Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's Fourth Quarter 2018 Earnings Results Conference Call. This call is being broadcasted simultaneously through the Internet on the website, banco.bradesco/ir-en. In that address, you can also find the presentation available for download. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Banco Bradesco and could also result to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Carlos Firetti, Market Relations Department Director. Please, Mr. Carlos, you may proceed.

Hello, everyone. Welcome to our conference call for discussion of our fourth quarter results. We have today with us participating in the call Octavio de Lazari, Bradesco's Chief Executive Officer; Andre Cano, Executive Vice President; Vinicius Albernaz, Chief Executive Officer of the Group of Bradesco Seguros; and Nianda Miranda, Executive Officer and Investor Relations Officer. To start the call, I turn the floor to Andre.

Thank you very much. Good afternoon. Hello, everyone. Thank you all for joining our fourth quarter 2018 earnings conference call. 2018, as you know, was marked up by dismal activity in global markets as well as the Brazilian markets. This was led by several political and economic disturbances that affected our economy. This combination prevented the economy as a whole from growing faster with [indiscernible] below 2017's 1% growth and the unemployment rate above 11.5%. Despite of this challenging scenario, Bradesco remains flexible, focused and seeks to present on healthy and strong and solid operational for, in financial performance. The bank was well positioned and with the right strategy to grow. This allowed us to expand our own portfolio, increase our services revenues and decrease our risk cost and keep the overall costs at very decent levels. We can say, generally speaking, that we were with costs below inflation. Operating cost remains uncontrolled and we partially absorbed the impact from the collective labor agreement, resulting in costs growing below inflation, as I have mentioned before. On page 3 of our presentation, we can see that, in 2018, we had a record net income of BRL21.6 billion, up 13.7% 13.4% year-on-year. Besides that, we had a solid operational profit above 24.9% year-on-year. It was an incredible year for us. Turning to page 4, we can see we had several foreign initiatives in the past month. Among them, we'd like to highlight the following. First of all, the renewal of our brand, which allows us to be more flexible in our visual communication and reflects our values as well as our deep level of technology and mobility. We also have experienced the flexible evolution of BIA, our unique artificial intelligence platform. And we were able to achieve the important milestone of 500,000…

Okay. Thank you, Andre. So now we start the analysis of our numbers. In Slide 14, we have a summary of our numbers. Many highlights will be provided is the strong increase in our operating income in the fourth quarter compared to the same period last year, 33% and for full year '18 an expansion of 25% of our operating income. Net income grew around 20% in the quarter, 13.4% for '18. And our return on equity reached 19.7% in the quarter and return on assets, 1.7% extending from 1.6%. In Slide 15, we have the evolution of our net income. Since the first quarter '17, we moved to a new level in the last 2 quarters, closed the fourth quarter, as I said, at 19.7%. We will keep working for expanding our level of returns. On Slide 16, we have our loan origination. We have been presenting this chart for more than a year and basically, we consistently show expansion of loan origination in individuals and companies in the fourth quarter compared to the same period in '17. Originations in the business grew 23%, while, for companies, it's growing at 37.5%. The quality of these originations have been very good, given all the changes and improvements we have in our models and origination, and that is the basis for our positive view on credit quality going forward. In Slide 17, we have our loan book. Basically, it grew 7.8% in '18. The individual portfolio was the main highlight, growing at 11%, with the main lines at payroll loans, real estate financing, mortgage, car loans. And also highlights for personal loans that accelerated throughout this year, reaching 18%, basically with improvements in our process originating the product and also changing some characteristics in the product. In the companies segment, the…

[Operator Instructions] Our first question comes from Mr. Carlos Macedo from Goldman Sachs.

I have a couple of questions. First one on your guidance for provisions. I'm just trying to understand, I'm not sure if you said something, you said about the underlying income with loan growth and in the coverage that you have on the NPLs now, 245% is very high. Even this quarter, I mean, your required provisions went down but your generic provisions, which are more at the discretion of the bank, they went up. Just trying to understand how the unbundle will happen, if it's just going to be fueled by the growth of the portfolio and things like that and how IFRS 9 will affect it. Second question on margins. From your guidance, it appears that margins, you expect margins to decline sequentially in 2019. Could you talk a little about that? I know that the change in the mix is pretty possible, but you didn't forecast it. You have a tightening of the margins. Is it going to be just the strength passing through the back book from the front book? How is that going to take place?

