income

5,017,526

17,856,873

16,759,980

14,535,723

12,757,131

10,932,237

Fee and commission expenses

(10,173)

(36,203)

(20,724)

(36,041)

(36,391)

(33,978)

Net fee and commission income

5,007,353

17,820,670

16,739,256

14,499,682

12,720,740

10,898,259

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

(2,318,709)

(8,252,055)

(1,933,003)

(5,790,089)

2,110,112

(608,271)

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

(188,769)

(671,810)

(991,894)

(6,100,782)

1,895,974

365,302

Net gains/(losses) on foreign currency transactions

(989,939)

(3,523,095)

(1,244,680)

(1,093,597)

(1,087,595)

2,625,816

Income from insurance and pension plans

1,544,720

5,497,505

5,411,845

6,933,680

1,413,016

3,076,175

Impairment of loans and advances

(4,136,433)

(14,721,152)

(10,291,386)

(9,623,870)

(11,451,383)

(8,239,358)

Personnel expenses

(3,950,110)

(14,058,047)

(13,667,639)

(12,354,418)

(11,559,002)

(11,094,794)

Other administrative expenses

(3,855,677)

(13,721,970)

(12,971,521)

(12,151,537)

(11,803,989)

(11,380,270)

Depreciation and amortization

(826,661)

(2,942,003)

(2,932,687)

(2,740,830)

(2,488,182)

(2,117,666)

Other operating income/(expenses)

(3,649,598)

(12,988,553)

(10,223,083)

(7,622,240)

(8,674,178)

(5,106,092)

Income before income taxes and equity in the earnings of associates

2,269,109

8,075,532

17,940,975

13,256,482

14,461,236

13,807,422

Equity in the earnings of associates and joint ventures

429,360

1,528,051

1,389,816

1,062,687

980,212

803,820

Income before income taxes

2,698,469

9,603,583

19,330,791

14,319,169

15,441,448

14,611,242

Income tax and social contribution

2,426,121

8,634,322

(3,914,313)

(1,833,031)

(4,089,754)

(3,521,800)

Net income for the year

5,124,590

18,237,905

15,416,478

12,486,138

11,351,694

11,089,442

Attributable to shareholders

 

 

 

 

 

 

Controlling

5,095,087

18,132,906

15,314,943

12,395,920

11,291,570

10,958,054

Non-controlling interest

29,503

104,999

101,535

90,218

60,124

131,388

(1) Amounts stated in U.S. dollars have been translated from Brazilian reais at an exchange rate of R$3.5589 per US$1.00, the Central Bank exchange rate on March 31, 2016. 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.

 

Year ended December 31,

R$, except for number of shares

2015

2014

2013

2012

2011

Data on Earnings and Dividends per Share (1)

 

 

 

 

 

Earnings per share (2)

 

 

 

 

 

Common

3.43

2.90

2.34

2.13

2.08

Preferred

3.78

3.19

2.58

2.35

2.28

Dividends/interest on equity per share (3)

 

 

 

 

 

Common

1.15

0.96

0.78

0.73

0.70

Preferred

1.27

1.05

0.85

0.81

0.78

Weighted average number of outstanding shares (1)

 

 

 

 

 

Common

2,520,790,423

2,520,886,223

2,520,886,223

2,520,999,776

2,519,812,451

Preferred

2,510,675,124

2,514,701,048

2,515,928,218

2,518,167,013

2,517,004,933

(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$

2015

2014

2013

2012

2011

Dividends/interest on equity per share (1)

 

 

 

 

 

Common

0.29

0.36

0.33

0.36

0.37

Preferred

0.33

0.40

0.36

0.40

0.41

(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.

 

6 Form 20-F – December 2015


 
 

Table of Contents

3.A. Selected Financial Data 
Form 20-F 


As of December 31,

US$ in
thousands (1)

R$ in thousands

2015

2015

2014

2013

2012

2011

Data from the Consolidated Statement of Financial Position

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and balances with banks

20,256,755

72,091,764

65,430,300

67,450,363

59,901,564

93,722,190

Financial assets held for trading

44,851,906

159,623,449

78,498,311

96,092,523

111,838,502

96,597,075

Financial assets available for sale

33,070,738

117,695,450

120,961,734

67,838,411

81,522,130

45,207,634

Investments held to maturity

11,240,428

40,003,560

25,071,031

23,069,026

3,715,673

4,110,987

Assets pledged as collateral

40,599,601

144,489,921

152,612,689

117,740,225

106,133,299

97,122,080

Loans and advances to banks

10,008,826

35,620,410

72,974,619

78,719,723

92,459,347

72,660,596

Loans and advances to customers, net of impairment

96,903,106

344,868,464

328,064,004

304,121,334

269,021,320

245,251,879

Non-current assets held for sale

350,419

1,247,106

1,006,461

832,546

532,973

445,328

Investments in associates and joint ventures

1,634,023

5,815,325

3,983,780

3,392,847

3,121,386

2,724,721

Property and equipment, net of accumulated depreciation

1,546,668

5,504,435

4,700,518

4,501,967

4,524,827

4,258,456

Intangible assets and goodwill, net of accumulated amortization

2,082,001

7,409,635

7,529,915

8,220,739

7,617,873

7,046,256

Taxes to be offset

1,915,599

6,817,427

6,130,191

5,293,116

5,294,566

4,503,040

Deferred income tax assets

12,756,155

45,397,879

28,388,183

25,661,079

17,913,529

17,051,947

Other assets

11,272,780

40,118,697

35,099,280

35,367,715

35,943,635

30,264,400

Total assets

288,489,006

1,026,703,522

930,451,016

838,301,614

799,540,624

720,966,589

Liabilities

 

 

 

 

 

 

Deposits from banks

82,582,649

293,903,391

279,940,227

243,100,373

220,943,354

204,351,800

Deposits from customers

54,654,556

194,510,100

210,031,505

216,218,057

210,774,263

216,620,050

Financial liabilities held for trading

5,435,873

19,345,729

3,315,573

1,826,382

4,049,982

747,210

Funds from securities issued

30,866,292

109,850,047

85,030,399

57,883,068

51,552,093

41,630,969

Subordinated debt

14,128,786

50,282,936

35,821,666

35,885,003

34,851,714

26,910,091

Insurance technical provisions and pension plans

48,031,959

170,940,940

146,559,220

130,329,023

118,768,720

99,112,321

Other provisions

4,317,153

15,364,317

13,864,401

13,752,577

21,021,109

17,894,158

Current income tax liabilities

781,450

2,781,104

3,602,333

3,082,976

3,288,688

2,694,395

Deferred income tax liabilities

216,960

772,138

808,178

799,824

3,091,667

2,246,508

Other liabilities

21,927,578

78,038,058

69,185,709

63,321,405

59,852,644

49,376,993

Total liabilities

262,943,258

935,788,760

848,159,211

766,198,688

728,194,234

661,584,495

Equity

 

 

 

 

 

 

Share capital

12,110,484

43,100,000

38,100,000

38,100,000

30,100,000

30,100,000

Treasury shares

(121,118)

(431,048)

(298,015)

(269,093)

(197,301)

(183,109)

Capital reserves

10,108

35,973

35,973

35,973

35,973

35,973

Profit reserves

14,026,812

49,920,020

43,765,349

34,122,503

34,189,383

26,732,531

Additional paid-in capital

19,808

70,496

70,496

70,496

70,496

70,496

Other comprehensive income

(1,124,708)

(4,002,724)

(659,501)

(1,102,887)

6,396,736

1,751,059

Retained earnings

589,146

2,096,710

1,153,439

927,314

542,422

632,096

Equity attributable to controlling shareholders

25,510,531

90,789,427

82,167,741

71,884,306

71,137,709

59,139,046

Non-controlling interest

35,217

125,335

124,064

218,620

208,681

243,048

Total equity

25,545,748

90,914,762

82,291,805

72,102,926

71,346,390

59,382,094

Total liabilities and equity

288,489,006

1,026,703,522

930,451,016

838,301,614

799,540,624

720,966,589

(1) Amounts stated in U.S. dollars have been translated from Brazilian reais at an exchange rate of R$3.5589 per US$ 1.00, the Central Bank exchange rate on March 31, 2016. 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 2011, the real depreciated 12.6% against the U.S. dollar, reaching R$1.8758 as of December 31, 2011. In 2012, the real depreciated 8.9% against the U.S. dollar, reaching R$2.0435 as of December 31, 2012. 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.

On March 31, 2016, the exchange rate was R$3.5589 per US$1.00, a 8.9% appreciation against the U.S. dollar, when compared to December 31, 2015. 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.

 

7 Form 20-F – December 2015


 
 

Table of Contents


3.B. Capitalization and Indebtedness

Form 20-F 
 
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:
 

Closing Selling Rate for U.S. dollars – R$ per US$1.00

Period

Period-End

Average (1)

High (1)

Low (1)

2011

1.8758

1.6705

1.8758

1.5563

2012

2.0435

1.9524

2.1074

1.7092

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

October

3.8589

3.2320

3.9729

2.6562

November

3.8506

3.2836

3.9729

2.6562

December

3.9048

3.3314

3.9729

2.6562

2016

 

 

 

 

January

4.0428

3.9738

4.0428

3.9048

February

3.9796

3.9757

4.0428

3.9048

March

3.5589

3.8715

4.0428

3.5589

(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 perception of certain risks and uncertainties relating to Brazil may have a material adverse effect on our financial condition and results of operations.

We conduct the vast majority of our operations in Brazil and, accordingly, our results of operations are significantly impacted by macroeconomic conditions in Brazil. In prior years, we have benefited from Brazil’s generally stable economic environment and relatively strong annual GDP growth. However, starting in 2013, GDP growth in Brazil began to decelerate as a result of a variety of factors including a weakening of the Brazilian real, the increasing level of the current account deficit and persistent inflation.

The decrease in primary balances in recent years and the increase in net public sector debt contributed to a further deterioration in macroeconomic conditions. Other events in the past year have contributed to a further slowdown in economic activities, as such events have adversely affected the perception of risks associated with Brazil. Further, the increase in unemployment rates as a result of macroeconomic conditions created risks to banking activities (especially due to the possibility of increased default rates for individuals and corporations). Moreover, high inflation rates may lead to an increase in basic interest rates in respect of financial assets, which may impact our operations.

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 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 influence commercial decisions. During the course of 2014, 2015 and 2016, these anti-corruption investigations have become wide-ranging and have given rise to various criminal proceedings, which eventually involved not only senior officers and employees of Petrobras but also senior officers of companies in the Brazilian construction sector. In the U.S., the SEC and the U.S. Department of Justice are also conduting 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 financing. 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.

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3.D. Risk Factors 
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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. 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.

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 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 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, elected officials or other public officials, including allegations made in relation to the "Operation Car Wash" investigation; 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 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.

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3.D. Risk Factors

Form 20-F 

 

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 in the last four years and early 2016. The weaker currency made some local manufacturers (particularly exporters) more competitive but also made 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.

As of December 31, 2015, the net exposure in relation to our assets and liabilities denominated in, or indexed to, foreign currencies (primarily U.S. dollars) was 3.3% 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 operations 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, such as 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 2015, Brazil’s rates of inflation reached 10.7%, while in 2014 rates of inflation reached 6.4%, and in 2013 reached 5.9%, as measured by the Extended Consumer Price Index - “IPCA” (Índice Nacional de Preços ao Consumidor Amplo).

Government measures to combat inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and reducing economic growth. As a result, interest rates have fluctuated significantly. Increases 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 demand for our credit, and increasing our cost of funds, domestic debt expense and the risk of customer default. Decreases in the SELIC rate may also have an adverse effect on us by decreasing the interest income we earn on our interest-earning assets and lowering our revenues and margins.

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 beyond 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 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.

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3.D. Risk Factors 
Form 20-F 

 

Changes in base interest rates by the COPOM may materially adversely affect our margins and results of operations.

The COPOM establishes the base interest rates for the Brazilian banking system (SELIC). The base interest rate was 14.25%, 11.75% and 10.0% per annum (“p.a.”) as of December 31, 2015, 2014 and 2013, 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 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 manage aspects of the Brazilian economy, including the protection of reserves and capital flows. We have no control over the SELIC rate set by the COPOM or how often such 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 global financial crisis has had significant consequences worldwide, including in Brazil, such as capital markets volatility, unavailability of credit, higher interest rates, a general slowdown of the world economy and volatile exchange rates, among others, which had, and may continue to have in the future, directly or indirectly, an adverse effect on our business, financial condition, results of operations, the market price of securities of issuers based in Brazil, including ours, and our ability to finance our operations.
Risks relating to us and the Brazilian banking industry

It may take longer than we expect for us to receive the authorization from the Brazilian anti-trust authorities for our acquisition of HSBC Brasil or we may not be able to successfully integrate the acquired business of HSBC Brasil.

On August 3, 2015, we announced to the market that we had entered into a share purchase and sale agreement with HSBC Latin America Holdings for the acquisition of its Brazilian operations (“HSBC Brasil”). The acquisition was approved by the Central Bank on December 31, 2015 and, as of the date of this annual report, the acquisition is pending approval by the Brazilian anti-trust authorities.

The acquisition and the integration of HSBC Brasil involves certain risks including the risk that:

·      in integrating new networks, information systems, personnel, financial and accounting systems, risk and other management systems, financial planning and reporting, products and customer bases into our existing business, we may run into difficulties or unexpected costs and place additional demands on our Senior Management, information systems, head office and back office operations and marketing resources;

·      unexpected events may occur, such as asset losses and/or recognition of liabilities or contingencies relating to the acquired business;

·      antitrust and other regulatory authorities may impose restrictions or limitations on the terms of the acquisition, require disposition of certain assets or businesses or withhold their approval of the transaction; and

·      delays in the integration process may cause us to incur greater operating expenses than expected with respect to the acquired business.

 

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3.D. Risk Factors

Form 20-F 
 
In addition, the expected operation and financial synergies and other benefits from the acquisition may not be fully achieved. If we fail to achieve the business growth opportunities and other benefits from this acquisition, or incur greater integration costs than we have estimated, our results of operations and financial condition may be adversely affected.

We may experience increases in our level of past due loans as our loans and advances portfolio becomes more seasoned.

Our loans and advances portfolio has grown over recent years. Any corresponding rise in our level of non-performing loans and advances may lag behind the rate of loan growth, as loans typically do not have payments falling due for a short period of time after their origination. Levels of past due loans are normally higher among our individual clients than our corporate clients.

As of December 31, 2015, our provision for impairment of loans and advances increased by 20.5% when compared to December 31, 2014, while our portfolio of loans and advances to customers grew by 6.1% over that same period.

As of December 31, 2014, our provision for impairment of loans and advances increased by 6.4% when compared to December 31, 2013, while our portfolio of loans and advances to customers grew by 7.8% over that same period.

In 2015, our delinquency ratio increased to 4.1%, due to the weakening economic environment in the period. In 2014 and 2013 and, our delinquency ratios, calculated based on information prepared in accordance with accounting practices adopted in Brazil (“BR GAAP”), which is defined as the total operations overdue for over 90 days in relation to the total portfolio of loans and advances, remained stable at 3.5%.

Rapid loan growth may also reduce our ratio of non-performing loans to total loans until growth slows or the portfolio becomes more seasoned. Adverse economic conditions and a slower growth rate for our loans and advances to customers may result in increases in our impairment of loans and advances, charge-offs and our ratio of non-performing loans and advances to total loans and advances, which may have an adverse effect on our business, financial condition and results of operations.

Adverse conditions in the credit and capital markets may adversely affect our ability to access funding in a cost effective and/or timely manner.

Volatility and uncertainties in the credit and capital markets have generally decreased liquidity, with increased costs of funding for financial institutions and corporations. These conditions may impact our ability to replace, in a cost effective and/or timely manner, maturing liabilities and/or access funding to execute our growth strategy. If we are forced to delay raising capital or pay unattractive interest rates in order to obtain capital, our financial condition and results of operations may be adversely affected.

The increasingly competitive environment in the Brazilian bank and insurance industries may negatively affect our business prospects.

The markets for financial, banking and insurance services in Brazil are highly competitive. We face significant competition in all of our principal areas of operation from other large banks and insurance companies, both public and private based in Brazil and internationally.

Competition has increased as a result of consolidations among financial institutions in Brazil and as a result of regulations by the National Monetary Committee (Conselho Monetário Nacional), or “CMN”, that facilitate customers' ability to switch business between banks. The increased competition may materially and adversely affect us by, among other things, limiting our ability to retain our existing consumer base, increase our customer base and expand our operations, reducing our profit margins on banking and other services and products we offer, and limiting investment opportunities.

The increased competition may negatively affect our business results and prospects by, among other things:

·      limiting our ability to increase our customer base and expand our operations;

·      reducing our profit margins in the banking, insurance, leasing and other services and products offered by us; and

·      increasing competition for foreign investment opportunities.

