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

 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
 
For the month of March, 2021
Commission File Number 1-15250
 

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

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

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

Yes _______ No ___X____

 .

 
 

 

 
 

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

 

 

Table of Contents

 

Independent Auditors’ Report 3
Audit Committee Report 9
Consolidated Statements of Income 10
Consolidated Statements of Comprehensive Income 11
Consolidated Statements of Financial Position 12
Consolidated Statements of Changes in Equity 13-14
Consolidated Statements of Cash Flows 15-16

Notes to the Consolidated Financial Statements

1)   General information 18
2)   Significant accounting practices 18
3)   Risk Management 42
4)   Estimates and judgments 91
5)   Operating segments 93
6)   Net interest income 97
7)   Fee and commission income 98
8)   Net gains/(losses) on financial assets and liabilities at fair value through profit or loss 98
9)   Net gains/(losses) on financial assets at fair value through other comprehensive income 98
10)   Net gains/(losses) on foreign currency transactions 98
11)   Income from insurance and pension plans 99
12)   Personnel expenses 99
13)   Other administrative expenses 100
14)   Depreciation and amortization 100
15)   Other operating income/(expenses) 100
16)   Income tax and social contribution 101
17)   Earnings per share 105
18)   Cash, balances with banks and cash equivalents 105
19)   Financial assets and liabilities at fair value through profit or loss 106
20)   Derivative financial instruments 107
21)   Financial assets at fair value through other comprehensive income 112
22)   Loans and advances to financial institutions 113
23)   Loans and advances to customers 114
24)   Bonds and securities at amortized cost 125
25)   Non-current assets held for sale 126
26)   Investments in associates and joint ventures 127
27)   Property and equipment 130
28)   Intangible assets and goodwill 132
29)   Other assets 133
30)   Deposits from banks 134
31)   Deposits from customers 134
32)   Funds from securities issued 134
33)   Subordinated debt 136
34)   Insurance technical provisions and pension plans 137
35)   Closed Supplementary pension plans 145
36)   Provisions, Contingents Assets and Liabilities and Legal Obligations – Tax and Social Security 148
37)   Other liabilities 151
38)   Shareholders’ Equity 153
39)   Transactions with related parties 156
40)   Off-balance sheet commitments 158
41)   New standards and amendments and interpretations of existing standards 159
42)   Other information 159

 

2 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Independent Auditors’ Report

 

 

Independent Auditors’ Report on consolidated financial statements

 

To

Shareholders and the Board of Directors of

Banco Bradesco S.A.

Osasco – SP

 

Opinion

We have audited the consolidated financial statements of Banco Bradesco S.A. (“Bradesco”), which comprise the consolidated statement of financial position as of December 31, 2020 and the respective consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and notes, including significant accounting policies and other clarifying information.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Banco Bradesco S.A as of December 31, 2020, and of its consolidated financial performance and its consolidated cash flows, for the year then ended, in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

 

Basis for opinion

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

 

Key Audit Matters

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

 

Assessment of the allowance for expected credit losses on loans and advances to customers, loan commitments, financial guarantees, financial assets at fair value through other comprehensive income and securities at amortized cost

As discussed in notes 2d viii, 3.2, 4, 21d, 23, 24 and 40, to the consolidated financial statements, the Bank has R$ 51,314,052 thousand of allowance for expected credit losses (ECL) related to loans and advances to customers and securities at amortized cost, loan commitments, financial guarantees and financial assets at fair value through other comprehensive income (FVOCI), as of December 31, 2020. The Bank recognizes a lifetime ECL for those contracts that have experienced a Significant Increase in Credit Risk (SICR) since initial recognition or are credit impaired, and a 12-month ECL for all other contracts. The Bank calculates ECL either on a group basis, using models, or, for certain significant exposures, on an individual basis, estimating the future cash flows including the value of related collateral. To calculate ECL on a group basis the Bank segregates the portfolio of contracts on the basis of shared credit risk characteristics and uses estimates of the Probability of Default (PD), the Loss Given Default (LGD) and the Exposure at Default (EAD) as well as estimates of the impact of projections of future economic conditions.

We identified the assessment of the ECL as a key audit matter. The estimation of ECL involved significant measurement uncertainty, primarily as a result of the complexity of the models and the quantity and subjectivity of the assumptions. These included: the overall ECL methodology, inclusive of the methodologies and assumptions used to estimate the PDs, EADs and LGDs; the future macroeconomic scenarios; the identification of a SICR (stage 2) and exposures that are credit impaired (stage 3); and, for ECL calculated on an individual basis, the expected cash flows including the related collateral valuation. The measurement uncertainty was accentuated by the effects of the Covid-10 pandemic on the current economic scenario and its possible effects in the future.

 

Bradesco 3

 

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

 
   

Independent Auditors’ Report

 

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the process for calculating the ECL. This included controls related to: (1) the development and approval of the ECL methodology; (2) the determination of the methodologies and assumptions used to estimate PD, EAD, LGD and the future macroeconomic scenarios; (3) the validation of models used to calculate the ECL; (4) the calculation of the ECL estimate; and (5) the projection of expected cash flows, including related collateral values, for ECL calculated on an individual basis.

 

We involved credit risk professionals with specialized skills and knowledge, who assisted in: (1) assessing the Bank’s ECL methodology for compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); (2) testing the accuracy of the Bank’s PDs, EADs and LGDs using the Bank’s historical data and defined methodologies; (3) analyzing whether the contracts are segmented by shared credit risk characteristics for the estimation of PD by observing historical correlation; and (4) evaluating the relevance of the macroeconomic variables considered in the future scenarios by analyses of regression and historical correlation. We compared the consider indices projected by the Bank in the future macroeconomic scenarios with independent third-party projections. For a selection of contracts, we evaluated the ECL calculated on an individual basis, including the assessment of expected cash flows and related collateral. For a sample of contracts, we assessed the adherence to internal policies in the identification of SICR and the classification of financial instruments in stages 2 and 3.

 

Based on the evidence obtained through the procedures summarized above, we consider the ECL to be adequate in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2020.

 

Evaluation of the measurement of provisions and the disclosure of contingent liabilities - tax, civil and labor lawsuits

As discussed in notes 2j, 4 and 36, to the consolidated financial statements, the Bank is a defendant in tax, civil and labor lawsuits for which it has provisions of R$ 8,271,112 thousand, R$ 9,092,421 thousand and R$ 6,890,498 thousand, respectively. The provisions for tax lawsuits include amounts relating to the legality and constitutionality of certain taxes. The provisions for civil lawsuits include certain indemnity claims for alleged moral and economic damages arising from the Bank’s actions in the course of providing banking products and services, adjustments for inflation on savings account balances due to the implementation of economic plans by the Federal Government and certain other specific civil lawsuits. In each case, the Bank applies judgment to determine the likelihood of loss and estimate the amount involved. For labor lawsuits, the Bank uses a model, based on historical data. The Bank segregates the lawsuits based on certain characteristics and uses the historical data to calculate the provision for each group of lawsuits.

 

We identified the evaluation of the measurement of provisions and the disclosure of contingent liabilities for certain tax and civil lawsuits and for labor lawsuits as a key audit matter. The evaluation required challenging auditor judgment due to the subjective nature of the estimates, judgments and assumptions made by the Bank. In the case of the tax and civil lawsuits, those estimates, judgments and assumptions related to estimating the likelihood of loss and the amount of any such loss, and, in the case of labor lawsuits, they related to the segregations used in the model and the historical observation period.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the evaluation and measurement of the provisions and disclosures for tax, civil and labor lawsuits. This included controls related to: (1) the assessment of information received from external and internal legal advisors on tax, civil and labor lawsuits; and (2) the development and approval of the models and assumptions used to measure the provision for labor liabilities.

 

We obtained and read the letters received directly from the Bank’s external legal advisors for certain tax lawsuits, and the documentation prepared by the internal legal advisors for certain civil lawsuits, which included an assessment of the likelihood of loss and an estimate of the amount of such loss. We compared these assessments and estimates with those used by the Bank, and considered historical data and information related to the lawsuits in question as well as to other similar lawsuits in order to evaluate the provisions and

 

4 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Independent Auditors’ Report

 

disclosures made in relation to these matters. We involved tax professionals with specialized skills and knowledge, who assisted in the assessment of the likelihood and estimate of loss of certain specific tax lawsuits based on the technical merits of the Bank’s position and the supporting documentation. We also involved legal professionals with specialized skills and knowledge, who assisted in the assessment of the likelihood of loss in certain specific civil lawsuits. For the labor lawsuits, we: (1) evaluated the length of the historical observation period used by the Bank by comparing it to the results of using alternative periods; (2) tested the accuracy of the segregations used in the model; and (3) tested the accuracy of the Bank’s model using the Bank’s historical data and defined methodologies. For civil and labor lawsuits, we tested the sufficiency of the provision by comparing actual disbursement in the year to the amounts provided for at the previous year end.

 

Based on the evidence obtained through the procedures summarized above, we consider the measurement of provisions and the disclosure of tax, civil and labor contingent liabilities to be adequate, in the context of the consolidated financial statements taken as a whole for year ended on December 31, 2020.

 

Assessment of the recoverability of deferred tax assets arising from carry-forward tax losses

As discussed in notes 2t, 4 and 16 to the consolidated financial statements the Bank has R$ 68,515,007 thousand of deferred tax assets arising from carry-forward tax losses as of December 31, 2020. The Bank recognizes these deferred tax assets to the extent that it is probable that future taxable profits will be available against which the carry-forward losses can be utilized. The Bank’s estimates of future taxable profits are based on its business plans and budgets which require the Bank to make a number of assumptions related to future events and conditions. Changes in certain assumptions about the future, such as growth rates of the principal lines of business, interest rates and foreign exchange rates, could have a significant impact on these estimates and, consequently, on the recoverability of deferred tax assets arising from carry-forward tax losses.

 

We identified the assessment of the recoverability of deferred tax assets arising from carry-forward tax losses as a key audit matter. The evaluation of the estimates of future taxable profit and the underlying assumptions required subjective auditor judgment because of the sensitivity of the estimate to minor changes in the assumptions and the degree of subjectivity associated with those assumptions. This subjectivity was accentuated by the uncertainty related to the possible future effects of the Covid-19 pandemic on the economic situation.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the process to estimate future taxable profits. This included controls related to the development and approval of key assumptions for the budget and the final estimates of future taxable profits.

 

We involved corporate finance professionals with specialized skills and knowledge, who assisted in assessing the assumptions, including growth rates of the principal lines of business, interest rates and foreign exchange rates underlying Bradesco’s estimate of future taxable profits, as well as the possible effects of the Covid-19 pandemic on the economic situation. We evaluated the Bank’s ability to accurately project taxable profits by comparing the estimated taxable profits for the year ended December 31, 2020 made in the prior year with actual taxable profits in 2020, taking into account the impacts of Covid-19.

 

Based on the evidence obtained through the procedures summarized above, we consider the assessment of recoverability of deferred tax assets arising from carry forward tax losses to be adequate in the context of the consolidated financial statements taken as a whole for the year ended on December 31, 2020.

 

Evaluation of the impairment testing of goodwill and intangible assets

As discussed in notes 2g, 2i, 4 and 28 to the consolidated financial statements the Bank has goodwill of R$ 7,093,544 thousand and other intangible assets with finite useful lives of R$ 3,631,848 thousand. The Bank performs impairment tests for goodwill at least annually and, for other intangible assets with finite useful lives, whenever there is objective evidence of impairment. As part of the impairment test of these assets, the Bank estimates recoverable amounts ​​of the relevant Cash Generating Units based on the present value of future cash flows. In order to estimate future cash flows the Bank estimates the growth rates for different businesses, income streams and expenses based on its business plans and budgets which, in turn, are based on a series of business and economic assumptions.

 

We identified the evaluation of the impairment testing of goodwill and intangible assets as a key audit matter. There is a high degree of subjectivity in determining the significant assumptions, including the growth rates for

 

Bradesco 5

 

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

 
   

Independent Auditors’ Report

 

different businesses, revenues and expenses, and the discount rates used, which was accentuated by the uncertainty related to the possible future effects of the Covid-19 pandemic on the economic situation.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the impairment testing of intangible assets, including controls related to: (1) the development, review and approval of the growth rates and discount rates used to determine the present value of future cash flows; and (2) the independent review of the calculation methodology to perform the impairment test.

 

We involved corporate finance professionals with specialized skills and knowledge who assisted in: (1) evaluating the growth rates used for different businesses, revenues and expenses by comparing them to information obtained from internal and external sources, including the possible impact of the Covid-19 pandemic on these assumptions; (2) evaluating the discount rates used in the impairment tests by comparing them to ranges of discount rates that were developed independently using publicly available market data for comparable entities; (3) assessing the Bank’s ability to project cash flows by comparing the prior year’s projections for the year ended December 31, 2020, as subsequently adjusted by the Bank for the expected impacts of Covid-19, with actual cash flows in this year; and (4) testing the mathematical accuracy of certain steps of the present value calculations.

 

Based on the evidence obtained through the procedures summarized above, we consider the evaluation of the impairment testing of intangible assets to be adequate in the context of the consolidated financial statements taken as a whole for the year ended December 31, 2020.

 

Evaluation of the measurement of insurance and pension plan technical provisions

As discussed in notes 2l, 4 and 34 to the consolidated financial statements the Bank, has R$ 279,465,384 thousand of technical provisions related to insurance and pension plans. To measure certain technical provisions and to perform the liability adequacy tests, the Bank uses actuarial techniques and methods that require judgment to determine methodologies and define assumptions including expected claim amounts, longevity, persistence, inflation of medical costs and discount rates.

 

We identified the evaluation of the insurance and pension plan technical provisions as a key audit matter. The assumptions used in their measurement are subjective and this subjectivity was accentuated by the uncertainty related to the possible future effects of the Covid-19 pandemic on the economic situation. Minor adjustments to certain assumptions can result in significant changes in the measurement of these liabilities. Subjective auditor judgment and specialized actuarial skills and knowledge was required to assess the assumptions as well as the actuarial methodologies used.

 

How our audit approached this matter

The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the liability adequacy tests and the measurement of technical provisions. This included controls related to: (1) the development and approval of actuarial methodologies and assumptions in respect of expected claim amounts, longevity, persistence, inflation of medical costs and discount rates; and (2) the review and approval of the final calculations.

 

We involved actuarial professionals with specialized skills and knowledge who assisted in: (1) evaluating the methodologies used in the measurement of certain technical provisions and the liability adequacy tests by comparing them to market practice; (2) assessing the assumptions related to expected claim amounts, longevity, persistence, inflation of medical costs and discount rates, by comparing them to the Bank’s historical experience and publicly available information, including the possible impact of the Covid-19 pandemic on these assumptions; (3) testing, through the use of a specialized software tool, the accuracy of certain technical provisions based on the Bank’s historical data, assumptions and methodologies; (4) developing, through the use of a specialized software tool, generally accepted actuarial techniques and independently sourced assumptions, an independent estimate of certain technical provisions; and (5) assessing the Bank’s ability to accurately project claims by comparing historical estimates of the last 3 years with subsequent payments made.

 

6 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Independent Auditors’ Report

 

Based on the evidence obtained through the procedures summarized above, we consider the measurement of the liability adequacy test and the technical provisions for insurance and pension plans to be adequate in the context of the consolidated financial statements taken as a whole for the year ended December 31, 2020.

 

Application controls and general information technology controls

Bradesco's technology environment has processes for managing access and changes in systems and applications, for developing new programs, besides automated controls and/or controls with automated components in the several relevant processes. In order to maintain its operations, Bradesco provides its employees with access to systems and applications, taking into account the duties performed by them and within its organizational structure. The controls to authorize, monitor, restrict and/or revoke the respective accesses to this environment aim to assure that the accesses and information updates are appropriately performed and by the appropriate professionals, to mitigate the potential risk of fraud or error arising from inappropriate access or change in a system or information, and to ensure the integrity of financial information and accounting records.

 

We consider this area as significant for our audit due to Bradesco's high dependence on its technology systems, the high volume of transactions processed daily, and the importance of access controls and change management in its systems and applications to plan the nature, timing and extent of our audit procedures.

 

How our audit approached this matter

The primary procedures we performed to address the matter significant to our audit is summarized below.

 

With the assistance of our information technology professionals with experience and knowledge in the sector, we performed the following procedures:

 

(i) We tested the design and operational effectiveness of certain key access controls, such as authorizing new users, revoking disconnected users and reviewing active users;

 

(ii) We carry out tests, based on sampling, since we plan to rely on specific information, on information extracted from certain systems, considered relevant for the purposes of preparing the consolidated financial statements;

 

(iii) In areas where, in our judgment, there is a high dependence on information technology, our tests also included the assessment of password policies, security settings and controls on developments and changes in systems and applications;

 

(iv) When we identify key internal controls for the financial reporting process and other relevant processes that are fully automated or with any component dependent on systems and applications, we test the design and operational effectiveness of these controls.

 

The evidence obtained through the procedures summarized above allowed us to consider application controls and general information technology controls to plan the nature, timing and extent of our audit procedures in the context of the consolidated financial statements taken as whole for the year ended December 31, 2020.

 

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

 

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

 

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

 

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

 

Bradesco 7

 

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

 
   

Independent Auditors’ Report

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

From the matters communicated with those charged with governance, we determined those matters that were of most significance in the audit of the consolidated financial statements of the current period, and are therefore

 

8 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Independent Auditors’ Report

 

the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matters, or when, in extremely rare circumstances, we determine a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefit of such communication.

 

 

 

 

Osasco, March 09, 2021

KPMG Auditores Independentes

CRC 2SP-028567/F

 

Original report in Portuguese signed by

 

André Dala Pola

Accountant CRC 1SP214007/O-2

 

Bradesco 9

 

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

 
   

Audit Committee Report

 

Bradesco Financial Conglomerate Audit Committee´s Report on financial statements prepared in accordance with International Financial Reporting Standards (IFRS)

In addition to the Audit Committee's Report related to the consolidated financial statements of Banco Bradesco S.A. for the year ended December 31, 2020, issued on February 3, 2021, we have also  analysed the complete set of consolidated statements in accordance with the International Financial Reporting Standards (IFRS) and the pronouncements issued by the International Accounting Standards Board (IASB).

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

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

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

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

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

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

 

Based on the review and discussions mentioned above, the Audit Committee recommends that the Board of Directors approves the audited financial statements for the year ended December 31, 2020, prepared in accordance with International Financial Reporting Standards.

 

Cidade de Deus, Osasco, SP, March 4, 2021.

 

ALEXANDRE DA SILVA GLÜHER

(Coordinator)

 

PAULO ROBERTO SIMÕES DA CUNHA

(Financial Expert)

 

PAULO RICARDO SATYRO BIANCHINI

 

JOSÉ LUIS ELIAS

10 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Consolidated Statements of Income

 

  R$ thousand
Note Years ended December 31
2020 2019 2018
Interest and similar income   119,743,371 124,417,705 122,053,139
Interest and similar expenses   (48,575,687) (58,617,986) (55,244,669)
Net interest income 6 71,167,684 65,799,719 66,808,470
Fee and commission income 7 24,936,454 25,337,676 23,831,590
Net gains/(losses) on financial assets and liabilities at fair value through profit or loss 8 (18,586,403) (1,090,917) (11,676,573)
Net gains/(losses) on financial assets at fair value through other comprehensive income 9 (1,716,879) 655,832 1,073,563
Net gains/(losses) on foreign currency transactions 10 (1,010,972) 323,774 1,096,826
Net profit from insurance and pension plans 11 7,578,707 8,254,939 7,656,872
- Insurance and pension income   68,410,501 71,191,410 66,270,095
- Insurance and pension expenses   (60,831,794) (62,936,471) (58,613,223)
Other operating income   (13,735,547) 8,143,628 (1,849,312)
Expected loss on loans and advances 23 (18,711,841) (12,532,133) (15,091,975)
Expected loss on other financial assets 21 and 24 (833,434) (1,472,394) (1,172,860)
Personnel expenses 12 (18,965,477) (21,143,568) (17,581,798)
Other administrative expenses 13 (15,484,126) (16,489,578) (16,873,962)
Accumulated depreciation and amortization 14 (5,921,030) (5,865,768) (4,808,255)
Other operating income/(expenses) 15 (18,822,246) (29,597,586) (15,500,258)
Other operating expense   (78,738,154) (87,101,027) (71,029,108)
Income before income taxes and share of profit of associates and joint ventures   3,630,437 12,179,996 17,761,640
Share of profit of associates and joint ventures 26 444,858 1,201,082 1,680,375
Income before income taxes and non-controlling interests   4,075,295 13,381,078 19,442,015
Income taxes 16 11,958,666 7,792,129 (2,693,576)
Net income for the year   16,033,961 21,173,207 16,748,439
         
Attributable to shareholders:        
Shareholders of the parent   15,836,862 21,023,023 16,583,915
Non-controlling interest   197,099 150,184 164,524
         
Basic and diluted earnings per share based on the weighted average number of shares (expressed in R$ per share):        
– Earnings per common share 17 1.71 2.27 1.79
– Earnings per preferred share 17 1.88 2.49 1.97

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

 

 

Bradesco 11

 

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

 
   

Consolidated Statements of Comprehensive Income

 

  Note R$ thousand
Years ended December 31
2020 2019 2018
Net income for the year   16,033,961 21,173,207 16,748,439
         
Items that are or may be reclassified to the Consolidated Statement of Income        
Financial assets at fair value through other comprehensive income        
Unrealized gains/(losses)   (1,529,928) 7,752,853 (473,594)
Gains/(losses) transferred to income 9 (1,720,958) 651,428 1,023,299
Tax effect   1,447,558 (3,609,375) (209,359)
         
Unrealized gains/(losses) on hedge 20      
Cash flow hedge   (335,620) 260,397 (96,760)
Hedge of investment abroad   (187,629) (119,635) (209,300)
Tax effect   235,462 (42,854) 122,424
          
Exchange differences on translations of foreign operations        
Foreign exchange on translations of foreign operations   235,863 73,867 113,198
         
Items that cannot be reclassified to the Consolidated Statement of Income        
Gains/(losses) on equity instruments at fair value through other comprehensive income   3,573,603 1,482,384 (756,042)
Tax effect   (1,464,897) (579,763) 302,417
          
Other   (21,593) (204,538) (92,764)
          
Total other comprehensive income   231,861 5,664,764 (276,481)
Total comprehensive income for the year   16,265,822 26,837,971 16,471,958
         
Attributable to shareholders:        
Shareholders of the parent   16,068,723 26,687,787 16,307,434
Non-controlling interest   197,099 150,184 164,524

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

 

 

12 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Consolidated Statements of Financial Position

 

  R$ thousand
Note On December 31
2020 2019
Assets       
Cash and balances with banks 18 107,602,594 109,610,999
Financial assets at fair value through profit or loss 19a 275,986,689 249,759,777
Financial assets at fair value through other comprehensive income 21 185,841,975 192,450,010
Financial assets at amortized cost       
- Loans and advances to financial institutions, net of provision for losses 22 191,424,731 59,083,791
- Loans and advances to customers, net of provision for losses 23 473,637,358 423,528,716
- Securities, net of provision for losses 24 179,623,894 166,918,360
- Other financial assets 29 52,416,117 56,101,781
Non-current assets held for sale 25 1,202,488 1,357,026
Investments in associates and joint ventures 26 7,386,840 7,635,612
Premises and equipment, net 27 14,071,129 14,659,222
Intangible assets and goodwill, net 28 14,669,464 14,724,647
Taxes to be offset 16 15,330,420 15,685,801
Deferred income tax assets 16c 76,984,262 59,570,055
Other assets 29 8,475,829 7,441,888
Total assets   1,604,653,790 1,378,527,685
       
Liabilities      
Liabilities at amortized cost      
- Deposits from banks 30 267,280,167 227,819,611
- Deposits from customers 31 545,292,743 366,227,540
- Securities issued 32 144,903,825 170,727,564
- Subordinated debts 33 53,246,232 49,313,508
- Other financial liabilities 37 75,528,047 79,121,127
Financial liabilities at fair value through profit or loss 19c 18,697,682 14,244,083
Provision for Expected Credit Loss       
- Loan Commitments 23 3,859,316 2,318,404
- Financial guarantees 23 2,318,930 1,970,321
Insurance technical provisions and pension plans 34 279,465,384 268,302,691
Other reserves 36 25,582,923 25,239,929
Current income tax liabilities   1,596,284 2,595,277
Deferred income tax assets 16c 1,249,650 1,080,603
Other liabilities 37 39,515,233 34,023,453
Total liabilities   1,458,536,416 1,242,984,111
       
Shareholders’ equity 38    
Capital   79,100,000 75,100,000
Treasury shares   (440,514) (440,514)
Capital reserves   35,973 35,973
Profit reserves   58,985,029 51,986,423
Additional paid-in capital   70,496 70,496
Other comprehensive income   8,103,343 7,871,482
Retained earnings   (234,109) 475,606
Equity attributable to shareholders of the parent   145,620,218 135,099,466
Non-controlling interest   497,156 444,108
Total equity   146,117,374 135,543,574
Total equity and liabilities   1,604,653,790 1,378,527,685

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

 

Bradesco 13

 

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

 
   

Consolidated Statements of Changes in Equity

 

  R$ thousand
Capital Treasury shares Capital reserves Profit reserves Additional paid-in capital Other comprehensive income (1) Retained earnings Equity attributable to  shareholders of the parent Non-controlling interest Total
Legal Statutory
Balance on January 1, 2018 59,100,000 (440,514) 35,973 7,540,016 41,941,211 70,496 2,483,199 4,536,236 115,266,617 289,873 115,556,490
Net income -   -   -   -   -   -   -   16,583,915 16,583,915 164,524 16,748,439
Financial assets at fair value through other comprehensive income -   -   -   -   -   -   (296,915) -   (296,915) -   (296,915)
Foreign currency translation adjustment -   -   -   -   -   -   113,198 -   113,198 -   113,198
Other -   -   -   -   -   -   (92,764) -   (92,764) -   (92,764)
Comprehensive income -   -   -   -   -   -   (276,481) 16,583,915 16,307,434 164,524 16,471,958
Increase of non-controlling shareholders’ interest -   -   -   -   -   -   -   -   -   2,265 2,265
Capital increase with reserves 8,000,000 -   -   -   (8,000,000) -   -   -   -   -   -  
Transfers to reserves -   -   -   954,247 10,832,110 -   -   (11,786,357) -   -   -  
Interest on equity and dividends -   -   -   -   -   -   -   (7,298,596) (7,298,596) (55,997) (7,354,593)
Balance on December 31,  2018 67,100,000 (440,514) 35,973 8,494,263 44,773,321 70,496 2,206,718 2,035,198 124,275,455 400,665 124,676,120
                        
Balance on January 1, 2019 67,100,000 (440,514) 35,973 8,494,263 44,773,321 70,496 2,206,718 2,035,198 124,275,455 400,665 124,676,120
Net income -   -   -   -   -   -   -   21,023,023 21,023,023 150,184 21,173,207
Financial assets at fair value through other comprehensive income -   -   -   -   -   -   5,795,435 -   5,795,435 -   5,795,435
Foreign currency translation adjustment -   -   -   -   -   -   73,867 -   73,867 -   73,867
Other -   -   -   -   -   -   (204,538) -   (204,538) -   (204,538)
Comprehensive income -   -   -   -   -   -   5,664,764 21,023,023 26,687,787 150,184 26,837,971
Increase of non-controlling shareholders’ interest -   -   -   -   -   -   -   -   -   8,750 8,750
Capital increase with reserves 8,000,000 -   -   -   (8,000,000) -   -   -   -   -   -  
Transfers to reserves -   -   -   1,129,131 13,589,708 -   -   (14,718,839) -   -   -  
Interest on equity and dividends -   -   -   -   (8,000,000) -   -   (7,863,776) (15,863,776) (115,491) (15,979,267)
Balance on December 31,  2019 75,100,000 (440,514) 35,973 9,623,394 42,363,029 70,496 7,871,482 475,606 135,099,466 444,108 135,543,574

 

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

 

14 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Consolidated Statements of Changes in Equity

 

  R$ thousand
Capital Treasury shares Capital reserves Profit reserves Additional paid-in capital Other comprehensive income (1) Retained earnings Equity attributable to  shareholders of the parent Non-controlling interest Total
Legal Statutory
Balance on December 31,  2019 75,100,000 (440,514) 35,973 9,623,394 42,363,029 70,496 7,871,482 475,606 135,099,466 444,108 135,543,574
Net income -   -   -   -   -   -   -   15,836,862 15,836,862 197,099 16,033,961
Financial assets at fair value through other comprehensive income -   -   -   -   -   -   17,591 -   17,591 -   17,591
Foreign currency translation adjustment -   -   -   -   -   -   235,863 -   235,863 -   235,863
Other -   -   -   -   -   -   (21,593) -   (21,593) -   (21,593)
Comprehensive income -   -   -   -   -   -   231,861 15,836,862 16,068,723 197,099 16,265,822
Increase of non-controlling shareholders’ interest -   -   -   -   -   -   -   -   -   (3,598) (3,598)
Capital increase with reserves 4,000,000 -   -   -   (4,000,000) -   -   -   -   -   -  
Transfers to reserves -   -   -   827,328 10,171,278 -   -   (10,998,606) -   -   -  
Interest on equity and dividends -   -   -   -   -   -   -   (5,547,971) (5,547,971) (140,453) (5,688,424)
Balance on December 31,  2020 79,100,000 (440,514) 35,973 10,450,722 48,534,307 70,496 8,103,343 (234,109) 145,620,218 497,156 146,117,374

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

 

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

 

Bradesco 15

 

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

 
   

Consolidated Statements of Cash Flows

 

  R$ thousand
Years ended December 31
2020 2019 2018
Operating activities      
Income before income taxes and non-controlling interests 4,075,295 13,381,078 19,442,015
Adjustments to reconcile income before income tax to net cash flow from operating activities:      
Expected loss on loans and advances 18,711,841 12,532,133 15,091,975
Changes in the insurance technical provisions and pension plans 29,983,129 32,036,527 29,409,222
(Gains)/Net realized losses on financial assets at fair value through other comprehensive income 1,716,879 (655,832) (1,073,563)
Expenses with provisions and contingent liabilities 3,822,270 9,244,967 4,306,043
Impairment of assets 2,162,468 3,196,683 1,757,981
Depreciation 2,960,106 2,737,383 1,460,013
Amortization of intangible assets 2,960,924 3,128,385 3,348,242
Share of profit of associates and joint ventures (444,858) (1,201,082) (1,680,375)
Losses on disposal of non-current assets held for sale 130,024 277,763 516,713
Net losses from disposal of property and equipment 139,411 17,937 98,182
(Gains)/Losses on the sale of investments in associates (29,829) 48,927 -  
Effect of changes in exchange rates in cash and cash equivalents (2,452,395) (752,829) (751,769)
Changes in assets and liabilities:      
(Increase)/Decrease in reserve requirement - Central Bank 6,864,805 (3,025,422) (20,882,690)
(Increase)/decrease in loans and advances to banks (8,449,903) (2,099,605) 33,357
(Increase)/decrease in loans and advances to customers (125,720,138) (123,571,123) (112,861,770)
(Increase)/Reduction in financial assets at fair value through profit or loss (26,226,912) (3,598,627) (3,625,822)
(Increase)/decrease in other assets (25,168,411) (33,187,183) (31,884,484)
Increase/(decrease) in deposits from banks 53,292,918 (3,555,713) (20,749,542)
Increase/(decrease) in deposits from customers 186,793,206 36,787,089 88,659,514
Increase/(Decrease) in financial liabilities at fair value through profit or loss 4,453,599 (1,908,004) 1,877,088
Increase/(decrease) in insurance technical provisions and pension plans (18,820,436) (15,312,123) (16,920,525)
Increase/(decrease) in other provisions (3,479,276) (3,807,209) (2,994,599)
Increase/(decrease) in other liabilities (4,622,104) 27,988,377 14,167,163
  102,652,613 (51,297,503) (33,257,631)
Interest received on investing financial assets 67,055,576 67,523,213 61,660,260
Interest paid (21,560,365) (27,246,400) (27,813,710)
Income tax and social contribution paid (5,715,233) (8,433,279) (7,086,237)
Net cash provided by/(used in) operating activities 142,432,591 (19,453,969) (6,497,318)
       
Investing activities      
(Acquisitions) of subsidiaries, net of cash and cash equivalents paid (3,173,403) -   (442,122)
(Acquisition) of financial assets at fair value through other comprehensive income (56,013,411) (96,192,725) (103,432,365)
Disposal of financial assets at fair value through other comprehensive income 54,381,559 99,911,819 103,897,609
Maturity of financial assets at amortized cost 53,919,341 17,458,880 21,759,857
(Acquisition) of financial assets at amortized cost (47,169,156) (41,401,367) (70,719,797)
Disposal of non-current assets held for sale 559,661 613,246 688,885
(Acquisitions) of investments in associates (491,438) -   (52,844)
Sale of investments in associates 130,249 17,961 -  
Dividends and interest on shareholders’ equity received 296,323 720,985 1,513,712
(Acquisition) of property and equipment (1,795,410) (2,629,435) (2,389,433)
Sale of premises and equipment 795,560 816,907 361,240
(Acquisition) of intangible assets (2,469,105) (2,696,067) (3,053,156)
Interest received on investing financial assets 21,491,721 8,053,047 17,383,392
Net cash provided by/(used in) investing activities 20,462,491 (15,326,749) (34,485,022)
       
Financing activities      
Funds from securities issued 61,833,816 84,982,152 85,963,195
Payments on securities issued (84,286,467) (60,215,940) (69,747,110)
Issuance of subordinated debt 688,186 -   10,890,606

 

16 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Consolidated Statements of Cash Flows (continued)

 

  R$ thousand
Years ended December 31
2020 2019 2018
Payments on subordinated debts (1,258,049) (3,207,429) (9,181,501)
Leases payment (1,797,408) (1,067,573) -  
Non-controlling interest (144,051) (106,741) 2,265
Interest paid (10,009,878) (16,951,569) (16,986,503)
Interest on equity and dividends paid (1,432,130) (17,751,148) (6,539,193)
Net cash provided by/(used in) financing activities (36,405,981) (14,318,248) (5,598,241)
       
(Decrease)/Increase in cash and cash equivalents 126,489,101 (49,098,966) (46,580,581)
       
Cash and cash equivalents      
At the beginning of the year 61,879,493 110,225,630 156,054,442
Effect of changes in exchange rates in cash and cash equivalents 2,452,395 752,829 751,769
At the end of the year 190,820,989 61,879,493 110,225,630
       
(Decrease)/Increase in cash and cash equivalents 126,489,101 (49,098,966) (46,580,581)
       
Non-cash transactions      
Credit operations transferred to non-current assets held for sale 1,087,055 1,934,762 1,947,924
Dividends and interest on equity declared but not yet paid 3,825,613 126,755 4,876,458
(Gains)/losses on financial assets at fair value through other comprehensive income (17,591) (5,795,435) 296,915

 

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

 

 

Bradesco 17

 

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

 
   

Notes to the Consolidated Financial Statements

 

1)       General information

 

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

 

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

 

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

 

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

 

The consolidated financial statements, in accordance with the IFRS, were approved by the Board of Directors on February 25, 2021.

 

2)       Significant accounting practices

 

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

 

The Organization has classified its expenses according to their nature.

 

The consolidated statement of cash flows shows the changes in cash and cash equivalents during the year arising from operating, investing and financing activities. Cash and cash equivalents include highly liquid investments. Note 18 details the accounts of the consolidated statement of financial position that comprise cash and cash equivalents. The consolidated statement of cash flows is prepared using the indirect method. Accordingly, the income before taxes was adjusted by non-cash items such as provisions, depreciation, amortization and Impairment losses on loans and advances. The interest and dividend received and paid are classified as operating, financing or investment cash flows according to the nature of the corresponding assets and liabilities.

 

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

 

18 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

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

 

a) Consolidation

 

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

 

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

 

  Activity Shareholding interest
December 31
2020 2019
Financial Sector – Brazil       
Ágora Corretora de Títulos e Valores Mobiliários S.A. Brokerage 100.00% 100.00%
Banco Bradescard S.A. Cards 100.00% 100.00%
Banco Bradesco BBI S.A. (1) Investment bank 100.00% 99.96%
Banco Bradesco BERJ S.A. Banking 100.00% 100.00%
Banco Bradesco Financiamentos S.A. Banking 100.00% 100.00%
Banco Losango S.A. Banking 100.00% 100.00%
Bradesco Administradora de Consórcios Ltda. Consortium management 100.00% 100.00%
Bradesco Leasing S.A. Arrendamento Mercantil Leases 100.00% 100.00%
Bradesco-Kirton Corretora de Câmbio S.A. Exchange Broker 99.97% 99.97%
Bradesco S.A. Corretora de Títulos e Valores Mobiliários Brokerage 100.00% 100.00%
BRAM - Bradesco Asset Management S.A. DTVM Asset management 100.00% 100.00%
Kirton Bank S.A. Banking 100.00% 100.00%
Tempo Serviços Ltda. Services 100.00% 100.00%
Financial Sector – Overseas      
Banco Bradesco Argentina S.A.U. (2) Banking 100.00% 100.00%
Banco Bradesco Europa S.A. (2) Banking 100.00% 100.00%
Banco Bradesco S.A. Grand Cayman Branch (2) (3) Banking 100.00% 100.00%
Banco Bradesco S.A. New York Branch (2) Banking 100.00% 100.00%
Bradesco Securities, Inc. (2) Brokerage 100.00% 100.00%
Bradesco Securities, UK. Limited (2) Brokerage 100.00% 100.00%
Bradesco Securities, Hong Kong Limited (2) Brokerage 100.00% 100.00%
Cidade Capital Markets Ltd. (2) Banking 100.00% 100.00%
Bradescard México, sociedad de Responsabilidad Limitada (4) Cards 100.00% 100.00%
Bac Florida Bank (5) Banking 100.00% -
Insurance, Pension Plan and Capitalization Bond Sector - In Brazil      
Atlântica Companhia de Seguros Insurance 100.00% 100.00%
Bradesco Auto/RE Companhia de Seguros Insurance 100.00% 100.00%
Bradesco Capitalização S.A. Capitalization bonds 100.00% 100.00%
Bradesco Saúde S.A. Insurance/health 100.00% 100.00%
Bradesco Seguros S.A. Insurance 99.96% 99.96%
Bradesco Vida e Previdência S.A. Pension plan/Insurance 100.00% 100.00%
Odontoprev S.A. (6) Dental care 50.01% 50.01%
Insurance - Overseas      
Bradesco Argentina de Seguros S.A. (2) (6) Insurance 99.98% 99.98%
Other Activities - Brazil      
Andorra Holdings S.A. Holding 100.00% 100.00%
Bradseg Participações S.A. Holding 100.00% 100.00%
Bradescor Corretora de Seguros Ltda. Insurance Brokerage 100.00% 100.00%
BSP Empreendimentos Imobiliários S.A. Real estate 100.00% 100.00%
Cia. Securitizadora de Créditos Financeiros Rubi Credit acquisition 100.00% 100.00%

 

Bradesco 19

 

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

 
   

Notes to the Consolidated Financial Statements

 

Columbus Holdings S.A. Holding 100.00% 100.00%
Nova Paiol Participações Ltda. Holding 100.00% 100.00%
Other Activities - Overseas      
Bradesco North America LLC (2) Services 100.00% 100.00%
Investment Funds (7)      
Bradesco FI RF Máster II Previdência Investment Fund 100.00% 100.00%
Bradesco FI RF Máster III Previdência Investment Fund 100.00% 100.00%
Bradesco FI Referenciado DI Master Investment Fund 100.00% 100.00%
Bradesco FIC FI RF Athenas PGBL/VGBL Investment Fund 100.00% 100.00%
Bradesco FIC FI RF VGBL - F10 Investment Fund 100.00% 100.00%
Bradesco FI RF Máster Previdência Investment Fund 100.00% 100.00%
Bradesco FI RF Referenciado DI União Investment Fund 99.99% 99.99%
Bradesco FI RF Master Previdência Investment Fund 100.00% 100.00%
Bradesco Private FIC de FI RF PGBL/VGBL Ativo-F 08 C Investment Fund 100.00% 100.00%
Bradesco FIC de FI RF Creta Investment Fund 100.00% 100.00%

 

(1) Acquisition of minority interest in January 2020;

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

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

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

(5) Company acquired on October 30, 2020, and its functional currency is the US dollar;

(6) Accounting information used with date lag of up to 60 days; and

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

 

i. Subsidiaries

 

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

 

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

 

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

 

20 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

ii. Associates

 

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

 

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

 

iii. Joint ventures

 

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

 

iv. Structured entities

 

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

 

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

 

restricted activities;
a narrow and well-defined objective, such as, to effect a specific structure like a tax efficient lease, to perform research and development activities, or to provide a source of capital or funding to an entity or to provide investment opportunities for investors by passing risks and rewards associated with the assets of the structured entity to investors;
thin capitalization, that is, the proportion of ‘real’ equity is too small to support the structured entity’s overall activities without subordinated financial support; and
financing in the form of multiple contractually linked instruments to investors that create concentrations of credit risk or other risks (tranches).

 

v. Transactions with and interests of non-controlling shareholders

 

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

 

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

 

vi. Balances and transactions eliminated in the consolidation

 

Intra-group transactions and balances (except for foreign currency transaction gains and losses) are eliminated in the consolidation process, including any unrealized profits or losses resulting from operations between the companies except when unrealized losses indicate an impairment

 

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Notes to the Consolidated Financial Statements

 

loss of the asset transferred which should be recognized in the consolidated financial statements. Consistent accounting policies as well as similar valuation methods for similar transactions, events and circumstances are used throughout the Organization for the purposes of consolidation.