Okay, Carlos. First question on provisions, expenses. Basically, we, the trends for provisions remain positive. We believe we had some one-offs in terms of provisions during 2018 that, in our view, in terms of the ticket from this one-off, they shouldn't repeat in the same levels. We continue to have the impairments. They amounted almost BRL1 billion. We believe there's room for seeing reductions there. But I think what gives more confidence for us is that, looking to the originations, we see the performance of the vintage doing very well. We believe, considering this performance, we are not normalized in terms of the level of provisions our portfolio should require. The growth demands, at some point, more provisions but we believe that the growth is of normalization and the absence of one-offs and also the lower impairments should compensate for it. In terms of margins, we believe, in 2018 we will continue to see some compression in spreads. I think that's the trend. That's the consequence of passing through the improvement in terms of cost of risk in an environment where we believe all the vectors will be willing to grow. We don't think the final reduction in the credit NII will be very big. We believe the mix during the year can help us to offset part of that movement. But when you look to the total margins, it also should be affected by the reduction in the margins or in the NII from the asset liability management or in the new classification, the margin from the market, considering that, in our view, the, as of today, the amount of which results to be appropriated in '19 should be smaller than we have appropriated in '18. So the, our, the, so the mix is, the margin from credit reduces probably not as much, and we have, as of today, a perception that there's also some reduction in the margin from the asset liability management.

Okay. And just a follow up then, if you can, talk a little bit about the IFRS-9 implementation. How do you expect that to take place and timing and the impact for Bradesco?

Can you repeat the beginning of your question? I lost it.

The IFRS 9 implementation, and how you expect that to take and the impact for Bradesco?

Okay. As of today, the expectation, this is not totally defined, the expectation that the full implementation should have be for 2021, sorry, 2020. And, but basically, there's kind of a gradual implementation of some aspects. In our view, the implementation will not require more provisions. Basically, we have enough. Considering the overall provision, the implementation doesn't change the coverage. Basically, the only thing is how, especially the additional provision is classified. So we believe we are in a very good position. There is no major impact coming from, or there's no impact coming from the provisioning side.

Okay. But could it increase, starting in 2020, when you implement it, will it increase the provision, given that its expected loss and you're moving more into consumer, which has longer duration. Could you increase the amount of provisions you have to make on your current basis? Or should we expect more of the same relative to what, 2019?

We don't, basically, in terms of the balance, as I said, you, we just reclassify. In terms of the flow, I think we are ready to do the provisions on the appropriate level for the flow of new provisions.

Our next question is coming from Mr. Mario Pierry of Bank of America.

Couple of questions as well. First, on your loan growth guidance of 9% to 13%. Can you give us a little bit more color on the breakdown of this growth, which products are you most excited about? Also, if you can share with us how does this compare for your expectations for industry growth, given the public sector banks in Brazil seem to be reducing the size of their balance sheets. So I was wondering if you're embedding any market share gains here on loan growth? The second question is related to fees. Basically the mid-point of your guidance, we're seeing fees growing roughly in line with inflation. Even though you do have some room here to change your fee for the old HSBC Brazil clients. So I was wondering, also, if you can give us a little bit more color on the guidance and why it's only growing in line with inflation.

Okay.

Okay. This is André speaking. Basically, we do not provide any specific guidance for every line of our corporate credit portfolio. But overall, what I can tell you is that regarding to our fee issues is that we shall see a very strong growth from individuals as well as SMEs. Regarding the corporate size, we are about to see a more competitive environment. We expect the local debt capital markets to provide most of the funds, especially for the high-graded companies. And we shall be able to be fast to provide solutions and then to rewrite our portfolio and strategy to markets. That's how we plan to be competitive in this scenario. Regarding to market share, we share your vision. Regarding to state-owned banks, so we guess we shall have room to get more market share here.

Also, one thing that is very important in all guidance lines, in term of our lines is, basically, we should keep a very high level of capital discipline. Our view in terms of credit is really have returns in the operations for that. As Andre said, we can originate [indiscernible] basically looking for maximization of return. We've been considering that as a banker of companies in Brazil, it's always important to serve our clients.

Okay. And, no, that's clear. And then the question on fees.

Oh, sorry. In terms of fees, we, the main pressure we see comes from the payment side. You guys follow us what's going on in terms of the competitive environment on the acquiring business, and that is impacting our credit card fees. It represents roughly 8.5% of total fees. So it's, this is the main fact. Also, as you guys know, there's the cap in the interchange for that. That was established last year and was, it started to be valid in October '18. That's going to have a full year impact. The impact is not huge, but it contributes to eroding a little bit the overall growth for this line. We have opportunities. We believe the volume of business, considering the stronger and stronger economy, should help us in cash management, in terms of credit, in many lines. But considering the environment, I think it's appropriate to be cautious. I think, the 5% in the middle of the range for this guidance, it sounds to us appropriate for the moment.

Our next question is coming from Mr. Marcelo Telles of Credit Suisse.