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3.D. Risk Factors 
Form 20-F 

Losses on our investments in financial assets held for trading and available for sale may have a significant impact on our results of operations and are not predictable.

The value of certain of our investments in financial assets may decline significantly due to volatile financial markets and may fluctuate over short periods of time. As of December 31, 2015, investments in financial assets held for trading and available for sale represented 27.0% of our assets, and realized gains and losses or unrealized gains and losses for financial assets held for trading and available for sale have had and may continue to have a significant impact on the results of our operations.The amounts of such gains and losses, which we record when investments in financial assets are sold, or in certain limited circumstances when they are recognized at fair value, may fluctuate considerably from period to period. The level of fluctuation depends, in part, upon the fair value of the financial assets, which in turn may vary considerably, and our investment policies. We cannot predict the amount of realized gain or loss for any future period, and our Management believes that variations from period to period have no practical analytical value. Furthermore, any gains on our investment portfolio may not continue to contribute to net income at levels consistent with recent periods, and we may not successfully realize the appreciation in our consolidated investment portfolio or any portion thereof.

We may incur losses associated with counterparty exposures.

We face the possibility that a counterparty will be unable to honor its contractual obligations. These counterparties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, as a result of entering into swap or other derivative contracts under which counterparties have obligations to make payments to us, executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Such counterparty risk is more acute in complex markets where the risk of failure of counterparties is higher.

Our trading activities and derivatives transactions may produce material losses.

We engage in the trading of securities, buying debt and equity securities principally to sell them in the near term with the objective of generating profits on short-term differences in price. These investments could expose us to the possibility of material financial losses in the future, as securities are subject to fluctuations in value, which may generate losses. In addition, we enter into derivatives transactions to manage our exposure to interest rate and exchange rate risk. Such derivatives transactions are designed to protect us against increases or decreases in exchange rates or interest rates.

The government regulates the operations of Brazilian financial institutions and insurance companies. Changes in existing laws and regulations or the imposition of new laws and regulations may negatively affect our operations and revenues.

Brazilian banks and insurance companies, including our banking and insurance operations, are subject to extensive and continuous regulatory review by the government. We have no control over government regulations, which govern all facets of our operations, including the imposition of:

·      minimum capital requirements;

·      compulsory deposit/reserve requirements;

·      fixed assets investment limitations;

·      lending limits and other credit restrictions;

·      accounting and statistical requirements;

·      minimum coverage; and

·      mandatory provisioning policies.

The regulatory structure governing banks and insurance companies based in Brazil is continuously evolving. Existing laws and regulations could be amended, the manner in which laws and regulations are enforced or interpreted could change, and new laws or regulations could be adopted. Such changes could materially adversely affect our operations and our revenues.

In particular, the government has historically enacted regulations affecting financial institutions in an effort to implement its economic policies. These regulations are intended to control the availability of credit and reduce or increase consumption in Brazil. These changes may adversely affect us because our returns on compulsory deposits are lower than those we obtain on our other investments. Regulations issued by the Central Bank are not subject to a legislative process. Therefore those regulations can be enacted and implemented in a very short period of time, thereby affecting our activities in sudden and unexpected ways.

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3.D. Risk Factors

Form 20-F 

A majority of our common shares are held, directly and indirectly, by one shareholder and none of our board members are independent; accordingly, their interests may conflict with those of our other investors.

As of December 31, 2015, Fundação Bradesco directly and indirectly held 56.7% of our common shares. As a result, Fundação Bradesco has the power, among other things, to prevent a change in control of our company, even if a transaction of that nature would be beneficial to our other shareholders, as well as to approve related party transactions or corporate reorganizations. Under the terms of Fundação Bradesco’s by-laws, members of our Diretoria Executiva, or of our Board of Executive Officers that have been working with us for more than ten years serve as members of the Board of Trustees of Fundação Bradesco. The Board of Trustees has no other members.

Our Board of Directors has 8 members, none of whom are considered independent in accordance with the criteria included in Brazilian Corporate Law, which provides that only individuals may be appointed to a company's board of directors. Accordingly, there is no legal or statutory provision requiring us to have independent directors. As a result, the interests of our Board of Directors may not always be in line with the interests of our common shareholders and these holders do not have the same protections they would have if most of the directors were independent. Furthermore, our directors are associated to Fundação Bradesco and circumstances may arise in which the interests of Fundação Bradesco, and its associates, conflict with our other investors’ interests.

Fundação Bradesco and our Board of Directors could make decisions in relation to our policy towards acquisitions, divestitures, financings or other transactions, which may be contrary to the interests of holders of common shares and have a negative impact on the interests of holders of common shares. For more information on our shareholders, see “Item 7.A. Major Shareholders”.

Changes in regulations regarding reserve and compulsory deposit requirements may reduce operating margins.

The Central Bank has periodically changed the level of compulsory deposits that financial institutions in Brazil are required to abide by.

Compulsory deposits generally yield lower returns than our other investments and deposits because:

·      a portion of our compulsory deposits with the Central Bank do not bear interest; and

·      a portion of our compulsory deposits must finance a federal housing program, the Brazilian rural sector, low income customers and small enterprises under a program referred to as a "microcredit program."

Rules related to compulsory deposits have been changed from time to time by the Central Bank, as described in "Item 4.B. Business Overview - Deposit-taking activities".

As of December 31, 2015, our compulsory deposits in connection with demand, savings and time deposits and additional compulsory deposits were R$54.8 billion. Reserve requirements have been used by the Central Bank to control liquidity as part of monetary policy in the past, and we have no control over their imposition. Any increase in the compulsory deposit requirements may reduce our ability to lend funds and to make other investments and, as a result, may adversely affect us. For further information on compulsory deposits, see "Item 4.B. Business Overview- Deposit - taking activities".

Changes in taxes and other fiscal assessments may adversely affect us.

The government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified. There can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing portfolio of loans and advances.

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The Brazilian Constitution used to establish a ceiling on loan interest rates and if the government enacts new legislation with similar effect in the future, our results of operations may be adversely affected.

Article 192 of the Brazilian Constitution, enacted in 1988, established a 12.0% p.a. ceiling on bank loan interest rates. However, since the enactment of the Brazilian Constitution, this rate had not been enforced, as the regulation regarding the ceiling was pending. The understanding that this ceiling is not yet in force has been confirmed by Súmula Vinculante No. 7, a final binding decision enacted in 2008 by the Brazilian Supreme Court (STF) in accordance with such Court’s prior understanding on this matter. Since 1988, several attempts were made to regulate the limitation on loan interest, and especially bank loan interest rates, but none of them were implemented nor have been confirmed by Brazilian superior courts.

On May 29, 2003, Constitutional Amendment No. 40 (EC 40/03) was enacted and revoked all subsections and paragraphs of Article 192 of the Brazilian constitution. This amendment allows the Brazilian Financial System, to be regulated by specific laws for each sector of the system rather than by a single law relating to the system as a whole.

With the enactment of Law No. 10,406/02, as amended, (the “Civil Code”), unless the parties to a loan have agreed to use a different rate, in principle the interest rate ceiling has been pegged to the base rate charged by the National Treasury Office (Tesouro Nacional). There is currently an uncertainty as to whether such base rate which is referred to in the Civil Code is: (i) the Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia) rate, which we call the “SELIC” rate, the base interest rate established by COPOM, which was 14.25% p.a. as of December 31, 2015 and, on March 31, 2016, was also 14.25% p.a. or (ii) the 12.0% a.a. rate established in Article 161, paragraph 1, of Law No. 5,172, of October 25, 1966, as amended (“Brazilian Tax Code”), which is the default interest rate due when taxes are not paid on time.

Any substantial increase or decrease in the interest rate ceiling could have a material effect on the financial condition, results of operations or prospects of financial institutions based in Brazil, including us.

Additionally, certain Brazilian courts have issued decisions in the past limiting interest rates on consumer financing transactions that are considered abusive or excessively onerous in comparison with market practice. Brazilian courts’ future decisions as well as changes in legislation and regulations restricting interest rates charged by financial institutions could have an adverse effect on our business.

Our losses in connection with insurance claims may vary from time to time. Differences between the losses from actual claims, underwriting and reserving assumptions and the related provisions may have an adverse effect on us.

The results of our operations significantly depend upon the extent to which our actual claims are consistent with the assumptions we used to assess our potential future policy and claim liabilities and to price our insurance products. We seek to limit our responsibility and price our insurance products based on the expected payout of benefits, calculated using several factors, such as assumptions for investment returns, mortality and morbidity rates, expenses, persistency, and certain macroeconomic factors, such as inflation and interest rates. These assumptions may deviate from our prior experience, due to factors beyond our control such as natural disasters (floods, explosions and fires), man-made disasters (riots, gang or terrorist attacks) or changes in mortality and morbidity rates as a result of advances in medical technology and longevity, among others. Therefore, we cannot determine precisely the amounts that we will ultimately pay to settle these liabilities, when these payments will need to be made, or whether the assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for payment of these liabilities. These amounts may vary from the estimated amounts, particularly when those payments do not occur until well in the future, which is the case with certain of our life insurance products. Accordingly, the establishment of the related provisions is inherently uncertain and our actual losses usually deviate, sometimes substantially, from such estimated amounts. To the extent that actual claims are less favorable than the underlying assumptions used in establishing such liabilities, we may be required to increase our provisions, which may have an adverse effect on our financial condition and results of operations.

We are jointly liable for claims of our customers if our reinsurers fail to meet their obligations under the reinsurance contracts.

The purchase of reinsurance does not hold us harmless against our liability towards our clients if the reinsurer fails to meet its obligations under the reinsurance contracts. As a result, reinsurers' insolvency or failure to make timely payments under these contracts could have an adverse effect on us, given that we remain liable to our policyholders.

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3.D. Risk Factors

Form 20-F 

 

A failure in, or breach of, our operational, security or technology systems could temporarily interrupt our businesses, increasing our costs and causing losses.

Although we have high profile information security controls, and continue to invest in the infrastructure, operations and crisis management in place, our data processing systems, operating systems, and business, financial, accounting, or other systems and facilities may stop operating properly for a limited period of time or become temporarily disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control, such as: electrical or telecommunications outages; breakdowns, systems failures or other events affecting third parties with which we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or service providers; events arising from local and larger-scale political or social matters and cyber attacks.

Due to the nature of our operations, we heavily depend on technology, and therefore are exposed to viruses, malicious software and other forms of cyber attacks, which may unexpectedly impair the operation of systems that manage and store sensitive and/or confidential information on our operations.

We and other financial institutions have already experienced attacks on computer systems. Although we have to date not experienced any material loss of data from these attacks, it is possible, given the use of new technologies and increasing reliance on the Internet, the varying nature of such attacks, that we may not be able to effectively anticipate and prevent such attacks in the future.

Cyber attacks and temporary interruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, could result in customer attrition, regulatory fines, penalties or intervention, reimbursement or other compensation costs.

The Brazilian Supreme Court is currently deciding cases relating to the application of inflation adjustments which may increase our costs and cause losses.

The Brazilian Supreme Court (Supremo Tribunal Federal, or “STF”), which is the highest court in Brazil and is responsible for judging constitutional matters, is currently deciding on whether savings account holders have the right to obtain adjustments for inflation related to their deposits due to the economic plans Cruzado, Bresser, Verão, Collor I and Collor II, implemented in the 1980s and 1990s, before the Plano Real, in 1994. The trial began in November 2013, but was recently interrupted. According to the institutions representing the account holders, banks misapplied the monetary adjustments when those economic plans were implemented, and should be required to indemnify the account holders for the non-adjustment of those amounts.

In connection with a related sentence, the Superior Court of Justice (Superior Tribunal de Justiça, or “STJ”), which is the highest court responsible for deciding on federal laws, decided, in May 2014, that the starting date for counting default interest for compensating savings account holders must be the date of summons of the related lawsuit (rather than the date of settlement of the judgment), therefore increasing the amount of possible losses for the affected banks in the event of an unfavorable decision by the STF.

We cannot predict the outcome of this case. However, depending on the decision by the STF, banks (including ourselves) might incur material costs which could cause losses for us.

Risks relating to our shares, preferred share ADSs and common share ADSs.

The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders.

The voting rights of preferred share ADS holders and common share ADS holders are governed by the Deposit Agreements. Those Deposit Agreements provide that the depositary bank shall mail voting instructions to holders only if we authorize and direct the depositary bank to do so. If we do not provide that authorization and direction to the depositary bank, holders of preferred share ADSs and common share ADSs will not be able to vote at our meetings, unless they surrender their preferred share ADSs or common share ADSs and receive the underlying preferred shares or common shares, as applicable, in accordance with the terms of the applicable Deposit Agreement.

In addition, there are practical limits on the ability of preferred share ADS and common share ADS holders to exercise any vote due to the additional procedural steps involved in communicating with such holders. For example, our shareholders will either be notified directly or through notification published in Brazilian newspapers and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. In contrast, preferred share ADS holders and common share ADS holders will not receive notice directly from us and cannot vote in person at the meeting. Instead, in accordance with the Deposit Agreements, the depositary bank will, if authorized and directed by us, send any notice of meetings of holders received by it from us to holders of preferred share ADSs and common share ADSs, together with a statement as to the manner in which voting instructions may be given by holders. To exercise any such ability to vote, preferred share ADS and common share ADS holders must then instruct the depositary bank how to vote with the shares represented by their preferred share ADSs or common share ADSs. Because of this extra step involving the depositary bank, if and when we authorize and direct the depositary bank to mail voting information to preferred share ADS holders and common share ADS holders, the process for voting will take longer for preferred share ADS and common share ADS holders than for holders of our shares. Preferred share ADSs and common share ADSs for which the depositary bank does not receive voting instructions in good time will not be able to vote at a meeting.

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3.D. Risk Factors 
Form 20-F 

Under Brazilian corporate law, holders of preferred shares have limited voting rights, accordingly, holders of preferred share ADSs will have similar limitations on their ability to vote.

Under Brazilian corporate law (Law No. 6,404/76, as amended by Law No. 9,457/97 and Law No. 10,303/01, which we refer to collectively as "Brazilian Corporate Law") and our Bylaws, holders of our preferred shares are not entitled to vote at our shareholders' meetings, except in limited circumstances (see "Item 10.B. Memorandum and Articles of Association – Organization – Voting Rights," for further information on voting rights of our shares). As such, in contrast to holders of common shares, holders of preferred shares are not entitled to vote on corporate transactions, including any proposed merger or consolidation with other companies, among other things.

As discussed above under "The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders," preferred share ADS holders will only be able to vote if we authorize and direct the depositary bank accordingly. As a result of the fact that holders of preferred shares have limited voting rights, any ability to vote that we may extend to holders of preferred share ADSs corresponding to preferred shares pursuant to the applicable Deposit Agreement would be similarly limited.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell shares underlying the preferred share ADSs and common share ADSs at the price and time you desire.

Investing in securities that trade in emerging markets such as Brazil often involves greater risk than investing in securities of issuers in more developed countries, and these investments are generally considered more speculative in nature. The Brazilian securities market is substantially smaller and less liquid than major securities markets, such as the United States, and may be more volatile. Although you are entitled to withdraw our shares underlying the preferred share ADSs and common share ADSs from the depositary bank at any time, your ability to sell our shares underlying the preferred share ADSs and common share ADSs at a price and time acceptable to you may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets such as the United States or other countries. The ten largest companies in terms of market capitalization accounted for 51.5% of the aggregate market capitalization of the Bolsa de Valores, Mercadorias e Futuros (“BM&FBOVESPA”) in December 2015.

Our shares, preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend.

 Holders of our shares and, consequently, our preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend. Pursuant to the Deposit Agreements, if the depositary (as holder of the common shares and preferred shares underlying the common share ADSs and preferred share ADSs,) receives any cash dividend or distribution from us, it shall distribute a corresponding U.S. dollar amount, net of depositary fees and certain withholding tax adjustments as described in the Deposit Agreements, to holders of our common share ADSs and preferred share ADSs as promptly as practicable. However, if we do not pay dividends to holders of our common shares or preferred shares then there will be no payment of dividends to holders of our common share ADSs or preferred share ADSs.

Pursuant to our Bylaws, our preferred shares are entitled to dividends 10.0% higher than those of our common shares. Although under our current Bylaws we are obligated to pay our shareholders at least 30.0% of our annual adjusted net income, the shareholders attending our annual general shareholders’ meeting may decide to suspend this mandatory distribution of dividends if the Board of Directors advises that payment of the dividend is not compatible with our financial condition. Neither our Bylaws nor Brazilian law

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3.D. Risk Factors

Form 20-F 

specify the circumstances in which a distribution would not be compatible with our financial condition, and our controlling shareholders have never suspended the mandatory distribution of dividends. However, Brazilian law provides that a company need not pay dividends if such payment would endanger the existence of the company or harm its normal course of operations.