 

b) Foreign currency translation

 

i. Functional and presentation currency

 

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

 

ii. Transactions and balances

 

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

 

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

 

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

 

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

 

iii. Foreign operations

 

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

 

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

 

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

 

· All resulting exchange differences are recognized in other comprehensive income.

 

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

 

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

 

c) Cash and cash equivalents

 

Cash and cash equivalents include: cash, bank deposits, unrestricted balances held with the Central Bank of Brazil and other highly liquid short-term investments, with original maturities of three months or less and which are subject to insignificant risk of changes in fair value, used by the Organization to manage its short-term commitments. See Note 18 (b) – “Cash and cash equivalents”.

 

d) Financial assets and liabilities

 

i. Financial assets

 

The Organization classifies and measures financial assets based on the business model for the management of financial assets, as well as on the characteristics of contractual cash flow of the financial asset.

 

The Organization classifies financial assets into three categories: (i) measured at amortized cost; (ii) measured at fair value through other comprehensive income (FVOCI); and (iii) measured at fair value through profit or loss (FVTPL).

 

- Business model: it relates to the way in which the organization manages its financial assets to generate cash flows. The objective (business model) of management in relation to each portfolio is defined as either: (i) to maintain the assets to receive contractual cash flows; (ii) to maintain the assets to receive the contractual cash flows and sales; or (iii) any other model. When the financial assets conform to the business models (i) and (ii) the SPPI test (Solely Payment of Principal and Interest) is applied. Financial assets held under business model (iii) are measured at FVTPL.

 

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

 

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

 

Measured at fair value through profit or loss

 

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

 

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

 

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

 

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Notes to the Consolidated Financial Statements

 

income. Subsequent changes to the fair value are recognized immediately in profit or loss.

 

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

 

· Measured at fair value through other comprehensive income

 

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

 

These financial assets are initially recognized at fair value, plus any transaction costs that are directly attributable to their acquisition or their issuance and are, subsequently, measured at fair value with gains and losses being recognized in other comprehensive income, except for impairment losses and foreign exchange gains and losses on debt securities, until the financial asset is derecognized. The expected credit losses are recorded in the consolidated statement of income.

 

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

 

· Measured at amortized cost

 

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

 

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

 

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

 

ii. Financial liabilities

 

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

 

· Measured at fair value through profit and loss

 

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

 

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Notes to the Consolidated Financial Statements

 

- Financial liabilities designated at FVTPL on initial recognition

 

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

 

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

 

- Financial liabilities held for trading

 

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

 

· Financial guarantee contracts and loan commitments

 

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

 

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

 

The expected credit losses, referring to loan commitments, are recognized in liabilities and are calculated, as described in Note 3.1.

 

iii. Derivative financial instruments and hedge transactions

 

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

 

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

 

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

 

The Organization has structures of cash flow hedges, whose objective is to protect the exposure to variability in cash flows attributable to a specific risk associated with all the assets or liabilities recognized, or a component of it. The details of these structures have been presented in Note 3.3 – Market risk.

 

iv. Recognition

 

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

 

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Notes to the Consolidated Financial Statements

 

v. Derecognition

 

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

 

vi. Offsetting financial instruments

 

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

 

vii. Determination of fair value

 

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

 

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

 

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

 

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

 

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

 

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

 

viii. Expected credit losses

 

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

 

Expected credit losses on financial instruments are measured as follows:

 

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

 

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

 

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

 

Expected credit losses are measured on one of the following basis:

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The criteria used to calculate the expected credit loss and to determine the significantly increased of the credit risk are detailed in Note 3.1.

 

e) Non-current assets held for sale

 

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

 

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

 
   

Notes to the Consolidated Financial Statements

 

f) Property and equipment

 

i. Recognition and valuation

 

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

 

The cost of assets internally produced includes the cost of materials and direct labor, as well as any other costs that can be directly allocated and that are necessary for them to function.

 

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

 

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

 

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

 

ii. Subsequent costs

 

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

 

iii. Depreciation

 

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

 

g) Intangible assets

 

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

 

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

 

i. Goodwill

 

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

 

Goodwill reflects the excess of the cost of acquisition in relation to the Organization’s share of the fair value of net identifiable assets or liabilities of an acquired subsidiary, associate or joint venture on the date of acquisition. Goodwill originated from the acquisition of subsidiaries is recognized

 

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

 

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

 

ii. Software

 

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

 

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

 

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

 

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

 

iii. Other intangible assets

 

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

 

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

 

h) Leasing

 

Until December 31, 2018, the Organization adopted IAS 17 as accounting practice for recording its leasing transactions, as described below. IFRS 16 – Leases is mandatory for the fiscal years beginning after January 1, 2019.

 

Accounting Policy applicable until December 31, 2018

 

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

 

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

 

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

 

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Notes to the Consolidated Financial Statements

 

Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

 

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

 

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

 

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

 

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

 

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

 

i. Finance Leases

 

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

 

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

 

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

 

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

 

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

 

ii. Operating leases

 

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

 

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

 

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

 

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

 

Accounting Policy adopted from January 1, 2019

 

The Organization assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

Bradesco applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Organization recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

At the beginning of a lease, the Organization recognizes a lease liability and a right of use asset. The expenses with interest on the lease liability and expenses of depreciation of the right of use asset are recognized separately.

 

The right of use asset is measured initially at cost value and is subsequently reduced by the accumulated depreciation and any accumulated impairment losses, when applicable. The right of use will also be adjusted in case of re-measurement of the lease liability. The depreciation is calculated in a linear fashion by the term of the leases.

 

The lease term is defined as the non-cancellable term of the lease, together with (i) periods covered by the option to extend the lease, if the lessee is reasonably certain to exercise that option; and (ii) periods covered by the option to terminate the lease, if the lessee is reasonably certain that it will not exercise that option. The Organization has a descriptive policy for the property lease terms, which considers the business plan and management expectations, extension options and local laws and regulations.

 

The lease liability is measured initially at the present value of the future lease payments, discounted by the incremental rate applied to each contract in accordance with the leasing term.

 

The lease payments include fixed payments, less any lease incentives receivable, and variable lease payments that depend on an index or a rate. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.

 

The incremental rate applied by the Organization takes into account the funding rate free of risk adjusted by the credit spread.

 

Subsequently, the lease liability is adjusted to reflect the interest levied on the payment flows, re-measured to reflect any revaluation or modifications of leasing and reduced to reflect the payments made.

 

Financial charges are recognized as a “Interest and similar expenses” and are adjusted in accordance with the term of the contracts, considering the incremental rate.

 

The contracts and leases of properties with an indefinite period were not considered in the scope of IFRS 16 because they are leases in which the contract can be terminated at any time without a significant penalty. In this way, the rental contract was not considered as executable.

 

Short-term leases and leases of low-value assets

 

The Organization applies the short-term lease recognition exemption to its short-term leases (leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that

 

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Notes to the Consolidated Financial Statements

 

are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense over the lease term.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

j) Provisions, contingent assets and liabilities and legal obligations

 

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

 

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

 

Contingent liabilities are not recognized, since their existence will only be confirmed by the occurrence or not of one or more future and uncertain events that are not totally under the control of

 

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the Management. Contingent liabilities do not meet the criteria for recognition, since they are considered as possible losses and are disclosed in explanatory notes, when relevant. Obligations classified as remote are neither provisioned nor disclosed.

 

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

 

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

 

k) Classification of insurance contracts and investments

 

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

 

l) Technical provisions for non-life, life, health and pension insurance

 

i. Non-life insurance

 

Non-life insurance contracts include mainly auto insurance, residential/business insurance and liability insurance whose main objective is to protect the insured's assets through the payment of an indemnity in the event of an accident, subject to the contractual conditions of each contract.

 

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

 

Provision for Claims Incurred But Not Reported (IBNR) is constituted based on the claims incurred and not yet paid (IBNP), subtracting the balance of the Provision for Claims to be Settled (PSL) at the reporting date. To calculate the IBNP, the final estimate of claims that have not yet been paid based on semiannual run-off triangles, which consider the historical development of the claims paid in the last 10 six-month periods for the product group of non-life, in order to establish a future projection by period of occurrence and also considers the estimate of Claims Incurred But Not Enough Reported (IBNER), reflecting the expectation of alteration of the provisioned amount throughout the settlement process.

 

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

 

The Provision for Related Expenses (PDR) is constituted to cover the expected expenses related to claims incurred and, for some contract types, yet to occur.

 

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

 

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Notes to the Consolidated Financial Statements

 

ii. Life insurance

 

Life insurance contracts include individual and group contracts that aim to guarantee the payment of an indemnity to the insured or its beneficiaries, subject to the contractual conditions and the contracted guarantees.

 

The Provision for Unearned Premiums (PPNG) is calculated on a pro rata basis, based on the net premium for the assignment of coinsurance, corresponding to the period of risk not arising from insurance contracts. The portion of this provision corresponding to the estimate for Risks in Effect but Not Issued is recorded in the PPNG-RVNE.

 

The Mathematical Provision for Benefits to be Granted (PMBaC) is calculated by the difference between the current value of future benefits and the current value of future premiums, corresponding to future obligations assumed.

 

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

 

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

 

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

 

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

 

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

 

The Provision for Related Expenses (PDR) is constituted to cover the expected expenses related to claims incurred and, for some contract types, yet to occur.

 

iii. Health Insurance

 

The health insurance contracts include individual and group contracts that aim to guarantee the insured and beneficiaries medical care, outpatient services in a referenced network or care according to the choice of the insured, subject to the contractual conditions.

 

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

 

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

 

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corresponding to the assumed obligations.

 

For health insurance, the Mathematical Provision for Benefits to be Granted (PMBaC) is calculated accounting for a discount rate of 3.6% per annum (3.9% on December 31, 2019), the period over which holders are expected to remain in the plan up to their death, and the projected costs of the five-year-period cover in which no premiums will be received.

 

For health insurance, the Mathematical Provision for Benefits Granted (PMBC) is constituted by the obligations arising from the contractual clauses of remission of installments in cash, regarding the coverage of health assistance and by the premiums through payment of insured persons participating in the Bradesco Saúde insurance – “GBS Plan”, and considering a discount rate of 3.6% per annum (3.9% on December 31, 2019).

 

The Provision for Claims Incurred but Not Reported (IBNR) is calculated from the final estimate of claims that have already occurred and have not yet been reported, based on monthly run-off triangles that consider the historical development of claims reported in the last 12 or 18 months for health insurance, to establish a future projection by occurrence period.

 

For health insurance, the reserve for events incurred but not reported in SUS (PEONA-SUS) is calculated from the estimate of the amount of events/claims originating in the Unified Health System (SUS), which have occurred and which have not been forewarned. The amount is calculated and reported monthly on the institutional website of the National Agency of Supplementary Health (ANS), its form of accounting being supported by the Normative Resolution No. 442/18 in force.

 

The Provision for Claims to be Settled (PSL) for health insurance, considers all claims received up to the reporting date, including all judicial claims and related costs adjusted for inflation.

 

The other technical provisions (OTP) for the individual health portfolio are constituted to cover differences between the expected present value of claims and related future costs and the expected present value of future premiums, considering a discount rate of 3.6% per annum (3.9% on December 31, 2019).

 

iv. Pension plans

 

Pension plans mainly include VGBL and PGBL (linked fund products with options to convert into annuities at maturity) and traditional plans (guaranteed return investments with options to convert to annuities at maturity).

 

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

 

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

 

In pension plans with variable contribution characteristic, the Mathematical reserve for unvested benefits (PMBAC) represents the contributions received from participants, net of costs and other contractual charges, plus the financial return generated through the investment of these amounts in units of specially constituted investment funds (FIE).

 

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

 

Bradesco 35

 

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

 
   

Notes to the Consolidated Financial Statements

 

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

 

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

 

The Provision for Related Expenses (PDR) is constituted to cover the expected expenses related to claims incurred and, for some contract types, yet to occur. The projections are performed through the liability adequacy test (LAT).

 

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

 

The Provision for Claims Incurred but Not Reported (IBNR) is calculated based on semiannual run-off triangles, which consider the historical development of claims paid and outstanding in the last 16 six-month periods to establish a future projection by period of occurrence.

 

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

 

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

 

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

 

v. Liability Adequacy Test (LAT)

 

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

 

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

 

To calculate the present value of projected cash flows, the Organization used the risk free forward (ETTJ) rate which was prepared by SUSEP (Danos) and Fenaprevi (Vida e Previdência) both approved by SUSEP.

 

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Notes to the Consolidated Financial Statements

 

Life Insurance and Pension Plans

 

The contracts are grouped based on similar risks or when the insurance risk is managed jointly by the Management. The projections follow the methodology and assumptions described in the preceding paragraphs of this section.

 

The result of the liability adequacy test (LAT) presented an insufficiency which was recognized in the Complementary Provision for Coverage (PCC), see Note 34.

 

Non-Life Insurance

 

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

 

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

 

The average projected loss ratio was 44.11% and the average reinsurance projected in the study, calculated based on the reported claims, was 7.05%.

 

The result of the liability adequacy test, for non-life insurance contracts, did not present insufficiency and, consequently, no additional PCC provisions were recorded.

 

m) Reinsurance contracts

 

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

 

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

 

n) Deferred acquisition costs

 

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

 

It also includes the deferred acquisition costs relating to the exclusivity agreement with the retail network, for the marketing of extended warranty insurance for the initial period of 12 years, with the extension of more than 4 years of contract, totaling 16 years.

 

o) Employee benefits

 

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

 

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Notes to the Consolidated Financial Statements

 

i. Defined contribution plan

 

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

 

ii. Defined benefit plans

 

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

 

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

 

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

 

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

 

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

 

iii. Termination benefits

 

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

 

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

 

iv. Short-term benefits

 

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

 

p) Capitalization bonds

 

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

 

The bonds are issued according to the types of payments, monthly or in a single payment. Each bond has a nominal value, which is capitalized monthly by the Referential Rate index - TR and by interest rates defined in the plan until the redemption or cancellation of the bond. Amounts payable are recognized in the item “Other Liabilities – Capitalizations Bonds”.

 

Capitalization bond beneficiaries are eligible for a prize draw. At the end of a certain period that is

 

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

 

Unclaimed amounts from “capitalization plans” are derecognized when the obligation legally expires.

 

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

 

q) Interest

 

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

 

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

 

r) Fees and commissions

 

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

 

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

 

s) Net insurance income

 

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

 

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

 

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

 

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

 

Reinsurance operations are recorded based on the provision of accounts, which are subject to review

 

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

 
   

Notes to the Consolidated Financial Statements

 

by reinsurers. The deferral of these operations is carried out in a manner consistent with the related insurance premium and/or reinsurance contract.

 

The acquisition costs relating to the commission of insurance are deferred and adapted to the result in proportion to the recognition of the earned premium.

 

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

 

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

 

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

 

Financial revenues include interest income on assets of the funds invested (including financial assets available for sale), income from dividends, gains from the disposal of financial assets available for sale, changes in the fair value of financial assets measured at fair value through profit or loss, accrued income in the calculation of the cost value of securities held to maturity and reclassifications of gains previously recognized in other comprehensive income. The income from interest is recognized in the results through the effective interest method.

 

Financial expenses cover losses in the disposal of assets available for sale, changes in the fair value of financial assets measured at fair value through profit or loss, losses by impairment recognized in the financial assets (except receivables).

 

t) Income tax and social contribution

 

Income taxes in Brazil consist of Company Income Tax (IRPJ) and Social Contribution on Profit (CSLL).

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. For financial companies, financial company equivalent and of the insurance industry, the social contribution on profit was calculated until August 2015, considering the rate of 15%. For the period between September 2015 and December 2018, the rate was changed to 20%, according to Law No. 13,169/15, and returned to the rate of 15% as from January 2019. In November 2019 the Constitutional Amendment No. 103 was promulgated, which establishes in article 32, the increase in the rate of the social contribution on profit of “Banks” from 15% to 20%, with effect from March 2020. For the other companies, the social contribution is calculated considering the rate of 9%.

 

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

 

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

 

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

 

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

 

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Notes to the Consolidated Financial Statements

 

Deferred tax assets on temporary differences are realized when the difference between the accounting treatment and the tax treatment reverses. Deferred tax assets on carry-forward income tax and social contribution losses are realizable when taxable income is generated, up to the 30% limit of the taxable profit for the period. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date based on current expectations of realization considering technical studies and analyses carried out by Management and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

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

 

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

 

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

 

· taxable temporary differences arising on the initial recognition of goodwill.

 

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

 

The Organization assesses its uncertain tax positions and considers whether it is probable that additional taxes and interest may be due. The Organization believes that its provisions for tax liabilities are adequate for all open fiscal years, based on its assessment of several factors, including interpretations of tax legislation and previous experience. This assessment are based on estimates and assumptions and may involve judgments about future events. New information may be made available that will lead the Organization to change its judgment regarding the adequacy of existing tax obligations, such changes in tax obligations will impact tax expense in the period in which such determination is made.

 

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

 

A deferred income tax and social contribution asset is recognized for unused tax losses, tax credits and deductible temporary differences when it is probable that future taxable profits will be available and against which they will be used. Deferred income tax and social contribution assets are reviewed at each reporting date and are reduced to the extent that their realization is no longer probable.

 

u) Segment reporting

 

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

 

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

 
   

Notes to the Consolidated Financial Statements

 

v) Shareholders’ Equity

 

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

 

i. Share issue costs

 

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

 

ii. Earnings per share

 

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

 

iii. Dividends payable

 

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

 

iv. Capital transactions

 

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

 

3)       Risk Management

 

The risk management activity is highly strategic due to the increasing complexity of products and services and the globalization of the Organization's business. The dynamism of the markets leads the Organization to constantly seek to improve this activity.

 

Covid-19 Pandemic

 

Bradesco, due to the serious pandemic scenario caused by Covid-19, which brought several adverse effects on people's lives and business, remains focused on supporting its customers and employees. Despite this adverse scenario, some learnings were incorporated into our operations, for example, how to relate to our supplier customers and the intensification of the Organization's home office. With these advances, Bradesco, through the Collective Labor Agreement carried out with the Banking Union Movement at the national level, was the first large bank to assume the commitment to adopt remote work after the pandemic.

 

Bradesco's Crisis Committee, formed by the Chief Executive Officer, all Vice-Presidents and the CRO (Chief Risk Officer), is evaluating the scenario of pandemic and reporting to the Board of Directors about the assessments of the evolution of the pandemic and its impact on our operations and society. In addition, we have a Risk Committee, which plays an important role in verifying various points and the scope of these actions in the Organization. The Organization has triggered the Business Continuity Plan (PCN), intensified internal and external actions, adopted the rotation of employees from the branch

 

42 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

network and throughout the pandemic period, optimization opportunities were identified due to the migration to remote work, prevailing a mentality focused on the digital environment in a consistent and timely manner, with the aim of minimizing the impacts involved.

 

The Organization adjusted Bradesco's governance and policies to the current situation.

 

Credit Policies: In relation to Bradesco’s credit policies, the main focus prevails in supporting the customers, with the assessment of the risks assumed. The Organization mapped the exposure to the most fragile sectors and companies and maintains a constant line of communication with companies throughout the relationship. The Organization maintained active credit recovery teams and focused on finding solutions for customers who need them. The Organization have incorporated new risk variables into the credit models in the current scenario, in order to correctly assess the situation;

Capital and Liquidity: The Organization maintained its regulatory capital above the required amounts and a margin of adequate liquidity to meet customer needs, as well as business sustainability. In addition, the measures implemented by the Central Bank in 2020 (mainly in the second and third quarters) further favored the system's liquidity and solvency;

Risk Governance: The Organization has constantly monitored and adjusted the operational limits and risk appetite, promoting the review and timely adaptation of scenarios in the current context. In addition to the internal monitoring activities, a follow-up with the Organization's relevant suppliers was implemented to ensure that the continuity strategy adopted by the companies, in fact, corresponded to the needs of the processes, to maintain the deliveries to customers.

 

Scope of Risk Management

 

The Organization risk management scope works with a wide view of the Economic Financial Consolidated risks. The Corporate Process of Risk Management, based on those guidelines, develop its activities, whose approach is based on three lines of defense:

 

· First line of defense, represented by the business areas and areas of support, responsible for identifying, assessing, reporting and managing the inherent risks as part of the day-to-day activities. In addition, they are responsible for the execution of controls, in response to the risks, and/or for the definition and implementation of action plans to ensure the effectiveness of the internal control environment, while keeping risks within acceptable levels;
· Second line of defense, represented by the areas of supervision, responsible for establishing policies and procedures of risk management and compliance for the development and/or monitoring of controls in the first line of defense. In this line, we highlight the Departments of Integrated Risk Control, Compliance, Conduct and Ethics, Legal, and Corporate Security, among others;
· Third line of defense, represented by the General Inspectorate Department (Internal Audit), which is responsible for assessing independently the effectiveness of the risk management and internal controls, including the form by which the first and second lines of defense accomplish their goals, reporting the results of their work to the Board of Directors, the Audit Committee, Fiscal Council and senior management.

 

Risk Appetite Statement (RAS)

The risk appetite refers to the types and levels of risks that the Organization is willing to accept in the conduct of its business and purposes. The Risk Appetite Statement – RAS is an important instrument that summarizes the risk culture of the Organization.

 

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

 

The Risk Appetite Statement is reviewed on annual basis1, or whenever necessary, by the Board of

 


1 The Risk Committee, in relation to the RAS, has the following attributions: to assess the risk appetite levels set out in the Risk Appetite Statement (RAS) and the strategies for its management, taking risks into account individually and in an integrated manner; and b) to supervise compliance, by the institution’s Board of Executive Officers, with the terms of the RAS.

 

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

 
   

Notes to the Consolidated Financial Statements

 

Directors and permanently monitored by forums of the Senior Management and business and control areas.

 

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

 

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

 

Capital: the Organization seeks to maintain, permanently, a solid capital base to support the development of activities and cope with the risks incurred (in normal situations or of stress), as well as to support any losses arising from non-measurable risks and make possible strategic acquisitions. To meet this goal, capital buffers were established, which are part of the framework of risk appetite, which are defined and approved by the Board of Directors.

The Organization has established that the Indexes of Basel, Level I, of Common Equity and Leverage Ratio should correspond at least to the regulatory cap, plus the current Equity buffer. In the same sense, Grupo Bradesco Seguros (GBS) must maintain the minimum Solvency Index above the regulatory framework, in the consolidated view, according to the buffers defined.

 

Liquidity: the Organization aims to effectively comply with its obligations through diversified and low cost sources of funding to provide a cash structure compatible with the size of its obligations; thus, ensuring survival even in adverse scenarios without affecting its daily operations and incurring significant losses.

 

For this dimension, indicators were established for short- and long-term monitoring. The Short-Term Liquidity Coverage Ratio (LCR) corresponds to the ratio between the stock of High-Quality Liquidity Assets (HQLA) and the total number of outflows of cash, calculated according to the standardized stress by the Central Bank of Brazil. Now the Indicator of Long-Term Liquidity – NSFR (Net Stable Funding Ratio) corresponds to the ratio between the stable funding available and the stable funding necessary. For Grupo Bradesco Seguros, the control of liquidity risk consists in the sizing of the Minimum Reserve of Liquidity (RML), represented by the amount of resources needed to settle the obligations in situations of stress during the period of turbulence (30 days) and their relation with the Cash Available, which is composed predominantly by high-quality net assets.

Profitability: the Organization prioritizes diligence for the sustainable growth of its business and results and for the adequate remuneration of its equity, seeking to cover the remuneration expectation of its shareholders in relation to the risks assumed in their business.

 

The Organization periodically monitors key performance indicators of the results by line of business, segments and products. On the basis of these monitoring, analyses, projections and studies are made in order to inform the business areas and Senior Management about the individual and consolidated results, thus allowing conscious decision making and strategic reviews.

 

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

 

The monitoring of credit risk is accomplished through continuous monitoring of portfolios and exhibitions, with assessment of the evolution of their volumes, delinquency, provisioning, studies of harvests, and equity, among others. Additionally, the Organization has a structured process of governance of limits of liability for approval of credit operations and recovery.

 

In relation to the risk appetite, metrics were defined to monitor the concentration limits of operations for the Economic Group, Sector and Transfer (concentration per country). In addition to the indicators of concentration, a specific indicator was established for the level of delinquencies above 90 days for Individuals (PF), an indicator of Margin of Economic Capital of Credit Risk, in order to monitor and track the capital in the economic and regulatory visions, and an indicator of the percentage of Troubled Assets.

 

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

   

Notes to the Consolidated Financial Statements

 

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

 

The Organization monitors and controls the possibility of financial losses due to fluctuating prices and interest rates of the financial instruments, as its asset and liability portfolios may have mismatched maturities, currencies and indexes. Considering the dynamics of this type of risk and the characteristics of each investment portfolio, various limits of risks and results were established.

 

For the Trading portfolio the indicators of Value at Risk (VaR), Stress Scenarios for a month and of Monthly and Quarterly Result are part of the risk appetite. For the Banking portfolio, the DEVE Internal Model, DEVE Outlier Test, DNII Internal Model and the Evolution of the Positions Evaluated at Market Value are monitored. Now for Grupo Bradesco Seguros, the indicators are the VaR for variable income and the interest rate risk (EVE).

 

Operational: the Organization aims to provide assurance with regard to appropriately carrying out its business in accordance with laws regulations and policies, ensuring that processes are covered by efficient controls.

 

In view of the wide range of products and services offered, as well as the significant volume of activities and operations made, the Organization can incur operating losses resulting from flaws, deficiency or inadequacy of internal processes, people and systems, or from external events.

 

In this sense, in the context of the Prudential Conglomerate, the Organization established limits of appetite and tolerance for operating losses, which are monitored on a monthly basis. Additionally, an indicator for monitoring the availability of the main channels of customer service and systems has been defined, aiming to provide continuous readiness in the customer service.

 

Reputation: the Organization monitors its reputation as perceived by customers, employees, regulatory authority, investors and the market in general, aiming to ensure the timely identification and assessment of potential sources of this risk and act preventively to mitigate them.

 

The control of reputation risk aims to ensure that the Organization evaluates and monitors the perception of various stakeholders in order to identify potential sources of risk in reputation and act in a timely manner to mitigate it.

 

The control of this risk is performed by means of a Consolidated Index of Reputation, which is subdivided into dimensions under which it is possible to determine the reputation of the Organization as perceived by customers, employees, regulatory authority, investors and the market in general.

 

Model: the Organization uses models to support the decision-making, preparation of financial reports and regulations, and to provide predictive information in several areas of the business. In this context, the Organization recognizes the existence of the risk associated with the use of the models and importance of its management process.

 

The Organization carries out the management and control of the model risk by means of assessment, inventory and classification of relevance and model risk, backed by processes of governance.

 

Qualitative Risk: in addition to the risks described above, the Organization is exposed to the risks of Third Party, Strategy, Socio-environmental, Underwriting, Cyber and Compliance. These risks are managed by means of processes and a governance structure that is composed of Departmental Committees, executive committees and Senior Management. The management of these risks has the backing of policies, standards and procedures that contribute to their proper management and control.

 

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

 
   

Notes to the Consolidated Financial Statements

 

Risk and Capital Management Structures

 

Risk and capital management structures also comprise various committees, commissions and departments that support the Board of Directors, the Chief Executive Officer, the Chief Risk Officer and the Board of Executive Officers of the Organization in decision-making.

 

The Organization has the Integrated Risk and Capital Allocation Management Committee – COGIRAC, whose duty is advise the Board of Directors in performing its duties, related to the management policy and to the risk exposure limits policy, and assure, within the scope of the Organization, the fulfillment of the processes, policies, related rules, and regulations and laws applicable to the Organization.

 

COGIRAC are supported by the following executive committees: a) Risk Monitoring, b) Risk Management, c) PLDFT/Sanctions and Information Security/Cyber Executive Committee and d) Risk Management, Actuarial Control and Compliance of Bradesco Seguros. In addition, it also is supported by the Products and Services Executive Committee and the executive committees in business areas, which, among other duties, suggest exposure thresholds for their respective risks and prepare mitigation plans to be submitted to COGIRAC and to the Board of Directors.

 

In the governance structure it is also notable the Risk Committee, whose main purpose is to assess the structure of the Organization’s risk management and occasionally propose improvements.

 

COGIRAC and the Risk Committee advise the Board of Directors in the performance of its assignments related to the management and control of risks, capital, internal controls and compliance.

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

 

Stress Test Program

 

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

 

In the Program of Stress Tests, the scenarios are designed by the Department of Research and Economic Studies – DEPEC and discussed with the Business areas, DCIR, Department of Controllership, among other areas. Stress testing results are discussed and approved in a specific Departmental Commission. Subsequently, they are submitted to the COGIRAC and Board of Directors, that, in addition to the scenarios and results of stress tests are also responsible for the approval of the program and guidelines to be followed.

 

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

 

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

   

Notes to the Consolidated Financial Statements

 

3.1. Capital Management

 

Capital Management Corporate Process

 

The Capital Management provides the conditions required to meet the Organization’s strategic goals to support the risks inherent to its activities. In this way, it adopts a forward-looking stance when elaborating its capital plan, anticipating the need for capital for the next three (3) years, as well as establishing procedures and contingency actions to be considered in adverse scenarios.

 

The Organization manages capital in line with the strategic guidelines, involving the control and business areas, in accordance with the guidelines of the Board of Executive Officers and Board of Directors. The structure of Capital Management Governance, Internal Capital Adequacy Assessment Process (ICAAP) and Recovery Plan is composed by Commissions, Committees and its highest-level body is the Board of Directors.

 

The Controllership Department ensures compliance with the stipulations of the Central Bank of Brazil pertaining to capital management activities and assistance to the Senior Management by providing analyses and projections of capital requirements and availability, identifying threats and opportunities that help plan the sufficiency and optimization of capital levels.

 

The Organization also has a Recovery Plan, delivered to the Central Bank of Brazil in December of each year and approved by the Board of Directors in accordance with CMN Resolution No. 4,502, of June 30, 2016, establishing procedures for the preparation of recovery plans, in order to maintain adequate levels of capital and liquidity in situations of severe stress in financial institutions considered systemically important.

 

Reference Equity Adequacy

 

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

 

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

Additionally, the Organization must maintain enough RE to meet the interest rate risk from operations not included in the trading portfolio (Banking Portfolio’s interest rate risk).

 

Capital Sufficiency

 

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

 

The Organization’s capital management aims at permanently ensuring a sound capital composition to support the development of its activities and to ensure adequate coverage of risks incurred. The Organization maintains a managerial capital margin (buffer), which is added to the minimum regulatory requirements.

 

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

 

The Organization’s regulatory capital sufficiency is monitored by periodically calculating the Basel Ratio, Tier I Ratio and Common Equity Ratio.

 

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

 
   

Notes to the Consolidated Financial Statements

 

Capital Forecast

 

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

 

The projections for the next three years have adequate levels of Capital Ratios, considering the incorporation of net income and the evolution of the need for capital.

 

Analysis of Reference Equity (RE), Capital Ratios and Liquidity

 

The following table presents the main metrics established by prudential regulation, such as regulatory capital, leverage ratio and liquidity indicators:

 

Calculation basis - Basel Ratio R$ thousand
Basel III
On December 31
2020 2019
Prudential
Regulatory capital - values    
Common equity 108,982,064 91,271,701
Level I 118,281,835 100,831,668
Reference Equity - RE 135,723,674 125,275,405
Excess of resources invested in permanent assets -   -  
RE Highlight -   -  
Risk-weighted assets (RWA) - amounts    
Total RWA 858,692,912 759,051,325
Regulatory capital as a proportion of RWA    
Index of Common equity - ICP 12.7% 12.0%
Level 1 Index 13.8% 13.3%
Basel Ratio 15.8% 16.5%
Additional Principal Capital (ACP) as a proportion of RWA    
Additional Principal Capital Conservation - ACPConservation (1) 1.25% 2.50%
Additional Contracyclic Principal Capital - ACPContracyclic 0.00% 0.00%
Additional Systemic Importance of Principal Capital - Systemic ACPS 1.00% 1.00%
Total ACP 2.25% 3.50%
Excess Margin of Principal Capital 5.94% 4.02%
Leverage Ratio (AR)    
Total exposure 1,436,809,012 1,228,715,207
AR 8.2% 8.2%
Short Term Liquidity Indicator (LCR)    
Total High Quality Liquid Assets (HQLA) 244,827,538 112,872,809
Total net cash outflow 137,247,662 78,493,191
LCR 178.4% 143.8%
Long Term Liquidity Indicator (NSFR)    
Available stable funding (ASF) 744,316,530 635,623,931
Stable resources required (RSF) 618,540,418 551,731,471
NSFR 120.3% 115.2%

(1) CMN Resolution No. 4,783/20, from April 2020, establishes the reduction of the Common Equity Additional for Conservation (ACPConservação) from 2.5% to 1.25%, for the term of one year and after this period, the requirement will gradually be restored until March 31, 2022 to the level of 2.5%.

 

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

   

Notes to the Consolidated Financial Statements

 

Breakdown of Risk-Weighted Assets (RWA)

 

The following table presents information on the amount of RWA used to determine the minimum RE requirement, as established in art. 4 of CMN Resolution No. 4,193/13:

 

RWA R$ thousand  
RWA Minimum RE requirement (3)  
On December 31, 2020 On December 31, 2019 On December 31, 2020 On December 31, 2019  
 
Credit Risk - treatment using a standardized approach 779,588,539 680,907,696 62,367,083 54,472,614  
Credit risk in the strict sense (1) 642,582,738 596,741,812 51,406,619 47,739,345  
Counterparty credit risk (CCR) 35,625,687 24,919,371 2,850,055 1,993,549  
- Of which: through standardized approach to counterparty credit risk (SA-CCR) 23,851,517 15,295,904 1,908,121 1,223,672  
- Of which: using the EMC approach -   -   -   -    
- Of which: using other approaches 11,774,170 9,623,467 941,934 769,877  
Increase related to the adjustment associated with the variation in the value of derivatives due to the variation in the credit quality of the counterparty (CVA) 14,687,826 6,519,630 1,175,026 521,570  
Unconsolidated fund shares - underlying assets identified 3,960,234 5,217,631 316,819 417,410  
Unconsolidated fund shares - underlying assets inferred according to fund regulations -   -   -   -    
Unconsolidated fund shares - unidentified underlying assets -   3,989,766 -   319,181  
Securitization exposures - requirement calculated using standardized approach 2,791,550 2,173,417 223,324 173,873  
Values referring to exposures not deducted in the calculation of PR (2) 79,940,504 41,346,069 6,395,240 3,307,686  
Market Risk (3) 14,690,553 13,571,488 1,175,244 1,085,719  
- Of which: requirement calculated using standardized approach (RWAMPAD) 8,805,006 16,029,113 704,400 1,282,329  
- Of which: requirement calculated using internal model (RWAMINT) 14,690,553 13,571,488 1,175,244 1,085,719  
Operational Risk 64,413,820 64,572,141 5,153,106 5,165,771  
Total 858,692,912 759,051,325 68,695,433 60,724,104  

(1) It does not include Counterparty Credit Risk operations;

(2) As defined in Resolution No. 4,192/13, 3, art. 4; and

(3) Composed of a maximum of 80% of the standardized model (RWAMPAD) and internal model (RWAMINT), according to Circular No. 3,646 and No. 3,674.

 

3.2. Credit risk

 

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

 

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

 

The Organization controls the exposure to credit risk which comprises mainly loans and advances, loan commitments, financial guarantees provided, securities and derivatives.

 

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

 

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

 

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

 
   

Notes to the Consolidated Financial Statements

 

Counterparty Credit Risk

 

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

 

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

 

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

 

In the context of risk management, the Organization performs the calculation of economic capital for credit risk, in order to contemplate the portfolio of derivatives that is consolidated by the counterpart both for the definition of the EAD (Exposure At Default) and the CVA (Credit Value Adjustment).

 

Also in this context, the Organization conducts studies of projection of capital, for example of the Stress Test of the ICAAP (Evaluation of Capital Adequacy) and TEBU (Bottom-Up Stress Test). These are multidisciplinary programs involving minimally the areas of Business and Economic Departments, of Budget/Result and Risk.

 

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

 

Additionally, from June 2019, the calculation of the value of the exposure relating to credit risk of the counterpart arising from operations with derivative instruments subject to the calculation of the capital requirement through the standardized approach (RWACPAD) has been updated following the Central Bank of Brazil’s Circular No. 3,904/18.

 

Credit-Risk Management Process

 

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

 

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

 

The structure of credit risk management is part of the second line of defense of the Organization, several areas actively participate in improving the client risk rating models.

 

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

 

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Credit Concession

 

The variety of business models allows direct and convenient channels customer services in the various regions of Brazil. The segments strategies corroborate, both for Individuals and Companies, to a good customer relationship and to the assertive offer of products and services.

 

The Organization’ strategy is to maintain a wide client base and a diversified credit portfolio, both in terms of products and segments, commensurate with the risks undertaken and appropriate levels of provisioning and concentration.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Credit Risk Rating

 

The Organization has a process of Governance practices and follow-ups. Practices include the Governance of Concession Limits and Credit Recovery, which, depending on the size of the operation or of the total exposure of the counterpart, require approval at the level of the Board of Directors. In addition, follow-ups are made frequently of the portfolio, with evaluations as to their evolution, delinquency, provisions, vintage studies, and capital, among others.

 

In addition to the process and governance of limits for approval of credit and recovery, in the risk appetite defined by the Organization, the concentration limits of operations for the Economic Group, Sector and Transfer (concentration per countries) are monitored. In addition to the indicators of concentration, a specific indicator was established for the level of delinquencies above 90 days for Individuals (PF), the indicator of problem asset and an indicator of Margin of Economic Capital of Credit Risk, in order to monitor and track the capital in the economic and regulatory visions.

 

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Notes to the Consolidated Financial Statements

 

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

 

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

 

In accordance with its commitment to the continuous improvement of methodologies, the credit risk rating of operations contracted by the Organization’s economic groups/ customers (Rating Operação Final – ROF) is distributed on a graduation scale in levels. This ensures greater adherence to the requirements set forth in the Basel Capital Accord and preserves the criteria established by Resolution No. 2,682 of the National Monetary Council for the constitution of the applicable provisions.

 

In a simplified manner, the risk classifications of the operations are determined on the basis of the credit quality of economic groups/ customers defined by the Customer Rating, warranties relating to the contract, modality of the credit product, behavior of delinquencies in the payment and value of credit contracted.

 

Customer Rating for economic groups (legal entities) are based on standardized statistical and judgmental procedures, and on quantitative and qualitative information. Classifications are carried out by economic group and periodically monitored in order to preserve the quality of the loan portfolio.

 

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

 

Customer rating is used in the analysis for granting and/or renewing operations and credit limits, as well as for the monitoring of the economic-financial situation of a company and its capacity to repay the loans contracted.

 

Control and Monitoring

 

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

 

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

 

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

 

Internal Report

 

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

 

52 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

With the objective of highlighting the risk situations that could result in the customers’ inability to honor its obligations as contracted, the credit risk monitoring area provides daily reports, to the branches, business segments, as well as the lending and loan recovery areas. This system provides timely information about the loan portfolios and credit bureau information of customers, in addition to enabling comparison of past and current information, highlighting points requiring a more in-depth analysis by managers, such as assets by segment, product, region, risk classification, delinquency and expected and unexpected losses, among others, providing both a macro-level and detailed view of the information, and also enabling a specific loan operation to be viewed.

 

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

 

Measurement of Credit Risk

 

Periodically, the Organization evaluates the expected credit losses from financial assets by means of quantitative models, considering the historical experience of credit losses of the different types of portfolio (which can vary from 2 to 7 years), the current quality and characteristics of customers, operations, and mitigating factors, according to processes and internal governance.

 

The actual loss experience has been adjusted to reflect the differences between the economic conditions during the period in which the historical data was collected, current conditions and the vision of the Organization about future economic conditions, which are incorporated into the measurement by means of econometric models that capture the current and future effects of estimates of expected losses. The main macroeconomic variables used in this process are the Brazilian interest rates, unemployment rates, inflation rates and economic activity indexes.

 

The estimate of expected loss of financial assets is divided into three categories (stages):

· Stage 1: Financial assets with no significant increase in credit risks;
· Stage 2: Financial assets with significant increase in credit risks; and
· Stage 3: Financial assets that are credit impaired.

 

The significant increase of credit risk is evaluated based on different indicators for classification in stages according to the customers’ profile, the product type and the current payment status, as shown below:

 

Retail Portfolio:

 

· Stage 1: Financial assets whose obligations are current or less than 30 days past due and which have a low internal credit risk rating;
· Stage 2 (Significant increase in credit risk): Financial assets that are overdue obligations between 31 and 90 days or whose internal credit risk rating migrated from low risk to medium or high risk;
· Stage 3 (Defaulted or “impaired”): Financial assets whose obligations are overdue for more than 90 days or that present bankruptcy events, judicial recovery and restructuring of debt;
· Re-categorization from stage 3 to stage 2: Financial assets that bring current the values overdue and whose internal ratings migrated to medium risk; and
· Re-categorization from stage 2 to stage 1: Financial assets that bring current the values overdue and whose internal ratings migrated to low risk.

 

Wholesale Portfolio:

 

· Stage 1: Financial assets whose obligations are current or less than 30 days past due and which have a low internal credit risk rating;
· Stage 2 (Significant increase in credit risk): Financial assets whose obligations are overdue between 31 and 90 days or whose internal rating of customers migrated from low risk to medium or high risk;
· Stage 3 (Defaulted or impaired): Financial assets whose relevant obligations are overdue by up to 90 days or that present bankruptcy events, judicial recovery, restructuring of debt or need for execution of guarantees;

 

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

 
   

Notes to the Consolidated Financial Statements

 

· Re-categorization from stage 3 to stage 2: Financial assets that no longer have any of the stage 3 criteria and whose internal ratings migrated to medium risk; and
· Re-categorization from stage 2 to stage 1: Financial assets that bring current the values overdue and whose internal ratings migrated to low risk.