I have 2 questions. The first one, regarding your insurance performance, I mean, you seem to be, improve your insurance operation quarter-after-quarter, and we saw a further decline in your claims ratio. So I'm wondering if you still see room for further improvement in your claims ratio down the road. I mean, can you think of it more like a late-cycle situation. Seems like your provisions were, you'd still be operating with a relatively high number. And what do you think that 70% that you had in the quarter, I know there's volatility on a quarterly basis, but what should be, a year that would, could as a benchmark for your loss ratios in the insurance operation. And the, and my second question is, we've seen, it's a more, it's kind of a broader question, we've seen like these very significant changes in the management teams throughout different public sector companies, including of course, Caixa Economica Federal. There has been a lot of talk about a new, or Caixa Economica becoming a dealer, with their inefficiencies, becoming like a better bank going for a significant increase in deposit penetration with its client base. And I'm wondering if you think there is, this will pose a risk, in your view, for private sector banks and for you specifically and if there is any overlap in adjusting your client base and the client base of Caixa Economica Federal. That sort of thing that you think could make the competitive environment tougher down the road?

Okay, thank you. Marcelo, let me start with your last question, then I will make some comments on insurance and transfer to Vinicius. So basically, regarding the changes in the public sector banks, I think, provided that they operate in a rational way and don't provide subsidized loans, a competition is always good. We think that doesn't pose a major risk. They are already a large bank. They have becoming more efficient and basically operation rationally. It's all, it's good. We don't see there's a, that's a problem. We, what was a problem was subsidized loans or subsidized [indiscernible] that somehow fostered a competition that, in our view, was not necessarily help. On the insurance, Vinicius will complement, but I think there were a lot of measures already implemented. They are working in many different fronts, improving the operation in terms of volatiles, in terms of profits. They have done a lot in terms of health insurance, and there's still more to go. But one thing that I will highlight is, especially, health, it still didn't see growth. I think the economy just reached kind of an inflection point, and employment started to stabilize. That helped in terms of claims because we have, we don't have the new unemployment, unemployed people that actually have coverage and they have for some time and generate very high levels of claims. So probably we still have room for capturing growth, especially in the health insurance segment. Vinicius?

Yes, just to add to what Firetti mentioned. Indeed, I mean, we still see room for growth. Actually, employment has just stabilized, and we are beginning to see room for increasing employment. And I think that should affect positively our health operation. Also, it is a combination, I mean, roughly you've seen in terms of the decline in the loss ratio. The combination of measures that have been taken in the company for quite some time now and that are maturing and are working basically on 2 fronts. One side is more competitive, more competitiveness in terms of products, and then we have the changing of our focus and also focusing on the regional aspects and creating new products that are more competitive. And also, on the efficiency side, as Firetti already mentioned, we have several fronts in terms of negotiation with providers of moving from a traditional fee-for-service model to more value-based type of initiatives with our providers. So we still see room for further efficiency gains there. So even though, of course, we, I mean this is a risky and volatile environment, and we still believe that there are structural reasons to believe in this process. In terms of auto, which has been also seen a return to double-digit returns in terms of return on equity. We have been focusing on more, in better portfolios with better returns and focusing on growing in terms of return on good portfolios. So there's a clear focus on internal equity here, a clear focus on growing those lines of products that can deliver the right return to the company.

I have 1 extra question, if I may. This one is related to margins, to NII. We saw in the quarter very nice growth with better mix, and the NII, the credit NII didn't really grow in the quarter. Is it possible for you to share with us what are the segments that you saw some decline in credit spreads? And think of 2019, what are the loan segments that you see more pressure on the spreads?

Okay. Basically, we are still feeling a little bit the impact of the changes in the overdraft. And also, we have been producing more loans in some lines with lower rates, kind of, especially incentivating our own clients to take more loans with lower rates. One example also that has produced volume and of very good, with lower spreads is, for instance, in the personal loans, we have changed the product. We used to treat it as a product for which we granted limits as a percentage of the income. Now we treat it as a product installment, while we can lend for longer. And we sell this product mostly to clients we know, our base of clients, that's driving the growth in personal loans. But the average spread we have generated on it, it's lower from the original portfolio before we started with this product. But anyway, it's a product of a very high return. I think going forward, our expectation is that mix will help and will help to stabilize the average spread, the overall spread of the portfolio, the overall margin of the portfolio and the strong increase in volumes. We believe this will drive NII to the levels we presented in the guidance.

[Operator Instructions] Our next question is coming from Mr. Jason Mollin of Scotiabank.