On March 1, 2013, CMN Resolution No. 4,193/13 was issued in an effort to further implement the Basel III Accord in Brazil. Pursuant to such rule, a restriction of dividend and interest payments on equity may be imposed by the Central Bank in the event of non-compliance with the additional capital requirements established by the Central Bank, as further described in "Item 5.B. Liquidity and Capital Resources - Capital adequacy and leverage.”

As a holder of preferred share ADSs and common share ADSs you will have fewer and less well‑defined shareholders' rights than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our Bylaws and Brazilian Corporate Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Brazil. Under Brazilian Corporate Law, you and the holders of our shares may have fewer and less well‑defined rights to protect your interests relative to actions taken by our Board of Directors or the holders of our common shares than under the laws of other jurisdictions outside Brazil.

Although Brazilian Corporate Law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or markets in certain other jurisdictions. In addition, in Brazil, self‑dealing and the preservation of shareholder interests may be less heavily regulated and what regulations are in place may not be as strictly enforced in Brazil as in the United States, which could potentially disadvantage you as a holder of our shares underlying preferred share ADSs and common share ADSs. For example, compared to Delaware general corporation law, Brazilian Corporate Law and practices have less detailed and well‑established rules and judicial precedents relating to review of management decisions under duty of care and duty of loyalty standards in the context of corporate restructurings, transactions with related parties, and sale-of-business transactions. In addition, shareholders in Delaware companies must hold 5.0% of the outstanding share capital of a corporation to have valid standing to bring shareholder derivative suits, while shareholders in companies based in Brazil do not normally have valid standing to bring a class action.

It may be difficult to bring civil liability causes against us or our directors and executive officers.

We are organized under the laws of Brazil, and all of our directors and executive officers reside outside the United States. In addition, a substantial portion of our assets and most or all of the assets of our directors and executive officers are located in Brazil. As a result, it may be difficult for investors to effect service of process within the United States or other jurisdictions outside of Brazil on such persons or to enforce judgments against them, including any based on civil liabilities under the U.S. federal securities laws.

If we issue new shares or our shareholders sell shares in the future, the market price of your preferred share ADSs and common share ADSs may be reduced.

Sales of a substantial number of shares, or the belief that this may occur, could decrease the market price of our shares, preferred share ADSs and common share ADSs, by diluting their value. If we issue new shares or our existing shareholders sell the shares they hold, the market price of our shares and therefore the market price of our preferred share ADSs and common share ADSs, may decrease significantly.

Payments on the preferred share ADSs and common share ADSs may be subject to U.S. withholding under FATCA.

The United States has enacted rules, commonly referred to as “FATCA,” that generally impose a new reporting and withholding regime with respect to certain U.S. source payments (including interest and dividends), gross proceeds from the disposition of property that can produce U.S. source interest and dividends and certain payments made by entities that are classified as financial institutions under FATCA. The United States has entered into an intergovernmental agreement regarding the implementation of FATCA with Brazil (the “IGA”). Under the current terms and conditions of the IGA, we do not expect payments made on or with respect to the preferred share ADSs or common share ADSs to be subject to withholding under FATCA. However, significant aspects of when and how FATCA will apply remain unclear, and no assurance can be given that withholding under FATCA will not become relevant with respect to payments made on or with respect to the preferred share ADSs or common share ADSs in the future. Prospective investors should consult their own tax advisors regarding the potential impact of FATCA. For more information about FATCA, see "Item 4.B. Business Overview-Regulation and Supervision."

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ITEM 4. INFORMATION ON THE COMPANY 
Form 20-F 

You may be unable to exercise preemptive rights relating to our shares.

You will not be able to exercise preemptive rights relating to our shares underlying your preferred share ADSs and common share ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Similarly, we may from time to time distribute rights to our shareholders. The depositary bank will not offer rights to you as a holder of the preferred share ADSs and common share ADSs unless the rights are either registered under the Securities Act or are subject to an exemption from the registration requirements.

We are not obligated to file a registration statement with respect to the shares or other securities relating to these rights, and we cannot assure you that we will file any such registration statement. Accordingly, you may receive only the net proceeds from the sale by the depositary bank of the rights received in respect of the shares represented by your preferred share ADSs and common share ADSs or, if the preemptive rights cannot be sold, they will be allowed to lapse. You may also be unable to participate in rights offerings by us, and your holdings may be diluted as a result.

If you exchange your preferred share ADSs or common share ADSs for their underlying shares, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.

Brazilian law requires that parties obtain registration with the Central Bank in order to remit foreign currencies, including U.S. dollars, abroad. The Brazilian custodian for the shares must obtain the necessary registration with the Central Bank for payment of dividends or other cash distributions relating to the shares or after disposal of the shares. If you exchange your preferred share ADSs or common share ADSs for the underlying shares, however, you may only rely on the custodian's certificate for five business days from the date of exchange. Thereafter, you must obtain your own registration in accordance with the rules of the Central Bank and the CVM, in order to obtain and remit U.S. dollars abroad after the disposal of the shares or the receipt of distributions relating to the shares. If you do not obtain a certificate of registration, you may not be able to remit U.S. dollars or other currencies abroad and may be subject to less favorable tax treatment on gains with respect to the shares. For more information, see "Item 10.D. Exchange Controls."

If you attempt to obtain your own registration, you may incur expenses or suffer delays in the application process, which could delay your receipt of dividends or distributions relating to the shares or the return of your capital in a timely manner. The custodian's registration and any certificate of foreign capital registration you may obtain may be affected by future legislative changes. Additional restrictions applicable to you, to the disposal of the underlying shares or to the repatriation of the proceeds from disposal may be imposed in the future.

 

ITEM 4. INFORMATION ON THE COMPANY

 

4.A. History and Development 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 operations, 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 and small companies and major local and international corporations and institutions. Our products and services

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4.A. History and Development of the Company

Form 20-F 

comprise 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, 2015, we had, on a consolidated basis:

·   R$1.0 trillion in total assets;

·   R$370.3 billion in total loans and advances to clients;

·   R$195.8 billion in total deposits;

·   R$90.9 billion in equity, including non-controlling interest;

·   R$170.9 billion in technical reserves for our insurance and pension plan business;

·   R$58.3 billion in foreign trading financing;

·   44.2 million insurance policyholders;

·   26.0 million checking account holders;

·   60.1 million savings accounts;

·   3.2 million capitalization bonds holders;

·   2.4 million pension plan holders;

·   1,562 Brazilian corporate groups and multinational companies in Brazil as ”Corporate” customers;

·   an average of 30.3 million daily transactions, including 1.5 million in our 4,507 branches and 28.8 million through Digital Channels, such as Bradesco Celular, Internet, Automatic Teller Machines, or ATMs, and telephone (Fone Fácil);

·      a nationwide network consisting of 4,507 branches and 4,247 service centers and electronic in-company service centers, 31,527 ATMs of our own network, and 18,940 ATMs under the Banco24Horas brand for cash withdrawals, obtaining statements and account balance information, loans, collections, transfers between Bradesco accounts and accounts at other banks, consultation of proof of wages, consultation of checks paid and cleared, proof of life to National Social Security Institute (“INSS” - Instituto Nacional do Seguro Social) and pre-paid card services. As of December 31, 2015, we had 92,861 employees. For more information on our employees, see “Item 6.D. Employees;” and

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

 

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4.A. History and Development of the Company 
Form 20-F 

Recent acquisitions

In July 2015, we signed a purchase contract for the acquisition of 100% of the share capital of HSBC Brasil. With the acquisition, we will take over all operations of HSBC in Brazil, including retail, insurance and asset management, as well as all branches and clients.The agreed price is approximately US$5.2 billion and will be adjusted by HSBC Brasil shareholders’ equity variation as from December 2014 and will be paid on the date of completion of the transaction.The acquisition allows us to gain in scale and optimize our platforms, while increasing national coverage, consolidating our leadership in the number of branches in several states, and strengthening our presence in the high-income segment. The acquisition will also enable us to expand our operations, increasing the range of products that are offered in Brazil, especially in the insurance, credit card and asset management segments. The Central Bank approved the acquisition in December 2015. The conclusion is subject to the approval of other regulatory agencies, and our compliance with other legal formalities.

In January 2014, Bradesco Saúde S.A. (“Bradesco Saúde”) concluded a transaction to indirectly acquire a 6.5% interest in the equity and voting capital of Odontoprev S.A., disclosed to the market in October 2013. As a result of this acquisition, Bradesco Saúde raised its interest in the equity and voting capital of Odontoprev S.A. (“Odontoprev”), from 43.5% to approximately 50.0%. Odontoprev was already being consolidated based on control obtained through its shareholders agreement.

Other strategic alliances

In July 2014, we, together with Banco do Brasil, Itaú Unibanco, Banco Santander, HSBC Brasil, Caixa Econômica Federal (“Caixa”) and Banco Citibank, signed a new shareholders’ agreement with Tecban, which establishes the consolidation of their external customer-service network by the Banco24horas Network. This agreement was approved by the relevant regulatory agencies and became effective in November 2014.

In July 2014, we announced the formalization of a strategic partnership with IBM Indústria Máquinas e Serviços Ltda. (“IBM”). Following execution of this agreement, the hardware and software supporting activities, currently provided by Scopus Tecnologia Ltda. (“Scopus Serviços”), will now be provided by IBM, which will take over the operational structure of Scopus Serviços and all supporting and maintenance agreements signed between Scopus Serviços and their other customers.

The information technology solution and innovation advisory activities currently developed by Scopus Serviços will now be served by Scopus Soluções em TI S.A., (“Scopus Soluções”) whose capital stock will continue to be fully held by us, which, in turn, will continue to hold the ownership of the Scopus brand.

In May 2014, we, together with, Banco do Brasil incorporated a company named Livelo S.A. (“LIVELO”), whose purpose is to exploit a coalition rewards program, enabling customers to earn and redeem points from a number of partners.

In April 2014, we, together with Banco do Brasil, via our joint venture Companhia Brasileira de Soluções e Serviços (“CBSS”), and in partnership with Cielo, created the company STELO S.A. (“STELO”), an electronic payment company responsible for managing, operating and exploring the payment facilitator industry geared towards e-commerce, as well towards digital portfolio businesses.

Bradesco Asset Management (“BRAM”) has developed important alliances with internationalization as part of its strategy, expanding the number of fund platforms through which our products are distributed in the European, Latin American and Asian markets. We have entered into advisory agreements for the offering of global equity funds, with a focus on Europe, Latin America (less Brazil), Australasia and recently Japan. In the United States, by means of its BRAM US LLC subsidiary, BRAM has been marketing funds directed at US investors. In Japan MUAM - Mitsubishi UFJ Asset Management, our partner, offers retail investors Fixed Income Funds and Equity Funds to invest in the Brazilian market. In Europe, BRAM offers overseas investors funds domiciled in Luxemburg with different strategies under the Bradesco Global Funds family, launched in 2009 with a sales team based in London.

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:

 

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Form 20-F 
 
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, Hong Kong and Tokyo.

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. 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.

Focus on corporate responsibility and sustainability as core principles of our business.        

We believe that corporate responsibility and sustainability are fundamental to our operations and have incorporated the following three principles into our overall strategy: a sustainable financial position, responsible management and investments in social and environmental projects. We are always seeking to develop and incorporate sustainable finance concepts into the process of designing and managing our products and services and in our relationships with clients and suppliers. We believe our admission to the sustainability indexes of both the New York Stock Exchange and BM&FBOVESPA represents strong recognition of our success in implementing sustainability principles. As part of this strategy, we will continue to apply social-environmental risk analysis in financing and investment activities in accordance with international practices, including the Equator Principles which we signed up to in 2004. Corporate responsibility has always been one of our core principles as evidenced by the significant investments we have made in education since 1956 through Fundação Bradesco, which is present in every state in Brazil and the Federal District, with 40 schools primarily located in regions of high socioeconomic deprivation. Fundação Bradesco offers quality formal education, free of charge, to children and young people from early childhood to high school as well as professional high school education for young people and adults, as well as initial and continuing education for employment and income.

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4.B. Business Overview 
Form 20-F 

4.B. 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 accounting practices adopted in Brazil ("BR GAAP") and non-financial metrics compiled on different bases. Hence, the segment data were prepared under BR GAAP and the consolidated financial statements were compiled under IFRS. 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, 2015 compared with the year ended December 31, 2014” and "Item 5.A. Operating Results - Results of operations for the year ended December 31, 2014 compared with the year ended December 31, 2013.”

As of December 31, 2015, according to the sources cited in parentheses below, we were:

·      one of the leading banks in terms of savings deposits, with R$91.9 billion, accounting for 13.8% of Brazil's total savings deposits (Central Bank);

·      one of the leaders in BNDES onlending, with R$8.1 billion in disbursements (BNDES);

·      the leader in volume of bank payment processing and collection services in Brazil (Central Bank);

·      one of the leaders in automobile financing loans, with a market share of 13.3% (Central Bank);

·      the leading bank in benefit payments from the INSS, with over 8.9 million INSS retirees, beneficiaries and other pensioners, accounting for 27.5% of the total number of INSS beneficiaries (INSS);

·      one of the leaders in leasing operations in Brazil, with an outstanding amount of R$3.1 billion; through our subsidiary Bradesco Leasing S.A. Arrendamento Mercantil, or “Bradesco Leasing” (ABEL);

·      one of the leaders in the asset management industry, through our subsidiaries BRAM, with R$395.8 billion in assets under management; and BEM Distribuidora de Títulos e Valores Mobiliários Ltda., or “BEM DTVM,” specialized in trust, custody and controllership of asset management services, with R$158.8 billion in assets under management (ANBIMA);

·      the leader in number of outstanding purchasing consortium quotas, through our subsidiary Bradesco Administradora de Consórcios Ltda., or “Bradesco Consórcios”, with 1,194,015 quotas in three segments, including: (i) automobiles, with 914,039 quotas; (ii) real estate, with 231,464 quotas, and (iii) trucks/tractors/machinery and equipment, with 48,512 quotas (Central Bank); and

·      the largest company operating in the Brazilian insurance market, operating in all lines of this segment, with a 25.5% 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 total revenues in 2015 were R$64.6 billion in insurance premiums, pension plan contributions and capitalization bond income.

The main awards and acknowledgments that we received in 2015 are as follows:

·      Best Brazilian Bank in the 2015 edition of The Banker Awards (The Banker / Financial Times);

·      Most Valuable Bank Brand in Latin America, according to a survey conducted by consultancy firm BrandAnalytics of Millward Brown for the 2015 edition of BrandZ Top 50 Most Valuable Latin American Brands. It also appears in fourth place in the general ranking among all segments with a value of US$5.2 billion;

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Form 20-F 

 

·      Featured in three important rankings of efficiency in people management: "Best Companies to Work For in Brazil" (Guia 2015 Você S/A – The 150 Best Companies to Work For); "The best in People Management" (newspaper Valor Econômico in partnership with Aon-Hewitt); and "50 Best Psychologically Healthy Companies" (publisher Editora Gestão and RH);

·      Most Valuable Brand in the Banking Sector in Latin America and 15th in the global ranking, according to a study conducted by the magazine The Banker and by Brand Finance.

·      Best Brazilian Bank, for the fourth consecutive year, by Awards for Excellence 2015, awarded by the English magazine Euromoney;

·      Largest Private Group in the Country, with revenues of R$201.2 billion, in the ranking of Valor Econômico, created by Valor Econômico, which lists the 200 largest groups that operate in Brazil;

·      Featured, for the fifth consecutive time, in Guia Você S/A – “The Best Companies to Begin a Career” – 2015 Edition in the survey conducted by the magazine Você S/A in partnership with Fundação Instituto de Administração – FIA and Cia. de Talentos;

·      Featured among “The Best Companies for the Consumer 2015”, according to the survey Época Reclame Aqui, featured as champion in the categories, Banks and Financial Services, Cards and Insurance;

·      Featured in the 2015 edition of the yearbook Melhores e Maiores (Best and Largest) of the Exame magazine, integrating the rankings: “200 Largest Groups by Net Revenue”; “50 Largest Banks by Equity”; “100 Largest Latin American Banks by Equity”; “200 Largest Latin American Companies by Market Value”; “50 Largest Insurers by Premiums Issued”, highlighting Bradesco Saúde, the first on the list, Bradesco Vida e Previdência and Bradesco Auto/RE;

·      Highlight in the 2015 edition of the Anuário Valor 1000 (Yearbook) published by the newspaper Valor Econômico, in which, in addition to integrating the ranking of the largest Banks, it also occupies the first place among the insurers, with Bradesco Seguros, Bradesco Vida e Previdência and Bradesco Saúde;

·      Grupo Bradesco Seguros received the RA 1000 seal, which is awarded by the Reclame Aqui site to companies that provide excellent service to their clients;

·      Grupo Bradesco Seguros, for the fourth consecutive time, is the leader in the category of Insurance of the Época Negócios 360º yearbook, according to the survey conducted in partnership with Fundação Dom Cabral. Bradesco Saúde and Odontoprev obtained a placement in the upper maximum range in the Supplementary Health Performance Index (IDSS), of the Qualification of Operators program 2015 (based on 2014), organized by Agência Nacional de Saúde Suplementar - ANS (National Supplementary Health Agency); and

·      The Ombudsman Services of Bradesco and Grupo Bradesco Seguros were featured in the Prêmio Ouvidoria Brasil (Ombudsman Award) for the fourth consecutive time, among the 10 Best in the Country, in a survey of the Associação Brasileira de Ouvidores - ABO (Brazilian Association of Ombudsmen) and the Associação Brasileira das Relações Empresa-Cliente - Abrarec (Brazilian Association of Company-Client Relations), with the support from the magazine Consumidor Moderno.