 

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

 

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

 

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

 

EAD is the exposure (gross book value) of the customer in relation to the Organization at the time of estimation of the expected loss. In the case of commitments or financial guarantees provided, the EAD will have the addition of the expected value of the commitments or financial guarantees provided that they will be converted into credit in case of default of the loan or credit rather than the customer.

 

Credit Risk Exposure

 

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

 

  R$ thousand
On December 31, 2020 On December 31, 2019
  Gross value Expected credit loss Gross value Expected credit loss
Financial assets        
Cash and balances with banks (Note 18) 107,602,594 - 109,610,999 -
Financial assets at fair value through profit or loss (Note 19) 275,986,689 - 249,759,777 -
Financial assets at fair value through other comprehensive income (Note 21) (1) 185,841,975 - 192,450,010 -
Loans and advances to banks (Note 22) 191,425,663 (932) 59,083,791 (44,465)
Loans and advances to customers (Note 23) 513,216,763 (39,579,405) 457,392,375 (33,863,659)
Securities at amortized cost (Note 24) 185,179,363 (5,555,469) 171,551,837 (4,633,477)
Other financial assets (Note 29) 52,416,117 - 56,101,781 -
Provision for Expected Credit Loss         
Loan commitments (Notes 23 and 40) 255,953,637 (3,859,316) 249,866,767 (2,318,404)
Financial guarantees (Notes 23 and 40) 80,236,602 (2,318,930) 78,231,145 (1,970,321)
Total risk exposure 1,847,859,403 (51,314,052) 1,624,048,482 (42,830,326)

(1) Financial assets measured at fair value through other comprehensive income are not reduced by the allowance for losses.

 

The Organization’s maximum credit risk exposure was R$1,847,859,403 thousand in 2020, which was an increase of 13.8% compared to 2019.

 

Of this exposure, R$107,602,594 thousand, or 5.8% is related to cash and bank deposits composed mainly of funds deposited with the Central Bank of Brazil that are assessed to have low credit risk.

 

Financial assets at fair value through profit or loss (14.9% of total exposure) are mostly low credit risk, composed mainly of Brazilian government securities at fair value and also include derivative financial instruments.

 

54 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Financial assets at fair value through other comprehensive income amounted to R$185,841,975 thousand (10.1% of total exposure), are recorded at fair value with changes in ECL recognized in profit or loss and are represented mostly by Brazilian government securities, for details of these assets, see Note 21.

 

Loans and advances to financial institutions, which are 10.4% of the total, consist basically of reverse repurchase agreements which have a low credit risk.

 

Loans and advances to customers represent 27.8% of the total exposure, for details of these assets and the expected loss, see Note 23 for details.

 

Financial assets at amortized cost represent 10.0% of the total, for details of these assets, see Note 24.

 

Operations classified as “Other financial assets” represent 2.8% of the total and are basically comprised of foreign exchange operations and escrow deposits.

 

In 2020, items not recorded in the consolidated balance sheet regarding loan commitments and financial guarantees (recorded in memorandum accounts) totaled R$336,190,239 thousand, representing 18.2% of total exposure.

 

Loans and advances to customers

 

Concentration of credit risk

 

  On December 31
2020 2019
Largest borrower 2.1% 1.9%
10 largest borrowers 7.5% 7.7%
20 largest borrowers 10.9% 11.3%
50 largest borrowers 15.7% 16.7%
100 largest borrowers 19.2% 20.1%

 

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

 
   

Notes to the Consolidated Financial Statements

 

By Economic Activity Sector

 

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

 

  On December 31 - R$ thousand
2020 % 2019 %
Public sector 11,810,973 2.3 8,899,863 1.9
Oil, derivatives and aggregate activities 10,661,873 2.1 8,870,762 1.9
Production and distribution of electricity 1,074,867 0.2 3,032 -  
Other industries 74,233 -   26,069 -  
Private sector 501,405,790 97.7 448,492,512 98.1
Companies 244,976,110 47.7 218,076,522 47.7
Real estate and construction activities 20,092,249 3.9 21,695,592 4.7
Retail 36,498,461 7.1 35,521,621 7.8
Services 30,108,475 5.9 20,136,089 4.4
Transportation and concession 23,662,184 4.6 20,807,687 4.5
Automotive 15,625,309 3.0 12,723,830 2.8
Food products 13,378,255 2.6 11,067,069 2.4
Wholesale 16,479,704 3.2 14,327,816 3.1
Production and distribution of electricity 6,979,203 1.4 2,868,563 0.6
Siderurgy and metallurgy 10,036,586 2.0 9,022,956 2.0
Sugar and alcohol 6,878,558 1.3 6,191,961 1.4
Other industries 65,237,126 12.7 63,713,338 13.9
Individuals 256,429,680 50.0 230,415,990 50.4
Total portfolio 513,216,763 100.0 457,392,375 100.0
Impairment of loans and advances (39,579,405)   (33,863,659)  
Total of net loans and advances to customers 473,637,358   423,528,716  

 

Credit Risk Mitigation

 

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

 

Credit derivatives are bilateral contracts in which one counterparty hedges credit risk on a financial instrument – its risk is transferred to the counterparty selling the hedge. Normally, the latter is remunerated throughout the period of the transaction. In the case default by the borrower, the buying party will receive a payment intended to compensate for the loss in the financial instrument. In this case, the seller receives the underlying asset in exchange for said payment.

 

56 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

The table below shows the fair value of guarantees of loans and advances to customers.

 

  R$ thousand
2020 2019
Book value (1) Fair Value Guarantees Book value (1) Fair Value Guarantees
Companies 256,810,316 89,481,169 230,415,990 139,878,361
Stage 1 217,561,123 75,882,476 199,384,194 127,231,341
Stage 2 13,960,366 5,035,349 19,594,716 10,277,550
Stage 3 25,288,827 8,563,344 11,437,080 2,369,470
         
Individuals 256,406,447 150,298,522 226,976,385 90,693,689
Stage 1 195,239,164 126,281,157 195,924,808 77,930,093
Stage 2 38,023,532 18,408,513 13,106,024 6,546,880
Stage 3 23,143,751 5,608,852 17,945,553 6,216,716
Total 513,216,763 239,779,691 457,392,375 230,572,050

(1) Of the total balance of loan operations, R$354,814,000 (2019 – R$311,522,000 thousand) refers to operations without guarantees.

 

3.3. Market risk

 

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

 

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

 

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

 

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

 

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

 

· Classification of Operations;
· Reclassification of Operations;
· Trading of Public or Private Securities;
· Use of Derivatives; and
· Hedging.

 

Market Risk Management Process

 

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

 

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

 
   

Notes to the Consolidated Financial Statements

 

Determination of Limits

 

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

 

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

 

The Trading Portfolio is monitored with the following limits:

 

· Value at Risk (VaR);
· Stress Analysis (measurement of negative impact of extreme events, based on historical and prospective scenarios);
· Income; and
· Financial Exposure/Concentration.

 

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

 

· Variation of economic value due to the variation in the interest rate – ∆EVE (Economic Value of Equity); and
· Variation of the net revenue of interest due to the variation in the rate of interest – ∆NII (Net Interest Income).

 

Market-Risk Measurement Models

 

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

 

Trading and Regulatory Portfolio

 

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

 

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

 

For regulatory purposes, the capital requirements relating to shares held in the Banking Portfolio of Prudential Conglomerate are determined on a credit risk basis, as per Central Bank of Brazil resolution, i.e., are not included in the market risk calculation.

 

58 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Risk of Interest Rate in the Banking Portfolio

 

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

 

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

 

In the case of the NII – Interest Earning Portion, the methodology intends to calculate the Organization’s variation in the net revenue interest (gross margin) due to eventual variations in the interest rate level, that is, the difference between the calculated NII in the base scenario and the calculated NII in the scenarios of increase or decrease of the interest rate will be Delta NII.

 

For the measurement of interest rate risk in the Banking Portfolio, behavioral premises of the customers are used whenever necessary. As a reference, in the case of deposits and savings, which have no maturity defined, studies for the verification of historical behaviors are carried out as well as the possibility of their maintenance. Through these studies, the stable amount (core portion) as well as the criterion of allocation over the years are calculated.

 

Financial Instrument Pricing

 

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

 

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

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

 

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

 

The following principles for the fair value process are adopted by the Organization:

· Commitment: the Organization is committed to ensuring that the prices used reflect the market value of the operations. Should information not be found, the Organization uses its best efforts to estimate the market value of the financial instruments;
· Frequency: the formalized mark-to-market criteria are applied on a daily basis;
· Formality: the CMM is responsible for ensuring the methodological quality and the formalization of the mark-to-market criteria;
· Consistency: the process to gather and apply prices should be carried out consistently, to guarantee equal prices for the same instrument within the Organization; and
· Transparency: the methodology must be accessible by the Internal and External Audit, Independent Model Validation Areas – AVIM and by Regulatory Agencies.

 

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

 
   

Notes to the Consolidated Financial Statements

 

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

 

Control and Follow-Up

 

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

 

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

 

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

 

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

 

Internal Communication

 

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

 

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

 

Hedging and Use of Derivatives

 

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

 

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

 

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

 

· alter, modify or revert positions due to changes in the market and to operational strategies; and
· reduce or mitigate exposures to transactions in inactive markets, in conditions of stress or of low liquidity.

 

For derivatives classified in the “hedge accounting” category, there is a monitoring of: (i) strategy effectiveness, through prospective and retrospective effectiveness tests, and (ii) mark-to-market of hedge instruments.

 

60 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Cash flow Hedge

 

On December 31, 2020, Bradesco maintained cash flow hedges. See more details in Note 20.

 

Standardized and “Continuous Use” Derivatives

 

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

 

Evolution of Exposures

 

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

 

Financial Exposure – Trading Portfolio (Fair Value)

 

Risk factors R$ thousand
On December 31
2020 2019
Assets Liabilities Assets Liabilities
Fixed rates 20,597,165 18,949,022 15,619,889 12,954,739
IGP-M (General Index of market pricing) / IPCA (Consumer price index) 5,151,508 2,598,754 889,026 1,476,167
Exchange coupon 348,315 336,868 221,069 1,135,449
Foreign Currency 485,660 402,441 759,320 1,437,774
Equities 801,588 794,455 461,860 427,778
Sovereign/Eurobonds and Treasuries 7,373,381 3,973,859 3,783,134 5,007,199
Other 449,161 186,396 384,269 25,793
Total 35,206,778 27,241,795 22,118,567 22,464,899

 

 

VaR Internal Model – Trading Portfolio

 

The 1-day VaR of Trading Portfolio net of tax effects was R$12,207 thousand in the end of 2020, with Equities as the largest risk factor participation of the portfolio.

 

Risk factors R$ thousand
On December 31
2020 2019
Fixed rates 5,014 1,614
IGPM/IPCA 3,645 2,774
Exchange coupon 342 415
Foreign Currency 4,704 5,327
Sovereign/Eurobonds and Treasuries 7,477 3,834
Equities 2,422 707
Other 154 2,122
Correlation/diversification effect (11,551) (6,820)
VaR at the end of the year 12,207 9,973
      
Average VaR in the year 38,522 10,263
Minimum VaR in the year 8,140 6,469
Maximum VaR in the year 104,811 15,309

 

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

 
   

Notes to the Consolidated Financial Statements

VaR Internal Model – Regulatory Portfolio

 

The capital is calculated by the normal delta VaR model based in Regulatory Portfolio, composed by Trading Portfolio and the Foreign Exchange Exposures and the Commodities Exposure of the Banking Portfolio. In addition, the historical simulation and the Delta–Gamma–Vega models of risk are applied to measure all risk factors to an options portfolio, whichever is the most conservative, whereby this risk of options is added to the VaR of the portfolio. In this model, risk value is extrapolated to the regulatory horizon2 (the highest between 10 days and the horizon of the portfolio) by the ‘square root of time’ method. VaR and Stressed VaR shown below refer to a ten-day horizon and are net of tax effects.

 

Risk factors R$ thousand
On December 31
2019 2018
VaR Stressed VaR Stressed
Interest rate 14.662 58.629 8.131 47.851
Exchange rate 34.638 104.429 5.666 20.959
Commodity price (Commodities) 465 1.637 8.194 14.704
Equities 2.766 3.772 3.355 4.844
Correlation/diversification effect (9.959) (29.875) (7.569) 33.180
VaR at the end of the year 42.572 138.592 17.777 121.538
          
Average VaR in the year 43.294 106.636 69.852 117.946
Minimum VaR in the year 16.606 34.838 17.777 57.523
Maximum VaR in the year 122.507 298.703 252.797 231.080

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

 

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

 

VaR Internal Model – Backtesting

 

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

 

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

 

The daily results corresponding to the last 250 business days, in the hypothetical and effective views, exceeded the respective VaR with a 99% confidence level five times in 2020 and, in 2019 the daily results corresponding to the last 250 business days did not exceed their VaR with a 99% confidence level.

 

According to the document published by the Basel Committee on Banking Supervision,3 exceptions are classified as being due to “either bad luck or the markets did not behave as expected by the model”, i.e. volatility was significantly higher than expected and, in certain situations, the correlations differed from those forecast by the model.

 


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

3 The Basel Committee on Banking Supervision is an organization that brings together banking supervisory authorities in order to strengthen the soundness of financial systems.

 

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

   

Notes to the Consolidated Financial Statements

 

Stress Analysis – Trading Portfolio

 

The Organization also assesses on a daily basis, the possible impacts on positions in stress scenarios for the next 20 business days, with limits established in the governance process. Thus, considering the effect of diversification between the risk factors and the tax effects, the average of the possible loss estimates in a stress situation would be R$187,519 thousand in 2020 (2019 – R$160,661 thousand), and the maximum estimated loss in the year of 2020 would be R$380,446 thousand (2019 – R$286,273 thousand).

 

  R$ thousand
On December 31
2020 2019
At the end of the year 90,071 103,444
Average in the year 187,519 160,661
Minimum in the year 56,369 67,675
Maximum in the year 380,446 286,273

Note: Values net of tax effects.

 

 

Sensitivity Analysis

 

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

 

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

 

Scenario 1: Based on market information (B3, Anbima, etc.), stresses were applied for 1 basis point on the interest rate and 1.0% variation on prices. For example: for a Real/US dollar exchange rate of R$5.18 a scenario of R$5.23 was used, while for a 1-year fixed interest rate of 2.86%, a scenario of 2.87% was applied;

 

Scenario 2: 25.0% stresses were determined based on market information. For example: for a Real/US dollar exchange rate of R$5.18 a scenario of R$6.47 was used, while for a 1-year fixed interest rate of 2.86%, a 3.57% scenario was applied. The scenarios for other risk factors also accounted for 25.0% stresses in the respective curves or prices; and

 

Scenario 3: 50.0% stresses were determined based on market information. For example: for a Real/US dollar quote of R$5.18 a scenario of R$7.77 was used, while for a 1-year fixed interest rate of 2.86%, a 4.29% scenario was applied. The scenarios for other risk factors also account for 50.0% stresses in the respective curves or prices.

 

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

 

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Notes to the Consolidated Financial Statements

 

Sensitivity Analysis – Trading Portfolio

 

  R$ thousand
Trading Portfolio (1)
On December 31
2020 2019
Scenarios Scenarios
1 2 3 1 2 3
Interest rate in Reais Exposure subject to variations in fixed interest rates and interest rate coupons (105) (11,776) (23,317) (97) (14,128) (27,256)
Price indexes Exposure subject to variations in price index coupon rates (1,788) (41,702) (84,093) (904) (29,440) (56,245)
Exchange coupon Exposure subject to variations in foreign currency coupon rates (32) (3,256) (6,485) (10) (689) (1,373)
Foreign currency Exposure subject to exchange rate variations (1,597) (39,926) (79,852) (2,772) (74,695) (149,390)
Equities Exposure subject to variation in stock prices (354) (8,856) (17,712) (228) (5,710) (11,420)
Sovereign/Eurobonds and Treasuries Exposure subject to variations in the interest rate of securities traded on the international market (167) (11,955) (23,430) (699) (29,099) (56,736)
Other Exposure not classified in other definitions -   (41) (82) -   (26) (52)
Total excluding correlation of risk factors (4,043) (117,512) (234,971) (4,710) (153,787) (302,472)
Total including correlation of risk factors (2,647) (73,605) (147,689) (2,617) (72,476) (145,411)

(1) Values net of taxes.

 

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

   

Notes to the Consolidated Financial Statements

 

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

 

Sensitivity Analysis – Trading and Banking Portfolios

 

  R$ thousand
Trading and Banking Portfolios (1)
On December 31
2020 2019
Scenarios Scenarios
1 2 3 1 2 3
Interest rate in Reais Exposure subject to variations in fixed interest rates and interest rate coupons (12,180) (1,553,493) (2,974,461) (14,670) (1,895,973) (3,775,039)
Price indexes Exposure subject to variations in price index coupon rates (27,143) (2,227,123) (4,031,341) (16,840) (1,312,832) (2,397,962)
Exchange coupon Exposure subject to variations in foreign currency coupon rates (2,277) (71,852) (141,860) (1,035) (71,631) (139,560)
Foreign currency Exposure subject to exchange rate variations (2,202) (65,746) (131,493) (3,136) (71,103) (142,206)
Equities Exposure subject to variation in stock prices (43,353) (1,083,824) (2,167,648) (28,808) (720,192) (1,440,384)
Sovereign/Eurobonds and Treasuries Exposure subject to variations in the interest rate of securities traded on the international market (1,339) (14,019) (27,608) (1,399) (52,962) (104,190)
Other Exposure not classified in other definitions (30) (748) (1,496) (66) (1,660) (3,320)
Total excluding correlation of risk factors (88,524) (5,016,805) (9,475,907) (65,954) (4,126,353) (8,002,661)
Total including correlation of risk factors (73,350) (4,168,903) (7,883,903) (42,209) (3,038,149) (5,919,579)

(1) Values net of taxes.

 

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Notes to the Consolidated Financial Statements

 

3.4. Liquidity risk

 

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

 

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

 

Liquidity Risk Management Process

 

The liquidity risk management is executed by the Organization at the corporate level and permeates all layers of governance. The following are the responsibilities of the departments responsible for the management and control of liquidity risk:

 

Treasury Department Perform the day-to-day management of cash and liquidity;
Propose limits for the indicators of control of the liquidity risk, as well as the levels for the flagging alerts;
Meet the strategic and operational limits established;
Report on matters related to the management of liquidity of the Asset and Liability Management Treasury Executive Committee;
Integrated Risk Control Department Propose the metrics of control of liquidity and concentration, considering its appropriate approval in the process of governance established;
Calculate and disclose the indicators for monitoring and control of liquidity periodically;
Provide tools for simulation of the main indicators implemented;
Report on matters related to the control and monitoring of the liquidity risk in the committees and executive committees where the theme is addressed;

Support Areas

(Shares and Custody Department, International and Foreign Exchange Department and Department of Controllership)

Execute the projection of cash flows for the monitoring of liquidity, including intraday;
Prepare the cash flows provided up to the horizon of 12 months and refer to the areas of interest;
Check and ensure consistency, integrity and completeness of the database available daily to managers and controllers of the liquidity risk;
Provide management information on the cash flow to the Treasury Department, as well as any significant changes in the levels of reserves of the Banks of the Conglomerate;
Provide management information on the mismatch mapping of the Treasury Department.

 

Policies and Standards

 

The process of managing the liquidity risk is composed of policies and standards that establish criteria related to our diversification of funding sources of the Organization.

 

The Liquidity Risk Management Policy ensures that there are rules, procedures and controls that ensure to the Organization the appropriate level of liquidity and diversification of its funding.

 

In turn, the Liquidity Risk Standard for the Prudential Conglomerate describes procedures and controls of the Organization for the liquidity risk, among them, the control of concentration of raising

 

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funds by product and counterpart.

 

In the executive committees of the Organization concentrations of funding from product, counterpart and deadlines are reported.

 

Control and Monitoring

 

The liquidity risk management of the Organization is performed using tools developed on platforms and validated by independent areas of the Organization. Among the key metrics and indicators considered in the framework of liquidity risk, are:

 

· Information on the Liquidity Coverage Ratio (LCR): A measure of the sufficiency of liquid instruments to honor the cash outflows of the Organization within the next thirty days in a scenario of stress;
· Net Stable Funding Ratio (NSFR): A measure of the sufficiency of structural funding to finance long-term assets in the balance sheet of the Organization;
· Loss of deposits to different time horizons;
· Maps of concentration of funding in different visions (product, term and counterpart); and
· Integrated stress exercises where different dimensions of risk are addressed.

 

Limits were established for the main metrics, which can be strategic (approved up to the level of the Board of Directors) or operational (approved by the Treasury Executive Committee for Asset and Liability Management), based on flags, which trigger different levels of governance according to the percentage of use (consumption) of their respective limits.

 

Liquidity Risk Mitigation

 

The governance established for the liquidity risk management includes a series of recommendations to mitigate the risk of liquidity, among the main strategies, are:

 

· Diversification of funding as to the counterpart, product and term;
· Adoption of managerial limits of liquidity, in addition to those required by the regulator;
· Prior analysis of products which may affect the liquidity before their implementation; and
· Simulations of stress of liquidity of the portfolio.

 

Stress Tests

 

Due to the dynamics and criticality of this theme, the management and control of liquidity risk should happen every day and be based on stress scenarios. In this way, the main metric used for the monitoring of the liquidity risk of the Prudential Conglomerate is the Short-term Liquidity Coverage Ratio (LCR), which measures the adequacy of liquid resources to honor the commitments in the next thirty days considering a scenario of stress. Therefore, the daily management is performed through the stress test.

 

In addition to the LCR and other metrics of monitoring, simulations of stress scenarios in the long-term are performed, within the integrated stress test program (ICAAP for example), also to evaluate a possible deterioration of liquidity indicators for different time horizons.

 

Contingency Plan

 

According to Article 38, paragraph II of Central Bank of Brazil’s Resolution No. 4,557 of February 23, 2017, all institutions should have a liquidity contingency plan. The liquidity contingency plan of the Organization covers the following points:

 

· Group of crisis management;
· Key responsibilities of the group of crisis management;
· Indicators for monitoring;
· Actions to mitigate the crisis; and
· Frequency of revision of the plan.

 

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Notes to the Consolidated Financial Statements

 

Internal communication

 

Internal communication about liquidity risk, both between departments and between the different layers of internal governance is done through internal reports and committees involving both areas (Treasury and DCIR) and the Organization's senior management.

 

Additionally, reports are distributed daily to the areas involved in management and control, as well as to senior management. Several analysis instruments are part of this process and are used to monitor liquidity, such as:

 

• Daily distribution of liquidity control instruments;

• Automatic intraday update of liquidity reports for the proper management of the Treasury Department;

• Preparation of reports with past and future movements, based on scenarios;

• Daily verification of compliance with the minimum liquidity level;

• Preparation of complementary reports in which the concentration of funding is presented by type of product, term and counterparty; and

• Weekly reports to senior management with behavior and expectations regarding the liquidity situation.

 

The liquidity risk management process has an alert system, which determines the appropriate level of reporting of risk reports according to the percentage of use of the established limits. Thus, the lower the liquidity ratios, the higher levels of the Organization receive the reports.

 

LCR – Liquidity Coverage Ratio

 

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

 

 

 

In accordance with the LCR implantation schedule defined by Basel, the level of the ratio between High Quality Liquid Assets and total net cash outflows must comply with the following schedule:

 

Year 2016 2017 2018 As of 2019
% Required 70% 80% 90% 100%

 

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

 

· The partial loss of retail and uncollateralized wholesale funding, as well as short-term funding capacity;
· The additional outflow of funds, contractually foreseen, due to the downgrading of the institution’s credit rating by up to three levels, including eventual additional collateral requirements;
· An increase in the volatility of factors that impact collateral quality or the potential future exposure of derivative positions, resulting in the application of larger collateral discounts or a call for additional collateral or in other liquidity requirements;
· Withdrawals of higher than expected amounts from credit/liquidity lines granted; and
· The potential need to repurchase debt or honor non-contractual obligations in order to mitigate reputational risk.

 

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Notes to the Consolidated Financial Statements

 

High Quality Liquid Assets (HQLA)

 

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

 

Cash Outflows and Inflows

 

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

 

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

 

The following table shows information of the Short-term Liquidity Coverage Ratio – LCR, relating to the cash inflows and outflows, as well as stock of High Quality Liquid Assets (HQLA), according to definitions and calculation methodology set out in Circular No. 3,749/15.

 

R$ thousand
Information on the Liquidity Coverage Ratio (LCR)
 Number of Lines   On December 31 (1) On December 31 (2)
2020 2019
Average Amount (3) Weighted Average Amount (4) Average Amount (3) Weighted Average Amount (4)
  High Quality Liquid Assets (HQLA)        
1 Total High Quality Liquid Assets (HQLA)   244,827,538   112,872,809
  Cash Outlows        
2 Retail funding: 325,354,419 29,651,389 239,379,478 21,636,196
3 Stable funding 170,521,207 8,526,060 129,085,762 6,454,288
4 Less stable funding 154,833,212 21,125,329 110,293,716 15,181,908
5 Non-collateralized wholesale funding: 235,478,141 97,681,458 132,504,666 53,070,146
6 Operating deposits (all counterparties) and affiliated cooperative deposits 12,635,960 631,798 9,638,912 481,946
7 Non-operating deposits (all counterparties) 220,227,439 94,434,918 121,673,837 51,396,283
8 Other non-collateralized wholesale funding 2,614,742 2,614,742 1,191,917 1,191,917
9 Collateralized wholesale funding -   4,581,792 -   3,828,662
10 Additional requirements: 109,487,520 14,836,353 113,180,204 14,729,075
11 Related to exposure to derivatives and other collateral requirements 11,778,909 6,330,665 14,457,167 6,617,026
12 Related to funding losses through the issue of debt instruments 1,085,406 1,085,406 765,093 765,093
13 Related to lines of credit and liquidity 96,623,205 7,420,282 97,957,944 7,346,956
14 Other contractual obligations 36,339,264 34,400,518 37,020,644 35,080,897
15 Other contingent obligations 131,523,849 5,164,538 132,713,942 5,420,129
16 Total cash outflows -   186,316,048 -   133,765,105
  Cash Inflows        
17 Collateralized loans 201,944,617 1,425,648 65,979,377 896,126
18 Outstanding loans whose payments are fully up-to-date 28,197,590 16,599,016 32,730,607 20,645,466
19 Other cash inflows 38,376,788 31,043,722 41,453,133 33,730,321
20 Total cash inflows 268,518,995 49,068,386 140,163,117 55,271,913

 

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Notes to the Consolidated Financial Statements

 

R$ thousand
      Total Adjusted Amount (5)   Total Adjusted Amount (5)
21 Total HQLA   244,827,538   112,872,809
22 Total net cash outflow   137,247,662   78,493,191
23 LCR (%) (5)   178.4%   143.8%

(1) Calculated based on the simple daily average of the months that compose the fourth quarter (63 observations);

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

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

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

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

 

The amount of net assets (HQLA) resulted in an average of R$244.8 billion in the fourth quarter of 2020, compared to an average of R$112.9 billion in the fourth quarter of 2019.

 

Related to the cash outflows, based on the regulatory stress scenario (line 16), about 68.3% are redemptions and non-renewals of retail and wholesale funding without collateral (unsecured), as shown on lines 2 and 5 of the table.

 

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

 

Regarding cash inflows, corresponding to an average of R$49.1 billion in the fourth quarter of 2020, most significant are the receipts of loans operations (partial renewal), the inflows of Trade Finance operations, cash and cash equivalents and redemptions of securities in addition to the inflow of transfer and credit card operations.

 

Net Stable Funding Ratio

 

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

 

The following figure shows the main components of the indicator:

 


 

Available Stable Funding (ASF)

 

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

 

Required Stable Funding (RSF)

 

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

 

The following table provides information regarding the Net Stable Funding Ratio (NSFR) and its components, as set forth in Circular No. 3,869/17:

 

 

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Notes to the Consolidated Financial Statements

 

R$ thousand
Information on the Long-term Indicator (NSFR)
Number of Lines   On December 31, 2020 (1) Weighted Average (2)
Amount per effective term of residual maturity
Without expiration Less than 6 months Greater than or equal to 6 months and less than one year Greater than or equal to one year
  Available stable funding (ASF)          
1 Capital 170,608,338 -   -   18,313,273 188,921,611
2 Reference Equity, gross of regulatory deductions 170,608,338 -   -   -   170,608,338
3 Other instruments not included in line 2 -   -   -   18,313,273 18,313,273
4 Retail funding: 162,839,765 179,861,858 803,877 2,236,352 320,279,728
5 Stable funding 98,174,559 79,593,950 -   -   168,880,084
6 Less stable funding 64,665,206 100,267,908 803,877 2,236,352 151,399,644
7 Wholesale Funding, of which: 40,091,080 503,793,771 36,532,855 82,124,727 231,014,206
8 Operating deposits and deposits of affiliated cooperatives 13,264,244 -   -   -   6,632,122
9 Other wholesale fundings 26,826,836 503,793,771 36,532,855 82,124,727 224,382,084
10 Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations, even if contingent -   28,703,455 2,570,541 128,837 -  
11 Other liabilities, of which: 67,492,309 49,383,786 -   -   4,100,984
12 Derivatives whose replacement value is less than zero -   17,816,827 -   -   -  
13 Other liabilities or shareholders' equity not included in the previous items 67,492,309 31,566,959 -   -   4,100,984
14 Total of Available Stable Funding (ASF) -   -   -   -   744,316,530
15 Total High Quality Liquid Assets (HQLA) -   -   -   -   12,066,027
16 Operating deposits held in other financial institutions -   -   -   -   -  
17 Securities, securities and transactions with financial institutions, non-financial institutions and central banks, of which: 6,869,747 334,657,624 78,329,704 322,434,714 393,088,895
18 Transactions with financial institutions collateralized by Level 1 HQLA -   19,755,276 -   -   1,975,528
19 Transactions with financial institutions collateralized by HQLA Level 2A, Level 2B or without collateral -   174,506,606 3,808,402 6,103,626 10,717,167
20 Loans and financing granted to wholesale, retail, central government and central bank operations, of which: -   121,625,294 59,029,816 196,243,241 262,649,323
21 Operations with a Risk Weighting Factor (FPR) of less than or equal to 35%, pursuant to Circular No. 3644, of 2013 -   -   -   228,587 149,060
22 Residential real estate financing, of which: -   3,040,642 2,778,993 42,524,930 33,760,904
23 Operations that comply with the provisions of Circular No. 3644, of 2013, art. 22 -   3,040,642 2,778,993 42,524,930 33,760,904
24 Securities not eligible for HQLA, including shares traded on the stock exchange 6,869,747 15,729,806 12,712,493 77,334,330 83,836,913
25 Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations, even if contingent -   29,448,146 1,627,240 92,779 -  
26 Other assets, of which: 210,548,649 45,074,927 (369,026) 8,192,910 201,162,188
27 Operations with gold and commodities, including those with a forecast of physical settlement -   -   -   -   -  
28 Assets provided as a result of the deposit of initial guarantee margin in operation with derivatives and participation inmutualized guarantee funds of clearing houses and clearing and settlement service providers that are interposed as central counterparty -   - - 4,080,085 3,468,072

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Notes to the Consolidated Financial Statements

 

R$ thousand
29 Derivatives whose replacement value is greater than or equal to zero -   23,905,679 - -   -  
30 Derivatives whose replacement value is less than zero, gross of the deduction of any guarantee provided as a result of the margin deposit -   -   -   -   7,345,256
31 Other assets not included in the previous lines 210,548,649 21,169,248 (369,025) 4,112,825 190,348,860
32 Transactions not recorded in the statement of financial position -   337,046,292 -   -   12,223,309
33 Total Required Stable Funding (RSF) -   -   -   -   618,540,418
34 NSFR (%)         120.3%

(1) Corresponding to the total statement of financial position; and

(2) Corresponding to the value after applying the weighting factors.

 

The NSFR long-term indicator presented a volume weighted for available stable funding resources much higher to that of required stable funding resources, with a surplus weighted balance of R$125,776,112 thousand, resulting in an indicator of 120.3%.

 

The amount of available stable funding (ASF) is formed largely by the funding of customers considering the level of stability as the main factor for the contribution of the ASF. The calculation of December 2020 for the ASF presented a participation of 43% from the funding of Retail and 31% from the funding of Wholesale.

 

The values of required stable funding (RSF) are constituted by the asset items and by items not recognized on the statement of financial position. These statement of financial position items are weighted according to their respective liquidity profile, therefore, the items related to loans and other assets, with low or no liquidity, feature prominently in the RSF (high weighting factors), while highly liquid assets, such as, for example unpledged federal public securities, receive low weighting factors. On December 31, 2020, the loan operations (line 20) accounted for 42% of the total RSF, while other assets (line 31) participated in 31% of the RSF.

 

Undiscounted cash flows of financial liabilities

 

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

 

  R$ thousand  
On December 31, 2020  
Up to 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years Total  
 
Deposits from banks 261,441,379 13,437,266 16,745,882 8,378,815 15,317,318 315,320,660  
Deposits from customers 193,450,578 22,163,986 85,235,469 256,887,231 9,364 557,746,628  
Securities issued 739,423 17,449,438 47,790,440 66,068,592 1,961,667 134,009,560  
Subordinated debt 2,535 5,971 68,945 33,230,835 13,590,851 46,899,137  
Other financial liabilities (1) 49,615,853 5,797,460 9,883,756 7,970,731 2,260,247 75,528,047  
Total liabilities 505,249,768 58,854,121 159,724,492 372,536,204 33,139,447 1,129,504,032  

 

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  R$ thousand  
On December 31, 2019  
Up to 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years Total  
 
Deposits from banks 211,933,285 7,951,703 17,687,715 16,148,899 5,095,470 258,817,072  
Deposits from customers 155,375,679 5,905,668 50,655,420 152,739,946 12,720 364,689,433  
Securities issued 5,525,148 15,106,936 64,755,163 105,451,340 7,777,040 198,615,627  
Subordinated debt 756 34,732 33,848 15,617,690 33,705,500 49,392,526  
Other financial liabilities (1) 49,689,795 13,312,723 4,436,523 9,071,260 2,610,826 79,121,127  
Total liabilities 422,524,663 42,311,762 137,568,669 299,029,135 49,201,556 950,635,785  

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

 

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

 

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

 

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

 

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

 

Undiscounted cash flows for derivatives

 

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

 

· Foreign currency derivatives – over-the-counter currency options, currency futures, and currency options traded on an exchange; and
· Interest rate derivatives – interest rate swaps, forward rate contracts, interest rate options, other interest rate contracts, interest rate futures traded on an exchange and interest rate options traded on an exchange.

 

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

 

  R$ thousand  
On December 31, 2020  
Up to 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years Total  
 
Differential of swaps payable 205,379 185,993 4,125,850 6,097,591 249,009 10,863,822  
Non-deliverable forwards 1,020,584 252,454 571,226 89,059 -   1,933,323  
• Purchased 477,415 140,329 274,623 84,010 -   976,377  
• Sold 543,169 112,125 296,603 5,049 -   956,946  
Premiums of options 1,143,498 80,198 250,664 1,043,564 592,180 3,110,104  
Other 362,780 251,689 564,300 81,637 2,062 1,262,468  
Adjustment payables - future 19,366 -   -   -   -   19,366  
Total of derivative liabilities 2,751,607 770,334 5,512,040 7,311,851 843,251 17,189,083  

 

Bradesco 73

 

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

 
   

Notes to the Consolidated Financial Statements

 

  R$ thousand  
On December 31, 2019  
Up to 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years Total  
 
Differential of swaps payable 2,464,064 385,676 510,465 7,826,017 730,510 11,916,732  
Non-deliverable forwards 90,835 115,400 151,731 67,247 -   425,213  
• Purchased 79,986 80,476 129,615 66,498 -   356,575  
• Sold 10,849 34,924 22,116 749 -   68,638  
Premiums of options 361,740 33,437 114,228 956,353 66,493 1,532,251  
Other 153,047 115,947 150,988 62,388 -   482,370  
Adjustment payables - future 23,676 -   -   -   -   23,676  
Total of derivative liabilities 3,093,362 650,460 927,412 8,912,005 797,003 14,380,242  

 

74 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Statement of financial position by maturities

 

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

 

  R$ thousand  
On December 31, 2020  
Current Non-current Total  
1 to 30 days 31 to 180 days 181 to 360 days 1 to 5 years More than 5 years No stated maturity  
 
Assets                
Cash and balances with banks 107,602,594 -   -   -   -   -   107,602,594  
Financial assets at fair value through profit or loss 16,514,868 23,110,617 21,495,431 165,166,660 36,104,212 13,594,901 275,986,689  
Financial assets at fair value through other comprehensive income 17,130,008 26,482,001 16,341,164 67,419,613 43,319,150 15,150,039 185,841,975  
Loans and advances to customers, net of impairment 48,686,483 114,058,384 65,199,454 245,684,709 8,328   473,637,358  
Loans and advances to banks, net of impairment 168,750,356 14,027,853 2,915,463 5,731,059 -   -   191,424,731  
Securities, net of provision for losses 126,822 20,225,202 16,938,842 79,727,828 62,605,200   179,623,894  
Other financial assets (1) 36,952,129 733,796 318,706 11,575,832 2,835,654   52,416,117  
Total financial assets 395,763,260 198,637,853 123,209,060 575,305,701 144,872,544 28,744,940 1,466,533,358  
                 
Liabilities                
Financial liabilities at amortized cost                 
Deposits from banks 221,467,747 18,319,819 9,944,641 17,547,960 -   -   267,280,167  
Deposits from customers (2) 202,956,338 50,518,912 54,368,623 237,448,870 -   -   545,292,743  
Securities issued 2,461,435 33,338,441 34,365,862 74,738,087 -   -   144,903,825  
Subordinated debt 8,307,884 22,838 383,673 34,971,870 -   9,559,967 53,246,232  
Other financial liabilities (3) 49,615,853 14,456,376 1,224,840 7,970,731 2,260,247 -   75,528,047  
Financial liabilities at fair value through profit or loss 5,462,495 1,063,954 937,849 11,233,384 -   -   18,697,682  
Provision for Expected Credit Loss                 
Loan Commitments -   -   -   3,859,316 -   -   3,859,316  
Financial guarantees -   -   -   2,318,930 -   -   2,318,930  
Insurance technical provisions and pension plans (2) 234,914,602 -   -   44,550,782 -   -   279,465,384  
Total financial liabilities 725,186,354 117,720,340 101,225,488 434,639,930 2,260,247 9,559,967 1,390,592,326  

 

Bradesco 75

 

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

 
   

Notes to the Consolidated Financial Statements

 

 

  R$ thousand  
On December 31, 2019  
Current Non-current Total  
1 to 30 days 31 to 180 days 181 to 360 days 1 to 5 years More than 5 years No stated maturity  
 
Assets                
Cash and balances with banks 109,610,999 -   -   -   -   -   109,610,999  
Financial assets at fair value through profit or loss 238,533,342 1,656,694 697,750 6,739,576 2,132,415 -   249,759,777  
Financial assets at fair value through other comprehensive income 10,143,306 21,137,632 9,604,834 100,201,043 41,411,881 9,951,314 192,450,010  
Loans and advances to customers, net of impairment 58,050,113 106,578,634 66,089,533 149,779,180 43,031,256 -   423,528,716  
Loans and advances to banks, net of impairment 48,010,255 5,636,401 3,219,405 2,217,730 -   -   59,083,791  
Securities, net of provision for losses 34,408,860 21,261,680 16,049,734 46,629,975 48,568,111 -   166,918,360  
Other financial assets (1) 42,308,091 115,534 500,348 10,564,411 2,613,397 -   56,101,781  
Total financial assets 541,064,966 156,386,575 96,161,604 316,131,915 137,757,060 9,951,314 1,257,453,434  
                 
Liabilities                
Financial liabilities at amortized cost                 
Deposits from banks 174,921,285 21,892,194 11,484,874 19,521,258 -   -   227,819,611  
Deposits from customers (2) 163,312,671 20,878,485 41,249,228 140,787,156 -   -   366,227,540  
Securities issued 5,533,584 37,545,964 43,156,796 84,491,220 -   -   170,727,564  
Subordinated debt 2,079 38,097 281,141 39,432,224 -   9,559,967 49,313,508  
Other financial liabilities (3) 49,689,795 13,312,723 4,436,523 9,071,260 2,610,826 -   79,121,127  
Financial liabilities at fair value through profit or loss 2,940,618 794,723 471,835 10,036,907 -   -   14,244,083  
Provision for Expected Credit Loss                 
Loan Commitments -   -   -   2,318,404 -   -   2,318,404  
Financial guarantees -   -   -   1,970,321 -   -   1,970,321  
Insurance technical provisions and pension plans (2) 228,230,978 2,373,787 1,035,302 36,662,624 -   -   268,302,691  
Total financial liabilities 624,631,010 96,835,973 102,115,699 344,291,374 2,610,826 9,559,967 1,180,044,849  

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

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

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

 

76 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

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

 

  R$ thousand
On December 31, 2020
Current Non-current Total
Assets      
Total financial assets 717,610,173 748,923,185 1,466,533,358
Non-current assets held for sale 1,202,488   1,202,488
Investments in associated companies -   7,386,840 7,386,840
Premises and equipment, net -   14,071,129 14,071,129
Intangible assets and goodwill, net -   14,669,464 14,669,464
Taxes to be offset 6,586,660 8,743,760 15,330,420
Deferred income tax assets -   76,984,262 76,984,262
Other assets 7,352,617 1,123,212 8,475,829
Total non-financial assets 15,141,765 122,978,667 138,120,432
Total assets 732,751,938 871,901,852 1,604,653,790
       
Liabilities      
Total financial liabilities 944,132,182 446,460,144 1,390,592,326
Other reserves 5,361,434 20,221,489 25,582,923
Current income tax liabilities 1,596,284 -   1,596,284
Deferred income tax assets -   1,249,650 1,249,650
Other liabilities 39,323,338 191,895 39,515,233
Total non-financial liabilities 46,281,056 21,663,034 67,944,090
Total equity -   146,117,374 146,117,374
Total equity and liabilities 990,413,238 614,240,552 1,604,653,790

 

  R$ thousand
On December 31, 2019
Current Non-current Total
Assets      
Total financial assets 793,613,145 463,840,289 1,257,453,434
Non-current assets held for sale 1,357,026 -   1,357,026
Investments in associated companies -   7,635,612 7,635,612
Premises and equipment, net -   14,659,222 14,659,222
Intangible assets and goodwill, net -   14,724,647 14,724,647
Taxes to be offset 11,569,545 4,116,256 15,685,801
Deferred income tax assets -   59,570,055 59,570,055
Other assets 7,042,105 399,783 7,441,888
Total non-financial assets 19,968,676 101,105,575 121,074,251
Total assets 813,581,821 564,945,864 1,378,527,685
       
Liabilities      
Total financial liabilities 823,582,682 356,462,167 1,180,044,849
Other reserves 5,525,041 19,714,888 25,239,929
Current income tax liabilities 2,595,277 -   2,595,277
Deferred income tax assets -   1,080,603 1,080,603
Other liabilities 31,246,562 2,776,891 34,023,453
Total non-financial liabilities 39,366,880 23,572,382 62,939,262
Total equity -   135,543,574 135,543,574
Total equity and liabilities 862,949,562 515,578,123 1,378,527,685

 

Bradesco 77

 

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

 
   

Notes to the Consolidated Financial Statements

 

3.5. Fair value of financial assets and liabilities

 

For financial instruments that are measured at fair value, disclosure of measurements is required according to the following hierarchical levels of fair value:

 

· Level 1

 

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

 

· Level 2

 

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

 

· Level 3

 

Valuation uses unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities normally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant Management judgment or estimation. This category generally includes certain corporate and bank debt securities and certain derivative contracts. The main non-observable data used in the determination of the fair value are the spreads of credit that vary between 2% and 9%.

