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After peak, Bradesco sees NPLs, provisions slowing in H2

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After peak, Bradesco sees NPLs, provisions slowing in H2

After calling the peak of nonperforming loan and provision growth, Banco Bradesco SA expects a slowdown toward the second half of the year, executives said during a conference call to discuss the bank's fourth-quarter 2016 results.

"I believe that the NPLs peak is happening now. ... Or we are very close to it," market relations department director Carlos Wagner Firetti said on the call.

The bank's corporate NPL ratio for loans between 15 and 90 days past due spiked in the fourth quarter to 3.77% from 3.24% in three months earlier and 3% a year ago, which Bradesco blamed on a specific client. Executives said the delinquency didn't affect the bank's results, however, because it had been already written off and was 100% provisioned.

The bank also impaired part of its portfolio tied to bonds and debentures, worth 1.26 billion Brazilian reais in the three-month period.

In terms of provisions, the peak occurred in 2016 due to a specific client case and ratings reviews, Firetti said. The bank's provisions for 2017 are expected to be lower than in 2016. The bank guided allowance for loan loss expenses totaling between 21 billion reais and 24 billion reais in the full year, which compares to 21.74 billion reais of such expenses booked for 2016.

The bank also foresees greater reduction in provisions levels in 2018, which should allow the lender to come back to its ROE of between 18% and 20%, executives said.

HSBC deal impact

During the call, executives noted that some of the bank's metrics for 2016 — such as its efficiency ratio, which rose to 52.2% from 46.5% year over year on a risk-adjusted basis — were affected by its incorporation of HSBC Bank Brasil SA - Banco Múltiplo.

The HSBC Brasil deal, which closed midyear 2016, also caused Bradesco to miss its annual operational expense target, executives noted. In its quarterly report, the bank noted that it booked about 104 million reais in nonrecurring expenses tied to the migration and integration of HSBC Brasil during the second half of 2016. As result, the company's full-year administrative and personnel expenses grew by 17.1% and 20.0%, respectively, well outside of the 12% to 16% range offered with the release of the bank's third-quarter results in November 2016.

For 2017, Bradesco sees operating expenses hitting between a 1% reduction and 3% growth on a pro forma basis, and between 10% to 14% growth on a reported basis. During the call, executives also noted that they expect the efficiency ratio to fall back in line in 2019.

Regulatory changes

Responding to several changes put forward by Banco Central do Brasil recently, Firetti noted both the positive and negative impact such moves would have on the company. The executive noted that the central bank's planned standardization of mandatory deposits should be a positive for the bank, noting that it will reduce compliance costs and make for a more dynamic and balanced market.

On the flip side, The Bradesco representative admitted that the regulator's changes to credit card and other revolving credit lines in an effort to lower credit costs for consumers will likely squeeze margins, but added that the accompanying reduction in risk should compensate.

Despite current challenges, the bank isn't planning any capital increase, executives said, maintaining that capital levels are "comfortable" enough to meet new BIS requirements in the coming years.

As of Feb. 1, US$1 was equivalent to 3.16 Brazilian reais.