Revenues per business segment

The following table summarizes our main gross revenues by segment for the periods indicated:

 

Years Ended December 31,

R$ in thousands

2015

2014

2013

Banking

 

 

 

Loans and advances (1)

69,877,296

62,634,879

57,561,074

Fees and commissions

19,195,003

17,570,839

15,639,215

Insurance and pension plans

 

 

 

Premiums retained from insurance and pension plans

58,760,780

50,454,983

44,887,215

(1) Includes industrial loans, financing under credit cards, overdraft loans, trade financing and foreign loans.

 

For further details of our segments, see Note 5 of our consolidated financial statements in "Item 18. Financial Statements."

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4.B. Business Overview 
Form 20-F 

We do not break down our revenues by geographic regions within Brazil, and less than 3.0% of our revenues come from international operations. For more information on our international operations, see "International banking services."

Banking

In our banking segment, we offer a range of banking products and services to our clients including deposit-taking, granting of loans and advance payments, debit and credit card services and capital market solutions, through our extensive distribution network.

We have a diverse customer base that includes individuals and small, midsized and large companies in Brazil. Historically, we have cultivated a strong presence among the broadest segment of the Brazilian market, middle- and low-income individuals.

The following table shows selected financial data for our banking segment for the periods indicated. This segment information is prepared in accordance with BR GAAP, which are the accounting practices on which the reports used by Management to assess performance and make decisions are based:

 

Year ended December 31,

Banking - R$ in thousands

2015

2014

2013

Statement of Income data

 

 

 

Net interest income

46,934,849

43,034,717

41,600,095

Impairment of loans and advances

(16,479,985)

(10,432,347)

(9,731,376)

Other income/(expenses) (1)

(31,200,150)

(21,285,902)

(24,455,897)

Income before income taxes

(745,286)

11,316,468

7,412,822

Income tax and social contribution

12,621,169

(771,896)

789,516

Net income for the year

11,875,883

10,544,572

8,202,338

Net income attributable to controlling shareholders

11,874,609

10,532,724

8,195,099

Net income attributable to non-controlling interest

1,274

11,848

7,239

Statement of Financial Position data

 

 

 

Total assets

894,579,942

872,867,916

768,059,393

Selected results of operations data

 

 

 

Interest and similar income

 

 

 

Loans and advances to banks

8,031,038

8,569,988

8,898,478

Loans and advances to customers

61,846,258

54,064,891

48,662,596

Financial assets

32,283,414

24,899,632

19,225,270

Compulsory deposits with the Central Bank

4,587,412

4,277,351

3,110,877

Other financial interest income

58,905

46,598

38,671

Interest and similar expenses

 

 

 

Deposits from banks

(31,212,421)

(26,429,261)

(21,615,019)

Deposits from customers

(12,392,644)

(11,903,447)

(9,941,279)

Funds from securities issued

(11,597,283)

(6,703,975)

(3,646,584)

Subordinated debt

(4,669,830)

(3,787,060)

(3,132,915)

Net interest income

46,934,849

43,034,717

41,600,095

Net fee and commission income

19,195,003

17,570,839

15,639,215

Note: Inter segment transactions have not been eliminated.

(1) For additional information, see "Item 5.A. Operational Results".

 

 

25 Form 20-F – December 2015


 
 

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4.B. Business Overview

Form 20-F 

 

Products and banking services

In order to meet the needs of each client, we offer the following range of banking products and services:

·      deposit-taking with clients, including checking accounts, savings accounts and time deposits;

·      loans and advances (individuals and companies, housing loans, microcredit, onlending BNDES/Finame, rural credit, leasing, among others);

·      credit cards, debit cards and pre-paid cards;

·      cash management solutions;

·      public authority solutions;

·      asset management;

·      services related to capital markets and investment banking activities;

·      intermediation and trading services;

·      capital markets solutions;

·      international banking services;

·      import and export financing; and

·      consortiums.

Deposit-taking with clients

We offer a variety of deposit products and services to our customers mainly through our branches, including:

·      Non-interest-bearing checking accounts, such as:

- Easy Account (Conta Fácil) – customers have a checking account and a savings account under the same bank account number, using the same card for both accounts;

- Click Account (Click Conta) – account for minors (from 11 to 17 years of age), with exclusive website and debit card, automatic pocket money service and free online courses, among other benefits; and

- Academic Account (Conta Universitária) – low fee checking account for college students, with subsidized credit conditions, exclusive website and free online courses, among other benefits.

·      traditional savings accounts, which currently earn the Brazilian reference rate, or taxa referencial, known as the "TR," plus 6.2% annual interest in the case the SELIC rate is higher than 8.5% p.a. or TR plus 70.0% of the SELIC rate if the SELIC rate is lower than 8.5% p.a.; and

·      time deposits, which are represented by Bank Deposit Certificates (certificados de depósito bancário – or "CDBs"), and earn interest at a fixed or floating rate.

As of December 31, 2015, we had 26.0 million checking account holders, 24.5 million of which were individual account holders and 1.5 million of which were corporate account holders. As of the same date, we had 60.1 million savings accounts.

The following table shows a breakdown of our deposits from customers by type of product on the dates indicated:

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4.B. Business Overview 
Form 20-F 

 

 

December 31,

R$ in thousands, except %

2015

2014

2013

Deposits from customers

 

 

 

 

 

 

Demand deposits

23,012,068

11.8%

32,086,299

15.3%

39,633,427

18.3%

Reais

21,122,202

10.9%

31,113,116

14.8%

39,009,598

18.0%

Foreign currency

1,889,866

1.0%

973,183

0.5%

623,829

0.3%

Savings deposits

91,878,765

47.2%

92,154,815

43.9%

80,717,805

37.3%

Reais

91,878,765

47.2%

92,154,815

43.9%

80,717,805

37.3%

Time deposits

79,619,267

40.9%

85,790,391

40.8%

95,866,825

44.3%

Reais

53,932,917

27.7%

56,998,851

27.1%

71,625,097

33.1%

Foreign currency

25,686,350

13.2%

28,791,540

13.7%

24,241,728

11.2%

Total

194,510,100

100.0%

210,031,505

100.0%

216,218,057

100.0%

 

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4.B. Business Overview

Form 20-F 

 

Loans and advances to customers

The following table shows loans and advances to customers broken down by type of product and period:

 

December 31,

R$ in thousands

2015

2014

2013

Loans and advances to individuals outstanding by type of operation

 

 

 

Other loans and advances to individuals

80,070,794

79,827,931

77,444,991

Housing loans

48,114,515

40,103,169

27,870,462

Onlending BNDES/Finame

38,158,108

42,168,754

40,543,267

Other corporate loans and advances

107,047,136

102,310,327

99,021,346

Rural loans

13,710,274

17,057,992

13,651,917

Leasing

3,072,777

4,319,149

5,713,481

Credit cards

30,943,428

28,072,447

25,473,079

Import and export financings

49,206,636

35,336,912

34,261,025

Total

370,323,668

349,196,681

323,979,568

 

The following table summarizes concentration for our outstanding loans and advances to customers by borrower on the dates shown:

 

December 31,

2015

2014

2013

Borrower size

 

 

 

Largest borrower

2.8%

2.0%

0.7%

10 largest borrowers

9.2%

6.9%

5.3%

20 largest borrowers

13.3%

10.0%

8.2%

50 largest borrowers

19.5%

14.2%

12.9%

100 largest borrowers

23.8%

17.8%

16.6%

 

Other loans and advances to individuals

Our significant volume of individual loans enables us to avoid concentration on any individual loans on the performance of our portfolio and helps build customer loyalty. They consist primarily of:

·      personal loans with pre-approved overdraft facilities to be obtained through our branches, ATM network, call center, mobile and internet banking, with average repayment terms in four months with an average interest rate of 8.6% per month as of December 31, 2015;

·      vehicle financings with average repayment terms of fourteen months with an average interest rate of 1.7% per month as of December 31, 2015;

·      overdraft loans on checking accounts - "cheque especial", with average repayment terms of one month, at interest rates varying from 11.1% to 12.0% per month as of December 31, 2015; and

·      payroll-deductible loans to INSS pension plan beneficiaries and retirees, public servants and private sector employees.

As of December 31, 2015, we had outstanding personal loans, vehicle financings, and overdraft loans totaling R$80.1 billion, or 21.6% of our portfolio of loans and advances.

Banco Bradesco Financiamentos ("Bradesco Financiamentos") offers direct-to-consumer credit and leasing for the acquisition of vehicles through our extensive network of correspondents in Brazil, which includes retailers and dealers of light and heavy vehicles and motorcycles and payroll-deductible loans to the public and private sectors in Brazil.

Under the “Bradesco Promotora” brand, we offer payroll-deductible loans to INSS retirees and pensioners and public-sector employees (federal, state and municipal), military personnel and private-sector companies sponsoring plans, and other aggregated products (insurance, cards and others).

Housing loans

As of December 31, 2015, we had 117.2 thousand outstanding housing loans. The aggregate outstanding amount of our housing loans amounted to R$48.1 billion, representing 13.0% of our portfolio of loans and advances.

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4.B. Business Overview 
Form 20-F 

Housing loans are made through the Housing Finance System – SFH (Sistema Financeiro Habitacional), the Housing Mortgage Portfolio – CHH (Carteira Hipotecária Habitacional) or the Commercial Mortgage Portfolio – CHC (Carteira Hipotecária Comercial). Loans from SFH feature variable-installment repayments and annual interest rates ranging from 11.0% to 12.0% plus TR, or 12.5% to 15.0% for those from CHC.

Residential SFH and CHH loans are to be repaid within 30 years and commercial loans within 10 years.

Our home construction loans, which are made with a 360-month period, are broken down as follows: (i) a 24-month period to complete construction; (ii) a 2-month grace period immediately following the construction period; and (iii) up to 334 months for repayment of the loan. Payments are made at the interest rate of 11.0% to 12.0% p.a. plus TR variation for real estate falling into the SFH rules, or interest rates of 12.5% to 14.0% p.a. plus TR variation for real estate falling into the CHH.

We also extend corporate financing for builders under the SFH, with a term of up to 36 months and interest rate of 12.0% p.a. plus TR. The prurpose of these construction loans is transferring loans to individual borrowers after the completion of the construction work. In case loans are not timely repaid, the remaining outstanding balance must be repaid by the builder within 36 months at TR plus 12.0% p.a. for SFH loans and TR plus 18.0% p.a. for CHH loans.

Central Bank regulations require us to provide at least 65.0% of the balance of savings accounts in the form of housing loans; 24.5% in compulsory deposit requirement and 5.5% in additional compulsory deposit requirement. The remaining balance should be allocated to cash and cash equivalents and/or other operations according to regulations in force.

BNDES onlending/FINAME

The government has some programs to provide government-funded long-term loans with below-market interest rates to sectors of the economy that it has targeted for development. We borrow funds from these programs through BNDES, the government’s development bank, or Agência Especial de Financiamento Industrial (“FINAME”), the equipment financing subsidiary of BNDES. We then on-lend these funds to borrowers in targeted sectors of the economy. We determine the spread on some of the loans based on the borrowers' credit. Although we bear the risk for these BNDES and FINAME onlending transactions, they are always secured.

According to BNDES, in 2015, we disbursed R$8.1 billion, 60.1% of which was loaned to micro, small and medium-sized companies (base October/15). Our BNDES onlending portfolio totaled R$38.2 billion as of December 31, 2015, and accounted for 10.3% of our portfolio of loans and advances at that date. Our portfolio of BNDES onlendings does not include rural credit operations and import and export financing discussed as follows.

 

Other corporate loans and advances

 

We provide traditional loans for the ongoing needs of our corporate customers. As of December 31, 2015, we had R$107.1 billion of outstanding other local commercial loans, accounting for 28.9% of our portfolio of loans and advances. We offer a range of loans to our corporate customers based in Brazil, including:

·      short-term loans of 29 days or less;

·      working capital loans to cover our customers' cash needs;

·      guaranteed checking accounts and corporate overdraft loans;

·      discounting trade receivables, promissory notes, checks, credit card and supplier receivables, etc.;

·      financing for purchase and sale of goods and services; and

·      investment lines for acquisition of assets and machinery.

These lending products generally bear interest at a rate of 1.6% to 12.0% per month.

In addition to these loans, we also offer guarantees.

Rural credit

We extend loans to the agricultural sector financed by demand deposits, BNDES onlendings and our

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4.B. Business Overview

Form 20-F 

own funds, in accordance with Central Bank regulations. As of December 31, 2015, we had R$13.7 billion in outstanding rural credit, representing 3.7% of our portfolio of loans and advances. In accordance with Central Bank regulations, loans arising from compulsory deposits are paid a fixed rate. The annual fixed rate was 8.7%, on average, as of December 31, 2015. Repayment of these loans generally coincides with agricultural harvest and principal is due when a crop is sold. For BNDES onlending for rural investment the term is no more than ten years with repayments on a semi-annual or annual basis. As security for such loans, we generally obtain a mortgage on the land where the agricultural activities being financed are conducted.

Since July 2012, Central Bank regulations require us to use at least 34.0% of the annual average (from June through May) of our checking account deposits to provide loans to the agricultural sector.

Leasing

According to ABEL, as of December 31, 2015, our leasing companies were among the sector leaders, with a 17.2% market share. According to this source, the aggregate discounted present value of the leasing portfolios in Brazil as of December 31, 2015 was R$17.9 billion.

As of December 31, 2015, we had 29,884 outstanding leasing agreements totaling R$3.1 billion, representing 0.8% of our portfolio of loans and advances.

The Brazilian leasing market is dominated by large banks and both domestic- and foreign-owned companies affiliated with vehicle manufacturers. Brazilian lease contracts generally relate to motor vehicles, computers, industrial machinery and other equipment.

Most of our leasing operations are financial (as opposed to operational). Our leasing operations primarily involve the leasing of trucks, cranes, aircraft and heavy machinery. As of December 31, 2015, 58.7% of our outstanding leasing operations were for vehicles.

We conduct our leasing operations through our primary leasing subsidiary, Bradesco Leasing and also through Bradesco Financiamentos.

We obtain funding for our leasing operations primarily by issuing debentures and other securities in the domestic market.

As of December 31, 2015, Bradesco Leasing had R$91.0 billion of debentures outstanding in the domestic market. These debentures will mature in 2032 and bear monthly interests at the interbank interest rate (“CDI rate”).

Terms of leasing agreements

Financial leases represent a source of medium and long-term financing for Brazilian customers. Under Brazilian law, the minimum term of financial leasing contracts is 24 months for transactions relating to products whose average life of five years or less, and 36 months for transactions for those with an average useful life of five years or more. There is no legal maximum term for leasing contracts. As of December 31, 2015, the remaining average maturity of contracts in our lease portfolio was approximately 57 months.

Microcredit

We extend microcredit to low-income individuals and small companies, in accordance with Central Bank regulations requiring banks to use 2.0% of their cash deposits to provide microcredit loans. As of December 31, 2015, we had 6,199 microcredit loans outstanding, totaling R$13.0 million.

In accordance with Central Bank regulations, most microcredit loans are charged up to a maximum effective interest rate of 2.0% per month. However, microcredit loans for certain types of business or specific products (“microcrédito produtivo orientado”) have a maximum effective interest rate of 4.0% per month. The CMN requires that the maximum amount loaned to a borrower be limited to (i) R$2,000 for low income individuals in general; (ii) R$5,000 for individuals or legal entities engaged in a productive activity of professional, commercial or industrial nature, provided that the sum of the value of the operation and the balance of other credit operations does not exceed R$40,000; and (iii) R$15,000 for our microcrédito produtivo orientado transactions. In addition, microcredit loans may not be for less than 120 days, and the origination fee must be between 2.0% and 3.0% of the loan value.