 

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

 

78 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

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

 

  R$ thousand
On December 31, 2020
Level 1 Level 2 Level 3 Fair Value
Brazilian government securities 209,599,900 6,345,101 3 215,945,004
Corporate debt and marketable equity securities 12,413,353 3,956,920 319,431 16,689,704
Bank debt securities 1,717,037 8,951,480 -   10,668,517
Mutual funds 6,516,477 -   -   6,516,477
Foreign governments securities 626,079 -   -   626,079
Brazilian sovereign bonds 725,515 -   -   725,515
Financial assets at fair value through profit or loss 231,598,361 19,253,501 319,434 251,171,296
Derivative financial instruments (assets) 138,708 24,657,390 19,295 24,815,393
Derivative financial instruments (liabilities) (67,427) (18,383,783) (246,472) (18,697,682)
Derivatives 71,281 6,273,607 (227,177) 6,117,711
Brazilian government securities 143,467,979 -   30,463 143,498,442
Corporate debt securities 1,128,700 3,627,146 138,187 4,894,033
Bank debt securities 5,576,877 496,598 53,830 6,127,305
Brazilian sovereign bonds 9,572,373 -   -   9,572,373
Foreign governments securities 6,508,218 -   -   6,508,218
Mutual funds 2,950,583 -   -   2,950,583
Marketable equity securities and other stocks 11,153,243 1,104,155 33,623 12,291,021
Financial assets at fair value through other comprehensive income 180,357,973 5,227,899 256,103 185,841,975
Total 412,027,615 30,755,007 348,360 443,130,982

 

 

  R$ thousand
On December 31, 2019
Level 1 Level 2 Level 3 Fair Value
Brazilian government securities 195,987,017 4,848,858 3 200,835,878
Corporate debt and marketable equity securities 7,911,149 4,772,477 707,392 13,391,018
Bank debt securities 1,466,695 13,517,702 -   14,984,397
Mutual funds 5,518,833 -   -   5,518,833
Foreign governments securities 471,153 -   -   471,153
Brazilian sovereign bonds 47,308 -   -   47,308
Financial assets at fair value through profit or loss 211,402,155 23,139,037 707,395 235,248,587
Derivative financial instruments (assets) 107,388 14,392,323 11,479 14,511,190
Derivative financial instruments (liabilities) (52,334) (14,152,623) (39,126) (14,244,083)
Derivatives 55,054 239,700 (27,647) 267,107
Brazilian government securities 161,031,769 -   35,132 161,066,901
Corporate debt securities 2,344,002 2,541,288 600,387 5,485,677
Bank debt securities 5,098,002 414,477 -   5,512,479
Brazilian sovereign bonds 1,746,932 -   -   1,746,932
Foreign governments securities 6,454,894 -   -   6,454,894
Mutual funds 2,231,810 -   -   2,231,810
Marketable equity securities and other stocks 7,192,221 2,638,655 120,441 9,951,317
Financial assets at fair value through other comprehensive income 186,099,630 5,594,420 755,960 192,450,010
Total 397,556,839 28,973,157 1,435,708 427,965,704

 

Derivative Assets and Liabilities

 

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

 

Bradesco 79

 

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

 
   

Notes to the Consolidated Financial Statements

 

derivative contracts are listed on an exchange; those are classified as Level 2 or Level 3.

 

The yield curves are used to determine the fair value by the method of discounted cash flow, for currency swaps and swaps based on other risk factors. The fair value of futures and forward contracts is also determined based on quoted markets prices on the exchanges for exchanges-traded derivatives or using similar methodologies to those described for swaps. The fair value of options is determined using external quoted prices or mathematical models, such as Black-Scholes, using yield curves, implied volatilities and the fair value of the underlying asset. Current market prices are used to determine the implied volatilities. The fair values of derivative assets and liabilities also include adjustments for market liquidity, counterparty credit quality and other specific factors, where appropriate.

 

The majority of these models do not contain a high level of subjectivity as the methodologies used in the models do not require significant judgment and inputs to the model are readily observable from active quoted markets. Such instruments are generally classified within Level 2 of the valuation hierarchy.

 

Derivatives that have significant unobservable inputs to their valuation models are classified within Level 3 of the valuation hierarchy.

 

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years 2020 and 2019:

 

  R$ thousand  
Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Assets Derivatives Liabilities Derivatives Total  
 
Balance on December 31,  2018 418,561 3,508,546 36,595 (23,901) 3,939,801  
Included in profit or loss (31,773) (66,250) -   -   (98,023)  
Included in other comprehensive income -   (226,873) -   -   (226,873)  
Acquisitions 132,408 318,623 -   (15,225) 435,806  
Write-offs (396,260) (2,869,742) (25,116) -   (3,291,118)  
Maturities -   (21,680) -   -   (21,680)  
Transfer levels (1) 584,459 113,336 -   -   697,795  
Balance on December 31,  2019 707,395 755,960 11,479 (39,126) 1,435,708  
Included in profit or loss 10,571 (322,991) -   -   (312,420)  
Included in other comprehensive income -   47,606 -   -   47,606  
Acquisitions 54,015 90,000 7,816 (207,346) (55,515)  
Write-offs (106,643) (172,135) -   -   (278,778)  
Maturities (8,902) (1,502) -   -   (10,404)  
Transfer with categories (27,152) 27,152 -   -   -    
Transfer levels (1) (309,850) (167,987) -   -   (477,837)  
Balance on December 31,  2020 319,434 256,103 19,295 (246,472) 348,360  

(1) These papers were reclassified between levels 2 and 3, as there was an increase in credit risk and the spread curve has unobservable parameters. When there is a reduction in this credit risk, the papers are transferred from level 3 to level 2.

 

80 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

The tables below show the gains/(losses) due to changes in fair value, including the realized and unrealized gains and losses, recorded in the consolidated statement of income for Level 3 assets and liabilities during the years 2020, 2019 and 2018:

 

  R$ thousand  
Year ended December 31, 2020  
Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Total  
 
Interest and similar income 9,230 92,123 101,353  
Net trading gains/(losses) realized and unrealized 1,341 (367,508) (366,167)  
Total 10,571 (275,385) (264,814)  

 

  R$ thousand  
Year ended December 31, 2019  
Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Total  
 
Interest and similar income 54,132 18,114 72,246  
Net trading gains/(losses) realized and unrealized (85,905) (311,237) (397,142)  
Total (31,773) (293,123) (324,896)  

 

  R$ thousand  
Year ended December 31, 2018  
Financial assets held for trading Financial assets available for sale Total  
 
Interest and similar income 8,415 79,579 87,994  
Net trading gains/(losses) realized and unrealized 15,727 (454,243) (438,516)  
Total 24,142 (374,664) (350,522)  

 

 

Sensitivity analysis for financial assets classified as Level 3

 

  R$ thousand
On December 31, 2020
Impact on income (1) Impact on shareholders’ equity (1)
1 2 3 1 2 3
Interest rate in Reais (25) (3,672) (6,971) (4) (504) (992)
Price indexes (4) (83) (165) -   -   -  
Equities (582) (14,548) (29,097) (185) (4,623) (9,246)

 

  R$ thousand
On December 31, 2019
Impact on income (1) Impact on shareholders’ equity (1)
1 2 3 1 2 3
Interest rate in Reais (44) (6,489) (12,504) (12) (1,798) (3,436)
Price indexes (10) (383) (761) -   -   -  
Equities (2,019) (50,472) (100,944) (978) (24,456) (48,913)

(1) Values net of taxes.

 

Bradesco 81

 

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

 
   

Notes to the Consolidated Financial Statements

 

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

 

Scenario 1: Based on market information (B3, Anbima, etc.), stresses were applied for 1 basis point on the interest rate and 1.0% variation on prices. For example: for a Real/US dollar exchange rate of R$5.18 a scenario of R$5.23 was used, while for a 1-year fixed interest rate of 2.86%, a 2.87% scenario was applied;

 

Scenario 2: 25.0% stresses were determined based on market information. For example: for a Real/US dollar exchange rate of R$5.18 a scenario of R$6.47 was used, while for a 1-year fixed interest rate of 2.86%, a 3.57% scenario was applied. The scenarios for other risk factors also had 25.0% stresses in the respective curves or prices; and

 

Scenario 3: 50.0% stresses were determined based on market information. For example: for a Real/US dollar quote of R$5.18 a scenario of R$7.77 was used, while for a 1-year fixed interest rate of 2.86%, a 4.29% scenario was applied. The scenarios for other risk factors also had 50.0% stresses in the respective curves or prices.

 

82 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Financial instruments not measured at fair value

 

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

 

  R$ thousand
On December 31, 2020
Fair Value Book value
Level 1 Level 2 Level 3 Total
Financial assets (1)          
Loans and receivables          
·  Banks -   191,473,570 -   191,473,570 191,424,731
·  Customers -   -   478,250,100 478,250,100 473,637,358
Securities at amortized cost 105,223,797 69,644,416 9,138,672 184,006,885 179,623,894
           
Financial liabilities          
Deposits from banks -   -   267,240,795 267,240,795 267,280,167
Deposits from customers -   -   545,341,621 545,341,621 545,292,743
Securities issued -   -   143,988,723 143,988,723 144,903,825
Subordinated debt -   -   54,192,090 54,192,090 53,246,232

 

  R$ thousand
On December 31, 2019
Fair Value Book value
Level 1 Level 2 Level 3 Total
Financial assets (1)          
Loans and receivables          
·  Banks -   59,091,251 -   59,091,251 59,083,791
·  Customers -   -   428,641,947 428,641,947 423,523,411
Securities at amortized cost 102,851,594 64,025,403 11,638,647 178,515,644 166,918,360
           
Financial liabilities          
Deposits from banks -   -   227,880,098 227,880,098 227,819,611
Deposits from customers -   -   366,023,072 366,023,072 366,227,540
Securities issued -   -   169,488,130 169,488,130 170,727,564
Subordinated debt -   -   50,108,020 50,108,020 49,313,508

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

 

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

 

Loans and receivables

 

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

 

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

 

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

 

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

 
   

Notes to the Consolidated Financial Statements

 

Bonds and securities at amortized cost

 

Financial assets are carried at amortized cost. Fair values are estimated according to the assumptions described in Note 2(d). See Note 24 for further details regarding the amortized cost.

 

Deposits from banks and customers

 

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

 

Funds from securities issued

 

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

 

Subordinated debt

 

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

 

3.6. Independent Model Validation

 

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

 

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

 

3.7. Insurance risk/underwriting risk

 

Underwriting risk is the risk related to a possible loss event that may occur in the future and for which there is uncertainty over the amount of damages that result from it. The risk arises from an economic situation not matching the Organization’s expectations at the time of drafting its underwriting policy with regard to the uncertainties existing both in the definition of actuarial assumptions and in the constitution of technical provisions as well as for pricing and calculating premiums and contributions. In short, it refers to the risk of the frequency or severity of loss events or benefits exceeding the Organization’s estimates Historical experience shows that the bigger the group of contracts of similar risks, the lower the variability on the cash flows that the Organization incurs to cope with events of claims. In that way, the risk management process seeks to diversify insurance operations, aiming to excel at balancing the portfolio, and is based on the grouping of risks with similar characteristics in order to reduce the impact of individual risks.

 

Risk underwriting management is carried out by the Technical Superintendence and the policies of underwriting and acceptance of risks are periodically evaluated. In addition, the Board of Risk Management, Internal Controls, Compliance, Data Management, Organization & Project and Ombudsman, an integral part of the framework of risk management, have as one of their main tasks, the structuring of internal models for underwriting risk and the calculation of regulatory capital for these businesses, and to certify the technical provisions, in addition to evaluating the impact of new products in the risk capital of the Organization.

 

Uncertainties over estimated future claim payments

 

Claims are due as they occur and the Organization must indemnify all covered claims that occurred during the contract period, even if the notification occurs after the end of its term. However, claims are reported over a period and a significant portion of these claims are accounted for in the Provisions for Claims Incurred but Not Reported (IBNR). The estimated cost of claims includes direct expenses

 

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Notes to the Consolidated Financial Statements

 

to be incurred when settling them.

 

In this way, giving the uncertainties inherent to the process for estimating claims provisions, the final settlement may be different from the original technical provision.

 

Asset and liability management (ALM)

 

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

 

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

 

Risk management by product

 

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

 

The main risks associated with non-life insurance

 

The risks associated with non-life insurance include, among others:

 

· Oscillations in the incidence, frequency and severity of the claims and the indemnifications of claims in relation to the expectations;
· Unpredictable claims arising from an isolated risk;
· Inaccurate pricing or inadequate underwriting of risks;
· Inadequate reinsurance policies or risk transfer techniques; and
· Insufficient or excessive technical provisions.

 

Generally, the non-life insurance underwritten by the Organization is of short duration. The underwriting strategies and goals are adjusted by management and informed through internal guidelines and practice and procedure manuals.

 

The main risks inherent to the main non-life insurance business lines are summarized as follows:

 

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

 

Non-life insurance risk management

 

The Board for Risk Management monitors and evaluates risk exposure and undertakes the development, implementation and revision of guidelines related to underwriting. The implementation of these guidelines, the treatment of claims, the reinsurances and the constitution of technical provisions for insurance purposes of these risks are carried out by the technical departments of each risk area. The Technical Departments has developed mechanisms such as the analysis of possible risk accumulations based on monthly reports that identify, quantify and manage accumulated exposures in order to keep them within the limits defined in the internal guidelines.

 

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

 
   

Notes to the Consolidated Financial Statements

 

The main risks associated with life insurance and private pension plans

 

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

 

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

 

· Biometric risks, which includes mortality experience, adverse morbidity, longevity and disability. The mortality risk may refer to policyholders living longer than expected (longevity) or passing away before expected. This is because some products pay a lump sum if the person dies, and others pay regular amounts while the policyholder is alive;
· Policyholder’s behavior risks, which includes persistence rate experience. Low persistence rates for certain products may result in less policies/private pension plan agreements remaining contracted to help cover fixed expenses and may reduce future positive cash flows of the underwritten business. A low persistence rate may affect liquidity of products which carry a redemption benefit;
· Group life-insurance risk results from exposure to mortality and morbidity rates and to operational experience worse than expected on factors such as persistence levels and administrative expenses; and
· Some Life and Pension Plan products have pre-defined yield guarantees, and thereby face risk from changes in financial markets, returns on investments and interest rates that are managed as a part of market risk.

 

Life insurance and private pension plan risk management

 

The Board for Risk Management monitors and assesses risk exposure and is responsible for developing, implementing and reviewing policies relating to underwriting. The implementation of these guidelines, the processing claims and the technical reserves for insurance purposes of these risks are carried out by the Technical Department; The Technical Department has developed mechanisms, such as the analysis of possible risk accumulations based on monthly reports that identify, quantify and manage accumulated exposures to keep them within limits defined by internal policies.

 

Longevity risks are monitored in relation to the most recent data and to the trends in the environments in which the Organization operates. Management monitors exposure to this risk and the capital implications of it in order to manage the possible impacts, as well as to ensure that business has the capital that it may require. The Management adopts improvement assumptions in its calculation of technical provisions in order to predict and thus be covered for possible impacts generated by the improvement in life expectancy of the insured/assisted population.

 

Mortality and morbidity risks are partially mitigated through reinsurance contracts for catastrophes.

 

Persistency risk is managed through frequent monitoring of the Organization’s historic experience. Management has also defined rules on the management and monitoring of persistence and the implementation of specific initiatives to improve, when appropriate, the renewal of policies that expire.

 

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

 

The main risks associated with health insurance

 

The risks associated with health insurance include, among others:

· Variations in cause, frequency and severity of indemnities of claims compared to expectations;
· Unforeseen claims resulting from isolated risk;
· Incorrect pricing or inadequate subscription of risks; and
· Insufficient or overvalued technical provisions.

 

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

   

Notes to the Consolidated Financial Statements

 

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

 

Management of health insurance risk

 

The Board for Risk Management monitors and evaluates risk exposure and is responsible for the development, implementation and review of policies that cover subscription, treatment of claims and technical insurance provisions. The implementation of these policies and management of risks are supported by the Superintendent of Actuary and Statistics. The Superintendent of Actuary and Statistics has developed mechanisms, such as statistical reports and performance by type that identify, quantify and manage accumulated exposure in order to keep it within the limits defined by internal policies.

 

Longevity risk is carefully monitored using the most recent data and tendencies of the environment in which the Organization operates. Management monitors exposure to this risk and its capital implications in order to manage possible impacts, as well as the funding that the future business needs.

 

Persistency risk is managed through the frequent management of the Organization’s experience. Management has also established guidelines for the management of persistency in order to monitor and implement specific initiatives, when necessary, to improve retention of policies.

 

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

 

Risk Concentration

 

The Organization operates throughout the national territory, so that potential exposures to the concentration of risks are monitored by management reports where the results of the contracts sold within the scope of the business of the main product groups are observed. The table below shows the concentration of risks, based on the amounts of premiums written net of reinsurance, cancellations and social security contributions:

 

Product group R$ thousand
On December 31
2020 2019
Non-Life 5,421,704 5,716,063
Pension plans 26,118,492 29,518,767
Life insurance 8,275,557 8,588,733

 

Sensitivity test

 

The objective of the sensitivity test is to measure the impact on the result and shareholders’ equity of the Organization, if isolated reasonably possible changes occur, in assumptions inherent to their operations that might be affected due to the process of risk underwriting and that are considered relevant to the balance sheet date.

 

As risk factors, the following significant assumptions were identified:

 

· Risk-free interest rate – represents the minimum level of return expected by the Organization of pension products. The test evaluated the impact of a reduction in the curve of the related interest free of risk;
· Longevity (Improvement) – represents the life expectancy of an individual, based on the year of their birth, current age and other demographic factors, including sex. The test evaluated the impact of an increase on the estimate of improvement in life expectancy for annuity contracts;

 

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

 
   

Notes to the Consolidated Financial Statements

 

· Conversion into income – The test evaluated the impact of an increase on the rate of conversion of pension products into income for annuity contracts; and
· Claims ratio – is the main indicator of insurance contracts and is equivalent to the ratio between expenses and income that the Organization received by contract. The test evaluated the impact of an increase on the claims ratio.

 

Results of sensitivity testing

 

The sensitivity test for life insurance and pension plans was carried out considering the same bases and groupings of the LAT test with the applications of the variations shown in the table below.

 

  R$ thousand  
On December 31, 2020  
Interest rate Longevity (improvement) Conversion to income  
Percentage adjustment to each assumption: Variation of -5% 0.2% + 5 p.p.  
 
Total (166,933) (83,624) (41,036)  

 

For non-life, life and health insurance, the table below shows the result of the premium issued (net of reinsurance, cancellations and social security contributions), if there was an increase in the loss ratio by 1 percentage point in the last twelve months of the calculation base date:

 

Product group R$ thousand
Gross of reinsurance Net of reinsurance
On December 31
2020 2019 2020 2019
Non-Life (33,524) (34,211) (33,253) (33,922)
Life (27,073) (31,701) (26,967) (31,549)
Health (139,863) (128,555) (139,863) (128,555)

 

Limitations of sensitivity analysis

 

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

 

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

 

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

 

Credit risk

 

Credit risk consists of the possible incurrence of losses in value of financial assets and reinsurance assets, as a consequence of noncompliance, by the counterparty, of its financial obligations according to agreed terms with the Organization.

 

This risk may materialize in different ways, among others.

 

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Notes to the Consolidated Financial Statements

 

· Losses arising from delinquency, due to lack of payment of the premium or of the installments by the insured person;
· Possibility of any issuer of financial asset not making the payment on the due date or the amortizations provided for each security; and
· Inability or unfeasibility of recovery of commissions paid to brokers when policies are canceled.

 

Credit risk management

 

The Organization performs various sensitivity analyses and stress tests as tools for management of financial risks. The results of these analyses are used for risk mitigation and to understand the impact on the results and the shareholders’ equity of the Organization in normal conditions and in conditions of stress. These tests take into account historical scenarios and scenarios of market conditions provisioned for future periods, and their results are used in the process of planning and decision making, as well as the identification of specific risks arising on financial assets and liabilities held by the Organization. The management of credit risk for reinsurance operations includes monitoring of exposures to credit risk of individual counterparts in relation to credit ratings by risk assessment companies, such as Am Best, Fitch Ratings and Standard & Poor’s and Moody’s. The reinsurers are subject to a process of analysis of credit risk on an ongoing basis to ensure that the goals of the mitigation of credit risk will be achieved.

 

In that sense, credit risk management in the Organization is a continuous and evolving process including the mapping, development, evaluation and diagnosis of existing models, instruments and procedures that requires a high level of discipline and control in the analysis of operations to preserve the integrity and independence of processes. It is a process carried out at the corporate level using structured, independent internal procedures based on proprietary documentation and reports, assessed by the risk management structures of the Organization and Banco Bradesco, and based on the gradual deployment of internal models for the determination, measurement and calculation of capital.

 

Meetings are held quarterly of the Executive Committee for Risk Management of Grupo Bradesco Seguros, of the Executive Committee of Investments and, monthly, of the Internal Meeting of Asset Allocation by the area of Investment Management of Bradesco Seguros S.A. for the deliberative negotiations, possessing all the functions, which are necessary for the regulatory/improvement requirement in the processes of management.

 

Reinsurance policy

 

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

 

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

 

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

 

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

 

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

 

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

 
   

Notes to the Consolidated Financial Statements

 

Exposure to insurance credit risk

 

Management believes that maximum exposure to credit risk arising from premiums to be paid by insured parties is low, since, in some cases, coverage of claims may be canceled (under Brazilian regulations), if premiums are not paid by the due date. Exposure to credit risk for premium receivables differs between risks yet to be incurred and risks incurred, since there is higher exposure on incurred-risk lines for which coverage is provided in advance of payment of the insurance premium.

 

The Organization is exposed to concentrations of risk with individual reinsurance companies, due to the nature of the reinsurance market and strict layer of reinsurance companies with acceptable loan ratings. The Organization manages the exposures of its reinsurance counterparties, limiting the reinsurance companies that may be used, and regularly assessing the default impact of the reinsurance companies.

 

3.8. 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 Organization have adopted the Three Lines of Defense model, which consists of identifying and assigning specific responsibilities to the Departments so that essential operational risk management tasks are performed in an integrated and coordinated manner. Accordingly, the following procedures are carried out:

 

· Identifying, evaluate and monitor the operational risks inherent to the Organization's activities;
· Assessing the operational risks inherent in new products and services, in order to promote their adequacy to the legislation, procedures and controls;
· Mapping and addressing records of operational losses to make up an internal data base;
· Provide analyses that offer quality information to Departments, aimed at improving operational risk management;
· Evaluating the scenarios and indicators for the purposes of economic capital composition and improvement of the Organization's risk maps;
· Assessing and calculating regulatory and economic capital needs in connection with the operational risk; and
· Preparing reports on the operational risk and its main aspects in order to support the strategic decisions of the Organization.

 

These procedures are supported by a number of internal controls, validated on an independent basis in relation to their effectiveness and operations, in order to meet the risk appetite limits established by the Organization.

 

Operational Risk Measurement Methodology

 

In compliance with the provisions of Circular No. 3,640 of the Central Bank of Brazil, the Organization adopted the Alternative Standardized Approach to calculate the portion of assets weighted by risk related to Operational Risk (RWAopad).

 

In addition, the Organization uses internal data on operating losses, which are elements for determining the economic capital of operational risk based on an internal model. In this context, the Organization classifies operational risk events as:

 

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Notes to the Consolidated Financial Statements

 

Operational Risk Events
n Internal Fraud n External Events
n External Fraud n Information Technology
n Human Resources n Processes
n Commercial Relations n Interruption of Activities
   

Another component that is part of the calculation of economic capital, and which are used to analyze scenarios and compare operational loss events against large global banks, is external data and, therefore, the Organization makes use of the operating loss database of a worldwide consortium called Operational Riskdata Exchange (ORX).

 

Control and Monitoring

 

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

 

4)       Estimates and judgments

 

The Organization makes estimates and judgments that can affect the reported amount of assets and liabilities within the next year. All estimates and judgments are best estimates undertaken in accordance with the applicable standard. Such estimates and judgments are continually evaluated and based in our historical experience and a number of other factors including future event expectations, regarded as reasonable, under the current circumstances.

 

The estimates and judgments that have a significant risk and might have a relevant impact on the amounts of assets and liabilities within the next year are disclosed below. The actual results may be different from those established by these estimates and judgments.

 

Fair value of financial instruments

 

Financial instruments recognized at fair value in our consolidated financial statements consist primarily of financial assets measured at fair value through profit or loss, including derivatives and financial assets classified as measured at fair value through other comprehensive income. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participant at the reporting.

 

These financial instruments are categorized within a hierarchy based on the lowest level of input that is significant to the fair value measurement. For instruments classified as level 3, we have to apply a significant amount of our own judgment in arriving at the fair value measurement. We base our judgment decisions on our knowledge and observations of the markets relevant to the individual assets and liabilities, and those judgments may vary based on market conditions. In applying our judgment, we look at a range of third-party prices and transaction volumes to understand and assess the extent of market benchmarks available and the judgments or modeling required in third-party processes. Based on these factors, we determine whether the fair values are observable in active markets or whether the markets are inactive.

 

Imprecision in estimating unobservable market inputs can impact the amount of revenue or loss recorded for a particular position. Furthermore, while we believe our valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value on the reporting date. For a detailed discussion of the determination of fair value of financial instruments, see Note 3.4.

 

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

 
   

Notes to the Consolidated Financial Statements

 

Expected credit loss

 

The measurement of the provision for expected credit losses on loans for financial assets measured at amortized cost and FVOCI requires the use of complex quantitative models and assumptions about future economic conditions and loan behavior.

 

Several significant judgments are also required to apply the accounting requirements for the measurement of the expected credit loss, such as:

 

· Determine the criteria in order to establish the significant increase of credit risk;
· Select quantitative models and assumptions suitable for the measurement of the expected credit loss;
· Establish several prospective scenarios and assumptions;
· Group similar financial assets for purposes of measuring the expected credit loss; and
· Define the expected time frame of exposure to credit risk for instruments without the contractual maturity defined.

 

The process to determine the level of provision for expected credit loss requires estimates and the use of judgment; it is possible that actual losses presented in subsequent periods will differ from those calculated according to current estimates and assumptions.

 

The explanation of assumptions and estimation techniques used in the measurement of expected credit loss is further detailed in Note 3.1.

 

Impairment of intangible assets and goodwill

 

The Organization analyzes, at least annually, whether the carrying value of intangible assets and goodwill (includes goodwill identified in the acquisition of associates) was impaired. The first step of the process requires the identification of independent Cash-Generating Units and the allocation of goodwill to these units. The carrying amount of the CGU, including the allocated goodwill, is compared to its recoverable amount to determine whether any impairment exists. If the value in use of a cash-generating unit is less than its carrying value, goodwill will be impaired. Detailed calculations may need to be carried out taking into consideration changes in the market in which a business operates (e.g., competitive activity, regulatory change). The value in use is based upon discounting expected pre-tax cash flows at a risk-adjusted interest rate appropriate to the operating unit, the determination of both requires one to exercise one’s judgment. While forecasts are compared with actual performance and external economic data, expected cash flows naturally reflect the Organization’s view of future performance.

 

Income tax

 

The determination of the amount of our income tax liability is complex, and our assessment is related to our analysis of our deferred tax assets and liabilities and income tax payable. In general, our evaluation requires that we estimate future amounts of current and deferred taxes. Our assessment of the possibility that deferred tax assets are realized is subjective and involves assessments and assumptions that are inherently uncertain in nature. The underlying support for our assessments and assumptions could change over time as a result of unforeseen events or circumstances, affecting our determination of the amount of our tax liability.

 

Significant judgment is required in determining whether it is more likely than not that an income tax position will be sustained upon examination, even after the outcome of any related administrative or judicial proceedings based on technical merits. Further judgment is then required to determine the amount of benefit eligible for recognition in our consolidated financial statements.

 

In addition, we have monitored the interpretation of tax laws by, and decisions of, the tax authorities and Courts so that we can adjust any prior judgment of accrued income taxes. These adjustments may also result from our own income tax planning or resolution of income tax controversies, and may be material to our operating results for any given period. For additional information about income tax, see Note 16.

 

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Notes to the Consolidated Financial Statements

 

Technical insurance provisions

 

Insurance technical provisions (reserves) are liabilities representing estimates of the amounts that will become due at a future date, to or on behalf of our policyholders – see Note 2(l). Expectations of loss ratio, mortality, longevity, length of stay and interest rate are used. These assumptions are based on our experience and are periodically reviewed against industry standards to ensure actuarial credibility.

 

Contingent liabilities

 

The Provisions are regularly reviewed and constituted, where the loss is deemed probable, based on the opinion of the legal counsel, the nature of the lawsuit, similarity to previous lawsuits, complexity and the courts standing. Contingencies classified as Probable Loss are recorded in the Consolidated Statements of Financial Position under “Other Provisions”.

 

5)       Operating segments

 

The Organization operates mainly in the banking and insurance segments. Our banking operations include operations in the retail, middle-market and corporate sectors, lease, international bank operations, investment bank operations and as a private bank. The Organization also conducts banking segment operations through its branches located throughout the country, in branches abroad and through subsidiaries as well as by means of shareholding interests in other companies. Additionally, we are engaged in insurance, supplemental pension plans and capitalization bonds through our subsidiary, Bradesco Seguros S.A. and its subsidiaries.

 

The following segment information was prepared based on reports made available to Management to evaluate performance and make decisions regarding the allocation of resources for investments and other purposes. Our Management uses a variety of accounting information, which includes the proportional consolidation of associates and joint ventures. Accordingly, the information of the segments shown in the following tables was prepared in accordance with the specific procedures and other provisions of the Financial Institutions Accounting Plan and the total amounts, which correspond to the consolidated information, were prepared in accordance with IFRS, issued by the IASB.

 

The main assumptions for the segmentation of income and expenses include (i) surplus cash invested by the entities operating in insurance, supplemental pension and capitalization bonds are included in this segment, resulting in an increase in net interest income; (ii) salaries and benefits and administrative costs included in the insurance, supplemental pension and capitalization bonds segment consist only of cost directly related to these operations, and (iii) costs incurred in the banking operations segment related to the infrastructure of the branch network and other general indirect expenses have not been allocated between segments.

 

Our operations are substantially conducted in Brazil. Additionally, as of December 31, 2020, we have one branch in New York, one branch in Grand Cayman, and one branch in London, mainly to complement our banking services and assist in import and export operations for Brazilian customers. Moreover we also have subsidiaries abroad, namely: Banco Bradesco Argentina S.A.U. (Buenos Aires), Banco Bradesco Europa S.A. (Luxembourg), Bradesco North America LLC (New York), Bradesco Securities, Inc. (New York), Bradesco Securities UK Limited (London), Cidade Capital Markets Ltd. (Grand Cayman), Bradesco Securities Hong Kong Limited (Hong Kong), Bradesco Trade Services Limited (Hong Kong), Bradescard Mexico, Sociedad de Responsabilidad Limitada (Mexico) and BAC Florida Bank.

 

No income from transactions with a single customers or counterparty abroad represented 10% of the Organization’s income in the period of 2020, 2019 and 2018.

 

All transactions between operating segments are conducted on an arm’s length basis, with intra-segment revenue and costs being eliminated in “Other operations, adjustments and eliminations”. Income and expenses directly associated with each segment are included in determining business-segment performance.

 

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

 
   

Notes to the Consolidated Financial Statements

 

  On December 31, 2020 - R$ thousand
  Banking Insurance, pension and capitalization bonds Other Activities Eliminations Managerial Income Statement Proportionately consolidated (1) Consolidation adjustments (2) Adjustments (3) Consolidated in accordance with IFRS
 
 
Revenue from financial intermediation 74,335,609 22,444,253 109,663 (111,074) 96,778,451 484,720 (3,521,128) 4,687,074 98,429,117
Expenses from financial intermediation (4) (23,937,104) (18,341,232) (455) 118,931 (42,159,860) (40,645) 1,051,877 (7,427,059) (48,575,687)
Financial margin 50,398,505 4,103,021 109,208 7,857 54,618,591 444,075 (2,469,251) (2,739,985) 49,853,430
Expected Credit Loss Associated with Credit Risk expense (25,268,087) -   -   -   (25,268,087) (104,072) -   5,826,884 (19,545,275)
Gross income from financial intermediation 25,130,418 4,103,021 109,208 7,857 29,350,504 340,003 (2,469,251) 3,086,899 30,308,155
Other income from insurance, pension plans and capitalization bonds -   8,074,969 -   23,773 8,098,742 -   -   -   8,098,742
Fee and commission income and income from banking fees 30,307,248 1,875,701 448,292 (203,830) 32,427,411 4,031,391 2,164,111 (13,686,459) 24,936,454
Personnel expenses (17,714,158) (1,903,919) (174,340) 62 (19,792,355) (631,755) -   1,458,633 (18,965,477)
Other administrative expenses (5) (19,349,706) (1,524,278) (340,464) 674,656 (20,539,792) (1,442,189) 218,055 358,770 (21,405,156)
Tax expenses (5,476,957) (1,038,918) (74,502) -   (6,590,377) (541,474) -   1,082,949 (6,048,902)
Share of profit (loss) of unconsolidated and jointly controlled companies (271) 98,937 16,222 -   114,888 (634,424) -   964,394 444,858
Other operating income / expenses (15,634,441) (1,033,754) 102,438 (502,518) (17,068,275) (678,421) 87,085 4,861,111 (12,798,500)
Operating profit/(loss) (2,737,867) 8,651,759 86,854 -   6,000,746 443,131 -   (1,873,703) 4,570,174
Non-operating income/(expense) (284,469) (197,204) 1,100 -   (480,573) (14,306) -   -   (494,879)
IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests 14,508,637 (3,425,110) (57,123) -   11,026,404 (428,825) -   1,361,087 11,958,666
Net income in 2020 11,486,301 5,029,445 30,831 -   16,546,577 -   -   (512,616) 16,033,961
Total assets 1,435,481,875 338,923,828 5,658,304 (135,259,892) 1,644,804,115 (9,364,134) (44,400,937) 13,614,746 1,604,653,790
Investments in associates and joint ventures 77,091,501 1,856,796 60,271 (77,139,456) 1,869,112 5,177,598 -   340,130 7,386,840
Total liabilities 1,291,779,235 338,923,828 5,658,304 (135,259,892) 1,501,101,475 (9,364,134) (44,400,937) 11,200,012 1,458,536,416

(1) It refers to: adjustments of consolidation, originating from proportionally consolidated companies (Grupo Cielo, Grupo Alelo, Crediare, etc.) for management purposes;

(2) Adjustments of consolidation originating from the “non-consolidation” of exclusive funds;

(3) Adjustments due to the differences of the accounting standards used in the management reports and in the financial statements of the Organization that were prepared in accordance with IFRS. The main adjustments refer to the loss expected from financial assets, business models, effective interest rate and business combinations;

(4) It includes, in the Consolidated IFRS, the balances referring to “Net gains / (losses) on financial assets and liabilities at fair value through profit or loss”, “Net gains / (losses) on financial assets at fair value through other comprehensive income” and “Net gains / (losses) from operations in foreign currency”; and

(5) It includes, in the Consolidated IFRS, the balances referring to depreciation and amortization.

 

94 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

 

  On December 31, 2019 - R$ thousand
  Banking Insurance, pension and capitalization bonds Other Activities Eliminations Managerial statement of income Proportionately consolidated (1) Consolidation adjustments (2) Adjustments (3) Consolidated in accordance with IFRS
 
 
Revenue from financial intermediation 113,402,430 22,936,178 228,386 (2,651,701) 133,915,293 (818,428) 125,364 (8,915,835) 124,306,394
Expenses from financial intermediation (4) (49,683,456) (16,930,146) -   2,651,701 (63,961,901) 104,508 2,404,402 2,835,005 (58,617,986)
Financial margin 63,718,974 6,006,032 228,386 -   69,953,392 (713,920) 2,529,766 (6,080,830) 65,688,408
Expected Credit Loss Associated with Credit Risk expense (18,891,493) -   -   -   (18,891,493) 170,961 -   4,716,005 (14,004,527)
Gross income from financial intermediation 44,827,481 6,006,032 228,386 -   51,061,899 (542,959) 2,529,766 (1,364,825) 51,683,881
Other income from insurance, pension plans and capitalization bonds -   8,935,610 -   33,355 8,968,965 (6,840) -   13,680 8,975,805
Fee and commission income and income from banking fees 31,135,507 2,028,371 306,865 (136,176) 33,334,567 (4,128,937) (2,254,425) (1,613,529) 25,337,676
Personnel expenses (23,072,600) (2,030,224) (390,706) -   (25,493,530) 710,807 -   256,405 (24,526,318)
Other administrative expenses (5) (20,327,502) (1,495,894) (194,265) 611,500 (21,406,161) 1,419,119 (249,173) (2,119,131) (22,355,346)
Tax expenses (6,203,188) (1,110,470) (72,662) -   (7,386,320) 528,090 -   -   (6,858,230)
Share of profit (loss) of unconsolidated and jointly controlled companies 12,921 276,165 8,046 -   297,132 906,399 -   (2,449) 1,201,082
Other operating income / expenses (21,082,041) (734,635) 99,071 (508,679) (22,226,284) 663,471 (26,168) 2,012,421 (19,576,560)
Operating profit/(loss) 5,290,578 11,874,955 (15,265) -   17,150,268 (450,850) -   (2,817,428) 13,881,990
Non-operating income/(expense) (537,428) 26,800 133 -   (510,495) (9,583) -   19,166 (500,912)
IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests 10,431,415 (4,490,945) 2,372 -   5,942,842 460,433 -   1,388,854 7,792,129
Net Income in 2019 15,184,565 7,410,810 (12,760) -   22,582,615 -   -   (1,409,408) 21,173,207
Total assets 1,264,627,391 325,767,085 5,014,369 (186,104,068) 1,409,304,777 (8,436,501) (41,729,208) 19,388,617 1,378,527,685
Investments in associates and joint ventures 106,628,723 2,261,867 6,603 (106,710,041) 2,187,152 5,103,609 -   344,851 7,635,612
Total liabilities 1,064,606,520 287,062,911 1,167,684 (79,394,027) 1,273,443,088 (7,333,871) (41,729,208) 18,604,102 1,242,984,111

(1) It refers to: adjustments of consolidation, originating from proportionally consolidated companies (Grupo Cielo, Grupo Alelo, Crediare, etc.) for management purposes;

(2) Adjustments of consolidation originating from the “non-consolidation” of exclusive funds;

(3) Adjustments due to the differences of the accounting standards used in the management reports and in the financial statements of the Organization that were prepared in accordance with IFRS. The main adjustments refer to the loss expected from financial assets, business models, effective interest rate and business combinations;

(4) It includes, in the Consolidated IFRS, the balances referring to “Net gains / (losses) on financial assets and liabilities at fair value through profit or loss”, “Net gains / (losses) on financial assets at fair value through other comprehensive income” and “Net gains / (losses) from operations in foreign currency”; and

(5) It includes, in the Consolidated IFRS, the balances referring to depreciation and amortization.