Some of mine have been addressed. I wanted to ask first one on your outlook for taxes. You've heard about the proposal to end the interest on capital tax deductibility. We've heard that in the past as well. But perhaps we could also see some reduction in corporate tax rates and some changes in the tax on the dividends. What is Bradesco's base case scenario today, if you can provide some color? And my second question is on possible M&A. I saw some press headlines quoting Bradesco's CEO saying that Bradesco is looking at possible acquisitions amid privatizations. What kinds of investments will be interesting for Bradesco? Are there specific companies? And would Bradesco consider nonfinancial companies?

Okay. Jason, in terms of tax, we believe that, considering the, it's, the nominal tax rate of 40% that is expected right now. Our expected tax rate for '19 should be around 30%. There's some debates on taxes, I think, and all of them, you have a lot of information material In the press. We believe what has been discussed sounds positive, making the system more rational. But we don't see in these proposals an increasing tax rate, we see a rationalization. So, but for practical purpose, for estimates, we have to focus on what we know. As I said, the nominal tax rate is right now at 40%, what should lead the effective tax rate to 30%.

Thank you for your question. Regarding to M&A, we have present a very strong balance sheet, and we see here a lot of opportunity in the country. We do expect that, as the economy grows, we shall increase our [indiscernible] here and provide more and more services to our clients. Nevertheless, if we find out any specific opportunity that can enhance our platform to provide any sort of a specific search that we are not in state of the art, we are not prevented from it. But there's nothing in our radar screen right now.

Jason, only to compliment, we don't see anything large. As Andre has said, marginal things that complement portfolios, we'll be looking but nothing that really looks sizable at this moment. I think the comments made by Octavio was more on general terms. We are free to look, considering the rules applied after the acquisition of HSBC. So in theory, we don't have those restrictions. But nothing in the horizon.

Our next question is coming from Mr. Thiago Batista of Itau BBA.

I have just some questions about the payout ratio. Last year, the bank's payout ratio was around 40%. That was 52% in '17. And all of those payments were through IOC. So my question is what is the expected payout ratio that the bank is, what is the expected payout ratio for '19? How much the bank can pay? And if it will be everything through IOC ?

Okay, Thiago, thanks. As of, as you know, we have been paying mostly interest on capital over the last few years, and I think the base case scenario without any other discussion is we should continue paying interest on capital. I think that's the base case. I think we know we are, we have reached a level of capitalization that is very healthy. We've got already a little bit above the level of capital we have been saying we would be very comfortable with, that is 13.5%. But I think there's some, still some things on the horizon. First, we still have to go through the major reforms and the reforms that make the country long-term sustainable. We are getting into a new growth phase. That should bring opportunities to expand the loan book. So we are always, our board is always discussing, but what we have on table is we should keep interest in capital for this year.

Our next question is coming from Mr. Carlos Gomez of HSBC.

I have a question regarding your new presentation of the information that you announced. You have been previously trying to match it. In my numbers, that increases the continuation of insurance towards, that is, 37%, 38% of the total. So first I would like to understand the logic for the reclassification. Is it internal approving or is it something that regulators or auditors indicated to you as a better alternate? Second, going forward, how sensitive are these interest, these earnings of insurance to interest rate, in that it's positive or negative related to them?

Okay, Carlos. Basically, on your second question, the sensitivity for, of earnings to interest rate, basically, short term, as we have been saying, our results are positively impacted by lower rates. Basically, that makes the cost of funding to reprice faster. So a lower rate, short term has, produces positive impact. So I think that, longer term, for, considering that we would be earning lower interest rates on cheap assets, our working capital, then the impact of lower rates comparing to higher rates is negative. But shorter term, it tends to be positive. For sure, it depends on the positions of the treasury, et cetera. In terms of the, your first question, if I got it right, is about the reclassifications.

What is the rationale for the reclassification? And who is the driver? Is it internally because you are looking at the business differently? Or is it the auditors or the related? I bet you have full information percentage in income?

Yes. I think, and the rationale is basically that's kind of closer to the way we look through our numbers internally. Basically, we had some managerial classifications that we have been carrying for some time, and we always resist to make the changes, but the current changes make the numbers to be more aligned to what we have been looking at, to the evolution of our internal managerial numbers. It makes also the numbers easily, more easily compared with other peers. So basically, this is the main reason for the reclassification. On the insurance side, that is kind of, in terms of size, the most important, basically, we had problems in the former classifications that the operational part of the insurance results was in one line and the margin, for insurance and the margin. So that made especially the insurance line the operating result volatile. Sometimes, the trends were hard to explain, looking to align isolated results. Trust me, this new classification makes the understanding of numbers better.

Excuse me, ladies and gentlemen, if there are no further questions, I would like to invite the speaker for the closing remarks.

Thank you all for participating in our conference call. And we are very glad that we have such numbers, and we will remain very positive for 2019. Have a nice day.

That does conclude the Banco Bradesco's conference call for today. Thank you very much for your participation, and have a good day.