Credit cards

We offer a range of credit cards to our clients including American Express, Elo, Visa, MasterCard brands and private label cards, which stand out due to the extent of benefits and convenience offered to associates.

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4.B. Business Overview 
Form 20-F 

We earn revenues from our credit card operations through:

·      fees on purchases carried out in commercial establishments;

·      issuance fees and annual fees;

·      interest on credit card balances;

·      interest and fees on cash withdrawals through ATMs; and

·      interest on cash advances to cover future payments owed to establishments that accept credit cards.

We offer our customers the most complete line of credit cards and related services, including:

·      cards issued for use restricted to Brazil;

·      credit cards accepted nationwide and internationally;

·      credit cards directed toward high net worth customers, such as Gold, Platinum and Infinite/Black from Visa, American Express and MasterCard brands;

·      multiple cards that combine credit and debit features in a single card, which may be used for traditional banking transactions and shopping;

·      co-branded credit cards, which we offer through partnerships with companies;

·      "affinity" credit cards, which we offer through associations, such as sporting clubs and non-governmental organizations; and

·      private label credit cards, which we only offer to customers of retailers, designed to increase business and build customer loyalty for the corresponding retailer, which may or may not have a restriction on making purchases elsewhere, among others.

We hold 50.0% of the shares of Elopar, an investment holding company which investments include Alelo (benefit cards, pre-paid and Money card), Livelo (coalition loyalty program), Stelo (digital portfolio for online purchases), as well as participations in Elo Serviços (brand) and Ibi Promotora (stores for sales of cards, personal credit, consigned credit and other products).

We also have a card business unit abroad, Bradescard Mexico, which has a partnership with C&A and also with suburbia stores of the Walmex Group and the LOB store chain.

As of December 31, 2015, we had several partners with whom we offered co-branded, affinity and private label/hybrid credit cards. These relationships have allowed us to integrate our relationships with our customers and offer our credit card customers banking products, such as financing and insurance.

The following table shows our revenues and total number of transactions of credit cards for the years indicated:

 

 

In millions

2015

2014

2013

Revenue – R$

 

 

 

Credit

140,063.8

131,999.9

119,407.0

Number of transactions

 

 

 

Credit

1,530.3

1,423.4

1,346.7

 

Import and Export Financing

For information on Import and Export Financing, see "Item 4.B. Business Overview – Foreign branches and subsidiaries”.

Cash Management Solutions

Management of accounts payable and receivable - In order to meet the cash management needs of our customers in both public and private sectors, we offer many electronic solutions for managing accounts payable and receivable, supported by our network of branches, bank correspondents and electronic channels, all of which aim to improve speed and security for customer data and transactions. The solutions provided include collection and payment services and online resource management, enabling our

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4.B. Business Overview

Form 20-F 

customers to pay suppliers, salaries, and taxes and other levies to governmental or public entities. These solutions, which can also be customized, facilitate our customers' day-to-day tasks and help to generate more business. We also earn revenues from fees and investments related to collection and payment processing services and, also by funds in transit received up to its availability to the related recipients.

Global Cash Management - Global Cash Management aims at structuring solutions to foreign companies operating in the Brazilian market and Brazilian companies making business in the international market. By way of customized solutions, partnerships with international banks and access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, we offer products and services for carrying out the cash management of these companies.

Solutions for receipts and payments - In 2015, we processed 1.4 billion receipts, for the payment of taxes, utility bills (such as water, electricity, telephone and gas), checks custody service, identified deposits and credit orders via our credit order by teleprocessing system (“OCT”). In 2015, the number of documents processed through virtual means (Pag-For Bradesco, Net Empresa and Online Tax Payment) was 774 million.

Market Niches – We offer our clients from specific niches of the market, such as education, condominiums, health and forwarding agent/driving school, the support of a qualified team to structure customized solutions tailored to their profile, characteristics and needs, thus adding value to the client’s business. Another important feature of our offering in this area is the support we provide towards the development of Local Production Arrangements - “APL”, by providing medical care to the businesses and assistance to these customers in this area. A further highlight is “Bradesco Franquias e Negócios” (Bradesco Franchises and Business), a program which aims to provide customized and directed solutions by observing the characteristics and needs of Brazilian franchising (franchisees and franchisors). The objective is to centralize the service to all franchisees of our affiliated networks, increasing the number of clients and volume of business with this important sector of the national economy.

Public authority solutions

We have a specific area dedicated to serving public administration, which offers specialized services aimed at identifying business opportunities and structuring customized solutions to entities and bodies of the Executive, Legislative and Judiciary branches at federal, state and municipal levels, in addition to independent governmental agencies, public foundations, state-owned and mixed companies, the armed forces (army, navy and air force) and the auxiliary forces (federal and state police forces).

Our exclusive website developed for these customers (www.bradescopoderpublico.com.br) offers corporate solutions for federal, state and municipal governments for payments, receipts, human resources and treasury services. The website also features exclusive facilities for public employees and the military, showing all of our products and services for these customers.

Our relationships with such public authorities are developed and maintained by specialized business managers located in distribution platforms throughout the country, which can be identified on our website.

In 2015, we took part in bidding processes sponsored by the Brazilian government and were successful in over 87.9% of these processes. Furthermore, we continue to be leaders in payments of INSS benefits, with more than 8.9 million retirees and pensioners.

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4.B. Business Overview 
Form 20-F 

Asset management and administration

We administer and manage assets by way of:

·      mutual funds;

·      individual and corporate investment portfolios;

·      pension funds, including assets guaranteeing the technical provisions of Bradesco Vida e Previdência;

·      insurance companies, including assets guaranteeing the technical provisions of Bradesco Seguros; and

·      receivable funds (FIDCs – Fundos de Investimento em Direitos Creditórios), FIIs (Real Estate Investment Funds) and private equity funds (FIPs – Fundos de Investimento em Participações).

On December 31, 2015, we administered or managed 2,054 funds and 320 portfolios, providing services to 2.7 million investors. These funds comprise a wide group of fixed-income, non-fixed income, investments abroad and multimarket funds, among others.

 

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4.B. Business Overview

Form 20-F 

 

The following tables show our equity of funds and equity of portfolios which are under our Management, the number of investors and the number of investment funds and managed portfolios for each period.

 

Distribution of Equity as of December 31,

R$ in thousands

2015

2014

Investment Funds

 

 

Fixed income

485,125,394

419,767,839

Variable income

21,295,410

27,019,024

Third party share funds

3,922,457

5,315,610

Total

510,343,260

452,102,473

Managed Portfolios

 

 

Fixed income

32,797,032

26,542,111

Variable income

4,896,936

8,130,414

Third party share funds

2,246,577

1,955,085

Total

39,940,546

36,627,610

Overall Total

550,283,806

488,730,084

 

As of December 31,

2015

2014

Number

Quotaholders

Number

Quotaholders

Investment Funds

2,054

2,710,988

1,697

2,776,357

Managed Portfolios

320

1,138

237

518

Overall Total

2,374

2,712,126

1,934

2,776,875

 

Our products are mostly distributed through our branch network, banking service by phone and the Internet (www.bradesco.com.br - investments).

Services related to capital markets and investment banking activities

As the organization's investment bank, “Bradesco BBI” originates and executes mergers and acquisitions, and originates, structures, syndicates and distributes fixed-income and equity capital market transactions in Brazil and abroad.

In 2015, Bradesco BBI advised customers on 144 transactions across a range of investment banking products, totaling R$170.9 billion.

Equities - Bradesco BBI coordinates and places public offerings of shares in local and international capital markets and intermediates public tender offers. Bradesco BBI ended 2015 marking significant presence in the IPOs and Follow-ons of market issuers in Brazil. Bradesco BBI participated as coordinator and joint bookrunner in five offers, which represented an aggregate volume of R$18.3 billion. These public offers were made up of: Follow-on of Telefônica Brasil S.A., amounting to R$16.1 billion; Follow-on of Valid Soluções e Serviços em Meios de Pagamento e Identificação S.A., amounting to R$396.0 million; Follow-on of Metalúrgica Gerdau S.A., amounting to R$900.0 million; tender offer to obtain the control of Tempo Participações S.A., amounting to R$318.0 million and IPO of FCP Par Corretora de Seguros S.A., amounting to R$603.0 million.

Fixed income – After having been engaged in a number of transactions during 2015, Bradesco BBI closed in 2015 in a strong position in fixed income operations. For the year ended December 31, 2015, Bradesco BBI was the market leader in terms of value, according to the fixed income ANBIMA ranking. In the period, it coordinated 68 domestic-market offerings totaling more than R$14.0 billion. In the international broker-dealer market, Bradesco BBI is continuously expanding its presence. In 2015, it acted as “joint bookrunner” for 4 bond issues, three involved issuers based in the USA, which exceeded US$4.2 billion. Additionally, Bradesco BBI was the leader in several liability management operations for Brazilian companies and repurchased over US$675 million of debt. In 2015, Bradesco BBI won “The Best Investment Bank” in Brazil Award by Euromoney magazine.

Structured operations - Bradesco BBI offers customized financial solutions for its customers in terms of their needs such as: investments, acquisitions, corporate reorganization, share repurchase, improved financial ratios, capital structure streamlining, and assets and risk segregation, by offering a number of funding tools to companies. Additionally, Bradesco BBI has a strong presence in the acquisition finance segment and in securitization (CRIs - Certificates of Real Estate Receivables, CRAs - Certificates of

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4.B. Business Overview 
Form 20-F 

 

Agribusiness Receivables and FIDCs – Fundos de Investimento em Direitos Creditórios). In 2015, Bradesco BBI also held a leading position in the securitization ranking published by ANBIMA, as a result of structuring 11 operations with a total value of R$3.4 billion.

Mergers and acquisitions - Bradesco BBI provides advisory services to important customers in merger, acquisition and corporate sale transactions, private placements, forming joint ventures, financial and corporate restructuring, and privatizations. In 2015, Bradesco BBI was rated among the top banks that provided advice for mergers and acquisitions in Brazil. During the year, Bradesco BBI advised on 21 transactions with a disclosed value of R$47.6 billion.

Project finance - Bradesco BBI has a solid background as financial advisor and structuring agent for a number of projects involving project and corporate finance, seeking to optimize financing solutions for projects across various industries through both credit and capital markets. Bradesco BBI won the award “Latin America Port Deal of the Year” by IJGlobal, for its outstanding role as leading structurer and advisor in the long-term financing for Porto do Açu (Prumo Logística). As of December 31, 2015, Bradesco BBI was involved in providing financial advice and structuring for approximately 33 projects totaling R$68.8 billion in investments.

Intermediation and trading services

Bradesco S.A. CTVM, or "Bradesco Corretora", operates in the financial market, and has as its objective the mediation of the purchase and sale of shares, commodities futures contracts, financial assets, indexes, options, share rental, and forward contracts, in the primary and secondary market. It also offers a wide range of products such as Investment Funds, Investment Clubs, government securities through Tesouro Direto (Treasury Direct), and is admitted to negotiations in BM&FBOVESPA and in the organized OTC market, which are tailored to the needs of high net-worth individuals, major corporations and institutional investors.

In 2015, Bradesco Corretora traded R$104.7 billion in the BM&FBOVESPA equities market and the exchange ranked it 9th in Brazil in terms of total trading volume.

In addition, in the same period, Bradesco Corretora traded 17.7 million futures, swaps and options totaling R$1.4 trillion on the BM&FBOVESPA. In 2015, Bradesco Corretora ranked 14th in the Brazilian market, in terms of the number of options, futures and swaps contracts executed.

Bradesco Corretora was awarded by BM&FBOVESPA, within the Operational Qualifying Program (PQO), four excellence seals (Carrying Broker, Agro Broker, Retail Broker and Execution Broker), indicating the high quality of its future market transactions. Bradesco Corretora is also certified by CETIP (Clearing House for the Custody and Financial Settlement of Securities).

Bradesco Corretora offers its clients the possibility to trade securities on the Internet through its "Home Broker" service. In 2015, "Home Broker" trading totaled R$11.1 billion, or 1.5% of all Internet transactions on BM&FBovespa, and Bradesco Corretora was the 18th largest Internet trader in the Brazilian market.

Bradesco Corretora has a full range of services in investment analysis with coverage of the main sectors and companies of the Brazilian market. With a team of 25 analysts, it is composed of sector specialists who fairly disclose their opinions to the customers by way of follow-up reports and instruction guides, with a wide range of projections and comparison multiples. Bradesco Corretora also has a team of its own economists dedicated to the customers' specific demands, focused on the stock market. Over 170 reports, in English and Portuguese, are forwarded on a monthly basis to the most important investors domiciled in Brazil, the United States, Europe and Asia.

Bradesco Corretora also operates through Bradesco Corretora offices located throughout Brazil. This is another service channel, where certified professionals guide clients interested in performing the purchase and sale of shares and other products.

Bradesco Corretora offers its services as a representative of non-resident investors for transactions in the financial and capital markets, in accordance with CMN Resolution No. 4,373/14. For more details of CMN Resolution No. 4,373/14, see "Item 10.D. Exchange Controls."

Capital markets solutions

In 2015, we were one of the main providers of capital markets solutions and we maintained our leadership position in the domestic market according to the ANBIMA’s ranking of custody of assets.

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Among the main services we offer in this segment, we highlight: qualified custody of securities for investors and issuers, administrators of investment funds, clubs and managed portfolios; bookkeeping of securities (shares, BDRs - Brazilian Depositary Receipts, quotas of investment funds, CRIs - Certificates of Real Estate Receivables and debentures); custody of shares backed by DRs - Depositary Receipts, loan of shares, liquidating bank, depositary (Escrow Account - Trustee), clearing agent, tax and legal representation for non-resident investors, and fiduciary administration for investment funds.

We have twelve Quality Management System ISO 9001:2008 certifications and three data protection GoodPriv@cy certifications. We also hold an ISAE 3402 (International Standard on Assurance Engagements) certification, which comprises assurance reports on controls at a service organization under international standards. These certifications expand the structures of controls, increasing the level of effectiveness and quality of processes.

As of December 31, 2015, the main services provided by Bradesco Custódia were:

·      administrative and custody services for investment funds and managed portfolios involving:

·           R$1.0 trillion in assets of clients;

·           R$1.5 trillion in total shareholders’ equity of investment funds and managed portfolios which are using our administration services; and

·           26 registered DR (Depositary Receipts) programs with a market value of R$61.1 billion as measured by the ANBIMA ranking.

·       fiduciary administration for third party funds:

·           R$254.2 billion total shareholders’ equity of third-party investment funds under fiduciary administration by BEM DTVM.

·      bookkeeping of bonds and securities:

·           Bradesco’s share registration system comprises 242 companies, with a total of 4.5 million shareholders;

·           Bradesco’s book entry debentures system contains 324 companies with 443 issues with a restated value of R$310.7 billion;

·           our fund share registration system contains 536 investment funds with a restated value of R$69.1 billion; and

·           we managed 33 registered BDR (Brazilian Depositary Receipts) programs, with a market value of R$2.4 billion.

·      depositary (escrow account)

·           8,216 contracts, with a financial volume of R$12.2 billion.

In December 2013, the CVM changed the rules that govern these activities through the issuance of Instructions Nos. 541, 542 and 543, which address centralized deposit, custody and bookkeeping of securities, respectively. Pursuant to these new instructions, recording agents will be required to maintain records in relation to issuances of registered assets and custodians will be responsible for safeguarding assets that were physically issued or for which they are holders of customers’ custody positions in central depositary entities. In addition, centralized deposit service providers will take on a crucial role for trading assets in organized markets, concentrating all operations corresponding to deposited assets. These new instructions became effective from July 1, 2014.

In January 2015, the Central Bank began regulating the activities of centralized depositories and the recording of financial assets, by way of Circular No. 3,743/15, which includes the registration and centralized depository of financial assets and liens and encumbrances on deposited financial assets.

International banking services

As a private commercial bank, we offer a wide range of international services, such as foreign exchange transactions, foreign trade finance, lines of credit and banking. As of December 31, 2015, our international banking services included:

Branches:

·      one in New York City;

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·      in the Cayman Islands; and

·      in London.

Subsidiaries:

·      one in London: Bradesco Securities U.K., named "Bradesco Securities U.K.;"

·      in the Cayman Islands: Cidade Capital Markets Ltd., or "Cidade Capital Markets;"

·      in Argentina: Banco Bradesco Argentina S.A., or "Bradesco Argentina;"

·      in Luxembourg: Banco Bradesco Europa S.A., or "Bradesco Europe;"

·      in Japan: Bradesco Services Co. Ltd., or "Bradesco Services Japan;"

·      in Mexico: Bradescard México, Sociedad de Responsabilidad Limitada, or "Bradescard México;"

·      two in Hong Kong: (i) Bradesco Trade Services Ltd. or "Bradesco Trade"; and (ii) Bradesco Securities Hong Kong or "Bradesco Hong Kong"; and

·      three in New York: (i) Bradesco Securities Inc. or “Bradesco Securities U.S.”; (ii) Bradesco North America LLC or “Bradesco North America”; and (iii) BRAM US LLC.