 

Bradesco 95

 

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

 
   

Notes to the Consolidated Financial Statements

 

 

  On December 31, 2018 - R$ thousand
  Banking Insurance, pension and capitalization bonds Other Activities Eliminations Managerial statement of income Proportionately consolidated (1) Consolidation adjustments (2) Adjustments (3) Consolidated in accordance with IFRS
 
 
Revenue from financial intermediation 110,639,034 18,612,108 256,364 (1,727,080) 127,780,426 (1,084,631) (1,084,034) (13,064,806) 112,546,955
Expenses from financial intermediation (4) (52,958,441) (13,365,526) -   1,727,080 (64,596,887) 88,764 3,729,581 5,533,873 (55,244,669)
Financial margin 57,680,593 5,246,582 256,364 -   63,183,539 (995,867) 2,645,547 (7,530,933) 57,302,286
Expected Credit Loss Associated with Credit Risk expense (18,319,973) -   -   -   (18,319,973) 94,494 -   1,960,644 (16,264,835)
Gross income from financial intermediation 39,360,620 5,246,582 256,364 -   44,863,566 (901,373) 2,645,547 (5,570,289) 41,037,451
Other income from insurance, pension plans and capitalization bonds -   8,320,676 -   39,858 8,360,534 -   -   -   8,360,534
Fee and commission income and income from banking fees 30,022,769 2,169,807 354,734 (221,722) 32,325,588 (4,578,360) (2,527,231) (1,388,407) 23,831,590
Personnel expenses (18,102,452) (1,643,734) (239,461) -   (19,985,647) 854,580 -   259,605 (18,871,462)
Other administrative expenses (5) (19,126,128) (1,609,750) (204,736) 649,851 (20,290,763) 971,706 (119,519) (2,243,641) (21,682,217)
Tax expenses (5,660,519) (960,453) (73,649) -   (6,694,621) 597,722 -   -   (6,096,899)
Share of profit (loss) of unconsolidated and jointly controlled companies 6,620 206,272 (14,879) -   198,013 1,420,804 -   61,558 1,680,375
Other operating income / expenses (11,943,485) (998,070) 193,794 (467,967) (13,215,728) 891,788 1,203 4,376,193 (7,946,544)
Operating profit/(loss) 14,557,425 10,731,330 272,167 20 25,560,942 (743,133) -   (4,504,981) 20,312,828
Non-operating income/(expense) (929,396) 32,145 2,406 (20) (894,865) 24,052 -   -   (870,813)
IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests (1,134,166) (4,374,553) (72,405) -   (5,581,124) 719,081 -   2,168,467 (2,693,576)
Net Income in 2018 12,493,863 6,388,922 202,168 -   19,084,953     (2,336,514) 16,748,439
Total assets 1,251,749,713 304,004,114 5,966,071 (175,709,936) 1,386,009,962 (8,731,352) (89,986,505) 18,251,609 1,305,543,714
Investments in associates and joint ventures 97,416,676 2,617,258 60,894 (97,903,242) 2,191,586 5,619,603 -   314,610 8,125,799
Total liabilities 1,068,861,135 270,540,773 1,148,139 (77,806,694) 1,262,743,353 (7,630,632) (89,986,505) 15,741,378 1,180,867,594

(1) It refers to: adjustments of consolidation, originating from proportionally consolidated companies (Grupo Cielo, Grupo Alelo, Crediare, etc.) for management purposes;

(2) Adjustments of consolidation originating from the “non-consolidation” of exclusive funds;

(3) Adjustments due to the differences of the accounting standards used in the management reports and in the financial statements of the Organization that were prepared in accordance with IFRS. The main adjustments refer to the impairment of loans and advances, effective interest rate and business combinations;

(4) It includes, in the Consolidated IFRS, the balances related to “Net gains/(losses) on financial assets and liabilities at fair value through income”, “Net gains/(losses) on financial assets at fair value through other comprehensive income” and “Net gains/(losses) on foreign currency transactions”; and

(5) It includes, in the Consolidated IFRS, the balances referring to depreciation and amortization.

 

96 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

6)       Net interest income

 

  R$ thousand
Years ended December 31
2020 2019 2018
Interest and similar income      
Loans and advances to banks 6,802,466 6,874,429 9,546,878
Loans and advances to customers:      
- Loans 67,443,078 67,807,238 61,949,949
- Leases 152,978 256,455 250,791
Financial assets:      
- At fair value through profit or loss 13,982,931 19,436,407 17,538,227
- Fair value through other comprehensive income 13,632,071 12,567,751 16,666,298
- At amortized cost 15,698,407 13,139,371 12,120,868
Compulsory deposits with the Central Bank 2,017,605 4,304,875 3,916,299
Other financial interest income 13,835 31,179 63,829
Total 119,743,371 124,417,705 122,053,139
       
Interest and similar expenses      
Deposits from banks:      
- Interbank deposits (28,232) (267,636) (137,154)
- Funding in the open market (8,423,041) (11,784,845) (15,094,786)
- Borrowings and onlending (5,907,385) (4,400,636) (3,176,469)
Deposits from customers:      
- Savings accounts (3,049,149) (4,568,663) (4,646,528)
- Time deposits (5,634,342) (7,707,131) (6,252,440)
Securities issued (4,786,206) (9,250,005) (9,054,699)
Subordinated debt (2,403,327) (3,708,924) (3,517,067)
Technical provisions for insurance, pension plans and capitalization bonds (18,344,005) (16,930,146) (13,365,526)
Total (48,575,687) (58,617,986) (55,244,669)
       
Net interest income 71,167,684 65,799,719 66,808,470

 

Bradesco 97

 

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

 
   

Notes to the Consolidated Financial Statements

 

7)       Fee and commission income

 

  R$ thousand
Years ended December 31
2020 2019 2018
Fee and commission income       
Credit card income 6,754,319 7,397,305 6,951,609
Current accounts 7,927,357 7,702,319 7,165,667
Collections 2,150,007 1,935,353 1,982,037
Guarantees 1,259,236 1,257,771 1,463,423
Asset management 1,348,214 1,582,733 1,525,280
Consortium management 1,921,206 1,921,082 1,683,942
Custody and brokerage services 1,200,729 1,134,630 916,083
Underwriting/ Financial Advisory Services 1,150,460 1,014,607 815,242
Payments 462,535 475,393 448,416
Other 762,391 916,483 879,891
Total 24,936,454 25,337,676 23,831,590

 

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

 

  R$ thousand  
Year ended December 31  
2020 2019 2018  
Fixed income securities 784,649 544,554 (1,360,349)  
Derivative financial instruments (19,188,022) (1,197,059) (10,543,169)  
Equity securities (183,030) (438,412) 226,945  
Total (18,586,403) (1,090,917) (11,676,573)  

 

 

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

 

  R$ thousand
Year ended December 31
2020 2019 2018
Fixed income securities 887,809 78,455 345,987
Equity securities (2,608,767) 572,973 677,312
Dividends received 4,079 4,404 50,264
Total (1,716,879) 655,832 1,073,563

 

 

10)       Net gains/(losses) on foreign currency transactions

 

Net gains and losses on foreign currency transactions primarily consists mainly of gains or losses from currency trading and translation of monetary items from a foreign currency into the functional currency.

 

98 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

11)       Income from insurance and pension plans

 

  R$ thousand
Years ended December 31
2020 2019 2018
Written premiums 65,335,387 67,835,874 62,736,288
Supplemental pension plan contributions 3,390,768 3,954,904 4,441,813
Ceded coinsurance premiums (66,647) (62,903) (47,232)
Refunded premiums (179,660) (467,546) (769,311)
Reinsurance premiums paid (69,347) (68,919) (91,463)
Written premiums net of reinsurance and coinsurance 68,410,501 71,191,410 66,270,095
        
Changes in the provision for insurance (27,442,202) (29,047,959) (25,837,488)
Changes in the provision for private pension plans (2,540,927) (2,988,568) (3,571,734)
Changes in the insurance technical provisions and pension plans (29,983,129) (32,036,527) (29,409,222)
        
Reported indemnities (27,333,375) (28,009,648) (26,463,800)
Claims expenses (32,153) (117,705) (67,298)
Recovery of ceded coinsurance 150,456 160,443 117,703
Recovery of reinsurance 17,595 50,237 18,786
Salvage recoveries 530,509 589,906 491,559
Changes in the IBNR provision (979,399) (324,069) (121,320)
Retained claims (27,646,367) (27,650,836) (26,024,370)
        
Commissions on premiums (2,779,012) (2,728,176) (2,655,101)
Recovery of commissions 5,073 5,855 12,411
Fees (319,105) (422,952) (353,139)
Brokerage expenses - private pension plans (133,786) (101,626) (125,770)
Changes in deferred commissions 24,532 (2,209) (58,032)
Selling expenses for insurance and pension plans (3,202,298) (3,249,108) (3,179,631)
        
Gross profit from insurance and pension plans 7,578,707 8,254,939 7,656,872

 

 

12)       Personnel expenses

 

  R$ thousand
Years ended December 31
2020 2019 2018
Salaries (9,280,777) (9,768,305) (8,350,461)
Benefits (4,659,876) (5,911,496) (4,383,644)
Social security charges (3,404,017) (3,470,191) (2,997,889)
Employee profit sharing (1,533,955) (1,803,545) (1,682,868)
Training (86,852) (190,031) (166,936)
Total (18,965,477) (21,143,568) (17,581,798)

 

Bradesco 99

 

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

 
   

Notes to the Consolidated Financial Statements

 

13)       Other administrative expenses

 

  R$ thousand
Years ended December 31
2020 2019 2018
Outsourced services (4,768,664) (4,808,331) (4,598,748)
Communication (1,333,127) (1,570,224) (1,541,742)
Data processing (2,150,048) (2,145,226) (2,398,676)
Advertising and marketing (1,052,083) (1,300,468) (1,136,062)
Asset maintenance (1,299,441) (1,231,596) (1,112,508)
Financial system (1,119,697) (1,135,964) (1,009,209)
Rental (1) (142,448) (180,648) (1,142,408)
Security and surveillance (698,206) (744,036) (748,577)
Transport (651,238) (773,208) (749,685)
Water, electricity and gas (373,056) (440,613) (412,789)
Advances to FGC (Deposit Guarantee Association) (588,093) (433,369) (408,335)
Supplies (139,371) (191,362) (216,768)
Travel (77,433) (302,170) (286,731)
Other (1,091,221) (1,232,363) (1,111,724)
Total (15,484,126) (16,489,578) (16,873,962)

(1) As of January 1, 2019, the IFRS 16 standard changed the accounting for leases, eliminating rental expenses and instead requiring the recognition of depreciation of the right-of-use asset (underlying assets) and interest expense on the leases (Notes 2h, 27 and 37).

 

14)       Depreciation and amortization

 

  R$ thousand
Years ended December 31
2020 2019 2018
Amortization expenses (2,960,924) (3,128,385) (3,348,242)
Depreciation expenses (2,960,106) (2,737,383) (1,460,013)
Total (5,921,030) (5,865,768) (4,808,255)

 

15)       Other operating income/(expenses)

 

  R$ thousand
Years ended December 31
2020 2019 2018
Tax expenses (6,048,902) (6,858,230) (6,096,899)
Legal provision (2,016,778) (4,435,942) (1,836,429)
Income from sales of non-current assets, investments, and property and equipment, net (239,606) (344,627) (614,895)
Card marketing expenses (2,858,522) (3,207,559) (3,381,586)
Other (1) (7,658,438) (14,751,228) (3,570,449)
Total (18,822,246) (29,597,586) (15,500,258)

(1) In the year ended December 31, 2020, it includes: (i) impairment losses: in the acquisition of the right to provide financial services, in the amount of R$320,726 thousand (R$519,749 thousand in 2019 and R$162 thousand in 2018); software/hardware, in the amount of R$258,998 thousand (R$222,024 thousand in 2019 and R$386,265 thousand in 2018); and investment goodwill, in the amount of R$726,419 thousand (R$255,301 thousand in 2019 and there were no impairment losses in 2018); (ii) expenses with provision for restructuring, in the amount of R$980,978 thousand, mainly related to the branch network and staff and other provisions in the amount of R$102,200 thousand (R$696,469 thousand in 2019). In the year ended December 31, 2019, it also included expenses with provision for contingencies, related to FCVS, in the amount of R$342,155 thousand.


100 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

16)       Income tax and social contribution

 

a) Calculation of income tax and social contribution charges

 

  R$ thousand
Years ended December 31
2020 2019 2018
Income before income tax and social contribution 4,075,295 13,381,078 19,442,015
Total burden of income tax and social contribution at the current rates (Note 2t) (1,833,883) (5,352,431) (8,748,907)
Effect of additions and exclusions in the tax calculation:      
Earnings (losses) of associates and joint ventures 200,186 480,433 756,169
Interest on shareholders’ equity 2,496,587 2,949,143 3,284,368
Other amounts (1) 11,095,776 9,714,984 2,014,794
Income tax and social contribution for the period 11,958,666 7,792,129 (2,693,576)
Effective rate 293.4% 58.2% 13.9%

(1) Primarily, includes: (i) the exchange variation of assets and liabilities, derived from investments abroad, in the amount of R$10,047,819 thousand (R$934,897 thousand in 2019 and R$3,735,509 thousand in 2018); (ii) in 2019 the amount of R$6,403,185 thousand, referring to the increase in the social contribution rate on banks' net income from 15% to 20% on temporary differences and negative basis, as established in Constitutional Amendment no. 103 enacted in November 2019; (iii) the equalization of the effective rate of non-bank financial companies and companies in the insurance industry, as of 2020, and of non-financial companies, in relation to that shown; and (iv) the deductions encouraged.

 

b) Composition of income tax and social contribution in the consolidated statement of income

 

  R$ thousand
Years ended December 31
2020 2019 2018
Current taxes:      
Income tax and social contribution payable (4,632,251) (7,097,696) (7,623,800)
Deferred taxes:      
Constitution/realization in the period on temporary additions and exclusions 5,863,870 13,686,499 3,254,601
Use of opening balances of:      
Social contribution loss (63,150) (107,984) (313,223)
Income tax loss (79,842) (186,773) (343,791)
Addition on:      
Social contribution loss 4,813,120 1,174,988 870,717
Income tax loss 6,056,919 323,095 1,461,920
Total deferred tax expense 16,590,917 14,889,825 4,930,224
Income taxes 11,958,666 7,792,129 (2,693,576)

 

c) Deferred income tax and social contribution presented in the consolidated statement of financial position

 

  R$ thousand
Balance on December 31, 2019 Amount recorded Realized / Decrease Balance on December 31,  2020
Provisions for credit losses 39,656,446 11,625,279 (5,531,450) 45,750,275
Provision for contingencies 10,462,850 1,803,110 (1,842,064) 10,423,896
Impairment of securities and investments 2,789,316 1,607,701 (646,514) 3,750,503
Adjustment to fair value of securities 1,346,668 633,811 (989,410) 991,069
Other 6,376,906 3,611,893 (3,417,972) 6,570,827
Total deductible taxes on temporary differences 60,632,186 19,281,794 (12,427,410) 67,486,570
Income tax and social contribution losses in Brazil and overseas 7,882,821 10,870,039 (142,992) 18,609,868
Total deferred tax assets (1) 68,515,007 30,151,833 (12,570,402) 86,096,438
Deferred tax liabilities (1) 10,025,555 3,071,916 (2,735,645) 10,361,826
Net deferred taxes (1) 58,489,452 27,079,917 (9,834,757) 75,734,612

 

Bradesco 101

 

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

 
   

Notes to the Consolidated Financial Statements

 

 

  R$ thousand
Balance on December 31, 2018 Amount recorded (2) Realized / Decrease Balance on December 31, 2019
Provisions for credit losses 31,642,800 14,212,786 (6,199,140) 39,656,446
Provision for contingencies 7,534,723 4,790,532 (1,862,405) 10,462,850
Impairment of securities and investments 1,889,028 1,967,811 (1,067,523) 2,789,316
Adjustment to fair value of securities 2,198,742 1,339,401 (2,191,475) 1,346,668
Other 3,336,145 5,025,820 (1,985,059) 6,376,906
Total deductible taxes on temporary differences 46,601,438 27,336,350 (13,305,602) 60,632,186
Income tax and social contribution losses in Brazil and overseas 6,679,495 1,498,083 (294,757) 7,882,821
Total deferred tax assets (1) 53,280,933 28,834,433 (13,600,359) 68,515,007
Deferred tax liabilities (1) 5,798,953 5,011,070 (784,468) 10,025,555
Net deferred taxes (1) 47,481,980 23,823,363 (12,815,891) 58,489,452

(1) Deferred income and social contribution tax assets and liabilities are offset in the statement of financial position by taxable entity, and were R$9,112,176 thousand in 2020 (R$8,944,952 thousand in 2019); and

(2) It includes the effect of R$6,403,185 thousand, referring to the increase in the social contribution rate on banks’ net income from 15% to 20% on temporary differences and negative basis, as established in Constitutional Amendment No. 103 promulgated in November 2019.

 

d) Expected realization of deferred tax assets on temporary differences, tax loss and negative basis of social contribution

 

  R$ thousand  
Temporary differences Carry-forward tax losses Total  
Income tax Social contribution Income tax Social contribution  
 
2021 9,037,091 7,077,160 207,207 167,457 16,488,915  
2022 8,600,523 6,801,509 177,515 144,305 15,723,852  
2023 8,412,841 6,568,376 252,134 203,715 15,437,066  
2024 7,423,699 5,892,039 207,162 184,877 13,707,777  
2025 3,410,326 2,530,929 1,607,787 1,294,024 8,843,066  
2026 821,069 652,097 2,060,938 1,716,355 5,250,459  
2027 138,800 109,690 2,285,541 1,896,055 4,430,086  
2028 5,789 4,632 2,214,619 1,828,733 4,053,773  
2029 -   -   836,633 1,324,811 2,161,444  
Total 37,850,138 29,636,432 9,849,536 8,760,332 86,096,438  

 

e) Deferred tax liabilities

 

  R$ thousand
Balance on December 31,  2019 Amount recorded Realized/Decrease Balance on December 31,  2020
Fair value adjustment to securities and derivative financial instruments 8,732 890,275 (8,732) 890,275
Difference in depreciation 237,400 15,080 (19,632) 232,848
Judicial deposit 2,154,003 113,429 (82,569) 2,184,863
Other 2,579,556 193,260 (110,597) 2,662,219
Total deferred liabilities on temporary exclusions 4,979,691 1,212,044 (221,530) 5,970,205
Adjustment to fair value of available-for-sale securities 5,045,864 1,859,872 (2,514,115) 4,391,621
Total deferred tax expense 10,025,555 3,071,916 (2,735,645) 10,361,826

 

102 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

  R$ thousand
Balance on December 31,  2018 Amount recorded Realized/Decrease Balance on December 31,  2019
Fair value adjustment to securities and derivative financial instruments 58,082 3,187 (52,537) 8,732
Difference in depreciation 242,571 3,969 (9,140) 237,400
Judicial deposit 1,841,678 326,879 (14,554) 2,154,003
Other 2,493,111 364,126 (277,681) 2,579,556
Total deferred liabilities on temporary exclusions 4,635,442 698,161 (353,912) 4,979,691
Adjustment to fair value of available-for-sale securities 1,163,511 4,557,141 (674,788) 5,045,864
Total deferred tax expense 5,798,953 5,255,302 (1,028,700) 10,025,555

Bradesco 103

 

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

 
   

Notes to the Consolidated Financial Statements

 

f) Income tax and social contribution on adjustments recognized directly in other comprehensive income

 

  R$ thousand
On December 31, 2020 On December 31, 2019 On December 31, 2018
Before tax Tax (expense)/ benefit Net of tax Before tax Tax (expense)/ benefit Net of tax Before tax Tax (expense)/ benefit Net of tax
Financial assets at fair value through other comprehensive income (200,532) 218,123 17,591 10,027,427 (4,231,992) 5,795,435 (512,397) 215,482 (296,915)
Exchange differences on translations of foreign operations 235,863 -   235,863 73,867 -   73,867 113,198 -   113,198
Other (39,523) 17,930 (21,593) (371,887) 167,349 (204,538) (154,607) 61,843 (92,764)
Total (4,192) 236,053 231,861 9,729,407 (4,064,643) 5,664,764 (553,806) 277,325 (276,481)

 

104 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

17)       Earnings per share

 

a) Basic earnings per share

 

The basic earnings per share was calculated based on the weighted average number of common and preferred shares outstanding, as shown in the calculations below:

 

  Years ended December 31
2020 2019 (1) 2018 (1)
Net earnings attributable to the Organization’s common shareholders (R$ thousand) 7,560,015 10,035,723 7,916,635
Net earnings attributable to the Organization’s  preferred shareholders (R$ thousand) 8,276,847 10,987,300 8,667,280
Weighted average number of common shares outstanding (thousands) 4,428,587 4,428,587 4,428,587
Weighted average number of preferred shares outstanding (thousands) 4,407,728 4,407,728 4,407,728
Basic earnings per share attributable to common shareholders of the Organization (in Reais) 1.71 2.27 1.79
Basic earnings per share attributable to preferred shareholders of the Organization (in Reais) 1.88 2.49 1.97

(1) All share amounts presented for prior periods have been adjusted to reflect the bonus share issue approved at the Special Shareholders’ Meeting held on March 10, 2020, in the proportion of one new share for every 10 shares held.

 

b) Diluted earnings per share

 

Diluted earnings per share are the same as basic earnings per share since there are no potentially dilutive instruments.

 

18)       Cash, balances with banks and cash equivalents

 

a) Cash and balances with banks

 

  R$ thousand
On December 31
2020 2019
Cash and due from banks in domestic currency 17,747,628 14,802,308
Cash and due from banks in foreign currency 6,096,396 4,185,462
Compulsory deposits with the Central Bank (1) 83,757,533 90,622,337
Investments in gold 1,037 892
Total 107,602,594 109,610,999

(1) Compulsory deposits with the Central Bank of Brazil refer to a minimum balance that financial institutions must maintain at the Central Bank of Brazil based on a percentage of deposits received from third parties.

 

b) Cash and cash equivalents

 

  R$ thousand
On December 31
2020 2019
Cash and due from banks in domestic currency 17,747,628 14,802,308
Cash and due from banks in foreign currency 6,096,396 4,185,462
Interbank investments (1) 166,975,928 42,890,831
Investments in gold 1,037 892
Total 190,820,989 61,879,493

(1) It refers to operations with maturity date on the effective date of investment equal to or less than 90 days and insignificant risk of change in the fair value. Of this amount, R$125,241,658 thousand (2019 – R$38,451,100 thousand) refers to financial assets pledged as collateral.

 

Bradesco 105

 

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

 
   

Notes to the Consolidated Financial Statements

 

19)       Financial assets and liabilities at fair value through profit or loss

 

a) Financial assets at fair value through profit or loss

 

  R$ thousand
On December 31
2020 2019
Financial assets (1)    
Brazilian government securities 215,945,004 200,835,878
Bank debt securities 10,668,517 14,984,397
Corporate debt and marketable equity securities 16,689,704 13,391,018
Mutual funds 6,516,477 5,518,833
Brazilian sovereign bonds 725,515 47,308
Foreign governments securities 626,079 471,153
Derivative financial instruments 24,815,393 14,511,190
Total 275,986,689 249,759,777

(1) In 2020 and 2019, no reclassifications were made of Financial Assets at fair value through profit or loss for other categories of financial assets.

 

b) Maturity

 

  R$ thousand
On December 31
2020 2019
Maturity of up to one year 60,438,153 22,695,708
Maturity of one to five years 165,430,418 162,184,205
Maturity of five to 10 years 28,103,378 44,090,948
Maturity of over 10 years 7,828,437 8,537,678
No stated maturity 14,186,303 12,251,238
Total 275,986,689 249,759,777

 

The financial instruments pledged as collateral classified as “Financial assets at fair value through profit or loss”, totaled R$6,060,344 thousand on December 31, 2020 (2019 – R$8,040,216 thousand), being composed primarily of Brazilian government bonds.

 

Unrealized net gains/ (losses) included in securities and trading securities totaled R$5,284,677 thousand on December 31, 2020 (2019 – R$1,386,484 thousand). Net variation in unrealized gains/(losses) from trading securities totaled R$3,898,193 thousand in 2020 (2019 – R$2,453,078 thousand).

 

 

c) Liabilities at fair value through profit or loss

 

  R$ thousand
On December 31
2020 2019
Derivative financial instruments 18,697,682 14,244,083
Total 18,697,682 14,244,083

 

106 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

20)       Derivative financial instruments

 

The Organization enters into transactions involving derivative financial instruments with a number of customers for the purpose of mitigating their overall risk exposure as well as managing risk exposure. The derivative financial instruments most often used are highly-liquid instruments traded on the futures market (B3).

 

(i) Swap contracts

 

Foreign currency and interest rate swaps are agreements to exchange one set of cash flows for another and result in an economic exchange of foreign currencies or interest rates (for example fixed or variable) or in combinations (i.e., foreign currency and interest rate swaps). There is no exchange of the principal except in certain foreign currency swaps. The Organization’s foreign currency risk reflects the potential cost of replacing swap contracts and whether the counterparties fail to comply with their obligations. This risk is continually monitored in relation to the current fair value, the proportion of the notional value of the contracts and the market liquidity. The Organization, to control the level of credit risk assumed, evaluates the counterparties of the contracts using the same techniques used in its loan operations.

 

(ii) Foreign exchange options

 

Foreign exchange options are contracts according to which the seller (option issuer) gives to the buyer (option holder) the right, but not the obligation, to buy (call option) or sell (put option) on a certain date or during a certain period, a specific value in foreign currency. The seller receives from the buyer a premium for assuming the exchange or interest-rate risk. The options can be arranged between the Organization and a customer. The Organization is exposed to credit risk only on purchased options and only for the carrying amount, which is the fair market value.

 

(iii) Foreign currency and interest rate futures

 

Foreign currency and interest rate futures are contractual obligations for the payment or receipt of a net amount based on changes in foreign exchange and interest rates or the purchase or sale of a financial instrument on a future date at a specific price, established by an organized financial market. The credit risk is minimal, since the future contracts are guaranteed in cash or securities and changes in the value of the contracts are settled on a daily basis. Contracts with a forward rate are interest-rate futures operations traded individually which require settlement of the difference between the contracted rate and the current market rate over the value of the principal to be paid in cash at a future date.

 

Bradesco 107

 

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

 
   

Notes to the Consolidated Financial Statements

 

(iv) Forward transactions

 

A forward operation is a contract of purchase or sale, at a fixed price, for settlement on a certain date. Because it is a futures market, in which the purchase of the share will only be made on the date of maturity, a margin deposit is necessary to guarantee the contract. This margin can be in cash or in securities. The value of the margin varies during the contract according to the variation of the share involved in the operation, to the changes of volatility and liquidity, besides the possible additional margins that the broker could request.

 

The breakdown of the notional and/or contractual values and the fair value of derivatives held for trading by the Organization is as follows:

 

  On December 31 - R$ thousand
2020 2019
Nominal value Net amount value (3) Original amortized cost Mark-to-market adjustment Fair value Nominal value Net amount value (3) Original amortized cost Mark-to-market adjustment Fair value
Futures contracts                     
Purchase commitments: 84,467,021 -   24,535 -   24,535 140,426,077   20,290 -   20,290
- Interbank market 40,651,059 -   10,050 -   10,050 108,149,874 -   12,659 -   12,659
- Foreign currency 39,875,542 -   10,832 -   10,832 30,351,663 -   5,560 -   5,560
- Other 3,940,420 2,807,910 3,653 -   3,653 1,924,540 777,414 2,071 -   2,071
Sale commitments: 316,512,537   (19,366) -   (19,366) 231,911,105   (23,676) -   (23,676)
- Interbank market (1) 263,958,439 223,307,380 (15,899) -   (15,899) 153,544,202 45,394,328 (18,640) -   (18,640)
- Foreign currency (2) 51,421,588 11,546,046 (1,371) -   (1,371) 77,219,777 46,868,114 (1,840) -   (1,840)
- Other 1,132,510 -   (2,096) -   (2,096) 1,147,126 -   (3,196) -   (3,196)
            -          
Option contracts           -          
Purchase commitments: 326,423,643   2,456,611 895,667 3,352,278 145,317,995   1,489,325 310,565 1,799,890
- Interbank market 311,472,364 -   1,504,181 193,326 1,697,507 130,179,263 -   617,942 153,980 771,922
- Foreign currency 13,878,682 -   854,484 701,089 1,555,573 14,233,062 1,019,989 808,235 131,756 939,991
- Other 1,072,597 282,563 97,946 1,252 99,198 905,670 -   63,148 24,829 87,977
Sale commitments: 331,145,703   (2,520,903) (589,180) (3,110,083) 253,288,998   (1,519,642) (12,609) (1,532,251)
- Interbank market 314,999,693 3,527,329 (1,640,039) (194,670) (1,834,709) 238,999,513 108,820,250 (891,953) (130,183) (1,022,136)
- Foreign currency 15,355,976 1,477,294 (619,545) (363,298) (982,843) 13,213,073 -   (545,433) 124,936 (420,497)
- Other 790,034 -   (261,319) (31,212) (292,531) 1,076,412 170,742 (82,256) (7,362) (89,618)
            -          
Forward contracts           -          
Purchase commitments: 76,011,205   4,696,246 14,818 4,711,064 16,258,721   1,428,434 1,328 1,429,762
- Interbank market 246,269 246,269 1,859 14,818 16,677 232,706 232,706 1,859 1,328 3,187
- Foreign currency 70,345,084 48,576,798 (453) -   (453) 13,794,259 -   (251,175) -   (251,175)
- Other 5,419,852 4,451,509 4,694,840 -   4,694,840 2,231,756 1,563,753 1,677,750 -   1,677,750
Sale commitments: 22,736,629   (132,076) (4,678) (136,754) 15,834,563   125,532 (2,167) 123,365

 

108 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

  On December 31 - R$ thousand
2020 2019
Nominal value Net amount value (3) Original amortized cost Mark-to-market adjustment Fair value Nominal value Net amount value (3) Original amortized cost Mark-to-market adjustment Fair value
- Foreign currency (2) 21,768,286 -   (82,681) -   (82,681) 15,166,560 1,372,301 107,747 -   107,747
- Other 968,343 -   (49,395) (4,678) (54,073) 668,003 -   17,785 (2,167) 15,618
                      
Swap contracts                     
Assets (long position): 66,137,265   11,195,415 3,591,785 14,787,200 70,032,236   9,668,531 987,011 10,655,542
- Interbank market 4,095,567 -   106,827 215,527 322,354 7,703,103 3,424,228 118,969 85,416 204,385
- Fixed rate 33,427,359 19,386,846 4,160,018 26,030 4,186,048 38,714,923 19,364,909 8,253,671 (515,320) 7,738,351
- Foreign currency 24,369,039 1,177,263 6,169,577 3,051,417 9,220,994 19,746,372 -   1,032,687 1,066,491 2,099,178
- IGPM 636,581 -   432,390 22,676 455,066 670,554 -   124,132 118,554 242,686
- Other 3,608,719 -   326,603 276,135 602,738 3,197,284 -   139,072 231,870 370,942
Liabilities (unrestricted position): 50,475,079   (10,838,073) (2,653,090) (13,491,163) 52,232,961   (9,044,701) (3,161,114) (12,205,815)
- Interbank market 7,350,385 3,254,818 (103,984) (27,012) (130,996) 4,278,875 -   (179,169) 76,722 (102,447)
- Fixed rate 14,040,513 -   (2,431,630) (1,448,120) (3,879,750) 19,350,014 -   (5,547,009) (2,015,586) (7,562,595)
- Foreign currency 23,191,776 -   (7,119,016) (801,099) (7,920,115) 21,483,368 1,736,996 (2,750,465) (605,694) (3,356,159)
- IGPM 836,307 199,726 (536,192) (48,393) (584,585) 893,000 222,446 (167,300) (170,755) (338,055)
- Other 5,056,098 1,447,379 (647,251) (328,466) (975,717) 6,227,704 3,030,420 (400,758) (445,801) (846,559)
Total 1,273,909,082   4,862,389 1,255,322 6,117,711 925,302,656   2,144,093 (1,876,986) 267,107

Derivatives include operations maturing in D+1.
(1) It includes: (i) accounting cash flow hedges to protect DI-indexed funding totaling R$128,431,775 thousand (in December 2019 – R$76,405,734 thousand); and (ii) accounting cash flow hedges to protect DI-indexed investments totaling R$12,942,667 thousand (in December 2019 – R$21,015,183 thousand (Note 20 (iv));
(2) It includes specific hedges to protect assets and liabilities, arising from foreign investments. Investments abroad totaling the amount of R$29,678,043 thousand (in December 2019 – R$64,376,717 thousand), contemplating the capital reduction carried out in the first half of 2020, in the amount of R$59,546,684 thousand; and
(3) It reflects the net balance between the Asset and Liability position.

 

Swaps are contracts of interest rates, foreign currency and cross currency and interest rates in which payments of interest or the principal or in one or two different currencies are exchanged for a contractual period. The risks of swap contracts refer to the potential inability or unwillingness of the counterparties to comply with the contractual terms and the risk associated with changes in market conditions due to changes in the interest rates and the currency exchange rates.

 

The interest rate and currency futures and the forward contracts of interest rates call for subsequent delivery of an instrument at a specific price or specific profitability. The reference values constitute a nominal value of the respective instrument whose variations in price are settled daily. The credit risk associated with futures contracts is minimized due to these daily settlements. Futures contracts are also subject to risk of changes in interest rates or in the value of the respective instruments.

 

Bradesco 109

 

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

 
   

Notes to the Consolidated Financial Statements

 

Credit Default Swap – CDS

 

In general, these represent a bilateral contract in which one of the counterparties buys protection against a credit risk of a particular financial instrument (its risk is transferred). The counterparty that sells the protection receives a remuneration that is usually paid linearly over the life of the operation.

 

In the event of a default, the counterparty who purchased the protection will receive a payment, the purpose of which is to compensate for the loss of value in the financial instrument. In this case, the counterparty that sells the protection normally will receive the underlying asset in exchange for said payment.

 

  On December 31 - R$ thousand
2020 2019
Risk received in credit Swaps: 3,872,939 3,894,982
- Debt securities issued by companies 1,024,244 791,045
- Bonds of the Brazilian public debt 2,580,026 3,056,778
- Bonds of foreign public debt 268,669 47,159
Risk transferred in credit Swaps: (1,304,372) (1,108,443)
- Brazilian public debt derivatives (332,589) (181,382)
- Foreign public debt derivatives (971,783) (927,061)
Total net credit risk value 2,568,567 2,786,539
Effect on Shareholders' Equity 105,226 84,382
Remuneration on the counterparty receiving the risk (26,462) (11,945)

 

The contracts related to credit derivatives transactions described above are due in 2025. There were no credit events, as defined in the agreements, during the period.

 

The Organization has the following hedge accounting transactions:

 

Cash Flow Hedge

 

The financial instruments classified in this category, aims to reduce exposure to future changes in interest and foreign exchange rates, which impact the operating results of the Organization. The effective portion of the valuations or devaluations of these instruments is recognized in a separate account of shareholders’ equity, net of tax effects and is only transferred to income in two situations: (i) in case of ineffectiveness of the hedge; or (ii) the realization of the hedge object. The ineffective portion of the respective hedge is recognized directly in the statement of income.

 

Strategy On December 31 - R$ thousand
Hedge instrument nominal value Hedge object accounting value Fair Value Accumulated Adjustments in shareholders' equity (gross of tax effects) Fair Value Accumulated Adjustments in shareholders' equity (net of tax effects)
Hedge of interest receipts from investments in securities (1) 12,942,667 13,197,717 100,114 55,063
Hedge of interest payments on funding (2) 128,431,775 126,398,921 (316,082) (173,845)
Total in 2020 141,374,442 139,596,638 (215,968) (118,782)
*        
Hedge of interest receipts from investments in securities (1) 21,015,183 21,127,503 216,845 119,265
Hedge of interest payments on funding (1) 76,405,734 75,942,005 (97,192) (53,456)
Total in 2019 97,420,917 97,069,508 119,653 65,809

(1) It refers to the DI interest rate risk, using DI Futures contracts in B3 and Swaps, with the maturity dates until 2025, making the cash flow fixed; and

(2) It refers to the DI interest rate risk, using DI Futures contracts in B3 and Swaps, with maturity dates in 2023, making the cash flow fixed.

 

110 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

For the next 12 months, the gains/(losses) related to the inefficiency of the cash flow hedge, which we expect to recognize in the statement of income, amount to R$(75,173) thousand.

 

There were no gains/(losses) related to the inefficiency of the cash flow hedge recorded in the statement of income in the years ended on December 2020 and 2019.

 

Hedge of investments abroad

 

The financial instruments classified in this category, have the objective of reducing the exposure to foreign exchange variation of investments abroad, whose functional currency is different from the national currency, which impacts the result of the Organization. The effective portion of the valuations or devaluations of these instruments is recognized in a separate account of shareholders’ equity, net of tax effects and is only transferred to income in two situations: (i) hedge ineffectiveness; or (ii) in the disposal or partial sale of the foreign operation. The ineffective portion of the respective hedge is recognized directly in the statement of income.

 

Strategy On December 31 - R$ thousand
Hedge instrument nominal value Hedge object accounting value Fair Value Accumulated Adjustments in shareholders' equity (gross of tax effects) Fair Value Accumulated Adjustments in shareholders' equity (net of tax effects)
Hedge of exchange variation on future cash flows (1) 4,839,546 2,570,621 (576,303) (316,967)
Total in 2020 4,839,546 2,570,621 (576,303) (316,967)
*        
Hedge of exchange variation on future cash flows (1) 1,919,177 925,820 (388,674) (213,771)
Total in 2019 1,919,177 925,820 (388,674) (213,771)

(1) Whose functional currency is different from the Real, using Forward and Futures contracts of US dollar, with the object of hedging the foreign investment referenced to MXN (Mexican Peso) and US$ (American Dollar).

 

For the next 12 months, the gains/(losses) related to the inefficiency of the hedge of investments abroad, which we expect to recognize in the result, amount to R$307 thousand.

 

The gains/(losses) related to the inefficiency of the hedge of investments abroad, recorded in income accounts, in the year ended on December 31, 2020 was R$(12,697) thousand (2019 R$(15,750) thousand).

 

Unobservable gains on initial recognition

 

When the valuation depends on unobservable data any initial gain or loss on financial instruments is deferred over the life of the contract or until the instrument is redeemed, transferred, sold or the fair value becomes observable. All derivatives which are part of the hedge relationships are valued on the basis of observable market data.

 

The nominal values do not reflect the actual risk assumed by the Organization, since the net position of these financial instruments arises from compensation and/or combination thereof. The net position is used by the Organization especially to protect interest rates, the price of the underlying assets or exchange risk. The result of these financial instruments are recognized in “Net gains and losses of financial assets held for trading”, in the consolidated statement of income.

 

Offsetting of financial assets and liabilities

 

In accordance with IFRS 7, Bradesco must present the amounts related to financial instruments subject to master clearing agreements or similar agreements. A financial asset and a financial liability are offset and their net value presented in the Statement of Financial Position when, and only when, there is a legally enforceable right to offset the amounts recognized and the Bank intends to settle them in a liquid basis, or to realize the asset and settle the liability simultaneously.

 

Bradesco 111

 

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

 
   

Notes to the Consolidated Financial Statements

 

The table below presents financial assets and liabilities subject to settlement:

 

  R$ thousand
On December 31, 2020 On December 31, 2019
Gross amount Related amount offset in the statement of financial position Net amount Gross amount Related amount offset in the statement of financial position Net amount
Financial assets            
Interbank investments 179,729,420 -   179,729,420 48,278,561 -   48,278,561
Derivative financial instruments 24,815,393 -   24,815,393 14,511,191 -   14,511,191
             
Financial liabilities            
Securities sold under agreements to repurchase 217,108,353 -   217,108,353 174,100,023 -   174,100,023
Derivative financial instruments 18,697,682 -   18,697,682 14,244,083 -   14,244,083

 

On December 31, 2020 and 2019, Bradesco does not offset any financial assets and financial liabilities in its Statement of Financial Position.

 

21)       Financial assets at fair value through other comprehensive income

 

a) Financial assets at fair value through other comprehensive income

 

  R$ thousand
Amortized cost Gross unrealized gains Gross unrealized losses Fair value
Brazilian government securities 134,289,029 9,310,390 (100,977) 143,498,442
Corporate debt securities 4,828,945 162,121 (97,033) 4,894,033
Bank debt securities 6,637,552 745,867 (1,256,114) 6,127,305
Brazilian sovereign bonds 9,222,104 608,077 (257,808) 9,572,373
Foreign governments securities 6,501,034 7,184 -   6,508,218
Mutual funds 2,939,361 14,770 (3,548) 2,950,583
Marketable equity securities and other stocks 9,895,440 2,631,980 (236,399) 12,291,021
Balance on December 31, 2020 (1) 174,313,465 13,480,389 (1,951,879) 185,841,975
         
Brazilian government securities 149,536,012 11,531,621 (732) 161,066,901
Corporate debt securities 5,293,589 318,798 (126,710) 5,485,677
Bank debt securities 5,606,859 534,907 (629,287) 5,512,479
Brazilian sovereign bonds 1,696,120 69,616 (18,804) 1,746,932
Foreign governments securities 6,449,559 5,335 -   6,454,894
Mutual funds 2,236,877 10,049 (15,116) 2,231,810
Marketable equity securities and other stocks 8,938,066 1,069,846 (56,595) 9,951,317
Balance on December 31, 2019 179,757,082 13,540,172 (847,244) 192,450,010

(1) In June 2020, Management decided to reclassify the Securities measured at fair value through other comprehensive income to be measured at amortized cost, in the amount of R$20,009,471 thousand. This reclassification was the result of the alignment of risk and capital management. Without considering this reclassification of the securities it would have been recognized in other comprehensive income fair value changes in the amount of R$1,794,263 thousand.