Our international and foreign exchange department in Brazil coordinates our international transactions with support from 28 operational units specializing in foreign exchange businesses located at major exporting and importing areas nationwide.

Revenues from Brazilian and foreign operations

The table below breaks down revenues (interest and similar income, and fee and commission income) from our Brazilian and foreign operations for the periods shown:

For the years ended December 31,

2015

2014

2013

R$ in thousands

%

R$ in thousands

%

R$ in thousands

%

Brazilian operations

141,487,792

97.6%

118,500,386

98.2%

103,248,646

98.1%

Overseas operations

3,417,333

2.4%

2,152,690

1.8%

1,969,702

1.9%

Total

144,905,125

100.0%

120,653,076

100.0%

105,218,348

100.0%

Foreign branches and subsidiaries

Our foreign branches and subsidiaries principally provide financing in foreign currency (particularly foreign trade finance operations) to Brazilian and non-Brazilian customers. Total assets of the foreign branches, excluding intra-group transactions, were R$76.2 billion, as of December 31, 2015, denominated in currencies other than the real.

Funding required for export financing or Brazilian foreign trade is primarily obtained from the international financial community, through credit lines granted by correspondent banks abroad. We issued debt securities in international capital markets as an additional source of funding, which amounted to US$8.7 billion in 2015.

The following is a brief description of our subsidiaries abroad:

Bradesco Europa - In April 2002, we acquired Banque Banespa International S.A., Luxemburg, currently named Banco Bradesco Europa. Bradesco Europa, through its unit in Luxembourg and its branch in London, is also dedicated to providing additional services to clients of the private banking segment. As of December 31, 2015, its total assets were R$19.5 billion.

Bradesco Argentina - To expand our operations in Latin America, in December 1999, we established our subsidiary in Argentina, Bradesco Argentina, the general purpose of which is to extend financing, largely to companies based in Brazil with local establishments and, to a lesser extent, to companies based in Argentina doing business with Brazil. As of December 31, 2015, Bradesco Argentina had R$176.8 million in assets.

Cidade Capital Markets – In February 2002, Bradesco acquired Cidade Capital Markets in Grand Cayman, through to the acquisition of its parent company in Brazil, Banco Cidade. As of December 31, 2015, Cidade Capital Markets had R$159.1 million in assets.

Bradesco Securities (U.S., U.K. and H.K.) - Bradesco Securities, our wholly owned subsidiary, is a

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broker dealer in the United States, England and Hong Kong:

·      Bradesco Securities U.S. focuses on facilitating the purchase and sale of shares, primarily in the form of ADRs and common shares. It is also an authorized dealer in bonds, commercial paper and deposit certificates, among other securities, and may provide investment advisory services. As of December 31, 2015, Bradesco Securities U.S. had assets of R$116.5 million;

·      Bradesco Securities U.K. focuses on the intermediation of equities and fixed income operations for Brazilian companies with global institutional investors. As of December 31, 2015, Bradesco Securities U.K. had assets of R$39.9 million; and

·      Bradesco Securities H.K. focuses on the trading of ADRs and public and private securities issued by Brazilian companies to global institutional investors. As of December 31, 2015, Bradesco Securities H.K. had assets of R$21.3 million.

BRAM U.S. LLC It manages funds and portfolios of investments dedicated to American investors. On December 31, 2015, its assets totaled R$4.3 million.

Bradesco North America LLC – It was incorporated in August 2011 to serve as a holding company for our investments in non-bank businesses in the United States. As of December 31, 2015, its total assets were R$6.0 million.

Bradesco Services Japan – It was incorporated in October 2001 to provide support and specialized services to the Brazilian community in Japan, including remittances to Brazil and advice regarding investments within Brazil. As of December 31, 2015, its assets totaled R$4.0 million.

Bradesco Trade Services – A non-financial institution and a subsidiary of our branch in the Cayman Islands, which we incorporated in Hong Kong in January 2007, in partnership with the local Standard Chartered Bank.

Bradescard Mexico – The business cards unit maintains a partnership with the chain of C&A stores, and also with the Suburbia stores, of the Walmex Group, and with the chain of LOB stores. As of December 31, 2015, its assets totaled R$690.1 million.

 

Banking operations in the United States

In January 2004, the United States Federal Reserve Bank authorized us to operate as a financial holding company in the United States. As a result, we may do business in the United States directly or through a subsidiary, and, among other activities, may sell insurance products and certificates of deposit, provide underwriting services, act as advisors on private placements, provide portfolio management and merchant banking services and manage mutual fund portfolios.

Import and export financing

Our Brazilian foreign-trade related business consists of export and import finance.

We provide foreign currency payments directly to foreign exporters on behalf of Brazilian importers, which are linked to the receipt of local currency payments by the importers. In export finance, exporters obtain advances in reais on closing an export forex contract for future receipt of foreign currency on the contract due date. Export finance arrangements prior to shipment of goods are known locally as Advances on Exchange Contracts or "ACCs," and the sums advanced are used to manufacture goods or provide services for export. If advances are paid after goods or services have been delivered, they are referred to as Advances on Export Contracts, or "ACEs."

There are still other forms of export financing, such as export prepayments, onlendings from BNDES-EXIM funds, Export Credit Notes and Bills (referred to locally as "NCEs" and "CCEs"), and the rate equalization program of PROEX (“Programa de Financiamento à Exportação”).

Our foreign trade portfolio is funded primarily by credit lines from correspondent banks. We maintain relations with various American, European, Asian and Latin American financial institutions for this purpose, using our network of approximately 1,400 correspondent banks abroad, 58 of which extended lines of credit as of December 31, 2015.

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As of December 31, 2015, our international unit had a balance of R$42.3 billion in export financing and R$11.2 billion and R$4.8 billion in import financing and international guarantees. The volume of our foreign exchange contracts for exports reached US$28.2 billion in 2015. In the same period, the volume of our foreign exchange contracts for imports reached US$19.0 billion. In 2015, based on Central Bank data, we reached a 15.3% market share of trade finance for Brazilian exports and 12.2% for imports.

 

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The following table shows the composition of our foreign trade asset portfolio as of December 31, 2015. This portfolio includes operations with and without credit features and off-balance sheet operations.

2015

R$ in thousands

Export financing

 

Advance on foreign exchange contracts – undelivered bills

9,451,145

Advance on foreign exchange contracts – delivered bills

376,393

Export prepayment

14,632,172

Onlending of funds borrowed from BNDES/EXIM

2,368,735

Proex - Rate Equalization Program

66,340

NCE/CCE (Exports Credit Note/Exports Credit Certificates)

15,450,071

Total export financing

42,344,856

Import financing

 

Import financing – foreign currency

8,109,609

Exchange discounted in advance for import credit

2,840,999

Import credit opened

245,751

Total import financing

11,196,359

International guarantees

4,786,633

Total foreign trade portfolio

58,327,848

 

Foreign exchange products

In addition to import and export financing, our customers have access to a range of services and foreign exchange products such as:

·      WEB exchange contracts;

·      collecting import and export receivables;

·      cross border money transfers;

·      advance payment for exports;

·      accounts abroad in foreign currency;

·      domestic currency account for foreign domiciled customers;

·      cash holding in other countries;

·      structured foreign currency transactions: through our overseas units;

·      foreign loans to customers (Decree-Law No. 4,131/62);

·      working capital loans abroad;

·      service agreements – receiving funds from individuals abroad via money orders;

·      prepaid cards with foreign currency (individual and corporate customers);

·      purchasing and selling travelers checks and foreign currency paper money;

·      cashing checks denominated in foreign currency;

·      international financial clearance certificate; and

·      international financial capacity certificate.

Consortia

In Brazil, persons or entities that wish to acquire certain goods may set up a group known as a "consortium”. Consortia in Brazil are made up of pooled funds for the purpose of financing an acquisition. Consortia that are formed for the purchase of real estate, vehicles, trucks/tractors/machines and equipment, have a fixed term and quota, both previously determined by its members, and are run by an administrator.

Bradesco Consórcios administers groups of consortia and, as of December 31, 2015, registered total sales of 1,194,015 outstanding quotas in the three segments, with total group revenues of over R$49.6 billion; net income of R$822.4 million; and fees from consortiums of R$1.0 billion.

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Insurance, pension plans and capitalization bonds

We offer a range of products and services to our clients, including life, health, accident and vehicles and property insurance, both to individuals and companies; supplementary pension plans, individual and corporate, as well as the capitalization securities, through our extensive distribution network.

The following table shows selected financial data for our insurance, pension plans and capitalization bonds segment for the periods indicated. This segment information is prepared in accordance with BR GAAP, which are the accounting practices on which the reports used by Management to assess performance and make decisions are based:

As of and for the year ended December 31,

Insurance, pension plans and capitalization bonds - R$ in thousands

2015

2014

2013

Statement of Income data

 

 

 

Net interest income

5,973,694

4,556,146

5,589,989

Other income and expenses (1)

2,539,976

2,742,922

446,117

Income before income taxes

8,513,670

7,299,068

6,036,106

Income tax and social contribution

(3,192,918)

(2,843,493)

(2,253,451)

Net income for the year

5,320,752

4,455,575

3,782,655

Net income attributable to controlling interest

5,215,765

4,354,752

3,692,531

Net income attributable to non-controlling interest

104,987

100,823

90,124

Statement of Financial Position data

 

 

 

Total assets

209,789,872

181,949,261

160,295,583

Selected results of operations data

 

 

 

Income from insurance and pension plans

 

 

 

Written premiums

55,920,681

47,745,885

42,226,410

Pension plan contributions

3,795,219

3,724,762

3,584,290

Coinsurance premiums ceded

(88,612)

(135,728)

(154,125)

Premiums returned

(522,309)

(525,895)

(543,779)

Reinsurance premiums

(344,199)

(354,041)

(225,581)

Premiums retained from insurance and pension plans

58,760,780

50,454,983

44,887,215

Changes in the insurance technical provisions and pension plans

(28,286,039)

(24,008,174)

(20,001,807)

Retained claims

(21,724,043)

(18,143,688)

(15,484,691)

Selling expenses for insurance and pension plans

(3,254,551)

(2,892,373)

(2,468,101)

Income from insurance and pension plans

5,496,147

5,410,748

6,932,616

Note: Inter segment transactions have not been eliminated.

(1) For additional information, see "Item 5.A. Operational Results".

 

Insurance products and services

We offer insurance products through a number of different entities, which we refer to collectively as "Grupo Bradesco Seguros." Grupo Bradesco Seguros is leader in the Brazilian insurance market. The insurance products offered in our customer service channels, are:

·      life insurance and personal accident;

·      health insurance;

·      car insurance, property and casualty and responsibility;

·      reinsurance;

·      pension plans; and

·      capitalization bonds.

 

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Life and personal accident insurance

We offer life and personal accident insurance, as well as insurance against miscellaneous events, such as job loss, through our subsidiary Bradesco Vida e Previdência. As of December 31, 2015, there were 29.6 million life insurance policyholders.

Health insurance

The health insurance policies cover medical/hospital expenses. We offer health insurance policies through Bradesco Saúde and its subsidiaries for small, medium or large companies wishing to provide benefits for their employees.

On December 31, 2015, Bradesco Saúde and its subsidiary Mediservice Administradora de Planos de Saúde S.A (Mediservice) had more than 4.4 million beneficiaries covered by company plans and individual/family plans. Approximately 132 thousand companies in Brazil pay into plans provided by Bradesco Saúde and its subsidiaries, including 50 of the top 100.

Bradesco Saúde currently has one of the largest networks of providers of health services in Brazil. As of December 31, 2015, it included 12,207 laboratories, 15,750 specialized clinics, 15,610 physicians and 2,711 hospitals located throughout the country.

Automobiles, property/casualty and liability insurance

We provide automobile, property/casualty and liability insurance through our subsidiary Bradesco Auto/RE. Our automobile insurance covers losses arising from vehicle theft, damage to the passenger and third-party injury. Retail property/casualty insurance is for individuals, particularly those with residential and/or equipment related risks and small- and medium-sized companies whose assets are covered by multi-risk business insurance.

Of the various property/casualty lines for individuals, our residential note ("Bilhete Residencial") is a relatively affordable and highly profitable product. For corporate customers, Bradesco Auto/RE offers Bradesco Seguro Empresarial (business insurance), which is adapted to meet our customers' and business needs. For corporate property/casualty and liability insurance, Bradesco Auto/RE has a specialized team that provides large business groups with services and products tailor-made to the specific needs of each policyholder. Top sellers in this segment are insurance policies for aeronautics, transportation, engineering, named operational and oil risks.

As of December 31, 2015, Bradesco Auto/RE had 1.5 million insured automobiles and 2.2 million property/casualty policies and notes, making it one of Brazil’s main insurers.

Reinsurance

Insurance companies must operate with reinsurers registered with SUSEP. In January 2007, Brazil's Congress enacted Supplementary Law No. 126/07, which abolished IRB-Brasil Re's monopoly and allowed three types of reinsurers referred to as "local," "admitted" and "occasional," thus opening up Brazil's reinsurance market for competition. Reinsurers classified as admitted and eventual, with their head office abroad, must meet specific minimum requirements, as provided for in legislation in force.

Under the same supplementary law, IRB-Brasil RE was recognized as a local reinsurer and authorized to continue its operations and make any required adjustments in due course.

As of the end of 2007, National Council of Private Insurance (CNSP - Conselho Nacional de Seguros Privados) and SUSEP issued a number of normative instructions containing rules for reinsurance, retrocession and intermediation business, based mainly on CNSP Resolution No. 168/07.

Through Decree No. 6,499/08, the President of Brazil set maximum limits for the ceding of premiums to reinsurance companies in each calendar year. For local insurers, such maximum limit was 10.0% of premiums, and for local reinsurers, 50.0% of premiums. In the case of local insurers, CNSP Resolution No. 203/09 raised the limit for local insurers from 10.0% to 25.0% in the case of guarantees for public obligations and oil risks and CNSP Resolution No.194/08, to up to 100%, in the case of nuclear risks.

CNSP Resolution No. 241/11 was introduced so to enable the transfer of certain risks associated with reinsurance or retrocession operations with reinsurers not authorized by SUSEP.

CNSP Resolution No. 322/15, which amended article 14 of CNSP Resolution No. 168/07, such that the maximum currently allowed limit for which an insurer or reinsurance company based in Brazil may transfer risks to related companies or to companies headquartered abroad, belonging to the same financial conglomerate is 20.0%. The resolution is valid until December 2016, increasing the rate annually up to 75.0% beginning in January 2020. In addition, article 15, which provides for minimum compulsory contracting of 40.0%, of the transfer of reinsurance, with local reinsurers, was amended so as to provide an annual and gradual reduction of up to 15.0%, beginning in January 2020.

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On December 31, 2015 there were 128 reinsurers authorized to operate in the Brazilian market, including IRB-Brasil RE and Lloyd's of London. Twenty-six reinsurance brokerage firms had authorization to intermediate reinsurance and retrocession operations.

In 2015, the Grupo Bradesco Seguros paid approximately R$344.0 million in reinsurance premiums. Almost all property and casualty lines, except for the automobile line, have reinsurance protection and the majority of them feature proportional and non-proportional plans per risk and/or event.

Senior Management is responsible for the reinsurance purchase policy and the approval of reinsurers with whom agreements are entered into. In addition to minimum legal and regulatory requirements, Senior Management considers certain other key parameters when choosing such partners, thus minimizing the credit risks inherent in the operation, such as: minimum ranking A - of S&P (or equivalent), except for local reinsurers and shareholders’ equity consistent with the amounts ceded. Accordingly, our reinsurance purchase policy is designed to operate within its automatic contractual capabilities, therefore preventing the frequent purchases of optional agreements and higher exposures to the credit risk.

A significant portion of automatic and optional agreements (proportional and non-proportional) is transferred to IRB - Brasil RE. Certain admitted reinsurers participate with a lower individual percentage, but all of them hold capital and a rating higher than those minimum set forth by applicable Brazilian legislation.

Pension plans

We have managed individual and corporate pension plans since 1981 through our wholly-owned subsidiary Bradesco Vida e Previdência, which is now the leading pension plan manager in Brazil, as measured by investment portfolio and technical provision criteria, based on information published by Fenaprevi and SUSEP.

Bradesco Vida e Previdência offers and manages a range of individual and group pension plans. Our largest individual plans in terms of contributions known as VGBL and PGBL are exempted from withholding taxes on income generated by the fund portfolio.