 

112 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

b) Maturity

 

  R$ thousand  
On December 31, 2020 On December 31, 2019  
Amortized cost Fair value Amortized cost Fair value  
Due within one year 60,234,322 59,892,379 33,240,423 33,247,822  
From 1 to 5 years 64,073,593 67,388,842 97,066,063 101,397,630  
From 5 to 10 years 14,913,201 15,784,368 21,003,150 22,423,476  
Over 10 years 22,257,548 27,534,782 17,272,504 23,197,955  
No stated maturity 12,834,801 15,241,604 11,174,942 12,183,127  
Total 174,313,465 185,841,975 179,757,082 192,450,010  

 

The financial instruments pledged as collateral, classified as Financial assets at fair value through other comprehensive income, totalled R$35,548,882 thousand on December 31, 2020 (2019 – R$71,964,109 thousand), being composed mostly of Brazilian government bonds.

 

c) Investments in equity instruments designated at fair value through other comprehensive income

 

  R$ thousand
Cost Adjustments to Fair Value Fair Value
Marketable equity securities and other stocks 9,895,440 2,395,581 12,291,021
Total in December 31, 2020 9,895,440 2,395,581 12,291,021

 

The Organization adopted the option of designating equity instruments at fair value through other comprehensive income due to the particularities of a given market.

 

d) Reconciliation of expected losses of financial assets at FVOCI:

 

  R$ thousand
Stage 1 Stage 2 Stage 3 Total
Expected loss of financial assets at FVOCI on December 31, 2018 14,712 162,061 160,733 337,506
New assets originated or purchased/Assets settled or paid 25,128 (149,362) (14,810) (139,044)
Expected loss of financial assets at FVOCI on December 31, 2019 39,840 12,699 145,923 198,462
Transferred to Stage 1 -   (306) -   (306)
Transferred to Stage 2 (1,088) -   -   (1,088)
Transfer from Stage 1 -   1,088 -   1,088
Transfer from Stage 2 306 -   -   306
New assets originated or purchased/Assets settled or paid 58,906 (10,305) (137,159) (88,558)
Expected loss of financial assets to VJORA on December 31, 2020 97,964 3,176 8,764 109,904

 

 

 

22)       Loans and advances to financial institutions

 

  R$ thousand
On December 31
2020 2019
Repurchase agreements (1) 179,729,419 48,278,561
Loans to financial institutions 11,696,244 10,849,695
Expected credit loss (932) (44,465)
Total 191,424,731 59,083,791

(1) In 2020, it included investments in repo operations given in guarantee, in the amount of R$125,241,658 thousand (2019 - R$38,451,100 thousand).

 

Bradesco 113

 

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

 
   

Notes to the Consolidated Financial Statements

 

23)       Loans and advances to customers

 

  R$ thousand
On December 31
2020 2019
Companies 256,810,316 226,976,385
Financing and On-lending 108,461,841 104,138,378
Financing and export 51,461,844 47,484,556
Housing loans 18,538,907 16,822,185
Onlending BNDES/Finame 16,691,762 16,643,236
Vehicle loans 13,589,893 12,040,355
Import 5,696,949 8,398,252
Leases 2,482,486 2,749,794
Borrowings 140,384,792 111,327,898
Working capital 91,405,458 57,887,358
Rural loans 4,956,707 5,525,886
Other 44,022,627 47,914,654
Limit operations (1) 7,963,683 11,510,109
Credit card 3,966,504 4,000,712
Overdraft for corporates/Individuals 3,997,179 7,509,397
      
Individuals 256,406,447 230,415,990
Financing and On-lending 93,134,830 78,615,264
Housing loans 59,064,431 44,175,642
Vehicle loans 27,818,022 28,350,727
Onlending BNDES/Finame 6,105,589 5,872,331
Other 146,788 216,564
Borrowings 118,655,689 105,427,418
Payroll-deductible loans 69,897,126 63,144,951
Personal credit 24,033,559 24,338,888
Rural loans 8,419,040 8,543,433
Other 16,305,964 9,400,146
Limit operations (1) 44,615,928 46,373,308
Credit card 41,229,795 41,353,388
Overdraft for corporates/Individuals 3,386,133 5,019,920
Total portfolio 513,216,763 457,392,375

(1) It refers to outstanding operations with pre-established limits linked to current account and credit card, whose limits are automatically recomposed as the amounts used are paid.

 

Financial Leases Receivables

 

Loans and advances to customers include the following financial lease receivables.

 

  R$ thousand
On December 31
2020 2019
Gross investments in financial leases receivable:     
Up to one year 1,013,244 1,076,955
From one to five years 1,489,536 1,658,449
Over five years 143,658 122,111
Impairment loss on finance leases (70,468) (160,382)
Net investment 2,575,970 2,697,133
     
Net investments in finance leases:    
Up to one year 987,530 1,012,714
From one to five years 1,446,058 1,563,529
Over five years 142,382 120,890
Total 2,575,970 2,697,133

 

114 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Reconciliation of the gross book value of loans and advances to customers

 

Stage 1 R$ thousand  
Balance on December 31,  2019 Transfer to Stage 2 Transfer to Stage 3 Transfer from Stage 2 Transfer from Stage 3 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2020  
 
 
Companies 193,236,364 (2,206,226) (1,490,046) 330,715 67,187 (9,770,601) 149,850,120 (112,456,390) -   217,561,123  
- Financing 91,632,329 (1,266,291) (1,000,667) 99,463 41,167 (4,828,945) 48,408,504 (38,854,293) -   94,231,267  
- Borrowings 91,448,563 (543,880) (294,077) 193,710 21,172 (4,941,656) 99,438,789 (68,522,416) -   116,800,205  
- Revolving 10,155,472 (396,055) (195,302) 37,542 4,848 -   2,002,827 (5,079,681) -   6,529,651  
Individuals 199,384,196 (14,601,213) (4,693,118) 1,217,269 580,355 (14,887,045) 105,059,308 (76,820,588) -   195,239,164  
- Financing 72,998,157 (5,142,405) (587,237) 492,025 25,325 (8,377,986) 41,562,050 (19,637,553) -   81,332,376  
- Borrowings 88,176,321 (6,647,911) (1,926,044) 456,863 13,417 (6,509,059) 55,442,719 (49,792,950) -   79,213,356  
- Revolving 38,209,718 (2,810,897) (2,179,837) 268,381 541,613 -   8,054,539 (7,390,085) -   34,693,432  
Total 392,620,560 (16,807,439) (6,183,164) 1,547,984 647,542 (24,657,646) 254,909,428 (189,276,978) -   412,800,287  

 

Stage 2 R$ thousand  
Balance on December 31,  2019 Transfer to Stage 1 Transfer to Stage 3 Transfer from Stage 1 Transfer from Stage 3 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2020  
 
 
Companies 13,106,024 (330,715) (1,385,968) 2,206,226 77,803 (2,378,718) 8,504,101 (5,838,387) -   13,960,366  
- Financing 5,732,352 (99,463) (693,154) 1,266,291 57,520 (1,380,199) 2,906,774 (911,790) -   6,878,331  
- Borrowings 6,758,152 (193,710) (630,399) 543,880 17,128 (998,519) 5,352,796 (4,519,348) -   6,329,980  
- Revolving 615,520 (37,542) (62,415) 396,055 3,155 -   244,531 (407,249) -   752,055  
Individuals 19,594,715 (1,217,269) (2,071,615) 14,601,213 794,308 (12,773,924) 29,573,277 (10,477,173) -   38,023,532  
- Financing 4,567,302 (492,025) (220,419) 5,142,405 140,369 (5,444,290) 8,404,759 (1,442,111) -   10,655,990  
- Borrowings 12,019,579 (456,863) (1,161,812) 6,647,911 62,719 (7,329,634) 20,588,030 (7,587,442) -   22,782,488  
- Revolving 3,007,834 (268,381) (689,384) 2,810,897 591,220 -   580,488 (1,447,620) -   4,585,054  
Total 32,700,739 (1,547,984) (3,457,583) 16,807,439 872,111 (15,152,642) 38,077,378 (16,315,560) -   51,983,898  

 

Bradesco 115

 

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

 
   

Notes to the Consolidated Financial Statements

 

Stage 3 R$ thousand  
Balance on December 31,  2019 Transfer to Stage 1 Transfer to Stage 2 Transfer from Stage 1 Transfer from Stage 2 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2020  
 
 
Companies 20,633,998 (67,187) (77,803) 1,490,046 1,385,968 (2,680,887) 14,626,196 (4,801,095) (5,220,409) 25,288,827  
- Financing 6,773,700 (41,167) (57,520) 1,000,667 693,154 (1,211,218) 2,056,572 (584,841) (1,277,104) 7,352,243  
- Borrowings 13,121,182 (21,172) (17,128) 294,077 630,399 (1,469,669) 12,159,563 (3,896,608) (3,546,037) 17,254,607  
- Revolving 739,116 (4,848) (3,155) 195,302 62,415 -   410,061 (319,646) (397,268) 681,977  
Individuals 11,437,078 (580,355) (794,308) 4,693,118 2,071,615 (3,953,496) 19,547,102 2,528,559 (11,805,562) 23,143,751  
- Financing 1,049,805 (25,325) (140,369) 587,237 220,419 (813,396) 1,085,403 (376,824) (440,486) 1,146,464  
- Borrowings 5,231,519 (13,417) (62,719) 1,926,044 1,161,812 (3,140,100) 16,349,733 1,491,101 (6,284,128) 16,659,845  
- Revolving 5,155,754 (541,613) (591,220) 2,179,837 689,384 -   2,111,966 1,414,282 (5,080,948) 5,337,442  
Total 32,071,076 (647,542) (872,111) 6,183,164 3,457,583 (6,634,383) 34,173,298 (2,272,536) (17,025,971) 48,432,578  

 

 

Consolidated - 3 stages R$ thousand  
Balance on December 31,  2019 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2020  
 
 
Companies 226,976,386 (14,830,206) 172,980,417 (123,095,872) (5,220,409) 256,810,316  
- Financing 104,138,381 (7,420,362) 53,371,850 (40,350,924) (1,277,104) 108,461,841  
- Borrowings 111,327,897 (7,409,844) 116,951,148 (76,938,372) (3,546,037) 140,384,792  
- Revolving 11,510,108 -   2,657,419 (5,806,576) (397,268) 7,963,683  
Individuals 230,415,989 (31,614,465) 154,179,687 (84,769,202) (11,805,562) 256,406,447  
- Financing 78,615,264 (14,635,672) 51,052,212 (21,456,488) (440,486) 93,134,830  
- Borrowings 105,427,419 (16,978,793) 92,380,482 (55,889,291) (6,284,128) 118,655,689  
- Revolving 46,373,306 -   10,746,993 (7,423,423) (5,080,948) 44,615,928  
Total 457,392,375 (46,444,671) 327,160,104 (207,865,074) (17,025,971) 513,216,763  

(1) Composed of advanced settlements, maturities and changes. 

 

116 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Stage 1 R$ thousand  
Balance on December 31,  2018 Transfer to Stage 2 Transfer to Stage 3 Transfer from Stage 2 Transfer from Stage 3 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2019  
 
 
Companies 174,823,333 (3,530,473) (1,047,643) 1,740,309 99,605 (14,129,128) 126,296,922 (91,016,561) -   193,236,364  
- Financing 87,491,428 (2,665,550) (216,644) 793,644 56,979 (6,599,164) 48,322,133 (35,550,497) -   91,632,329  
- Borrowings 77,801,046 (788,067) (771,301) 932,838 34,874 (7,529,964) 70,778,365 (49,009,228) -   91,448,563  
- Revolving 9,530,859 (76,856) (59,698) 13,827 7,752 -   7,196,424 (6,456,836) -   10,155,472  
Individuals 164,711,763 (3,830,157) (2,331,304) 1,939,655 323,117 (15,271,291) 126,773,073 (72,930,660) -   199,384,196  
- Financing 62,636,298 (2,196,138) (567,081) 843,573 62,471 (8,742,813) 31,123,133 (10,161,286) -   72,998,157  
- Borrowings 69,241,572 (1,524,297) (1,697,183) 1,027,710 154,480 (6,528,478) 62,155,926 (34,653,409) -   88,176,321  
- Revolving 32,833,893 (109,722) (67,040) 68,372 106,166 -   33,494,014 (28,115,965) -   38,209,718  
Total 339,535,096 (7,360,630) (3,378,947) 3,679,964 422,722 (29,400,419) 253,069,995 (163,947,221) -   392,620,560  

 

 

Stage 2 R$ thousand  
Balance on December 31,  2018 Transfer to Stage 1 Transfer to Stage 3 Transfer from Stage 1 Transfer from Stage 3 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2019  
 
 
Companies 21,750,671 (1,740,309) (4,150,902) 3,530,473 604,824 (1,537,738) 5,702,723 (11,053,718) -   13,106,024  
- Financing 11,855,797 (793,644) (3,637,599) 2,665,550 183,776 (640,153) 768,132 (4,669,507) -   5,732,352  
- Borrowings 9,449,412 (932,838) (510,021) 788,067 415,621 (897,585) 4,445,528 (6,000,032) -   6,758,152  
- Revolving 445,462 (13,827) (3,282) 76,856 5,427 -   489,063 (384,179) -   615,520  
Individuals 15,354,577 (1,939,655) (1,100,985) 3,830,157 622,122 (1,616,061) 11,754,505 (7,309,945) -   19,594,715  
- Financing 4,130,401 (843,573) (292,952) 2,196,138 70,757 (550,578) 693,061 (835,952) -   4,567,302  
- Borrowings 9,122,134 (1,027,710) (691,602) 1,524,297 479,625 (1,065,483) 8,288,437 (4,610,119) -   12,019,579  
- Revolving 2,102,042 (68,372) (116,431) 109,722 71,740 -   2,773,007 (1,863,874) -   3,007,834  
Total 37,105,248 (3,679,964) (5,251,887) 7,360,630 1,226,946 (3,153,799) 17,457,228 (18,363,663) -   32,700,739  

 

Bradesco 117

 

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

 
   

Notes to the Consolidated Financial Statements

 

Stage 3 R$ thousand  
Balance on December 31,  2018 Transfer to Stage 1 Transfer to Stage 2 Transfer from Stage 1 Transfer from Stage 2 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2019  
 
 
Companies 22,370,956 (99,605) (604,824) 1,047,643 4,150,902 (552,471) 4,249,360 (3,941,465) (5,986,498) 20,633,998  
- Financing 6,325,568 (56,979) (183,776) 216,644 3,637,599 (237,542) 422,843 (1,756,639) (1,594,018) 6,773,700  
- Borrowings 15,363,975 (34,874) (415,621) 771,301 510,021 (314,929) 3,175,691 (1,928,627) (4,005,755) 13,121,182  
- Revolving 681,413 (7,752) (5,427) 59,698 3,282 -   650,826 (256,199) (386,725) 739,116  
Individuals 12,481,355 (323,117) (622,122) 2,331,304 1,100,985 (1,010,738) 6,655,466 1,502,563 (10,678,618) 11,437,078  
- Financing 1,094,697 (62,471) (70,757) 567,081 292,952 (372,611) 215,265 (117,483) (496,868) 1,049,805  
- Borrowings 5,604,645 (154,480) (479,625) 1,697,183 691,602 (638,127) 2,679,383 1,146,472 (5,315,534) 5,231,519  
- Revolving 5,782,013 (106,166) (71,740) 67,040 116,431 -   3,760,818 473,574 (4,866,216) 5,155,754  
Total 34,852,311 (422,722) (1,226,946) 3,378,947 5,251,887 (1,563,209) 10,904,826 (2,438,902) (16,665,116) 32,071,076  

 

 

Consolidated - 3 stages R$ thousand  
Balance on December 31,  2018 Amortization Originated Constitution/ (Reversal) (1) (Write off) Balance on December 31,  2019  
 
 
Companies 218,944,960 (16,219,337) 136,249,005 (106,011,744) (5,986,498) 226,976,386  
Financing and on-lending 105,672,793 (7,476,859) 49,513,108 (41,976,643) (1,594,018) 104,138,381  
Borrowings 102,614,433 (8,742,478) 78,399,584 (56,937,887) (4,005,755) 111,327,897  
Revolving 10,657,734 -   8,336,313 (7,097,214) (386,725) 11,510,108  
Individuals 192,547,695 (17,898,090) 145,183,044 (78,738,042) (10,678,618) 230,415,989  
Financing and on-lending 67,861,396 (9,666,002) 32,031,459 (11,114,721) (496,868) 78,615,264  
Borrowings 83,968,351 (8,232,088) 73,123,746 (38,117,056) (5,315,534) 105,427,419  
Revolving 40,717,948 -   40,027,839 (29,506,265) (4,866,216) 46,373,306  
Total 411,492,655 (34,117,427) 281,432,049 (184,749,786) (16,665,116) 457,392,375  

(1) Composed of advanced settlements, maturities and changes.

 

118 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Reconciliation of expected losses from loans and advances to customers

 

Stage 1 R$ thousand  
Balance on December 31,  2019 Transfer to Stage 2 Transfer to Stage 3 Transfer from Stage 2 Transfer from Stage 3 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2020  
 
 
Companies 5,248,063 (123,246) (75,367) 60,005 61,068 (903,698) 3,371,617 (2,980,502) -   4,657,940  
- Financing 1,705,068 (49,907) (27,696) 16,574 31,255 (333,242) 658,126 (565,632) -   1,434,546  
- Borrowings 3,176,569 (53,547) (37,344) 39,733 22,403 (570,456) 2,410,885 (2,239,660) -   2,748,583  
- Revolving 366,426 (19,792) (10,327) 3,698 7,410 -   302,606 (175,210) -   474,811  
Individuals 7,818,574 (697,750) (395,724) 131,913 735,688 (528,786) 1,675,794 (2,476,657) -   6,263,052  
- Financing 939,390 (119,136) (18,889) 63,780 9,837 (269,484) 497,334 (338,900) -   763,932  
- Borrowings 2,253,045 (210,380) (79,140) 28,887 8,422 (259,302) 1,653,102 (1,316,920) -   2,077,714  
- Revolving 4,626,139 (368,234) (297,695) 39,246 717,429 -   (474,642) (820,837) -   3,421,406  
Total 13,066,637 (820,996) (471,091) 191,918 796,756 (1,432,484) 5,047,411 (5,457,159) -   10,920,992  

 

 

 

Stage 2 R$ thousand  
Balance on December 31,  2019 Transfer to Stage 1 Transfer to Stage 3 Transfer from Stage 1 Transfer from Stage 3 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2020  
 
 
Companies 1,890,105 (60,005) (265,984) 123,246 38,907 (204,168) 1,255,949 (1,232,383) -   1,545,667  
- Financing 216,936 (16,574) (37,785) 49,907 17,910 (16,975) 346,847 (60,772) -   499,494  
- Borrowings 1,610,244 (39,733) (221,113) 53,547 15,372 (187,193) 840,047 (1,133,519) -   937,652  
- Revolving 62,925 (3,698) (7,086) 19,792 5,625 -   69,055 (38,092) -   108,521  
Individuals 2,745,182 (131,913) (421,879) 697,750 538,366 15,143 4,766,938 (1,414,664) -   6,794,923  
- Financing 603,412 (63,780) (29,919) 119,136 62,383 400,501 2,185,389 (172,335) -   3,104,787  
- Borrowings 1,647,973 (28,887) (246,523) 210,380 36,954 (385,358) 2,714,098 (1,009,214) -   2,939,423  
- Revolving 493,797 (39,246) (145,437) 368,234 439,029 -   (132,549) (233,115) -   750,713  
Total 4,635,287 (191,918) (687,863) 820,996 577,273 (189,025) 6,022,887 (2,647,047) -   8,340,590  

 

Bradesco 119

 

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

 
   

Notes to the Consolidated Financial Statements

 

Stage 3 R$ thousand  
Balance on December 31,  2019 Transfer to Stage 1 Transfer to Stage 2 Transfer from Stage 1 Transfer from Stage 2 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2020  
 
 
Companies 12,248,924 (61,068) (38,907) 75,367 265,984 298,005 8,314,816 (1,566,331) (5,220,409) 14,316,381  
- Financing 2,996,708 (31,255) (17,910) 27,696 37,785 970,922 1,224,427 123,928 (1,277,104) 4,055,197  
- Borrowings 8,700,237 (22,403) (15,372) 37,344 221,113 (672,917) 6,627,728 (1,561,378) (3,546,037) 9,768,315  
- Revolving 551,979 (7,410) (5,625) 10,327 7,086 -   462,661 (128,881) (397,268) 492,869  
Individuals 8,201,536 (735,688) (538,366) 395,724 421,879 (405,497) 11,224,590 5,421,072 (11,805,562) 12,179,688  
- Financing 530,122 (9,837) (62,383) 18,889 29,919 (45,990) 589,605 16,122 (440,486) 625,961  
- Borrowings 3,733,550 (8,422) (36,954) 79,140 246,523 (359,507) 7,443,890 2,829,081 (6,284,128) 7,643,173  
- Revolving 3,937,864 (717,429) (439,029) 297,695 145,437 -   3,191,095 2,575,869 (5,080,948) 3,910,554  
Total 20,450,460 (796,756) (577,273) 471,091 687,863 (107,492) 19,539,406 3,854,741 (17,025,971) 26,496,069  

 

 

Consolidated - 3 stages R$ thousand  
Balance on December 31,  2019 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2020  
 
 
Companies 19,387,092 (809,861) 12,942,382 (5,779,216) (5,220,409) 20,519,988  
- Financing 4,918,712 620,705 2,229,400 (502,476) (1,277,104) 5,989,237  
- Borrowings 13,487,050 (1,430,566) 9,878,660 (4,934,557) (3,546,037) 13,454,550  
- Revolving 981,330 -   834,322 (342,183) (397,268) 1,076,201  
Individuals 18,765,292 (919,140) 17,667,322 1,529,751 (11,805,562) 25,237,663  
- Financing 2,072,924 85,027 3,272,328 (495,113) (440,486) 4,494,680  
- Borrowings 7,634,568 (1,004,167) 11,811,090 502,947 (6,284,128) 12,660,310  
- Revolving 9,057,800 -   2,583,904 1,521,917 (5,080,948) 8,082,673  
Total (1) 38,152,384 (1,729,001) 30,609,704 (4,249,465) (17,025,971) 45,757,651  

 

(1) Consider expected losses on loans, commitments to be released and financial guarantees provided.

 

 

 

 

 

 

120 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

 

 

 

 

 

Stage 1 R$ thousand  
Balance on December 31,  2018 Transfer to Stage 2 Transfer to Stage 3 Transfer from Stage 2 Transfer from Stage 3 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2019  
 
 
Companies 3,443,204 (94,861) (67,862) 160,068 67,150 (699,827) 3,512,364 (1,072,173) -   5,248,063  
- Financing 1,122,680 (37,774) (8,497) 41,914 34,652 4,017 775,161 (227,085) -   1,705,068  
- Borrowings 1,945,637 (52,890) (57,437) 116,806 23,010 (703,844) 2,515,926 (610,639) -   3,176,569  
- Revolving 374,887 (4,197) (1,928) 1,348 9,488 -   221,277 (234,449) -   366,426  
Individuals 7,273,362 (164,394) (157,138) 177,609 251,008 (750,372) 5,812,053 (4,623,554) -   7,818,574  
- Financing 901,119 (66,512) (34,051) 78,516 28,735 (257,642) 476,691 (187,466) -   939,390  
- Borrowings 2,053,854 (79,136) (107,024) 84,208 94,472 (492,730) 1,716,160 (1,016,759) -   2,253,045  
- Revolving 4,318,389 (18,746) (16,063) 14,885 127,801 -   3,619,202 (3,419,329) -   4,626,139  
Total 10,716,566 (259,255) (225,000) 337,677 318,158 (1,450,199) 9,324,417 (5,695,727) -   13,066,637  

 

 

 

Stage 2 R$ thousand  
Balance on December 31,  2018 Transfer to Stage 1 Transfer to Stage 3 Transfer from Stage 1 Transfer from Stage 3 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2019  
 
 
Companies 2,547,908 (160,068) (953,343) 94,861 212,921 (355,917) 1,218,315 (714,572) -   1,890,105  
- Financing 1,445,950 (41,914) (835,870) 37,774 29,175 (205,170) 51,560 (264,569) -   216,936  
- Borrowings 1,047,715 (116,806) (117,292) 52,890 178,660 (150,747) 1,117,295 (401,471) -   1,610,244  
- Revolving 54,243 (1,348) (181) 4,197 5,086 -   49,460 (48,532) -   62,925  
Individuals 1,831,813 (177,609) (173,561) 164,394 384,088 (100,890) 1,672,251 (855,304) -   2,745,182  
- Financing 405,730 (78,516) (38,370) 66,512 30,577 209,080 94,304 (85,905) -   603,412  
- Borrowings 1,097,633 (84,208) (116,067) 79,136 271,118 (309,970) 1,195,503 (485,172) -   1,647,973  
- Revolving 328,450 (14,885) (19,124) 18,746 82,393 -   382,444 (284,227) -   493,797  
Total 4,379,721 (337,677) (1,126,904) 259,255 597,009 (456,807) 2,890,566 (1,569,876) -   4,635,287  

 

Bradesco 121

 

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

 
   

Notes to the Consolidated Financial Statements

 

Stage 3 R$ thousand  
Balance on December 31,  2018 Transfer to Stage 1 Transfer to Stage 2 Transfer from Stage 1 Transfer from Stage 2 Remeasurement Originated Constitution/ (Reversal) (Write off) Balance on December 31,  2019  
 
 
Companies 10,860,724 (67,150) (212,921) 67,862 953,343 2,832,030 1,938,037 1,863,497 (5,986,498) 12,248,924  
- Financing 2,681,912 (34,652) (29,175) 8,497 835,870 727,234 242,132 158,908 (1,594,018) 2,996,708  
- Borrowings 7,635,874 (23,010) (178,660) 57,437 117,292 2,104,796 1,162,299 1,829,964 (4,005,755) 8,700,237  
- Revolving 542,938 (9,488) (5,086) 1,928 181 -   533,606 (125,375) (386,725) 551,979  
Individuals 8,419,460 (251,008) (384,088) 157,138 173,561 1,339,621 4,773,024 4,652,446 (10,678,618) 8,201,536  
- Financing 619,474 (28,735) (30,577) 34,051 38,370 154,279 107,267 132,861 (496,868) 530,122  
- Borrowings 3,411,114 (94,472) (271,118) 107,024 116,067 1,185,342 1,818,298 2,776,829 (5,315,534) 3,733,550  
- Revolving 4,388,872 (127,801) (82,393) 16,063 19,124 -   2,847,459 1,742,756 (4,866,216) 3,937,864  
Total 19,280,184 (318,158) (597,009) 225,000 1,126,904 4,171,651 6,711,061 6,515,943 (16,665,116) 20,450,460  

 

 

Consolidated - 3 stages R$ thousand  
Expected loss on December 31, 2018 Remeasurement Originated Constitution/ (Reversal) (Write off) Loss expected on December 31, 2019  
 
 
Companies 16,851,836 1,776,286 6,668,716 76,752 (5,986,498) 19,387,092  
Financing and on-lending 5,250,542 526,081 1,068,853 (332,746) (1,594,018) 4,918,712  
Borrowings 10,629,226 1,250,205 4,795,520 817,854 (4,005,755) 13,487,050  
Revolving 972,068 -   804,343 (408,356) (386,725) 981,330  
Individuals 17,524,635 488,359 12,257,328 (826,412) (10,678,618) 18,765,292  
Financing and on-lending 1,926,323 105,717 678,262 (140,510) (496,868) 2,072,924  
Borrowings 6,562,601 382,642 4,729,961 1,274,898 (5,315,534) 7,634,568  
Revolving 9,035,711 -   6,849,105 (1,960,800) (4,866,216) 9,057,800  
Total (1) 34,376,471 2,264,645 18,926,044 (749,660) (16,665,116) 38,152,384  

(1) Consider expected losses on loans, commitments to be released and financial guarantees provided.


122 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Sensitivity analysis

The measurement of the expected credit loss incorporates prospective information from projections of economic scenarios that are developed by a team of experts and approved according to the risk governance of the Organization. The projections are reviewed at least annually, being more timely in cases of relevant events that may materially change the future prospects.

In order to determine possible oscillations of expected loss arising from the economic projections, simulations were made by changing the weighting of the scenarios used in the calculation of the expected loss. In the table below, we show the probabilities assigned to each scenario and the impacts:

  On December 31, 2020 - R$ thousand  
Weighting Constitution/ (Reversal)  
Base Scenario Optimistic Scenario* Pessimistic Scenario**  
 
Simulation 1 100% - - (300,652)  
Simulation 2 - 100% - (502,242)  
Simulation 3 - - 100% 1,226,712  

* Scenario in which the economy grows more than expected.
** Scenario in which the economy grows less than expected.

 

Expected loss on loans and advances

 

  Years ended December 31 - R$ thousand
2020 2019
Amount recorded 24,631,238 20,441,029
Amount recovered (5,919,397) (7,908,896)
Expected loss on loans and advances 18,711,841 12,532,133

 

Bradesco 123

 

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

 
   

Notes to the Consolidated Financial Statements

 

Loans and advances to customers renegotiated

 

The total balance of “Loans and advances to customers renegotiated” includes renegotiated loans and advances to customers. Such loans contemplate extension of loan payment terms, grace periods, reductions in interest rates, and/or, in some cases, the forgiveness (write-off) of part of the loan principal amount.

 

Renegotiations may occur after debts are past due or when the Company has information about a significant deterioration in the client’s creditworthiness. The purpose of such renegotiations is to adapt the loan to reflect the client’s actual payment capacity.

 

The following table shows changes made and our analysis of our portfolio of renegotiated loans and advances to customers:

 

  R$ thousand
On December 31
2020 2019
Opening balance 19,030,657 17,143,212
Additional renegotiated amounts, including interest 34,683,660 20,283,735
Payments received (19,448,835) (13,363,684)
Write-offs (4,508,342) (5,032,606)
Closing balance 29,757,140 19,030,657
Expected loss on loans and advances (10,659,899) (8,021,445)
Total renegotiated loans and advances to customers, net of impairment at the end of the year 19,097,241 11,009,212
      
Impairment on renegotiated loans and advances as a percentage of the renegotiated portfolio 35.8% 42.2%
Total renegotiated loans and advances as a percentage of the total loan portfolio 5.8% 4.2%
Total renegotiated loans and advances as a percentage of the total loan portfolio, net of impairment 3.7% 2.6%

 

At the time a loan is modified, Management considers the new loan’s conditions and renegotiated maturity and it is no longer considered past due. From the date of modification, renegotiated interest begins to accrue, using the effective interest rate method, taking into consideration the client’s capacity to pay the loan based on the analysis made by Management. If the customer fails to maintain the new negotiated terms, management considers ceasing accrual from that point.

 

Additionally, any balances related to renegotiated loans and advances to customers that have already been written off and recorded in memorandum accounts, as well as any gains from renegotiations, are recognized only when received.

 

124 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

24)       Bonds and securities at amortized cost

 

  R$ thousand
Amortized cost Gross unrealized gains (2) Gross unrealized losses (2) Fair value
Securities:        
Brazilian government securities 91,884,693 6,795,851 (8,422) 98,672,122
Corporate debt securities 87,739,201 291,387 (2,695,825) 85,334,763
Balance on December 31, 2020 (1) 179,623,894 7,087,238 (2,704,247) 184,006,885
         
Securities:        
Brazilian government securities 89,114,107 11,814,621 (538,480) 100,390,248
Corporate debt securities 77,804,253 970,671 (649,528) 78,125,396
Balance on December 31, 2019 (1) 166,918,360 12,785,292 (1,188,008) 178,515,644

(1) In 2020 and 2019, no reclassifications were made of Financial Assets at amortized cost – Bonds and securities for other categories of financial assets; and

(2) Unrealized gains and losses on amortized costs assets have not been recognized in comprehensive income.

 

Maturity

 

  R$ thousand
On December 31, 2020 On December 31, 2019
Amortized cost Fair value Amortized cost Fair value
Due within one year 37,272,651 37,799,094 51,513,100 52,049,525
From 1 to 5 years 77,744,401 78,452,236 53,600,975 56,134,668
From 5 to 10 years 34,641,933 32,852,519 31,572,806 31,489,480
Over 10 years 29,964,909 34,903,036 30,231,479 38,841,971
Total 179,623,894 184,006,885 166,918,360 178,515,644

 

The financial instruments pledged as collateral, classified as financial assets at amortized cost, totalled R$38,224,516 thousand at December 31, 2020 (2019 – R$47,129,734 thousand), being composed mostly of Brazilian government bonds.

 

Reconciliation of expected losses of financial assets at amortized cost:

 

  R$ thousand
Stage 1 Stage 2 Stage 3 Total (1)
Expected loss of financial assets at amortized cost on December 31, 2018 178,207 789,021 2,054,811 3,022,039
Transferred to Stage 1 -   (12,246) -   (12,246)
Transferred to Stage 2 (42,073) -   (67,004) (109,077)
Transferred to Stage 3 -   (474,161) -   (474,161)
Transfer from Stage 1 -   42,073 -   42,073
Transfer from Stage 2 12,246 -   474,161 486,407
Transfer from Stage 3 -   67,004 -   67,004
Assets originated or purchased/Assets settled/Reversal 150,962 280,647 1,179,829 1,611,438
Expected loss of financial assets at amortized cost on December 31, 2019 299,342 692,338 3,641,797 4,633,477
Transferred to Stage 1 -   (69,057) -   (69,057)
Transferred to Stage 2 (34,918) -   -   (34,918)
Transferred to Stage 3 (26,365) (79,871) -   (106,236)
Transfer from Stage 1 -   34,918 26,365 61,283
Transfer from Stage 2 69,057 -   79,871 148,928
Transfer from Stage 3 -   -   -   -  
New assets originated or purchased/Assets settled or paid (11,688) 544,691 388,989 921,992
Expected loss of financial assets at amortized cost as of December 31, 2020 295,428 1,123,019 4,137,022 5,555,469

(1) The expected loss expense is recorded as “Expected Loss on Other Financial Assets” in the Consolidated Statement of Income.

 

Bradesco 125

 

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

 
   

Notes to the Consolidated Financial Statements

 

25)       Non-current assets held for sale

 

  R$ thousand
On December 31
2020 2019
Assets not for own use    
Real estate 995,614 1,133,572
Vehicles and similar 205,347 223,051
Machinery and equipment 1,487 362
Other 40 41
Total 1,202,488 1,357,026

 

The properties or other non-current assets received in total or partial settlement of the payment obligations of debtors are considered as non-operating assets held for sale in auctions, which normally occur in up to one year. Non-current assets held for sale are those for which selling expectation, in their current condition, is highly probable to occur within a year.

 

126 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

26)       Investments in associates and joint ventures

 

a) Breakdown of investments in associates and joint ventures

 

Companies R$ thousand  
Equity interest Shareholding interest with voting rights Investment book value Equity in net income (loss) Associates and joint ventures current assets Associates and joint ventures non - current assets Associates and joint ventures current liabilities Associates and joint ventures non - current liabilities Revenue (1) Associates and joint ventures net income (loss) for the year  
 
Cielo S.A. (2) 30.06% 30.06% 3,885,336 (157,556) 75,507,836 16,299,562 66,942,947 10,806,367 11,186,013 (347,338)  
IRB - Brasil Resseguros S.A. (3) - - -   53,454 -   -   -   -   -   -    
Fleury S.A. (4) (5) 22.47% 22.47% 1,206,372 42,158 1,990,891 3,632,868 1,201,313 2,622,634 2,930,975 220,692  
Haitong Banco de Investimento do Brasil S.A. 20.00% 20.00% 106,085 4,384 5,492,157 1,410,680 4,265,660 2,107,953 1,070,232 20,221  
Cia. Brasileira de Gestão e Serviços S.A. 41.85% 41.85% 130,641 (2,196) 207,631 136,107 25,451 6,112 154,225 (5,248)  
Tecnologia Bancária S.A. (4) 24.32% 24.32% 166,044 35,285 685,459 1,796,631 716,566 1,089,234 2,680,429 130,596  
Swiss Re Corporate Solutions Brasil (4) 40.00% 40.00% 332,244 (2,651) 2,499,009 1,446,089 2,809,293 305,194 991,491 (6,627)  
Gestora de Inteligência de Crédito S.A. (4) 20.00% 20.00% 28,680 (19,064) 199,844 1,063,455 138,933 980,967 40,598 (95,260)  
Other (4)     96,001 52,811              
Total investments in associates     5,951,403 6,625 86,582,827 25,785,392 76,100,163 17,918,461 19,053,963 (82,964)  
                       
Elo Participações Ltda. (6) 50.01% 50.01% 1,435,437 434,313 892,035 2,704,326 262,501 151,629 18,223 864,391  
Crediare S.A. – Crédito, Financiamento e Investimento (7) - - -   3,920 -   -   -   -   -   -    
MPO - Processadora de Pagamentos Móveis S.A. (8) - - -   -   -   -   -   -   -   -    
Total investments in joint ventures     1,435,437 438,233 892,035 2,704,326 262,501 151,629 18,223 864,391  
Total on December 31, 2020     7,386,840 444,858 87,474,862 28,489,718 76,362,664 18,070,090 19,072,186 781,427  

(1) Income from financial intermediation or fee and commission;

(2) Brazilian company, services provider related to credit and debit cards and other means of payment. In 2020, the Organization received R$20,797 thousand of dividends and interest on shareholders’ equity of this investment. In its financial statements, Cielo S.A. presented R$51,779 thousand of other comprehensive income;

(3) Equity method discontinued after the loss of significant influence resulting from the resignation of the chair on the institution’s board of directors, in April 2020, being classified as marketable securities in the category at fair value through other comprehensive income;

(4) Companies for which the equity accounting adjustments are calculated using statements of financial position and statements of income with lag in relation to the reporting date of these consolidated financial statements;

(5) Participation in Fleury S.A. (i) company considered using equity method as Bradesco has significant influence due its participation on the Board of the Directors and other Committees;

(6) Brazilian company, holding company that consolidates joint business related to electronic means of payment. In 2020, the Organization received R$228,125 thousand of dividends from this investment;

(7) Company sold in July 2020; and

(8) Company merged in November 2020.

 

Bradesco 127

 

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

 
   

Notes to the Consolidated Financial Statements

 

 

Companies R$ thousand  
Equity interest Shareholding interest with voting rights Investment book value Equity in net income (loss) Associates and joint ventures current assets Associates and joint ventures non - current assets Associates and joint ventures current liabilities Associates and joint ventures non - current liabilities Revenue (1) Associates and joint ventures net income (loss) for the year  
 
Cielo S.A. (2) 30.06% 30.06% 4,012,423 475,194 80,584,265 13,924,371 74,467,296 8,648,722 5,300,681 1,583,827  
IRB - Brasil Resseguros S.A. (3) (4) 15.23% 15.23% 668,833 225,137 10,900,366 6,029,558 11,222,870 1,334,052 7,842,177 1,472,003  
Fleury S.A. (3) (5) 16.28% 16.28% 703,401 37,312 990,578 3,707,962 685,626 2,210,530 3,047,851 327,279  
Aquarius Participações S.A. 49.00% 49.00% 44,535 12,155 914 90,013 39 -   -   24,805  
Haitong Banco de Investimento do Brasil S.A. 20.00% 20.00% 104,420 3,824 2,769,583 1,501,644 3,018,405 732,665 3,933,691 16,642  
Cia. Brasileira de Gestão e Serviços S.A. 41.85% 41.85% 135,005 9,328 245,624 106,351 25,873 3,491 188,407 22,550  
NCR Brasil Indústria de Equipamentos para Automação S.A. (6) - - -   -   -   -   -   -   -   -    
Tecnologia Bancária S.A. (3) 24.32% 24.32% 130,759 15,327 561,182 1,646,932 448,857 1,256,342 2,478,999 44,698  
Swiss Re Corporate Solutions Brasil (3) 40.00% 40.00% 345,825 9,056 2,206,395 1,487,009 2,522,673 317,259 1,167,924 22,641  
Gestora de Inteligência de Crédito S.A. (3) 20.00% 20.00% 47,744 (11,354) 202,904 323,845 38,512 249,519 17 (73,143)  
Other (3) - - 54,021 98,959 -   -   -   -   -   -    
Total investments in associates     6,246,966 874,938 98,461,811 28,817,685 92,430,151 14,752,580 23,959,747 3,441,302  
                       
Elo Participações S.A. (7) 50.01% 50.01% 1,338,973 314,644 1,385,306 1,835,595 199,891 29,192 38,605 627,367  
Crediare S.A. – Crédito, Financiamento e Investimento 50.00% 50.00% 49,673 11,482 448,568 4,738 353,962 -   135,746 23,498  
MPO - Processadora de Pagamentos Móveis S.A. (8) 100.00% 100.00% -   18 2,676 1,423 4,187 -   150 44  
Total investments in joint ventures     1,388,646 326,144 1,836,550 1,841,756 558,040 29,192 174,501 650,909  
Total on December 31, 2019 (9)     7,635,612 1,201,082 100,298,361 30,659,441 92,988,191 14,781,772 24,134,248 4,092,211  

(1) Income from financial intermediation or fee and commission;

(2) Brazilian company, services provider related to credit and debit cards and other means of payment. In 2019, the Organization received R$448,291 thousand of dividends and interest on shareholders’ equity of this investment. In its financial statements, Cielo S.A. presented R$45,693 thousand of other comprehensive income;

(3) Companies for which the equity accounting adjustments are calculated using statements of financial position and statements of income with lag in relation to the reporting date of these consolidated financial statements;

(4) Bradesco has a board member at IRB-Brasil with voting rights, which results in significant influence;

(5) Participation in Fleury S.A. (i) company considered using equity method as Bradesco has significant influence due its participation on the Board of the Directors and other Committees;

(6) In 2019, there was the divestiture of the company NCR Brasil Indústria de Equipamentos para Automação S.A.;

(7) Brazilian company, holding company that consolidates joint business related to electronic means of payment. In 2019, the Organization received R$72,215 thousand of dividends from this investment. In its financial statements, Elo Participações S.A. presented R$22 thousand of other comprehensive income;

(8) In December 2019, we began to consolidate the company MPO – Processadora de Pagamentos Móveis S.A., after the shareholding acquisition; and

(9) In 2019, impairment losses were recorded in “associates and jointly controlled entities” in the amount of R$727,235 thousand.