As of December 31, 2015, Bradesco Vida e Previdência accounted for 28.8% of the pension plan and VGBL market in terms of contributions, according to SUSEP. Managed pension funds accounted for 28.7% of VGBL, 25.5% of PGBL and 13.5% of traditional pension plans in Brazil. As of December 31, 2015, Bradesco Vida e Previdência accounted for 29.4% of all supplementary pension plan assets under management, 28.0% of VGBL, 21.9% of PGBL and 51.9% of traditional pension plans, according to Fenaprevi.

Brazilian law currently permits the existence of both "open" and "closed" private pension entities. "Open" private pension entities are those available to all individuals and legal entities wishing to join a benefit plan by making regular contributions. "Closed" private pension entities are those available to discrete groups of people such as employees of a specific company or a group of companies in the same sector, professionals in the same field, or members of a union. Private pension entities grant benefits on the basis of periodic contributions from their members, or their employers, or both.

We manage pension and VGBL plans covering 2.4 million participants, 62.7% of whom have individual plans, and the remainder of whom are covered by company plans. The company’s plans account for 22.2% of technical reserves.

Under VGBL and PGBL plans, participants are allowed to make contributions either in installments or in lump-sum payments. Participants in pension plans may deduct the amounts contributed to PGBL up to 12.0% of the participant's taxable income when making their annual tax declaration. Under current legislation, redemptions and benefits are subject to withholding tax. VGBL plan participants may not deduct their contributions when declaring income tax. At the time of redemption, or when benefits are paid out, tax will be levied on these benefits, pursuant to current legislation.

VGBL and PGBL plans may be acquired by companies in Brazil for the benefit of their employees. In 2015, Bradesco Vida e Previdência managed R$106.1 billion in VGBL and R$22.8 billion in PGBL plans. Bradesco Vida e Previdência also managed R$27.5 billion in pension plans.

Bradesco Vida e Previdência also offers pension plans for corporate customers that are in most cases negotiated and adapted to the specific needs for this type of customer.

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Bradesco Vida e Previdência earns revenues primarily from:

·      pension and PGBL plan contributions, life insurance and personal accidents premiums and VGBL premiums;

·      revenues from management fees charged to participants in accordance with mathematical provisions; and

·      interest income.

Capitalization bonds

Bradesco Capitalização is the leader among private sector capitalization bond companies, according to SUSEP and offers its customers capitalization bonds with the option of a lump-sum or monthly contributions. Plans vary in value (from R$8 to R$50,000), form of payment, contribution period, and periodicity of draws for cash prizes of up to R$5.0 million (net premiums). Plans are adjusted based on the Reference Rate (TR) plus approximately 0.5% per month over the value of the mathematical provision, which may be redeemed by the shareholder at the end of the grace period. As of December 31, 2015, we had around 7.6 million "traditional" capitalization bonds and around 13 million incentive capitalization bonds. Given that the purpose of the incentive capitalization bonds is to add value to the products of a partner company or even to provide an incentive for its customer to avoid delinquency, the plans are for short terms and grace periods with low unit sales value. In 2015, Bradesco Capitalização had approximately 21 million capitalization bonds and 3.2 million customers.

Bradesco Capitalização is the only company in its industry to have received a Standard & Poor’s (S&P) rating of “brAA+”, the highest rating in Brazil.

Distribution channels of insurance products, pension plans and capitalization bonds

We sell our insurance products, pension plans and capitalization bonds through our website, through exclusive brokers based in our network of bank branches, and non-exclusive brokers throughout Brazil, all of whom are compensated on a commission basis. Our capitalization bonds are offered through our branches, the Internet, our call center, ATMs and external distribution channels.

The following table shows the distribution of sales of these products through our branches and outside our branches:

 

% of total sales, per product

2015

2014

2013

Insurance products

 

 

 

Sales through the branches

38.0%

36.0%

37.9%

Sales outside the branches

62.0%

64.0%

62.1%

Pension plans products

 

 

 

Sales through the branches

87.9%

86.6%

86.1%

Sales outside the branches

12.1%

13.4%

13.9%

Capitalization bonds

 

 

 

Sales through the branches

87.0%

83.0%

82.1%

Sales outside the branches

13.0%

17.0%

17.9%

 

 

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Distribution channels

The following table shows our main distribution channels as of the dates indicated below:

Distribution Channels (1) - Units

2015

2014

2013

Service Stations: (2)

65,851

75,176

72,736

Branches

4,507

4,659

4,674

PAs - Service Points (3)

3,511

3,486

3,586

PAEs - ATMs located on a company´s premises

736

1,145

1,180

External ATM Network - Bradesco (4) (5)

627

1,344

3,003

Banco24Horas Network (4)

11,721

12,450

11,583

Bradesco Expresso (Banking Correspondents)

43,560

50,006

46,851

Bradesco Promotora de Vendas

1,175

2,073

1,846

Branches/Subsidiaries abroad

14

13

13

ATMs

50,467

48,682

48,203

Bradesco Network

31,527

31,089

33,464

Banco24horas Network

18,940

17,593

14,739

(1) We offer products and services also through digital channels such as: (i) contact center; (ii) mobile app; and (iii) internet banking;

(2) The decrease is related to: (i) the migration of “External ATM Network– Bradesco” to “Banco24Horas Network”; (ii) the deactivation of ATMs from “Banco24Horas Network”; and (iii) the reduction of Bradesco Expresso Network;

(3) PA (Service Points): a result of the consolidation of PAB (Banking Service Branch), PAA (Advanced Service Branch) and Exchange Branches, according to CMN Resolution No. 4,072/12;

(4) Including overlapping ATMs within Bradesco´s own network and Banco24Horas network; and

(5) This decrease is related to the sharing of external network ATMs by the Banco24Horas network ATMs.

 

Partnerships with retail companies – Bradesco Expresso

“Bradesco Expresso” enables us to expand our share of the correspondent bank segment through partnerships with supermarkets, drugstores, grocery stores, department stores and other retail chains. These companies provide basic banking services like the receipt of utility bills, payment vouchers, withdrawals from current and savings accounts and social security benefits, and deposits, among others. The services are provided by employees at the relevant establishments, while decisions regarding granting of credit or opening of accounts are made by us.

The main services we offer through Bradesco Expresso are:

·      receipt and submission of account application form;

·      receipt and submission of loans, financing and credit card application form;

·      withdrawals from checking accounts and savings accounts;

·      Social Security National Service (INSS) benefit payments;

·      checking accounts, savings accounts and INSS balance statements;

·      receipt of utility bills, bank charges and taxes; and

·      prepaid mobile refill.

As of December 31, 2015, the Bradesco Expresso network totaled 43,560 service stations, of which 6,154 were new service stations, with an average of 38.5 million monthly transactions or 1.8 million transactions per business day.

Digital channels

The digital channels offer mobility and independence to customers so that they may expand their businesses with us.

We aim to make the banking experience even more convenient, fast and safe. In addition to the traditional service channels, such as ATM network, “Fone Fácil” (easy phone) and internet, customers and users have access to us from anywhere via Bradesco Celular (mobile banking). Below is a brief description of our digital channels:

Internet - Portal Bradesco has 15 web portals for banking transactions (transactional sites) and 42 institutional sites, which provide information on the Bank, guidance on security, disclosure of social and environmental actions, and specific investor publications, among others.

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ATM network - Our ATM network has 31,527 ATMs distributed across Brazil, providing quick and convenient access to products and services. In addition to using our ATMs, customers can access the pooled network of 18,940 Banco24Horas machines to perform transactions such as cash withdrawals, statements, balance status queries, loans, payments of payment vouchers, transfers between Bradesco accounts and to other banks, consultation of wage statement, consultation for checks paid and cleared, proof of life to INSS and pre-paid card services. In 2015, 2.0 billion transactions were conducted in the ATMs.

We were a pioneer in Brazil in introducing a biometric reading system that identifies customers and authenticates ATM transactions through a sensor/invisible light beam capturing the image of the vascular pattern of the palm of the hand. This technology allows our customers to carry out transactions using only their card and hand palm reading. In addition, for greater convenience and speed, customers may also withdraw cash and check balances without their card, simply using biometrics and a six-digit password.

We believe that the biometric reading system is one of the world’s most advanced security technologies. This technology is available in 100% of Bradesco ATMs and in the Banco24Horas Network.

This technology allows retired customers and pensioners to perform “proof of life” with the use of automatic biometrics, through a partnership firmed with the INSS.

Bradesco Celular (Mobile banking) - We were the first Brazilian institution to use mobile banking.

Through this channel the customer can check bank balances and statements, make payments, recharge prepaid mobile phones, make transfers, get loans, obtain quotes and follow stock purchase and sale orders, among other things.

Bradesco Celular also provides the following services:

·      Free access: our free access enables customers to monitor their accounts via Bradesco Celular free of charge, without exhausting their data plans. Our agreement with mobile phone network operators Claro, Oi, Tim, and Vivo (Brazilian mobile phone network operators) is an important step towards providing our customers with access to their accounts and also digital progression in Brazil;

·      Depositing checks via mobile phone: our “Bradesco app” enables our customer to process checks by way of photographic image on a smartphone camera, thus eliminating the need to physically deliver checks at branch or ATM;

·      Payment with a barcode reader: our barcode reader application enables our customers to pay an invoce by focusing a smartphone camera on a barcode, which is then automatically filled in;

·      Touch ID: this functionality enables a client to associate their digital print to a four-digit password, enabling faster and more practical access to the account using the appications. This functionality is available on “Bradesco apps”, Bradesco Exclusive and Bradesco Prime for iPhones with a digital reader;

·      Bradesco Direct Reload: a service that enables reloading credits for prepaid mobile phones with just a single call from the device itself, even if there are no credits available for making calls. This feature is currently available for mobile phone users who are registered customers of Vivo, TIM and Claro;

·      SMS payments: by simply answering a SMS, our previously-registered customers are able to schedule advance payments or make payments with their banking collection forms registered with the DDA or utility bills;

·      InfoCelular (information on mobile phones): with this feature, our registered customers quickly and safely receive SMS messages reporting on banking transactions for their account in accordance with the period and amount they designate;

·      Bradesco Net Empresa Celular: unique application that allows legal entities to manage their company at any time and at any place;

·      Mobile Security token: an innovative and pioneering service in the market, the security token provides an additional convenience option for our customers by enabling them to authenticate any transaction carried out on the device and other digital channels; and

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· Bradesco Celular via SMS (SMS Banking): this service allows our customers to confirm balances, see their last three entries in a bank statement and reload credits for prepaid mobile phones via SMS.

Telephone services - Fone Fácil (Contact Center) - Fone Fácil is our telephone banking system. The customized service system, with financial experts and virtual servicing, makes Fone Fácil one of the most efficient service channels and we have one of the most awarded banking relationship centers in Brazil, which is available to customers on a 24/7 basis.

Through this channel, the customer may acquire products, obtain information relating to their account, credit card, pension plans, capitalization bonds and carry out a number of transactions, such as: checking account balances, bank statements, payments, transfers, credit transactions, investments, registering with the mobile security token, registering and disabling a password, cancelling and reissuing cards.

In addition to the customized digital service, customers have access, through a number of specific numbers, to several telephone service centers including service centers for: internet banking, Net Empresa, Consortium, Private Pension Plan, Bradesco Financiamentos and Alô Bradesco.

Social Networks - We have had a strong performance on social networks since 2004 by performing the monitoring of our brand, products and services, providing services and relating with clients and non-clients 24 hours a day, 7 days a week. Our specialized social media team aims to provide responses to any queries raised within five minutes. We maintain relevant content on the financial universe, technology and relationship in all major social platforms.

Next Mobile Space - In 2012, we launched the Bradesco Next, a fully digital and multitouch space of interaction, which was designed to test new forms of usability, formats, layout and design for banking services. The strategy behind Bradesco Next is to develop new digital services that may be used in our branches.

In 2015, 92.0% of our transactions were performed through digital channels. The table below shows the number of operations carried out through digital channels:

Year ended December 31,

In millions of transactions

% Change

2015

2014

Internet Individuals + Companies - with WebTA (1)

4,585

4,492

2.1%

ATMs

1,982

2,087

(5.0)%

Mobile Banking (Bradesco Celular)

3,664

1,908

92.0%

Telephone Banking (Fone Fácil)

278

410

(32.2)%

Total

10,509

8,897

18.1%

(1) WebTA is an internet file transmission service, to the Bank, carried out by corporate customers using Net Empresa.

 

Segmentation of Clients

We operate a model of client segmentation, which groups certain clients of the same profile together, thus furthering our ability to provide personalized service to our clients, in accordance with their needs.

Our five segments offer a range of products and differentiated services that are tailored to companies and individuals. We present below our segmentation of clients:

Client Segmentation

Corporations

Bradesco Corporate - Large companies, with annual revenues of more than R$250 million

Bradesco Empresas - Midsized companies, with annual revenues between R$30 million and R$250 million

Bradesco Varejo (Empresas e Negócios) - Small companies, with annual revenues of up to R$ 30 million

Individuals

Bradesco Private Bank - Clients with availability for investments as from R$3.0 million

Bradesco Prime - individuals with monthly income from R$10 thousand or availability of investment from R$100 thousand

Varejo Exclusive - Clients with a monthly income between R$4 thousand and R$10 thousand, or availability of investment from R$40 thousand.

Varejo Classic - Clients with a monthly income of up to R$ 3,999.99 or availability of investment of less than R$40 thousand.

 

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Bradesco Corporate

The Corporate segment is responsible for serving 1,562 business groups in a range of large corporations and institutional investors (revenues over R$250.0 million/year). Its offices are located in the main financial centers, offering customized services with a global reach. Bradesco Corporate counts on a highly skilled team to fulfill customers´ needs through a wide portfolio of products, structured solutions and financial services.

Bradesco Empresas

Bradesco Empresas serves companies with annual revenues between R$30 million and R$250 million across its 70 business units located strategically in Brazil, in several Brazilian capitals. In addition to these units, it still has 93 “Office Spaces” in other strategic locations, not covered by Bradesco Empresas, in environments with specialized structures for the service of economic groups, which fit the profile of the segment.

Bradesco Empresas offers business management products such as loans and advances, financing, investments, foreign trade, hedging transactions, cash management and structured transactions in capital markets to ensure good results and customer satisfaction.

Bradesco Private Bank

Bradesco Private Bank is responsible for advising high net-worth individuals, family-owned holding companies and investment companies, who have at least R$3.0 million in available resources for investing. It offers a wide range of financial products and services, and advises on the most appropriate solutions for each client profile. It also offers advice on tax planning, property and inheritance, as well as providing advice on structured operations and non-financial assets.

Currently, Bradesco Private Bank has 15 offices throughout Brazil and also counts on the support of the units abroad located in New York, London, Luxembourg and the Cayman Islands.

Bradesco Varejo

We are present in 100% of Brazil’s municipalities. Bradesco Varejo counts on a network of 4,109 Branches, 3,449 Service Stations (“PA”), 736 Electronic Service Stations (“PAEs”) and 43,560 units of banking correspondents - Bradesco Expresso, as well as thousands of self service equipment.

The customer service network offers products and services in remote places, of difficult access and also in regions with large concentrations of people with lower purchasing power, for example the Communities of Rocinha, Cidade de Deus, Rio das Pedras, Complexo do Alemão, Gardênia Azul, Cantagalo, Turano, Santa Marta, Mangueira, Chapéu Mangueira and Vila Kennedy in Rio de Janeiro, Heliópolis and Paraisópolis in São Paulo, besides the two boats: “Voyager III” and “Voyager V”, which provide banking services to riverside communities in the Amazon region. This service is increasing access to banking services for those people who would otherwise have little or no access to banking services, thus increasing social mobility.

Bradesco Prime

Bradesco Prime operates in the segment of individuals and has a service network of 305 branches and 448 "Bradesco Prime Spaces" strategically positioned. The Prime segment offers the following benefits to our clients:

·       personalized services provided by relationship managers: Experienced and skilled professionals providing full financial advisory services Certified by ANBIMA, each customer relationship manager manages a reduced client portfolio;

·       exclusive facilities: Bradesco Prime customers have access to their own network of exclusive branches offering convenience and privacy to tend to their business affairs. It also counts on "Bradesco Prime Spaces," a reserved and distinctive environment installed at Bradesco Varejo branches that fully maintains the segment's value proposition. Additionally, customers count on a wide network of branches throughout Brazil, including ATMs – Bradesco Network and Banco24Horas; and

·       exclusive products and services: Bradesco Prime offers a variety of products and services, such as internet banking (bradescoprime.com.br), call center (Fone Fácil Bradesco Prime), online advisors and investment funds, credit solutions with distinct rates, a diversified portfolio of insurance, pension plans and credit cards.

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Present in all Brazilian capitals, Bradesco Prime has been, throughout its existence, investing in technology, in the improvement of the relationship with clients and in the training of its professionals. It established a prominent position in the Brazilian market of banking services for high-income clients and has consolidated its position as the largest provider of services for these clients, with strategically positioned service stations throughout Brazil.