 

128 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

 

Companies R$ thousand  
Equity interest Shareholding interest with voting rights Investment book value Equity in net income (loss) Associates and joint ventures current assets Associates and joint ventures non - current assets Associates and joint ventures current liabilities Associates and joint ventures non - current liabilities Revenue (1) Associates and joint ventures net income (loss) for the year  
 
Cielo S.A. (2) 30.06% 30.06% 4,679,589 1,011,125 65,967,300 16,595,791 56,802,838 10,890,157 1,883,033 3,341,909  
IRB - Brasil Resseguros S.A. (3) (4) 15.23% 15.23% 606,161 174,277 10,265,219 5,417,377 10,845,420 873,938 7,036,160 1,139,542  
Fleury S.A. (3) (5) 16.28% 16.28% 699,927 38,805 1,510,304 2,482,580 640,899 1,570,942 2,642,751 238,558  
Aquarius Participações S.A. (6) 49.00% 49.00% 43,030 130,769 19,096 86,626 17,907 -   -   266,876  
Haitong Banco de Investimento do Brasil S.A. 20.00% 20.00% 100,597 602 2,587,712 1,503,374 2,210,690 1,880,396 6,362,896 3,010  
Cia. Brasileira de Gestão e Serviços S.A. (3) 41.85% 41.85% 127,677 8,895 230,503 100,052 22,207 3,258 174,816 21,254  
NCR Brasil Indústria de Equipamentos para Automação S.A. (3) 49.00% 49.00% 52,571 6,689 305,278 30,249 207,894 -   9,601 13,651  
Técnologia Bancária S.A. (3) 24.32% 24.32% 115,433 (8,492) 471,119 1,488,542 511,883 1,035,574 2,225,362 (34,918)  
Swiss Re Corporate Solutions Brasil (3) (7) 40.00% 40.00% 345,036 (10,998) 2,110,050 1,479,827 2,509,280 246,060 973,422 (27,494)  
Gestora de Inteligência de Crédito S.A. (3) 20.00% 20.00% 59,098 (6,466) 165,299 173,083 42,894 -   13,726 (32,330)  
Other (3) - - 35,083 33,788 -   -   -   -   -   -    
Total investments in associates     6,864,202 1,378,994 83,631,880 29,357,501 73,811,912 16,500,325 21,321,767 4,930,058  
                       
Elo Participações S.A. (8) 50.01% 50.01% 1,191,343 288,938 718,623 1,981,596 170,683 8,220 28,938 573,968  
Crediare S.A. – Crédito, Financiamento e Investimento 50.00% 50.00% 70,254 12,473 330,042 66,980 161,458 -   136,193 24,946  
MPO - Processadora de Pagamentos Móveis S.A. 50.00% 50.00% -   (30) 2,284 1,696 4,112 -   154 (60)  
Total investments in joint ventures     1,261,597 301,381 1,050,949 2,050,272 336,253 8,220 165,285 598,854  
Total on December 31, 2018     8,125,799 1,680,375 84,682,829 31,407,773 74,148,165 16,508,545 21,487,052 5,528,912  

 

(1) Income from financial intermediation or fee and commission;

(2) Brazilian company, services provider related to credit and debit cards and other means of payment. In 2018, the Organization received R$1.204.069 thousand of dividends and interest on shareholders’ equity of this investment. In its financial statements, Cielo S.A. presented R$6,948 thousand of other comprehensive income;

(3) Companies for which the equity accounting adjustments are calculated using statements of financial position and statements of income with lag in relation to the reporting date of these consolidated financial statements;

(4) Bradesco has a board member at IRB-Brasil with voting rights, which results in significant influence;

(5) Participation in Fleury S.A. (i) company considered using equity method as Bradesco has significant influence due its participation on the Board of the Directors and other Committees;

(6) In 2018, occurred the partial spin-off and consolidation of Fidelity Processadora S.A., controlled by Aquarius Participações S.A.;

(7) In 2018, impairment losses were recorded in “associates and jointly controlled entities” in the amount of R$107,000 thousand; and

(8) Brazilian company, holding company that consolidates joint business related to electronic means of payment. In 2018, the Organization received R$38,278 thousand of dividends from this investment. In its financial statements, Elo Participações S.A. presented R$44 thousand of other comprehensive income.


Bradesco 129

 

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

 
   

Notes to the Consolidated Financial Statements

 

In 2020, with the exception of Cielo S.A. and Fleury S.A., the other investments mentioned in the previous table were not regularly traded on any stock exchange. The fair value of investments totaled R$5,002,162 thousand (2019 - R$14,815,109 thousand). The Organization does not have contingent liabilities for investments in associates, which is responsible in part or in whole.

 

b) Changes in associates

 

  R$ thousand
2020 2019
Initial balances 7,635,612 8,125,799
Acquisitions (1) 491,438 -  
Spin-off of associates (2) (102,282) (66,889)
Equity in net income of associates 444,858 1,201,082
Dividends/Interest on equity (405,791) (729,654)
Impairment -   (727,235)
Other (3) (676,995) (167,491)
At the end of the year 7,386,840 7,635,612

(1) In 2020, there was a stake increase in the company Fleury S.A., after the approval of BACEN;

(2) In 2020, there was the divestiture of the companies Aquarius Participações S.A., Crediare S.A. Crédito, Financiamento e Investimento and EBP - Estrutura Brasileira de Projetos (Brazilian Structure of Projects); and

(3) Balance refers mainly to the investment of IRB-Brasil Resseguros S.A., which ceased to be an investment in an associate, in April 2020, and is now treated as marketable securities at fair value through other comprehensive income.

 

27)       Property and equipment

 

a) Composition of property and equipment by class

 

  R$ thousand
Annual depreciation rate Cost Accumulated depreciation Net
Buildings 4% 8,767,456 (2,597,842) 6,169,614
Land - 1,021,594 -   1,021,594
Installations, properties and equipment for use 10% 6,706,990 (3,459,963) 3,247,027
Security and communication systems 10% 388,588 (236,324) 152,264
Data processing systems 20% 10,137,875 (6,780,155) 3,357,720
Transportation systems 20% 213,691 (90,781) 122,910
Balance on December 31, 2020 (1)   27,236,194 (13,165,065) 14,071,129
         
Buildings 4% 7,847,887 (1,365,046) 6,482,841
Land - 967,928 -   967,928
Installations, properties and equipment for use 10% 6,690,473 (2,965,884) 3,724,589
Security and communication systems 10% 375,712 (221,860) 153,852
Data processing systems 20% 9,167,330 (5,977,994) 3,189,336
Transportation systems 20% 211,510 (70,834) 140,676
Balance on December 31, 2019 (1)   25,260,840 (10,601,618) 14,659,222

(1) It includes underlying assets identified in lease contracts recognized under the scope of IFRS 16.

 

We enter into lease agreements as a lessee for data processing equipment and properties, which are recorded as buildings and equipment leased in property, plant and equipment. See Note 37 for disclosure of the obligation.

 

130 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

b) Change in property and equipment by class

 

  R$ thousand
Buildings Land Installations, properties and equipment for use Security and communications systems Data processing systems Transportation systems Total
Balance on December 31, 2018 2,131,206 976,869 3,162,832 142,806 2,381,480 31,643 8,826,836
Initial adoption - IFRS 16 4,136,603 -   31,215 -   -   8,793 4,176,611
Adjusted balance on January 1, 2019 6,267,809 976,869 3,194,047 142,806 2,381,480 40,436 13,003,447
Additions 1,321,052 18,380 1,898,293 43,111 1,913,392 113,816 5,308,044
Write-offs (59,792) (27,321) (786,791) (6,291) (8,359) (861) (889,415)
Impairment -   -   (2,123) (1,806) (21,499) (43) (25,471)
Depreciation (1,046,228) -   (578,837) (23,968) (1,075,678) (12,672) (2,737,383)
Balance on December 31, 2019 6,482,841 967,928 3,724,589 153,852 3,189,336 140,676 14,659,222
Additions 1,411,771 46,213 1,262,493 24,315 1,250,334 5,970 4,001,096
Write-offs (709,254) (23,530) (893,576) (1,440) (11,588) -   (1,639,388)
Impairment (11) 30,983 -   (2,505) (17,903) (258) 10,306
Depreciation (1,015,733) -   (846,479) (21,958) (1,052,459) (23,478) (2,960,107)
Balance on December 31, 2020 (1) 6,169,614 1,021,594 3,247,027 152,264 3,357,720 122,910 14,071,129

(1) It includes underlying assets identified in lease contracts recognized under the scope of IFRS 16.

Bradesco 131

 

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

 
   

Notes to the Consolidated Financial Statements

 

28)       Intangible assets and goodwill

 

a)       Change in intangible assets and goodwill by class

 

  R$ thousand
Goodwill Intangible Assets
Acquisition of financial service rights (1) Software (1) Customer portfolio (1) Other (1) Total
Balance on December 31, 2018 5,576,068 4,795,136 3,241,280 2,494,003 22,061 16,128,548
Additions/(reductions) 7,134 1,525,833 1,195,049 (43,589) 11,640 2,696,067
Impairment (2) (255,301) (519,749) (196,533) -   -   (971,583)
Amortization -   (1,313,322) (1,112,408) (697,655) (5,000) (3,128,385)
Balance on December 31, 2019 5,327,901 4,487,898 3,127,388 1,752,759 28,701 14,724,647
Additions/(reductions) 1,765,643 791,047 1,373,474 -   314,917 4,245,081
Impairment (2) -   (320,726) (258,998) (759,616) -   (1,339,340)
Amortization -   (1,326,371) (720,992) (625,253) (288,308) (2,960,924)
Balance on December 31, 2020 7,093,544 3,631,848 3,520,872 367,890 55,310 14,669,464

(1) Rate of amortization: acquisition of banking rights – in accordance with contract agreement; software – 20%; Customer portfolio – up to 20%; and others – 20%; and

(2) Impairment losses were recognized in the consolidated statement of income, within “Other operating income/(expenses)”.

 

 

132 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

b) Composition of goodwill by segment

 

  R$ thousand
On December 31
2020 2019
Banking 6,601,162 4,835,519
Insurance 492,382 492,382
Total 7,093,544 5,327,901

 

The Cash Generation Units (UGCs) allocated to the banking segment and the insurance, pension and capitalization bonds segment are tested annually for impairment of goodwill. We did not incur any goodwill impairment losses in 2020, 2019 and 2018.

 

The recoverable amount from the Banking Segment has been determined based on a value-in-use calculation. The calculation uses cash-flow projections based on financial budgets approved by Management, with a terminal growth rate of 6.1% p.a. (2019 – 6.6% p.a.). The forecast cash flows have been discounted at a rate of 12.6% p.a. (2019 – 11.5% p.a.).

 

The key assumptions described above may change as economic and market conditions change. The Organization estimates that reasonably possible changes in these assumptions within the current economic environment are not expected to cause the recoverable amount of either unit to decline below the carrying amount.

 

29)       Other assets

 

  R$ thousand
On December 31
2020 2019
Financial assets (4) (5) 52,416,117 56,101,781
Foreign exchange transactions (1) 25,754,975 30,952,382
Debtors for guarantee deposits (2) 18,489,500 18,695,102
Securities trading 6,111,610 4,659,791
Trade and credit receivables 759,677 164,467
Receivables 1,300,355 1,630,039
Other assets 8,475,829 7,441,888
Deferred acquisition cost (insurance) - Note 34e 1,020,567 983,999
Other debtors 3,475,850 3,218,639
Prepaid expenses 1,019,578 847,197
Interbank and interdepartmental accounts 444,023 467,540
Other (3) 2,515,811 1,924,513
Total 60,891,946 63,543,669

(1) Mainly refers to purchases in foreign currency made by the institution on behalf of customers and rights in the institution’s domestic currency, resulting from exchange sale operations;

(2) It refers to deposits resulting from legal or contractual requirements, including guarantees provided in cash, such as those made for the filing of appeals in departments or courts and those made to guarantee services of any nature;

(3) It includes basically trade and credit receivables, material supplies, other advances and payments to be reimbursed;

(4) Financial assets are recorded at amortized cost; and

(5) In 2020, there were no losses for impairment of other financial assets.

 

Bradesco 133

 

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

 
   

Notes to the Consolidated Financial Statements

 

30)       Deposits from banks

 

Financial liabilities called “Deposits from banks” are initially measured at fair value and, subsequently, at amortized cost, using the effective interest rate method.

 

Composition by nature

 

  R$ thousand
On December 31
2020 2019
Demand deposits 1,593,170 1,606,079
Interbank deposits 797,216 369,982
Securities sold under agreements to repurchase 217,108,353 174,100,023
Borrowings 23,966,470 29,272,183
Onlending 23,814,958 22,471,344
Total 267,280,167 227,819,611

 

31)       Deposits from customers

 

Financial liabilities called “Deposits from customers” are initially measured at fair value and subsequently at amortized cost, using the effective interest rate method.

 

Composition by nature

 

  R$ thousand
On December 31
2020 2019
Demand deposits 50,247,334 37,283,988
Savings deposits 136,698,248 114,177,799
Time deposits 358,347,161 214,765,753
Total 545,292,743 366,227,540

 

32)       Funds from securities issued

 

a) Composition by type of security issued and location

 

  R$ thousand
On December 31
2020 2019
Instruments Issued – Brazil:    
Real estate credit notes 27,601,333 27,019,439
Agribusiness notes 14,694,484 13,149,546
Financial bills 81,588,961 120,518,300
Letters property guaranteed 7,930,718 5,540,086
Subtotal - Securities purchased under agreements to resell 131,815,496 166,227,371
Securities – Overseas:    
Euronotes 2,113,000 1,407,888
Securities issued through securitization – (item (b)) 9,112,256 1,967,746
Subtotal - Securities purchased under agreements to resell 11,225,256 3,375,634
Structured Operations Certificates 1,863,073 1,124,559
Total 144,903,825 170,727,564

 

 

b) Securities issued through securitization

 

Since 2003, Bradesco uses certain arrangements to optimize its activities of funding and liquidity management by means of a Specific Purpose Entity (SPE). This SPE, which is called International Diversified Payment Rights Company, is financed with long-term bonds which are settled with the future

 

134 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

cash flow of the corresponding assets, basically comprising current and future flow of payment orders sent by individuals and legal entities abroad to beneficiaries in Brazil for whom Bradesco acts as payer.

 

The long-term instruments issued by the SPE and sold to investors will be settled with funds from the payment orders flows. The Organization is required to redeem the instruments in specific cases of default or upon closing of the operations of the SPE.

 

The funds deriving from the sale of current and future payment orders flows, received by the SPE, must be maintained in a specific bank account until they reach a given minimum level.

 

 

c) Net financial activity in the issuance of securities

 

  R$ thousand
2020 2019
Opening balance on December 31 170,727,564 148,029,018
Issuance 61,833,816 84,982,152
Interest 5,576,416 9,233,505
Settlement and interest payments (93,179,856) (71,781,695)
Exchange variation and others (54,115) 264,584
Closing balance on December 31 144,903,825 170,727,564

 

Bradesco 135

 

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

 
   

Notes to the Consolidated Financial Statements

 

33)       Subordinated debt

 

a) Composition of subordinated debt

 

Maturity R$ thousand
Original term in years Nominal amount On December 31, 2020 On December 31, 2019
In Brazil:        
Financial bills:        
2020 7 -   -   3,288
2022 7 4,305,011 6,662,957 6,426,671
2023 7 1,347,452 2,011,986 1,958,936
2024 7 67,450 93,765 87,316
2025 7 5,425,906 6,126,601 5,943,283
2027 8 401,060 403,352 -  
2020 8 -   -   64,624
2021 8 1,236 2,565 2,364
2023 8 1,699,346 2,798,899 2,671,282
2024 8 136,695 196,932 186,376
2025 8 6,193,653 6,340,117 6,424,128
2026 8 694,800 783,605 952,807
2028 8 55,437 55,702 -  
2021 9 7,000 15,460 14,999
2024 9 4,924 9,347 8,375
2025 9 370,344 507,771 525,232
2027 9 89,700 104,782 159,920
2021 10 19,200 56,608 49,621
2022 10 54,143 128,910 118,117
2023 10 688,064 1,318,725 1,225,020
2025 10 284,137 596,797 518,242
2026 10 196,196 329,699 523,687
2027 10 256,243 338,894 319,582
2028 10 248,300 308,959 282,192
2030 10 134,500 139,596 -  
2026 11 3,400 5,477 5,009
2027 11 47,046 65,771 62,776
2028 11 74,764 100,369 91,899
Perpetual   9,290,255 9,389,642 9,559,967
Subtotal in Brazil (1)     38,893,288 38,185,713
Overseas:        
2021 11 8,314,720 8,539,366 6,619,620
2022 11 5,716,370 5,813,578 4,508,175
Subtotal overseas     14,352,944 11,127,795
Total     53,246,232 49,313,508

(1) It includes the amount of R$26,741,610 thousand (in December 2019 – R$34,003,704 thousand), referring to subordinated debts recognized in “Eligible Debt Capital Instruments” for regulatory capital purpose.

 

b) Net movement of subordinated debt

 

  R$ thousand
2020 2019
Opening balance on December 31 49,313,508 53,643,444
Issuance 688,186 -  
Interest 2,403,327 3,708,924
Settlement and interest payments (2,374,538) (8,593,243)
Exchange variation 3,215,749 554,383
Closing balance on December 31 53,246,232 49,313,508

 

136 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

34)       Insurance technical provisions and pension plans

 

a) Technical provisions by account

 

  R$ thousand
Non-Life and Health (1) (3) Life and Pension (2)(3) Total
On December 31 On December 31 On December 31
2020 2019 2020 2019 2020 2019
Current and long-term liabilities            
Mathematical reserve for unvested benefits (PMBAC) 1,225,279 1,462,699 237,436,250 230,996,998 238,661,529 232,459,697
Mathematical reserve for vested benefits (PMBC) 612,835 410,410 10,403,722 8,895,571 11,016,557 9,305,981
Reserve for claims incurred but not reported (IBNR) 4,040,072 3,655,551 945,744 938,466 4,985,816 4,594,017
Unearned premium reserve 4,381,913 4,454,214 1,719,098 1,042,959 6,101,011 5,497,173
Reserve for unsettled claims (PSL) 4,893,477 4,432,487 1,677,216 1,533,696 6,570,693 5,966,183
Reserve for financial surplus (PET) -   -   783,786 622,703 783,786 622,703
Other technical provisions 3,404,474 2,028,532 7,941,518 7,828,405 11,345,992 9,856,937
Total reserves 18,558,050 16,443,893 260,907,334 251,858,798 279,465,384 268,302,691

(1) “Other technical provisions” – Insurance includes substantially the Provision for Insufficient Premiums (PIP) of R$3,044,169 thousand;

(2) The “Other technical provisions” line of Life and Pension Plan substantially includes “Provision for redemptions and other amounts to be settled” in the amount of R$2,822,392 thousand, “Provision of related expenses” of R$633,768 thousand, “Complementary Provision for Coverage (PCC)” in the amount of R$3,161,509 thousand and” Other technical provisions” of R$1,305,127 thousand; and

(3) It includes the Provision for unearned Provision for unearned premiums for risks not yet issued (PPNG-RVNE) in the amount of R$172,706 thousand, of which R$132,078 thousand for Insurance and R$40,628 thousand for Life and Pension Plans.


Bradesco 137

 

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

 
   

Notes to the Consolidated Financial Statements

 

b) Technical provisions by product

 

  R$ thousand
Non-Life and Health Life and pension plans Total
On December 31 On December 31 On December 31
2020 2019 2020 2019 2020 2019
Health 13,906,115 11,132,262 -   -   13,906,115 11,132,262
Non-Life 4,651,935 5,311,631 -   -   4,651,935 5,311,631
Life -   -   16,186,345 13,539,168 16,186,345 13,539,168
Pension plans -   -   244,720,989 238,319,630 244,720,989 238,319,630
Total technical provisions 18,558,050 16,443,893 260,907,334 251,858,798 279,465,384 268,302,691

 

138 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

c) Changes in the insurance and pension technical provisions

 

(i) Insurance – Non-Life, Life and Health Insurance

 

  R$ thousand
Years ended December 31
2020 2019
At the beginning of the year 29,983,376 27,272,042
(-) DPVAT insurance (559,843) (602,842)
Subtotal at beginning of the year 29,423,533 26,669,200
Additions, net of reversals 37,778,695 31,792,068
Payment of claims, benefits and redemptions (33,359,738) (29,523,868)
Adjustment for inflation and interest 870,195 482,598
Constitution of judicial provision 29,288 3,535
Subtotal at end of the period 34,741,973 29,423,533
(+) DPVAT insurance 2,423 559,843
At the end of the year 34,744,396 29,983,376

 

(ii) Insurance – Pension Plans

 

  R$ thousand
Years ended December 31
2020 2019
At the beginning of the year 238,319,314 224,707,223
Receipt of premiums net of fees 25,979,731 29,325,335
Payment of benefits (1,124,913) (1,068,408)
Payment of redemptions (26,326,995) (24,183,246)
Adjustment for inflation and interest 11,942,820 15,831,077
Others (4,068,969) (6,292,667)
At the end of the year 244,720,988 238,319,314

 

Bradesco 139

 

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

 
   

Notes to the Consolidated Financial Statements

 

d) Guarantees for the technical provisions

 

  R$ thousand
Insurance Life and pension plans Total
On December 31 On December 31 On December 31
2020 2019 2020 2019 2020 2019
Total technical provisions 18,558,050 16,443,893 260,907,334 251,858,798 279,465,384 268,302,691
(-) Commercialization surcharge – extended warranty -   (10,051) -   -   -   (10,051)
(-) Portion corresponding to contracted reinsurance (21,617) (110,759) (13,114) (11,713) (34,731) (122,472)
(-) Premiums receivables (1,502,349) (1,166,691) -   -   (1,502,349) (1,166,691)
(-) Unearned premium provision – Health and dental insurance (1) (1,656,290) (1,527,337) -   -   (1,656,290) (1,527,337)
(-) Provisions from DPVAT agreements -   (558,021) -   -   -   (558,021)
(-) Other -   -   -   -   -   -  
Technical provisions to be covered 15,377,794 13,071,034 260,894,220 251,847,085 276,272,014 264,918,119
             
Investment fund quotas (VGBL and PGBL) (2) -   -   211,617,915 210,044,616 211,617,915 210,044,616
Investment fund quotas (excluding VGBL and PGBL) 4,367,527 4,477,721 29,465,654 27,689,439 33,833,181 32,167,160
Government securities 13,470,796 11,326,945 29,871,219 24,422,182 43,342,015 35,749,127
Private securities 34,580 34,403 79,114 138,043 113,694 172,446
Total assets guarantee portfolio (3) 17,872,903 15,839,069 271,033,902 262,294,280 288,906,805 278,133,349

(1) Deduction provided for in Article 4 of ANS Normative Resolution No. 392/15;

(2) The investment funds “VGBL” and “PGBL” were consolidated in the financial statements; and

(3) These guarantor assets may be settled only to cover the liabilities to which they are related.

 

140 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

e) Changes in deferred acquisition cost (insurance assets)

 

  R$ thousand
Years ended December 31
2020 2019
At the beginning of the year 983,999 925,884
Additions 1,335,881 1,542,179
Amortizations (1,299,313) (1,484,064)
At the end of the year 1,020,567 983,999

 

f) Changes in reinsurance assets

 

  R$ thousand
Years ended December 31
2020 2019
At the beginning of the year 168,225 176,324
Additions 7,795 124,337
Amortization and reversal of provisions -   (85,777)
Recovered insurance losses (55,953) (24,969)
Reversal/Monetary update (37,980) 3,658
Other 4,949 (25,348)
At the end of the year 87,036 168,225

 

g) Claim information

 

The purpose of the table below is to show the inherent insurance risk, comparing the insurance claims paid with their provisions. Starting from the year in which the claim was reported, the upper part of the table shows the changes in the provision over the years. The provision varies as more precise information concerning the frequency and severity of the claims is obtained. The lower part of the table shows the reconciliation of the amounts with the amounts presented in the financial statements.

 

Bradesco 141

 

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

 
   

Notes to the Consolidated Financial Statements

 

Non-life – Gross Claims (1)

 

  R$ thousand
Year claims were notified
Until 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total
Amount estimated for the claims:                        
·  In the year after notification 2,592,573 2,859,480 3,348,274 3,224,788 3,914,716 4,428,926 4,109,825 3,749,457 3,448,593 3,300,264 3,082,054 -  
·  One year after notification 2,562,789 2,824,610 3,240,688 3,041,662 3,652,423 4,277,245 3,912,436 3,740,543 3,422,386 3,341,699 -   -  
·  Two years after notification 2,561,264 2,809,879 3,233,150 3,009,371 3,666,041 4,232,474 3,923,389 3,754,077 3,418,592 -   -   -  
·  Three years after notification 2,577,663 2,812,812 3,256,062 3,044,232 3,654,223 4,260,118 3,932,335 3,733,681 -   -   -   -  
·  Four years after notification 2,595,369 2,811,587 3,292,376 3,034,096 3,669,148 4,275,952 3,923,772 -   -   -   -   -  
·  Five years after notification 2,607,212 2,840,368 3,113,580 3,049,171 3,679,488 4,276,245 -   -   -   -   -   -  
·  Six years after notification 2,611,105 2,837,693 3,128,386 3,058,018 3,690,793 -   -   -   -   -   -   -  
·  Seven years after notification 2,599,521 2,850,912 3,133,871 3,064,089 -   -   -   -   -   -   -   -  
·  Eight years after notification 2,608,176 2,852,787 3,137,466 -   -   -   -   -   -   -   -   -  
·  Nine years after notification 2,607,504 2,848,411 -   -   -   -   -   -   -   -   -   -  
·  Ten years after notification 2,635,488 -   -   -   -   -   -   -   -   -   -    
Estimate of claims on the reporting date (2020) 2,635,488 2,848,411 3,137,466 3,064,089 3,690,793 4,276,245 3,923,772 3,733,681 3,418,592 3,341,699 3,082,054 37,152,290
Payments of claims (2,601,000) (2,837,189) (3,119,145) (3,047,445) (3,657,992) (4,228,044) (3,875,106) (3,689,771) (3,355,539) (3,237,332) (2,436,327) (36,084,890)
Outstanding Claims 34,488 11,222 18,321 16,644 32,801 48,201 48,666 43,910 63,053 104,367 645,727 1,067,400

 

142 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Non-Life – Claims Net of Reinsurance Ceded (1)

 

  R$ thousand
Year claims were notified
Until 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total
Amount estimated for net claims for reinsurance:                        
·  In the year after notification 2,439,011 2,653,641 3,022,457 3,021,084 3,738,619 4,074,519 3,960,519 3,710,845 3,410,760 3,281,789 2,345,716 -  
·  One year after notification 2,404,646 2,617,957 2,908,173 2,849,909 3,516,057 3,954,939 3,796,535 3,702,199 3,386,329 2,831,845 -   -  
·  Two years after notification 2,406,805 2,609,034 2,915,173 2,832,016 3,534,208 3,900,981 3,803,980 3,715,400 3,389,058 -   -   -  
·  Three years after notification 2,426,310 2,629,288 2,927,529 2,874,862 3,525,610 3,921,156 3,813,890 3,695,185 -   -   -   -  
·  Four years after notification 2,445,507 2,639,629 2,957,403 2,868,888 3,539,001 3,933,030 3,808,429 -   -   -   -   -  
·  Five years after notification 2,460,692 2,670,472 2,963,901 2,884,539 3,550,642 3,926,061 -   -   -   -   -   -  
·  Six years after notification 2,472,476 2,673,132 2,978,029 2,893,423 3,554,010 -   -   -   -   -   -   -  
·  Seven years after notification 2,471,407 2,686,379 2,983,500 2,894,891 -   -   -   -   -   -   -   -  
·  Eight years after notification 2,479,351 2,688,317 2,981,996 -   -   -   -   -   -   -   -   -  
·  Nine years after notification 2,478,498 2,683,677 -   -   -   -   -   -   -   -   -   -  
·  Ten years after notification 2,506,052 -   -   -   -   -   -   -   -   -   -   -  
Estimate of claims on the reporting date (2020) 2,506,052 2,683,677 2,981,996 2,894,891 3,554,010 3,926,061 3,808,429 3,695,185 3,389,058 2,831,845 2,345,716 34,616,920
Payments of claims (2,475,046) (2,672,460) (2,964,025) (2,878,351) (3,521,235) (3,878,291) (3,759,915) (3,651,613) (3,326,619) (2,727,836) (1,703,417) (33,558,808)
Net outstanding unsettled claims 31,006 11,217 17,971 16,540 32,775 47,770 48,514 43,572 62,439 104,009 642,299 1,058,112

 

Bradesco 143

 

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

 
   

Notes to the Consolidated Financial Statements

 

Non-Life, Life and Pension - Claims Net of Reinsurance Ceded (1)

 

  R$ thousand
Year claims were notified
Until 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total
Amount estimated for net claims for reinsurance:                        
·  In the year after notification 3,446,862 3,844,686 4,257,561 4,326,906 5,069,079 5,490,043 5,453,855 5,248,319 4,848,787 4,768,287 4,136,182 -  
·  One year after notification 3,419,740 3,806,221 4,134,444 4,148,519 4,889,217 5,380,728 5,287,974 5,190,160 4,802,426 4,317,355 -   -  
·  Two years after notification 3,428,088 3,797,808 4,151,462 4,158,528 4,902,783 5,304,496 5,272,711 5,218,931 4,844,993 -   -   -  
·  Three years after notification 3,437,538 3,826,913 4,163,604 4,184,738 4,802,886 5,244,592 5,263,080 5,214,282 -   -   -   -  
·  Four years after notification 3,467,643 3,834,708 4,191,766 4,165,035 4,781,938 5,243,035 5,270,597 -   -   -   -   -  
·  Five years after notification 3,480,339 3,871,555 4,197,799 4,189,183 4,775,574 5,226,808 -   -   -   -   -   -  
·  Six years after notification 3,490,242 3,873,835 4,218,005 4,193,407 4,774,017 -   -   -   -   -   -   -  
·  Seven years after notification 3,481,343 3,896,069 4,224,281 4,210,256 -   -   -   -   -   -   -   -  
·  Eight years after notification 3,496,367 3,886,942 4,230,263 -   -   -   -   -   -   -   -   -  
·  Nine years after notification 3,497,445 3,889,088 -   -   -   -   -   -   -   -   -   -  
·  Ten years after notification 3,623,080 -   -   -   -   -   -   -   -   -   -   -  
Estimate of claims on the reporting date (2020) 3,623,080 3,889,088 4,230,263 4,210,256 4,774,017 5,226,808 5,270,597 5,214,282 4,844,993 4,317,355 4,136,182 49,736,921
Payments of claims (3,485,784) (3,843,593) (4,168,436) (4,137,134) (4,675,857) (5,078,047) (5,106,558) (5,003,584) (4,581,466) (3,984,520) (2,939,037) (47,004,016)
Net outstanding unsettled claims 137,296 45,495 61,827 73,122 98,160 148,761 164,039 210,698 263,527 332,835 1,197,145 2,732,905

(1) “Retrocession” R$16,965 thousand, “Health” R$3,619,299 thousand, estimate of salvages and redresses in the amount of R$137,689 thousand and incurred but not enough reported (IBNER) claims in the amount of R$(329,925) thousand were not considered in the claims development.

 

144 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

35)       Supplementary pension plans

 

Bradesco and its subsidiaries sponsor a private defined contribution pension for employees and managers, that allows financial resources to be accumulated by participants throughout their careers by means of employee and employer contributions and invested in an Exclusive Investment Fund (FIE). The plan is managed by Bradesco Vida e Previdência S.A. and BRAM – Bradesco Asset Management S.A. DTVM is responsible for the financial management of the FIEs funds.

 

The supplementary pension plan counts on contributions from employees and managers of Bradesco and its subsidiaries equivalent to at least 4% of the salary by employees and, 5% of the salary, plus the percentage allocated to covers of risk benefits (invalidity and death) by the company. Actuarial obligations of the defined contribution plan are fully covered by the plan assets of the corresponding FIE. In addition to the plan, in 2001, participants who chose to migrate from the defined benefit plan are guaranteed a proportional deferred benefit, corresponding to their accumulated rights in that plan. For the active participants, retirees and pensioners of the defined benefit plan, now closed to new members, the present value of the actuarial obligations of the plan is fully covered by guarantee assets.

 

Following the merger of Banco Alvorada S.A. (successor from the spin-off of Banco Baneb S.A.) into Kirton Bank S.A. Banco Múltiplo, on April 30, 2019, Kirton Bank S.A. Banco Múltiplo maintains variable contribution and defined benefit retirement plans, through Fundação Baneb de Seguridade Social – Bases related to the former employees of Baneb.

 

Banco Bradesco S.A. sponsors both variable benefit and defined contribution retirement plans, through Caixa de Assistência e Aposentadoria dos Funcionários do Banco do Estado do Maranhão (Capof), to employees originating from Banco BEM S.A.

 

Banco Bradesco S.A. sponsors a defined benefit plan through Caixa de Previdência Privada Bec – Cabec for employees of Banco do Estado do Ceará S.A.

 

Kirton Bank S.A. Banco Múltiplo, Bradesco Capitalização S.A., Kirton Corretora de Seguros S.A., Bradesco-Kirton Corretora de Câmbio S.A. and Bradesco Seguros S.A. sponsor a defined benefit plan called APABA for employees originating from Banco Bamerindus do Brasil S.A., and Kirton Administração de Serviços para Fundos de Pensão Ltda. sponsors for its employees a defined contribution plan, known as the Kirton Prev Benefits Plan (Plano de Benefícios Kirton Prev), both managed by MultiBRA – Pension Fund.

 

Banco Losango S.A. Banco Múltiplo, Kirton Bank S.A. Banco Múltiplo and Credival – Participações, Administração e Assessoria Ltda. sponsor three pension plans for its employees, which are: Losango I Benefits Plan – Basic Part, in the defined benefit mode, Losango I – Supplementary Part and PREVMAIS Losango Plan, the last two in the form of contribution variable, all managed by MultiBRA – Settlor – Multiple Fund.

 

Banco Bradesco S.A. also took on the obligations of Kirton Bank S.A. Banco Múltiplo with regard to Life Insurance, Health Insurance Plans, and Retirement Compensation for employees coming from Banco Bamerindus do Brasil S.A., as well as complementing Retirement and Health Plan of employees from Lloyds.

 

Risk factors On December 31
2020 2019
Nominal discount rate 3.25% - 7.26% p.a. 6.45% - 7.45% p.a.
Nominal rate of future salary increases 3.25% p.a. 3.8% p.a.
Nominal growth rate of social security benefits and plans 3.25% p.a. 3.8% p.a.
Initial rate of growth of medical costs 7.38% - 8.41% p.a. 7.95% - 8.99% p.a.
Inflation rate 3.25% p.a. 3.8% p.a.
Biometric table of overall mortality AT 2000 and BR-SEM AT 2000 and BR-SEM
Biometric table of entering disability Per plan Per plan
Expected turnover rate - -
Probability of entering retirement 100% in the 1ª eligibility to a benefit by the plan 100% in the 1ª eligibility to a benefit by the plan

 

 

Bradesco 145

 

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

 
   

Notes to the Consolidated Financial Statements

 

Considering the above assumptions, the present value of the actuarial obligations of the benefit plans and of its assets to cover these obligations, is represented below:

 

  On December 31 – R$ thousand
  Retirement Benefits Other post-employment benefits
  2020 2019 2020 2019
(i) Projected benefit obligations:        
At the beginning of the year 3,065,146 2,530,590 917,870 669,093
Cost of current service 546 179 -   -  
Interest cost 212,033 224,508 66,772 60,185
Participant’s contribution 556 819 -   -  
Actuarial gain/(loss) (1) 123,504 516,333 13,671 224,683
Past service cost - plan changes -   (3,920) -   -  
Early elimination of obligations -   -   -   (1,613)
Benefit paid (219,657) (203,363) (31,883) (34,478)
At the end of the year 3,182,128 3,065,146 966,430 917,870
         
(ii) Plan assets at fair value:        
At the beginning of the year 2,716,865 2,363,009 -   -  
Balance from an acquired institution        
Expected earnings 187,531 209,252 -   -  
Actuarial gain/(loss) (1) 59,071 332,368 -   -  
Contributions received:        
Employer 15,150 14,763 -   -  
Employees 556 819 -   -  
Benefit paid (219,428) (203,346) -   -  
At the end of the year 2,759,745 2,716,865 -   -  
         
(iii) Changes in the unrecoverable surplus:        
At the beginning of the year 36,155 54,025 -   -  
Interest on irrecoverable surplus 2,736 4,981 -   -  
Change in irrecoverable surplus (1) (38,581) (22,851) -   -  
At the end of the year 310 36,155 -   -  
         
(iv) Financed position:        
Deficit plans (2) 422,693 384,436 966,430 917,870
Net balance 422,693 384,436 966,430 917,870

(1) In the year ended December 31, 2020, the remeasurement effects recognized in Shareholders' Equity, in Other Comprehensive Income totaled R $ 21,593 thousand (2019 - R $ 212,188 thousand), net of tax effects; and

(2) Bradesco and its subsidiaries, as sponsors of said plans, considering an economic and actuarial study, calculated their actuarial commitments and recognize in their financial statements the actuarial obligation due.

 

The net cost/(benefit) of the pension plans recognized in the consolidated statement of income includes the following components:

 

  R$ thousand
Years ended December 31
2020 2019 2018
Projected benefit obligations:      
Cost of service 546 (2,689) 151
Cost of interest on actuarial obligations 278,805 282,997 273,893
Expected earnings from the assets of the plan (187,531) (208,122) (225,060)
Interest on recoverable surplus 2,736 4,981 20,327
Net cost/(benefit) of the pension plans 94,556 77,167 69,311

 

 

146 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

Maturity profile of the present value of the obligations of the benefit plans defined for the next years:

 

  On December 31, 2020 - R$ thousand
Retirement Benefits Other post-employment benefits
Weighted average duration (years) 10.07 12.84
2021 229,641 44,375
2022 234,469 46,487
2023 239,025 49,937
2024 243,650 53,408
2025 247,303 57,139
After 2026 1,279,375 337,370

 

In 2021, contributions to defined-benefit plans are expected to total R$24,820 thousand.

 

The long-term rate of return on plan assets is based on the following:

 

- Medium to long-term expectations of the asset managers; and

- Public and private securities, with short to long-term maturities which represent a significant portion of the investment portfolios of our subsidiaries, the return on which is higher than inflation plus interest.

 

The assets of pension plans are invested in compliance with the applicable legislation (government securities and private securities, listed company shares and real estate properties) and the weighted-average allocation of the pension plan’s assets by category is as follows:

 

  On December 31
Assets of the Alvorada Plan Assets of the Bradesco Plan Assets of the Kirton Plan Assets of the Losango Plan
2020 2019 2020 2019 2020 2019 2020 2019
Asset categories                 
Equities - - 3.8% 9.6% - - - 18.5%
Fixed income 91.3% 93.5% 91.9% 86.6% 100.0% 100.0% 100.0% 78.9%
Real estate 5.6% 5.3% 2.6% 1.9% - - - -
Other 3.1% 1.2% 1.7% 1.9% - - - 2.6%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

 

Below is the sensitivity analysis of the benefits plan obligations, showing the impact on the actuarial exposure (8.5% – 10.0% p.a.) assuming a change in the discount rate and medical inflation by 1 p.p.:

 

Rate Discount rate/Medical inflation rate Sensitivity Analysis Effect on actuarial liabilities Effect on the present value of the obligations
Discount rate 6.87% - 8.26% Increase of 1 p.p. reduction (393,887)
Discount rate 4.87% - 6.26% Decrease of 1 p.p. increase 470,116
Medical Inflation 8.38% - 9.41% Increase of 1 p.p. increase 113,797
Medical Inflation 6.38% - 7.41% Decrease of 1 p.p. reduction (95,008)

 

Total expenses related to contributions in the year ended December 31, 2020 were R$959,220 thousand (2019 – R$997,446 thousand).

 

In addition to this benefit, Bradesco and its subsidiaries offer other benefits to their employees and Management, including health insurance, dental care, life and personal accident insurance, and professional training. These expenses, including the aforementioned contributions, totaled, in the year ended December 31, 2020, R$4,746,728 thousand (2019 – R$6,101,527 thousand).

 

Bradesco 147

 

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

 
   

Notes to the Consolidated Financial Statements

 

36)       Provisions, Contingents Assets and Liabilities and Legal Obligations – Tax and Social Security

 

a) Contingent assets

 

Contingent assets are not recognized in the financial statements. There are ongoing proceedings where the chance of success is considered probable, such as: a) Social Integration Program (PIS), Bradesco has made a claim to offset PIS against Gross Operating Income, paid under Decree-Laws No. 2,445/88 and No. 2,449/88, regarding the payment that exceeded the amount due under Supplementary Law No. 07/70 (PIS Repique); and b) other taxes, the legality and/or constitutionality of which is being challenged, where the decision may lead to reimbursement of amounts and such amounts are recorded as receivable only when collection is considered certain.