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Main subsidiaries

The following is a simplified framework containing our main subsidiaries in the activities of financial and insurance services and our voting interest as of December 31, 2015 (all consolidated in our financial statements under "Item 18. Financial Statements"). With the exception of Bradesco Argentina, Bradesco Europa, Bradesco Grand Cayman Branch and Bradesco New York Branch, the other significant subsidiaries are Brazilian entities. For more information in relation to the consolidation of our significant subsidiaries, see Note 2a of our consolidated financial statements in "Item 18. Financial Statements."

 

 

 

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Risk management

Risk management is of great strategic importance to us due to the increasing complexity of services and products and the globalization of our business. The improvement in this activity has enabled us to be the first and only bank in Brazil authorized by the Central Bank to use, since January 2013, internal market risk models, which were already used for management, in order to calculate the regulatory capital (RC) set forth in the Basel Accord.

We seek to exercise control over risks in an integrated and independent manner, preserving and valuing collective decision-making, devising and implementing methodologies, models, measurement and control tools. We also promote improvement among employees at all levels, from the business areas to the Board of Directors.

Our risk management process ensures that risks are proactively identified, measured, mitigated, monitored and reported, as required for the complexity of our financial products and the profile of our activities.

Risk Management Structure

The structure of our risk and capital management function consists of committees, responsible for assisting our Board of Directors and our Diretoria Executiva in making strategic decisions.

The “Integrated Risk Management and Capital Allocation Committee” is responsible for advising the Board of Directors on the performance of its roles in the management and control over risks and capital.

The committee is assisted by the Capital Management Executive Committee and the executive committees for risk management of: (i) Credit; (ii) Market and Liquidity; (iii) Operational and Socioenvironmental; (iv) Grupo Bradesco Seguros and BSP Empreendimentos Imobiliários; and (v) Basel. There are also the Executive Products and Services Committee, and executive committees for our business units, whose tasks include suggesting limits for exposure to their related risks and devising mitigation plans to be submitted to the Integrated Risk Management and Capital Allocation Committee and the Board of Directors.

Credit risk

Credit risk is the possibility of losses associated with a borrower’s or counterparty’s failure to comply with their respective financial obligations under agreed terms, as well as the depreciation of loan agreements resulting from deterioration in the borrower's risk rating, the reduction in gains or remunerations, including benefits granted in renegotiations, recovery costs and other amounts related to the counterparty’s non-compliance with financial obligations.

Our credit risk management 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 operations in order to preserve the integrity and independence of the processes.

We seek to monitor our exposure to credit risk, which mainly results from loans and advances, securities and derivative financial instruments. Credit risk also stems from financial obligations related to loan commitments and financial guarantees.

In order not to compromise the quality expected from the portfolio, committees monitor all relevant aspects of the process of lending, concentration, collateral requirements, maturities, and other aspects.

We continually outline all the activities that can potentially generate exposure to credit risk, with the respective classifications regarding probability and size, as well as identifying managers, measurement and mitigation plans for those activities.

Credit Risk Management Process

Credit risk management is conducted in a centralized manner for the institution as a whole. This process engages several particular areas, which ensure an efficient framework to provide for independent and centralized credit risk measurement and control.

Our Credit Risk monitoring area is actively engaged in improving the customer risk rating models, following up large risks by periodically monitoring major delinquencies and the provisioning levels due to expected and unexpected losses.

This area continuously reviews the internal processes, including the roles and responsibilities, information technology training and requirements and periodic review of risk assessment, in order to incorporate new practices and methodologies.

 

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Corporate control and monitoring of our credit risk take place in the credit risk unit of the Integrated Risk Control Department. The department assists the Credit Risk Management Executive Committee on discussions and implementation of the methodologies to measure the credit risk. Relevant issues discussed by this committee are reported to the Integrated Risk and Capital Allocation Committee, which reports to the Board of Directors.

In addition to the committee meetings, the business area holds monthly meetings with officers and heads of products and segments to ensure they are informed about the evolution of the portfolio of loans and advances, delinquency, adequacy of levels of losses by reducing the recoverable value of loans and advance payments, credit recovery, gross and net losses, portfolio limits and concentrations, and other items. This information is also monthly reported to the Audit Committee.

The business area also tracks each internal or external event that may significantly impact credit risk such as mergers, bankruptcies or crop failures and monitors sectors of economic activity in which we have the most representative exposures.

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

Market Risk

Market risk is the possibility of a loss of income due to fluctuations in prices and interest rate of the financial instruments resulting from mismatched maturities, currencies and indices of our asset and liability portfolios.

This risk is identified, measured, mitigated, controlled and reported. Our profile of exposure to market risk is in line with guidelines established by the governance process, with limits that are monitored on a timely and independent basis.

All transactions exposing us to market risk are mapped, measured and classified according to probability and magnitude, with the whole process approved by the governance structure.

Our risk management process involves the participation of all levels, from business units to the Board of Directors.

In line with Corporate Governance and in order to preserve and strengthen our management of market and liquidity risks, as well as to meet the requirements of CMN Resolution No. 3,464/07, the Board of Directors approved the Market and Liquidity Risk Management Policy, which is reviewed at least annually by the relevant committees and the Board of Directors itself, providing the main operational guidelines for accepting, controlling and managing market risk.

In addition to this policy, we have several specific rules that regulate the market risk management process, including:

·      classification of operations;

·      reclassification of operations;

·      trading in government or private securities;

·      use of derivatives; and

·      hedge.

Market risk measurement and control are carried out through stress methodologies, Value at Risk (VaR), Economic Value of Equity (EVE), and sensitivity analysis, and limits for earnings management and financial exposure. The use of several methodologies to measure and evaluate risks is important, as they are always supplementary to each other and their combined use permits capturing different scenarios and situations.

 

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Market Risk Management Process

Our market risk management process is run on a corporate wide basis. This process involves several areas with specific purposes, ensuring an efficient structure, with market risk measurement and control carried out on a centralized and independent basis. The management process, approved by the Board of Directors, is also reassessed at least annually by the relevant committees and the Board of Directors itself.

 

 

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Definition of limits

Proposed market risk limits are validated by specific committees for approval by the Integrated Risk and Capital Allocation Committee, to be submitted to the Board of Directors depending on the characteristics of business, which are separated into the following portfolios:

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

The trading portfolio is monitored by limits of:

·      Value at Risk (VaR);

·      stress;

·      results; and

·      financial exposure/concentration.

Banking portfolio: comprises transactions not qualifying for our trading portfolio, deriving from our other businesses and their respective hedges.

The banking portfolio is monitored by limits related to the interest rate risk.

Market risk is controlled and monitored by an independent business unit, the Integrated Risk Control Department, which calculates risk of outstanding positions on a daily basis, consolidates results and reports as required by the existing governance process.

In addition to daily reports, the positions of the trading portfolio are discussed weekly by the Treasury Committee and the positions of the banking portfolio and liquidity reports are handled every fortnight by the Treasury Executive Committee for the Management of Assets and Liabilities. In both committees, the results and the risks are evaluated and the strategies are discussed. Both governance process and limits are validated by the Integrated Risk and Capital Allocation Committee and submitted for approval by the Board of Directors, which are reviewed at least once a year.

In case of any risk limit breach monitored by the Integrated Risk Control Department, the head of the business unit in charge is informed of the limit usage and, in a timely manner, the Committee of Integrated Risk Management and Capital Allocation is called in order to make a decision. If the committee chooses to increase the limit and/or change or maintain the positions, the Board of Directors is called to approve a new limit or to review our strategy with regard to this particular risk.

For more information on how we evaluate and monitor market risk, see "Item 11. Quantitative and Qualitative Disclosures about Market Risk."

Liquidity risk

Liquidity risk is represented by the possibility of the institution failing to effectively comply with 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.

Understanding and monitoring this risk is crucial, especially for us to be able to ensure conditions to settle transactions in a timely and secure manner.

Liquidity Risk Management Process

We manage our liquidity risk process on a group-wide basis. This process involves a number of areas with specific responsibilities, ensuring an efficient structure, and the liquidity risk is measured and controlled on a centralized and independent basis, with daily monitoring of available funds, compliance with minimum liquidity levels, and contingency planning for high-stress situations.

Our policy for risk management and market liquidity, approved by the Board of Directors, is mainly aimed at ensuring the existence of standards, criteria and procedures to guarantee the establishment of the Minimum Liquidity Reserve (RML), as well as the strategy and action plans for liquidity crisis situations. The policy and controls we established fully comply with CMN Resolution No. 4,090/12.

Our approved criteria and procedures determine the minimum liquidity reserve to be maintained on a daily basis and the types of assets considered as available funds. Additionally, we determine instruments for management of liquidity in normal and crisis scenarios, with strategies to be followed in each case.

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Our liquidity risk is managed by the Treasury Department, based on the positions provided by the back-office controls positions, which provides liquidity information to our Management and monitors compliance with established limits. The Integrated Risk Control Department is responsible for the methodology of measurement of liquidity reserve requirements, control over limits established by type of currency and company (including for non-financial companies), reviewing policies, standards, criteria and procedures, and drafting reports for new recommendations.

Liquidity risk is monitored at meetings of the Treasury Executive Committee for Asset Liability Management, which controls liquidity reserves and maturity and currency mismatches. Additionally, monitoring activity is also conducted by the Integrated Risk and Capital Allocation Committee and the Board of Directors.

Operational Risk

Operational risk is represented by the possibility of incurring losses arising from failures, deficiencies or the inadequacy of internal processes, people, systems and external events. This includes legal risk, associated with the activities we carry out.

Operational Risk Management Process

The operational risk process is carried out throughout the Organization. This involves a number of areas, with specific responsibilities, thus ensuring an efficient structure, and operational risk is measured and controlled on a centralized and independent basis. Accordingly, the following procedures are carried out:

·      identifying, assessing, and monitoring the operational risks inherent in the Organization activities, as well as those related to new products/services and their adequacy to procedures and controls;

·      mapping and addressing records of operational losses to make up an internal data base;

·      measuring, controlling and reporting increased operational losses by way of assessing the effectiveness of the mitigating measures of business areas/branches;

·      assessing and calculating capital needs in connection with the operational risk; and

·      preparing reports on the operational risk for the areas related to the management process, including the committees and Senior Management.

These procedures are supported by a number of internal controls, validated on an independent basis in relation to their effectiveness and operation, to ensure acceptable risk levels in our processes.

Operational risk is primarily controlled and followed up by an independent area, Integrated Risk Control Department is supported by a number of areas that integrate the management process of this risk.

The Integrated Risk Control Department coordinates the Internal Control and Operational Risk Commission (“CIRO”). This Commission, which reports to the Executive Committee of Operational and Socioenvironmental Risk Management ("CEROS"), is aimed at analyzing the behavior of the operational losses of the business areas/branches, the efficiency and effectiveness of the processes and controls adopted, as well as the indicators and scenarios and assessing external data on operational losses by incorporating/adjusting processes and controls, if applicable.

CEROS, in turn, is assisted by the Integrated Risk Control Department, and reports the relevant subjects to the Audit Committee and to the Integrated Risk Management and Capital Allocation Committee, which reports to the Board of Directors.

The governance process is approved by the Board of Directors and reviewed at least once a year.

Internal controls and compliance

The efficacy of our internal controls is supported by trained professionals, well-defined and implemented processes, and by technology compatible with business needs.

We highlight that the internal control methodology we adopted is in line with the guidelines of the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) 2013 version, the purpose of which is to provide a model for internal controls, and management of corporate and fraud risks, aimed at improving organizational supervision and performance.

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The existence, enforcement and efficacy of controls that ensure acceptable risk levels in our processes are certified by the area responsible for the execution of the tests of adherence of the controls, the results of which are conveyed to the Internal Controls and Compliance Audit Committees, as well as to the Board of Directors, with the purpose of providing assurance with regard to appropriately carrying out business transactions and achieving defined objectives, in accordance with external laws and regulations, internal policies, rules and procedures, as well as applicable codes of conduct and self-regulation.

Prevention of illegal acts

We conduct our business and our various relationships based on ethics and transparency, concepts that permeate our organizational culture, whose values and principles are ratified by our Code of Ethical Conduct and in our Sector-based Codes of Ethical Conduct.

In 2015, we provided training sessions to the Board of Directors, the Diretoria Executiva and areas with greater exposure to risk, which focused on policy, standards and procedures for the prevention of illegal acts, combining lectures and on-site courses.

The training given to our employees is comprised of programs in a variety of formats, such as guidebooks, videos, distance and on-site courses and live lectures specific to areas in which they are required.

For 2016 we are planning the continuity and reinforcement of training to administrators and employees is planned.

We have channels for corporate complaints, available on our Investor Relations website (www.bradescori.com.br/Governança Corporativa), which are also used to receive complaints about the occurrence of illegal acts, of the various interested parties.

Prevention of Money Laundering and Terrorism Financing

The Prevention of Money Laundering and Terrorism Financing Program is based on specific policies, principles, procedures and systems that establish guidelines to prevent and detect the utilization of our structure and/or our products and services for money laundering and terrorist financing purposes. This program is supported by the Prevention and Combat of Money Laundering and Terrorism Financing Executive Committee, which is responsible for assessing the work as to its effectiveness and the need to coordinate procedures with regulations defined by the regulating bodies and best domestic and international practices. Any suspect or unusual cases identified are forwarded to the Committee on Assessment of Suspicious Transactions, composed of a number of our areas, which assess the need for reporting to regulatory bodies.

Prevention and Fight against Corruption

We continuously seek to enforce measures with a view to preventing and fighting corruption and bribery, thus demonstrating our commitment towards operating our business and building and maintaining relationships in an ethical manner. The Program of Prevention and Fight against Corruption is supported by the Code of Ethical Conduct, by the Corporate Anti-corruption Policy and by the Ethical Conduct Committee, all approved by the Board of Directors. The Anti-Corruption Corporate Standard, with rules and procedures are aimed at the concession of gifts, sponsorships, donations, procurement and management of business partners, which aim to prevent and combat corruption and bribery, in compliance with the laws and regulations in force in Brazil and in the countries in which we have business units. We apply self-assessment (corporate, operational and administrative), which is one of the tools to ascertain the level of knowledge, understanding and implementation of the program, as well as subsidizing the actions for its dissemination. In 2016, we will continue to implement measures aimed at improvement of the integrity program provided for by Law No. 12,846/13. The main initiatives of such measures will be the review for the mapping of the risks of corruption and automated monitoring of concessions to third parties including, when applicable, public agents.

Independent Validation of Management and Measurement Models of Risk and Capital

We employ internal models to manage risks and capital, developed based on statistical, economic, financial, and mathematical theories or expertise by specialists, who support or work to structure critical topics and to provide conformity and agility to decisions.

In order to detect, mitigate and control risks inherent in our models, which are associated with potential adverse consequences arising from decisions based on incorrect or obsolete models, we have an independent validation process, mainly focused on checking whether models operate in accordance with previously defined objectives and whether their results meet the uses for which they were intended. This validation is carried out by applying a strict evidence program, which addresses the adequacy aspects of the processes, governance and construction of models and their assumptions, with results being reported to managers, Internal Audit, the Internal Control and Compliance Committee and the Integrated Risk Management and Capital Allocation Committee.

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Treasury activities

Our Treasury Department main objective is maximizing results with available resources and minimizing risks, by complying with the limits set forth by our Senior Management and the guidelines issued by our integrated risk control unit.

The main treasury-related activities are as follows:

 

·      planning and managing local and foreign currency cash flows;

·      proposing and observing asset and liability management strategy of the financial conglomerate;

·      managing maturity, rate and liquidity gaps arising from our activities;

·      calculating costs of our operations from both the assets and liabilities sides;

·      getting price estimates and managing commercial operations that involve risks such as: market, interest rate, foreign exchange, commodities and price index risks;

·      performing proprietary trading operations aimed at taking opportunities found in the range of the Treasury Department´s prospective scenario and market prices; and

·      taking part of analysis and decisions regarding directed credit and capital management.

Corporate security

The primary objective of the Corporate Security Department has as its main mission to act preventively and correctively regarding frauds in the information and system security that supports the business through the creation, implementation and maintenance of rules, processes and technologies. To achieve its objectives, it acts strategically and corporately to ensure security of customer service channels, information and systems, evaluating, treating and proposing improvements, aimed at preventing any critical exposures of vulnerabilities, supported by the possibility of an overall vision of the incidents and trends, obtained internally and externally. It is also a focal point for issuing technical opinions, in connection with strategic security issues, in the implementation of products, services or processes.

Among the main "Corporate Security Global Vision" responsibilities, we highlight the following:

·      the definition of our “System for Data Security Management”, based on our “Corporate Policy for Information Security” and establishment of a set of guidelines and policie