 

b) Provisions classified as probable losses and legal obligations – tax and social security

 

The Organization is a party to a number of labor, civil and tax lawsuits, arising from the normal course of business.

 

Management recognized provisions where, based on their opinion and that of their legal counsel, the nature of the lawsuit, similarity to previous lawsuits, complexity and the courts standing, the loss is deemed probable.

 

Management considers that the provision is sufficient to cover the future losses generated by the respective lawsuits.

 

Provisions related to legal obligations are maintained until the conclusion of the lawsuit, represented by judicial decisions with no further appeals or due to the statute of limitation.

 

I -       Labor claims

 

These are claims brought by former employees and outsourced employees seeking indemnifications, most significantly for unpaid “overtime”, pursuant to Article 224 of the Consolidation of Labor Laws (CLT). Considering that the proceedings database is basically composed by proceedings with similar characteristics and for which there has been no official court decision, the provision is recognized considering the following factors, among others: date of receipt of the proceedings (before or after the labor reform of November 2017), the average calculated value of payments made for labor complaints settled in the past 12 months before and after the labor reform, and inflation adjustment on the average calculated values.

 

Overtime is monitored by using electronic time cards and paid regularly during the employment contract, so that the claims filed by Bradesco’s former employees do not represent individually relevant amounts.

 

 

II -      Civil claims

 

These are claims for pain and suffering and property damages, related to banking products and services, the inclusion of information about debtors in the credit restriction registry and the replacement of inflation adjustments excluded as a result of government economic plans. These lawsuits are individually controlled using a computer-based system and provisioned whenever the loss is deemed as probable, considering the opinion of the legal advisors, the nature of the lawsuits, similarity with previous lawsuits, complexity and positioning of the courts. Most of these lawsuits involve the Special Civil Court (JEC), in which the claims are limited to 40 minimum wages.

 

In relation to the legal claims that are pleading alleged differences in the adjustment of inflation on savings account balances and due to the implementation of economic plans that were part of the federal government’s economic policy to reduce inflation in the 80s and 90s, Bradesco, despite complying with the law and regulation in force at the time, has provisioned certain proceedings, taking into consideration the claims in which they were mentioned and the perspective of loss of each demand, in view of the decisions and subjects still under analysis in

 

148 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

the Superior Court of Justice (STJ), such as, for example, the application of interest in executions arising from Public Civil Actions and succession.

 

In December 2017, with the mediation of the Attorney’s General Office (AGU), the entities representing the bank and the savings accounts, entered into an agreement related to litigation of economic plans, with the purpose of closing these claims, in which conditions and schedule were established for savings accounts holders to accede to the agreement. This agreement was approved by the Federal Supreme Court (STF) on March 1, 2018. On March 11, 2020, the signatory entities signed an amendment extending the collective agreement for a period of five (5) years, the Federal Supreme Court approved the extension of the agreement for 30 months, an opportunity in which it will evaluate the results and may extend it for another 30 months. As this is a voluntary agreement, Bradesco is unable to predict how many savings account holders will choose to accept the settlement offer. It is important to note that provisions were recognized to cover the claims eligible under this agreement. The proceedings that are not in the scope of the agreement, including those related to merged banks are individually revaluated based on the procedural stage they are in.

 

Note that, regarding disputes relating to economic plans, the Federal Supreme Court (STF) suspended the prosecution of all lawsuits at the cognizance stage, until the Court issues a final decision on the right under litigation.

 

III -    Provision for tax risks

 

The Organization is disputing the legality and constitutionality of certain taxes and contributions in court, for which provisions have been recorded in full, although there is good chance of a favorable outcome, based on the opinion of the legal counsel. The processing of these legal obligations and the provisions for cases for which the risk of loss is deemed as probable is regularly monitored. During or after the conclusion of each case, a favorable outcome may arise for the Organization, resulting in the reversal of the related provisions.

 

The main cases are:

 

- PIS and COFINS – R$2,702,641 thousand (on December 31, 2019 – R$2,632,829 thousand): a request for authorization to calculate and pay contributions to PIS and COFINS only on the sale of goods/rendering of services (billing), excluding from the calculation bases financial income;

 

- Pension Contributions – R$1,785,787 thousand (on December 31, 2019 - R$1,799,047 thousand): official notifications related to the pension contributions made to private pension plans, considered by the authorities to be employee compensation subject to the incidence of mandatory pension contributions and to an isolated fine for not withholding IRRF on such financial contributions;

 

- IRPJ/CSLL on losses of credits – R$1,262,225 thousand (on December 31, 2019 - R$1,264,448 thousand): we are requesting to deduct from income tax and social contributions payable (IRPJ and CSLL, respectively) amounts of actual and definite loan losses related to unconditional discounts granted during collections, regardless of compliance with the terms and conditions provided for in Articles 9 to 14 of Law No. 9,430/96 that only apply to temporary losses;

 

- IRPJ/CSLL on MTM - R$635,802 thousand (on December 31, 2019 - R$626,341 thousand): assessment received in December 2018 challenging the deduction of certain mark-to-market gains from securities in the calculation of IRPJ and CSLL in 2007;

 

- INSS – Contribution to SAT – R$440,524 thousand (on December 31, 2019 - R$432,873 thousand): in an ordinary lawsuit filed by the Brazilian Federation of Banks – Febraban, since April 2007, on behalf of its members, is questioned the classification of banks at the highest level of risk, with respect to Occupational Accident Risk – RAT, which eventually raised the rate of the respective contribution from 1% to 3%, in accordance with Decree No. 6,042/07;

 

Bradesco 149

 

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

 
   

Notes to the Consolidated Financial Statements

 

- PIS and COFINS – R$415.785 thousand (on December 31, 2019 - R$370.997 thousand): seeks to ensure companies the right to collect contributions to PIS and COFINS by the cumulative regime (3.65% rate on sales of goods / installment services); and

 

- INSS Autonomous Brokers – R$333,852 thousand (on December 31, 2019 - R$490,651 thousand): the Bradesco Organization is questioning the charging of social security contribution on remunerations paid to third-party service providers, established by Supplementary Law No. 84/96 and subsequent regulations/amendments, at 20.0% with an additional of 2.5%, on the grounds that services are not provided to insurance companies but to policyholders, thus being outside the scope of such a contribution as provided for in item I, Article 22 of Law No. 8,212/91, as new wording in Law No. 9,876/99.

 

In general, the provisions relating to lawsuits are classified as long-term, due to the unpredictability of the duration of the proceedings in the Brazilian justice system. For this reason, the estimate has not been disclosed with relation to the specific year in which these lawsuits will be closed.

 

IV -  Changes in other provision

 

  R$ thousand
Labor Civil Tax
Balance on December 31, 2018 5,983,603 5,614,362 8,204,206
Adjustment for inflation 682,600 645,001 431,394
Provisions, net of (reversals and write-offs) 3,382,750 4,330,466 (227,244)
Payments (2,702,886) (1,904,036) (18,271)
Balance on December 31, 2019 7,346,067 8,685,793 8,390,085
Adjustment for inflation 960,812 696,997 147,683
Provisions, net of (reversals and write-offs) 663,547 1,609,720 (256,489)
Payments (2,079,928) (1,900,089) (10,167)
Balance on December 31, 2020 6,890,498 9,092,421 8,271,112

 

 

c) Contingent liabilities classified as possible losses

 

The Organization maintains a system to monitor all administrative and judicial proceedings in which the institution is plaintiff or defendant and, based on the opinion of legal counsel, classifies the lawsuits according to the expectation of loss. Case law trends are periodically analyzed and, if necessary, the related risk is reclassified. In this respect, contingent lawsuits deemed to have a possible risk of loss are not recognized as a liability in the financial statements and totaled, on December 31, 2020, R$7,222,015 thousand (on December 31, 2019 - R$6,272,466 thousand) for civil claims and R$35,761,167 thousand (on December 31, 2019 - R$33,474,303 thousand) for tax proceedings.

 

 

The main tax proceedings with this classification are:

 

- IRPJ and CSLL deficiency note – 2013 to 2015 – R$9,431,944 thousand (on December 31, 2019 - R$9,216,012 thousand): due to the disallowance of interest expenses (CDI), related to certain investments and deposits between the companies of the Organization;

 

- IRPJ and CSLL – 2006 to 2017 – R$7,251,952 thousand (on December 31, 2019 - R$7,169,765 thousand): relating to goodwill amortization being disallowed on the acquisition of investments;

 

- COFINS – 1999 to 2005 – R$5,354,315 thousand (on December 31, 2019 - R$5,172,183 thousand): fines and disallowances of Cofins loan compensations, released after a favorable decision in a judicial proceeding, where the unconstitutionality of the expansion of the intended calculation base was discussed for revenues other than those from billing (Law No. 9,718/98);

 

150 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

- Leasing companies’ Tax on Services of any Nature (ISSQN) – R$2,485,745 thousand (on December 31, 2019 - R$2,537,997 thousand): which relates to the municipal tax demands from municipalities other than those in which the company is located and where, under law, tax is collected;

 

- Social Security Contribution Taxes –2014 to 2016 – R$2,079,650 thousand (on December 31, 2019 – R$1,268,227 thousand): related to food and meal allowance made available to employees, according to the Worker’s Food Program – PAT, through card and not “in natura”;

 

- PIS and COFINS notifications and disallowances of compensations – R$1,444,586 thousand (on December 31, 2019 - R$1,490,269 thousand): related to the unconstitutional extension of the basis of calculation intended for other income other than the billing (Law No. 9,718/98), from acquired companies;

 

- IRPJ and CSLL deficiency note – 2000 to 2014 – R$848,605 thousand (on December 31, 2019 - R$1,187,411 thousand): relating to disallowance of exclusions and expenses, differences in depreciation expenses, insufficient depreciation expenses, expenses with depreciation of leased assets, operating expenses and income and disallowance of tax loss compensation;

 

- IRPJ and CSLL deficiency note – 2005 to 2013 – R$834,272 thousand (on December 31, 2019 - R$925,806 thousand): relating to disallowance of expenses with credit losses;

 

- IRPJ and CSLL deficiency note – 2008 to 2013 – R$649,441 thousand (on December 31, 2019 - R$608,860 thousand): relating to profit of subsidiaries based overseas; and

 

- PLR – Profit Sharing Program – 2009 to 2011 – R$463,501 thousand (on December 31, 2019 – R$401,417 thousand): notifications for requirement of social security contribution on amounts paid to employees as profit sharing program, allegedly not complying with the rules contained in Law No. 10,101/00 originating from acquired businesses.

 

37)       Other liabilities

 

  R$ thousand
On December 31
2020 2019
Financial liabilities 75,528,047 79,121,127
Credit card transactions (1) 23,522,792 21,595,677
Foreign exchange transactions (2) 26,365,058 31,546,034
Loan assignment obligations 6,098,991 6,594,471
Capitalization bonds 8,570,919 8,837,770
Securities trading 5,877,144 4,822,215
Lease liabilities (Note 37a) 5,093,143 5,724,960
      
Other liabilities 39,515,233 34,023,453
Third party funds in transit (3) 7,873,642 7,296,234
Provision for payments 7,876,749 9,172,457
Sundry creditors 4,435,990 3,778,494
Social and statutory 3,747,682 933,003
Other taxes payable 2,257,376 2,176,673
Liabilities for acquisition of assets and rights 1,582,134 1,493,329
Other 11,741,660 9,173,263
Total 115,043,280 113,144,580

(1) It refers to amounts payable to merchants;

(2) Primarily refers to Bradesco’s sales in foreign currency to customers and its rights in domestic currency, resulting from exchange sale operations; and

(3) Primarily refers to payment orders issued domestically and the amount of payment orders in foreign currency coming from overseas.

 

Bradesco 151

 

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

 
   

Notes to the Consolidated Financial Statements

 

a) Lease liabilities

 

R$ thousand  
Opening balance on December 31, 2018 - IAS 17 827,574  
Initial adoption - IFRS 16 4,176,611  
Adjusted balance on January 1, 2019 5,004,185  
Remeasurement and new contracts 1,362,692  
Payments (1,067,573)  
Appropriation of financial charges 410,195  
Exchange variation 15,461  
Closing balance on December 31, 2019 5,724,960  
Remeasurement and new contracts 622,085  
Payments (1,797,408)  
Appropriation of financial charges 476,215  
Exchange variation 67,291  
Final balance on December 31, 2020 5,093,143  

 

Maturity of the leases

 

The maturity of these financial liabilities as of December 31, 2020 is divided as follows: R$942,039 thousand up to one year (R$1,037,679 thousand up to 1 year as of December 31, 2019), R$2,760,546 thousand between 1 and 5 years (R$3,007,071 thousand between one to five years as of December 31, 2019) and R$1,575,473 thousand over 5 years (R$1,680,210 thousand for more than five years as of December 31, 2019).

 

Impacts on the statement of income

 

As of the adoption of IFRS 16 on January 1, 2019, lease payments that were previously recorded as expenditure on rent in the line of “Other Administrative Expenses” in the statement of income, began to be recorded as “Expenses of depreciation” and “Interest and similar expenses”.

 

The impact on the income for 2020 was: “Expenses of depreciation” – R$839,177 thousand (R$854,620 thousand in 2019), “Interest and similar expenses” – R$398,210 thousand (R$393,879 thousand in 2019) and “Expenses of the foreign exchange variation” – R$67,291 thousand (R$15,461 thousand in 2019), totaling R$1,304,678 thousand in expenses (R$1,263,960 thousand in 2019).

 

Expenses for 2020 with short-term contracts were R$1,695 thousand (R$11,732 thousand in 2019).

 

Other information

 

In compliance with CVM Circular Letter No. 02/19, the Organization performed the lease calculations considering the update of cash flows for inflationary expectations and discounted at a nominal rate (real x nominal model). The Organization evaluated that the real x nominal model when compared to the nominal x nominal model (discounted cash flow at a nominal rate) does not present material differences.

 

152 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

38)       Shareholders’ Equity

 

a) Capital and shareholders’ rights

 

i. Composition of share capital in number of shares

 

The share capital, which is fully subscribed and paid, is divided into registered shares with no par value.

 

  On December 31
2020 2019
Common 4,435,106,575 4,031,915,068
Preferred 4,435,106,111 4,031,914,646
Subtotal - Securities purchased under agreements to resell 8,870,212,686 8,063,829,714
Treasury (common shares) (7,307,259) (6,642,963)
Treasury (preferred shares) (27,378,542) (24,889,584)
Total outstanding shares 8,835,526,885 8,032,297,167

 

ii. Changes in share capital, in number of shares

 

  Common Preferred Total
Number of outstanding shares as at December 31, 2019 4,025,272,105 4,007,025,062 8,032,297,167
Increase of capital stock with issuing of shares – bonus of 10% (1) 403,191,507 403,191,465 806,382,972
Increase of shares in treasury – bonus of 10% (664,296) (2,488,958) (3,153,254)
Number of outstanding shares as at December 31, 2020 4,427,799,316 4,407,727,569 8,835,526,885

1) It benefited the shareholders registered in the records of Bradesco on April 13, 2020.

 

In the Special Shareholders’ Meeting held on March 12, 2018, the approval was proposed by the Board of Directors to increase the share capital by R$8,000,000 thousand, increasing it from R$59,100,000 thousand to R$67,100,000 thousand, with a bonus in shares, through the capitalization of part of the balance of the account “Profit Reserves – Statutory Reserve”, in compliance with the provisions in Article 169 of Law No. 6,404/76, by issuing 610,896,190 new nominative-book entry shares, with no nominal value, whereby 305,448,111 are common shares and 305,448,079 are preferred shares, attributed free-of-charge to the shareholders as bonus, to the ratio of 1 new share for every 10 shares of the same type that they own on the base date.

 

In the Special Shareholders’ Meeting held on March 11, 2019, the approval was proposed by the Board of Directors to increase the share capital by R$8,000,000 thousand, increasing it from R$67,100,000 thousand to R$75,100,000 thousand, with a bonus in shares, through the capitalization of part of the balance of the account “Profit Reserves – Statutory Reserve”, in compliance with the provisions in Article 169 of Law No. 6,404/76, by issuing 1,343,971,619 new nominative-book entry shares, with no nominal value, whereby 671,985,845 are common shares and 671,985,774 are preferred shares, attributed free-of-charge to the shareholders as bonus, to the ratio of 2 new shares for every 10 shares of the same type that they own on the base date, was approved by Bacen on March 19, 2019.

 

In the Special Shareholders’ Meeting held on March 10, 2020, the Board of Directors’ proposal to increase the share capital by R$4,000,000 thousand was approved, increasing it from R$75,100,000 thousand to R$79,100,000 thousand, with bonus shares, through the capitalization of part of the balance of the “Profit Reserves - Statutory Reserve” account, in accordance with the provisions of Article 169 of Law No. 6,404/76, with the issuance of 806,382,972 new registered-book-entry shares, with no par value, being 403,191,507 common and 403,191,465 preferred shares, which were attributed free of charge to shareholders in the proportion of 1 new share for every 10 shares of the same type that they held on the base date, approved by Bacen on March 30, 2020.

 

All of the shareholders are entitled to receive, in total, a mandatory dividend of at least 30% of Bradesco’s annual net income, as shown in the statutory accounting records, adjusted by transfers to reserves. The Organization has no obligation that is exchangeable for or convertible into shares. As a result, its diluted earnings per share is the same as the basic earnings per share.

 

Bradesco 153

 

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

 
   

Notes to the Consolidated Financial Statements

 

As defined in Central Bank Resolution No. 4,820/20, as amended by Resolution No. 4,885/20, the payout in 2020 was limited to the percentage indicated in the statutory accounting records.

 

In occurring any operation that changes the number of shares, simultaneously with the transaction in the Brazilian Market, and with the same timeframes, an identical procedure is adopted in the International Market, for the ADRs/GDRs traded in New York, USA, and Madrid, Spain.

 

Treasury shares are recorded at cost, which is approximately equivalent to the market prices on the date they are acquired. Cancellation of treasury shares is recorded as a reduction of unappropriated retained earnings. Treasury shares are acquired for subsequent sale or cancellation.

 

b) Reserves

 

Capital reserves

 

The capital reserve consists mainly of premiums paid by the shareholders upon subscription of shares. The capital reserve is used for (i) absorption of any losses in excess of accumulated losses and revenue reserves, (ii) redemption, reimbursement of purchase of shares, (iii) redemption of founders’ shares, (iv) transfer to share capital, and (v) payment of dividends to preferred shares, when this privilege is granted to them.

 

Revenue reserves

 

In accordance with Corporate Legislation, Bradesco and its Brazilian subsidiaries must allocate 5% of their annual statutory net income, after absorption of accumulated losses, to a legal reserve, the distribution of which is subject to certain limitations. The reserve can be used to increase capital or to absorb losses, but cannot be distributed in the form of dividends.

 

The Statutory Reserve aims to maintain an operating margin that is compatible with the development of the Organization’s active operations and may be formed by up to 100% of net income remaining after statutory allocations if proposed by the Board of Executive Officers, approved by the Board of Directors and ratified at the Shareholders’ Meeting, with the accumulated value limited to 95% of the Organization’s paid-in capital share amount.

 

c) Interest on shareholders’ equity/Dividends

 

Interest on equity are calculated on the net income as determined in the financial statements prepared in accordance with Brazilian generally accepted accounting principles (BR GAAP) applicable to financial institutions authorized to operate by the Central Bank of Brazil. The dividends are paid in Reais and can be converted into US dollars and remitted to shareholders abroad, provided that the equity participation of the non-resident shareholder is registered with the Central Bank of Brazil. Brazilian companies may pay interest on equity to shareholders based on the shareholders’ equity and treat these payments as deductible expenses in the Brazilian income tax and social contribution calculations. The interest cost is treated for accounting purposes as a deduction from shareholders’ equity in a manner similar to dividends. Withholding income tax is levied and paid at the time that the interest on equity is paid to the shareholders.

 

In a meeting of the Board of Directors on June 28, 2019, the Board of Directors proposal was approved for the payment to shareholders of intermediary interest on equity, related to the first half of 2019, amounting to R$1,455,000 thousand, which equates to R$0.172536471 per common share and R$0.189790118 per preferred share, payment of which was made on July 15, 2019.

 

In a meeting held on October 17, 2019, the Board of Directors approved the payment, on October 23, 2019, of extraordinary dividends from profit reserves, in the amount of R$8,000,000 thousand, which represents R$0.948654134 per common share and R$1.043519547 per preferred share.

 

In a meeting of the Board of Directors on December 19, 2019, the Board of Executive Officers ‘proposal for payment of complementary interest on shareholders’ equity for the year of 2019 was approved, in

 

154 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

the amount of R$4,245,000 thousand, of which R$0.503379600 per common share and R$0.553717560 per preferred share, payment of which was made on December 30, 2019.

 

In a meeting of the Board of Directors on December 16, 2020, the proposal of the Board of Executive Officers was approved for payment to shareholders of supplementary interest on shareholders’ equity related to the fiscal year of 2020, to the value of R$3,502,000 thousand, of which R$0.377521225 was offered per common share and R$0.415273347, per preferred share, whose payment will be made on January 7, 2021.

 

Bradesco 155

 

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

 
   

Notes to the Consolidated Financial Statements

 

39)       Transactions with related parties

 

Related-party transactions (direct and indirect) are disclosed according to IAS 24, the Organization has a Transaction Policy with related parties. The transactions are carried out under conditions and at rates consistent with those entered into with third parties at that time. The transactions are as follows:

 

  R$ thousand
Shareholders of the parent (1) Associates and Jointly controlled companies (2) Key Management Personnel (3) Total
On December 31
2020 2019 2020 2019 2020 2019 2020 2019
Assets                
Loans and advances to banks -   -   186,504 577,906 -   -   186,504 577,906
Securities and derivative financial instruments 62,326 20,721 649,932 287,849 -   -   712,258 308,570
Loans and other assets 16 9 334,746 109,766 119,659 88,750 454,421 198,525
Liabilities                
Customer and financial institution resources 2,129,974 2,137,714 677,839 3,181,766 143,815 393,475 2,951,628 5,712,955
Securities and subordinated debt securities 11,480,275 13,697,802 -   -   702,417 891,211 12,182,692 14,589,013
Derivative financial instruments 32,219 -   -   7,264 -   -   32,219 7,264
Other liabilities (4) 1,195,928 217,765 10,808,025 11,665,639 18,594 6,735 12,022,547 11,890,139

 

  R$ thousand
Shareholders of the parent (1) Associates and Jointly controlled companies (2) Key Management Personnel (3) Total
Years ended December 31
2020 2019 2018 2020 2019 2018 2020 2019 2018 2020 2019 2018
Revenues and expenses                        
Net interest income (448,376) (857,937) (778,829) (181,754) (6,508) (11,814) (45,003) (58,353) (55,045) (675,133) (922,798) (845,688)
Other revenues 109 105 334 98,556 342,793 315,832 119 359 247 98,784 343,257 316,413
Other expenses 58,434 54,471 50,745 (1,644,088) (1,899,818) (2,635,494) 89,582 288,187 323,130 (1,496,072) (1,557,160) (2,261,619)

(1) Cidade de Deus Cia. Coml. de Participações, Fundação Bradesco, NCF Participações S.A., BBD Participações S.A. and Nova Cidade de Deus Participações S.A.;

(2) Companies listed in Note 26;

(3) Members of the Board of Directors and the Board of Executive Officers; and

(4) It includes interest on equity and dividends payable.

 

156 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

a) Remuneration of key management personnel

 

The following is established each year at the Annual Shareholders’ Meeting:

 

· The annual total amount of management compensation, set forth at the Board of Directors’ Meeting, to be paid to Board members and members of the Board of Executive Officers, as determined by the Company’s Bylaws; and

 

· The amount allocated to finance Management pension plans, within the Employee and Management pension plan of the Bradesco Organization.

 

For 2020, the maximum amount of R$871,589 thousand was determined for the remuneration of the Directors, and part of this refers to the social security contribution to the INSS, which is an obligation of the Organization, and R$515,650 thousand to cover supplementary pension plan defined contributions.

 

The current policy on Management compensation sets forth that 50% of net variable compensation, if any, must be allocated to the acquisition of PNB shares issued by BBD Participações S.A. and/or PN shares issued by Banco Bradesco S.A., which vest in three equal, annual and successive installments, the first of which is in the year following the payment date. This procedure complies with CMN Resolution No. 3,921/10, which sets forth a Management compensation policy for financial institutions.

 

Short-term benefits for Management

 

  R$ thousand
Years ended December 31
2020 2019 2018
Salaries 534,696 852,862 485,949
Total 534,696 852,862 485,949

 

Post-employment benefits

 

  R$ thousand
Years ended December 31
2020 2019 2018
Defined contribution supplementary pension plans 513,082 468,079 474,378
Total 513,082 468,079 474,378

 

The Organization has no long-term benefits or for the termination of employment contracts or for remuneration based on shares for its key Management personnel.

 

a) Equity participation

 

Together directly, members of the Board of Directors and the Board of the Executive Officers had the following shareholding in Bradesco:

 

  On December 31
2020 2019
Common shares 0.53% 0.55%
Preferred shares 0.91% 1.04%
Total shares (1) 0.72% 0.79%

(1) On December 31, 2020, direct and indirect shareholding of the members of the Board of Directors and the Board of Executive Officers in Bradesco totaled 2.65% of common shares, 0.95% of preferred shares and 1.80% of all shares (on December 31, 2019 – 2.48% of common shares, 1.07% of preferred shares and 1.78% of all shares).

 

Bradesco 157

 

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

 
   

Notes to the Consolidated Financial Statements

 

40)       Off-balance sheet commitments

 

The table below summarizes the total risk represented by off-balance sheet commitments:

 

  R$ thousand
On December 31
2020 2019
Commitments to extend credit (1) 254,897,024 248,455,570
Financial guarantees (2) 80,236,602 78,231,145
Letters of credit for imports 1,056,613 1,411,197
Total 336,190,239 328,097,912

(1) It includes available lines of credit, limits for credit cards, personal loans, housing loans and overdrafts; and

(2) It refers to guarantees mostly provided for Corporate customers.

 

Financial guarantees are conditional commitments for loans issued to ensure the performance of a customer in an obligation to a third party. There is usually the right of recourse against the customer to recover any amount paid under these guarantees. Moreover, we can retain cash or other highly-liquid funds to counter-guarantee these commitments.

 

The contracts are subject to the same credit evaluations as other loans and advances. Standby letters of credit are issued mainly to endorse public and private debt issue agreements including commercial paper, securities financing and similar transactions. The standby letters of credit are subject to customer credit evaluation by the Management.

 

We issue letters of credit in connection with foreign trade transactions to guarantee the performance of a customer with a third party. These instruments are short-term commitments to pay the third-party beneficiary under certain contractual terms for the shipment of products. The contracts are subject to the same credit evaluation as other loans and advances.

158 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

41)       New standards and amendments and interpretations of existing standards

 

Standards, amendments and interpretations of new standards for the year ended December 31, 2020

 

· Conceptual Framework – The Conceptual Framework for Financial Reporting describes the purpose and concepts of general purpose financial reporting. Among the changes in definitions contained in this document, the new definition of assets and liabilities stands out, being active, “a present economic resource controlled by the entity as a result of past events” and a liability, a present obligation of the entity to transfer an economic resource as a result of past events. The new Conceptual Framework came into effect for the period beginning on January 1, 2020. An analysis of the new Conceptual Framework has been carried out and no material impacts have been identified on the Organization.

 

· IFRS 16 – Leases – This is a practical expedient that allows tenants not to consider as an amendment to the contract, those leases that they receive as concession, due to the Covid-19 pandemic. The Organization has opted not to use the practical expedient, therefore, there was no impact on the Financial Statements.

 

Reform of interest rates used as market benchmarks (IBOR - Interbank Offered Rate) - Phase I - Changes in IFRS 9 - Financial Instruments, IAS 39 - Financial Instruments: Recognition and Measurement and IFRS 7 - Financial Instruments: Disclosures - These are changes in the aforementioned standards, due to the uncertainties caused by the IBOR reform project that may impact hedge accounting relationships. The changes aim to minimize such impacts. These changes are effective for years beginning on January 1, 2020. No impacts were identified on the Organization.

 

Standards, amendments and interpretation of standards applicable to future periods

 

· IFRS 17 – Insurance Contracts. Establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The purpose of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. The general model of IFRS 17 requires insurers and reinsurers to measure their insurance contracts at the initial time by the estimated total cash flow, adjusted for the time value of money and the explicit risk related to non-financial risk, in addition to of the contractual margin of the service. This estimated value is then remeasured at each base date. The unrealized profit (corresponding to “the contractual margin of the service) is recognized over the term of the contracted coverage. Apart from this general model, IFRS 17 provides, as a way of simplifying the process, the award allocation approach. This simplified model is applicable to certain insurance contracts, including those with coverage of up to one year. This information provides a basis for accounting firm users to evaluate the effect that insurance contracts have on the financial position, financial performance and the Company’s cash flows. IFRS 17 is effective for annual periods beginning on or after January 1, 2023. The Company is in the process of assessing the impact of the new standard.

 

Reform of interest rates used as market references (IBOR) - Phase II. Impacts on IFRS 4 - Insurance Contracts, IFRS 7 - Financial Instruments: Disclosures, IFRS 9 - Financial Instruments, IFRS 16 - Leases and IAS 39 - Financial Instruments: Recognition and Measurement. The main changes are: (i) permission to replace the effective interest rate on financial instruments with a compatible rate, without derecognizing the transaction, as long as it is a consequence of the reform; (ii) Recognition as a result of the ineffective portion of hedge accounting, due to the end of the exemptions provided for in Phase I of the project. The standard is effective as of the year beginning on January 1, 2021. The Company is assessing the impacts arising from Phase II.

 

42)       Other information

 

  1. Since March 11, 2020 the World Health Organization (WHO) declared Covid-19, which originated in China at the end of 2019 and spread throughout the world, a pandemic resulting in a significant increase in the restrictions of national and international travel, downtime for many businesses and services in virtually all countries, government orders of social isolation to slow the spread of the virus, among other restrictions, generating an environment of strong financial volatility and increasing uncertainties, in addition to social, economic and employment instability. The Covid-19 pandemic has brought great challenges and uncertainties to the whole world, being considered the largest pandemic ever seen, according to the WHO. The crisis caused as a result of the pandemic can be observed from the beginning of March 2020 generating certain negative impacts on the Brazilian economy, such as (i) higher risk aversion, with pressures on the exchange rate; (ii) greater difficulties in foreign trade; and (iii) increase in the uncertainties of economic agents.

Bradesco 159

 

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

 
   

Notes to the Consolidated Financial Statements

 

In order to mitigate the impacts of this crisis, governments and central banks around the world have intervened in the economy of their countries and have adopted unconventional measures, like the closing of non-essential economic activity and actions of monetary stimulus, with the practice of zero interest in addition to fiscal expansion.

 

In Brazil, various measures have been adopted, including some directly impacting the liquidity of the financial markets, the credit markets, monetary and fiscal policy and exchange rates. In this context, in addition to the various measures taken by the Monetary Policy Committee (COPOM) and the Central Bank of Brazil, such as reducing the interest rate on August 2020, to 2.0% p.a., the National Monetary Council and the Federal Government approved, in extraordinary meetings, various measures to help the Brazilian economy tackle the adverse effects caused by the virus.

 

The Executive and Legislative Powers have tried to approve Bills that minimize the repercussion of Covid-19, including proposing the temporary suspension of taxes (such as the relaxation of the IOF on loans and the deferral of payment of PIS/COFINS) and granting tax benefits to the sectors of the economy/workers most affected.

 

We cannot control, and nor can we predict what measures or policies the government may adopt in response to the current or future economic situation in Brazil, nor how the intervention or government policies will affect the Brazilian economy and how they will affect our operations. Below we highlight the main items of our statement of financial position which may potentially be impacted:

 

Financial instruments: whose market value may vary significantly given the price volatility of these assets, especially those issued by private companies that have a higher credit risk;
Loans: expenses for expected loss on loans and advances increased 49% in relation to 2019, reaching R$18,711,841 thousand in 2020, mainly reflecting the effects caused by the pandemic. It is worth noting that there was a worsening of the economic situation, as well as the updating of prospective scenarios in order to capture the current and future events resulting from the pandemic, increasing the risk of credit operations, resulting in migration between the stages and, consequently, a higher level provisioning;
Deferred tax assets: whose recoverability depends on future taxable income, which may be affected depending on the consequences of the pandemic event if it extends over a long period of time;
Intangible assets: may have their recoverable amount impacted on the basis of the changes caused by the crisis to their main assumptions of realization, such as the rates of returns initially expected;
Funding: volatility, as well as uncertainties in credit and capital markets, generally reduces liquidity, which could result in an increase in the cost of funds for financial institutions, which may impact our ability to replace, appropriately and at reasonable costs, obligations that are maturing and/or the access to new resources to execute our growth strategy;
Technical provisions of insurance and pension resources: that depending on the evolution of the crisis can be impacted negatively given the possible increase in the level of claims, mainly in the “life” segment and a higher frequency of claims from “health” policyholders with the increased use of hospitals, furthermore, we may experience higher demand for early redemptions by pension plan participants, which would impact our revenues through a reduction in the management fees we charge; and
Civil and labor provisions: the number of labor lawsuits may increase as a result of third party suppliers that go bankrupt as we may be considered co-responsible in these lawsuits. It is also

160 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

possible that we could experience a greater volume of civil processes, mainly involving reviews and contract renewals.

Our activities are operating at full capacity, since the beginning of the pandemic, and our actions have taken into account the guidelines of the Ministry of Health. We have established a crisis committee which is formed by the CEO, all the Vice-presidents and by the CRO (Chief Risk Officer), which meets daily and reports periodically, to the Board of Directors, evaluations on the evolution of Covid-19 and their reflections on the operations. In addition, we have a Risk Committee, which plays an important role in verifying the various points and scope of these actions in the Organization. We launched the Business Continuity Plan (“BCP”) and since the second half of March 2020, we intensified the internal and external actions, in a consistent and timely manner, with the objective of minimizing the impacts involved, which we highlight include:

giving leave to employees at-risk groups for an indefinite period of time;
increasing the number of employees working from home, with approximately 90% of our employees from the headquarters and offices and 50% of the branch employees working from home;
definition of the accompanying protocol, together with health professionals, for employees and family members who have symptoms of Covid-19;
intensification of the communication with our branches, providing guidance to our customers and employees about the prevention measures and the remote means of customer service;
making Covid-19 tests available to all employees for free; and
anticipation of the flu vaccine for all employees and dependents.

One of the main objectives of our risk management structure is to monitor the allocation of capital and liquidity, aiming to maintain the levels of risk in accordance with the limits established and, in addition, monitor the economic scenarios actively (national and international), as well as the evolution of the Covid-19 pandemic and will make every effort to maintain the fullness of our operations, the services to the population, and the stability of the national financial system.

We offer emergency lines of credit to companies, such as funds for financing of payrolls, as well as the extension of the installments of loan operations to individuals for which the amounts in question, up to the date of approval of these financial statements, were immaterial.

The measurements of the future financial and economic impacts related to the pandemic will continue to be assessed, although, they possess a certain level of uncertainty and depend on the development of the pandemic, since, part of the impact of the pandemic is already reflected in the level of provisioning, however, its duration or deterioration cannot yet be predicted, which could continue adversely affecting the global and local economy for an indefinite period of time, which negatively affects the results of financial institutions and, consequently, the performance of our operations.

 

2. On May 6, 2019, Bradesco announced to the market, that it has entered into a Share Purchase Agreement (“Agreement”) with the controlling shareholders of BAC Florida Bank (“BAC Florida”), the bank that has offered various financial services in the United States for 46 years, especially to non-resident high net worth Individuals.

 

On September 10, 2019, the Central Bank of Brazil authorized Bradesco to: (i) hold up to 100% of the capital of BAC Florida Bank and its subsidiaries - the securities brokerage firm BAC Florida Investments Corp. and the non-financial corporations BAC Global Advisors Inc., 5551 Luckett Road, Inc. and Representaciones Administrativas Internacionales S.A., the latter located in Guatemala and the others located in the United States.

 

On October 8, 2020, all regulatory authorizations were granted for the acquisition of 100% of the share capital of BAC Florida Bank by Bradesco.

 

Upon completion of the acquisition, on October 30, 2020, Bradesco:

has assumed the operations of BAC Florida, with the main objective of expanding the offering of investments in the USA to its high net worth customers (Prime) and Private Bank, in addition to other banking services, such as checking accounts, credit card and real estate financing; and

 

Bradesco 161

 

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

 
   

Notes to the Consolidated Financial Statements

 

this transaction will also provide Bradesco with the opportunity to expand business related to corporate and institutional customers.

 

We present below, the composition of the values of acquisition of BAC Florida and its subsidiaries and goodwill in the acquisition of shares as provisionally determined:

 

R$ thousand
Payment to BAC Florida 3,105,557
Total cost of acquisition 3,105,557
   
Fair value of net assets acquired (provisional amount) 1,346,061
   
Goodwill on the acquisition of shares 1,759,496

 

Bradesco hired a specialized and independent company to conduct the study of the purchase price allocation (“PPA”), for the initial allocation of the fair value of the assets acquired and liabilities assumed by Bac Florida. Due to the complexity of operations and their relevance, the final allocation may undergo changes and enhancements until the end of the study, which is estimated in up to 12 months from the date of its acquisition.

 

We present the provisional amounts for the assets and liabilities acquired on October 30, 2020 base date of the acquisition:

 

  R$ thousand  
BAC Florida Bank  
 
 
Assets    
Cash and due from banks 4,366,118  
Financial instruments 10,292,617  
- Securities and derivative financial instruments 1,209,024  
- Loans 9,080,574  
- Other financial instruments 3,019  
Investments in Associates 56,863  
Premises and equipment 6,133  
Other assets 364,956  
Total assets 15,086,687  
     
Liabilities    
Deposits and other financial liabilities 13,603,913  
- Deposits from customers 12,952,310  
- Securities issued 642,661  
- Other financial liabilities 8,942  
Other liabilities 136,713  
Shareholders’ equity 1,346,061  
Total 15,086,687  

 

If the acquisition had taken place on January 1, 2020, Management estimates that net income from the year would have been R$15,928,549 thousand. For the determination of this amount, Management considered that the fair value adjustments, provisionally determined on the acquisition date, would have been the same if the acquisition had occurred on January 1, 2020.

 

3. On January 15, 2020, Banco Bradesco announced that it sold the entire shareholding held in Chain Serviços e Contact Center S.A. (“Chain”) to Almaviva do Brasil Telemarketing e Informática S.A.

 

162 IFRS – International Financial Reporting Standards – 2020

 
 

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

   

Notes to the Consolidated Financial Statements

 

4. On January 27, 2020, Bradesco issued US$1.6 billion of senior notes in the international market, composed of two tranches of US$800 million, maturing in January 2023 and January 2025, with remuneration at fixed interest rates 2.85% and 3.20% p.a., respectively.

 

5. On October 1, 2020, Cielo announced to the market that it had signed a contract for the sale of all of its shares in Companhia Brasileira de Gestão de Serviços (“Orizon”), representing 40.95% of the share capital of Orizon, to Bradseg Participações S.A. for the sum of R$128,992 thousand. The closing of the Operation is subject to the fulfillment of certain precedent conditions, including approval by the Central Bank of Brazil and by the Administrative Council for Economic Defense – CADE.

 

6. On July 29, 2020, Law No. 14,031 was sanctioned, amending, from the fiscal year of 2021, the tax treatment incident on the exchange rate variation of the portion with risk coverage (hedge) of the value of the investment made by financial institutions and other institutions, authorized to operate by the Central Bank of Brazil, in a subsidiary, associated company, branch or agency located abroad, registered in accordance with the regime of competence, which should be computed in determining the real income and on the base of the Social Contribution on Net Profit (CSLL) of the investing legal entity, domiciled in Brazil, in the ratio of: (i) 50%, in 2021; and 100%, from the fiscal year of 2022.

 

7. Due to the so-called “Operação Zelotes” (“Zealots Operation”), which investigates the alleged improper performance of members of CARF – Administrative Council of Tax Appeals, a criminal proceeding against two former members of Bradesco’s Board of Executive Officers was opened in 2016 and received by the 10th Federal Court of Judicial Section of the Federal District. The investigation phase of the process was already completed, and is currently waiting for the decision of the first-degree court.

 

The Company’s Management conducted an internal evaluation of records and documents related to the matter and found no evidence of any illegal conduct practiced by its former representatives. Bradesco provided all of the information to the authorities and competent regulatory bodies, both in Brazil and abroad.

 

As a result of the news about the Operação Zelotes, a Class Action was filed against Bradesco and members of its Board of Executive Officers before the District Court of New York (“Court”), on June 3, 2016, based on Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934. On July 1, 2019, Bradesco and the Lead Plaintiff made an agreement (“Agreement”) to terminate the Class Action, with the payment of US$14.5 million by Bradesco. The Agreement was finally approved by the Court on November 18, 2019 and the case was closed in relation to Bradesco and to the members of its Executive Board of Directors. The Agreement made does not represent the recognition of guilt or admission of liability by Bradesco, but its intent is to avoid uncertainties, costs and onus related to the progression of the Class Action.

 

Also as a result of Operação Zelotes, the Corregedoria Geral do Ministério da Fazenda (General Internal Affairs of the Ministry of Finance) began an investigative administrative procedure to verify the need for the establishment of an Administrative Accountability Process (“PAR”). The filing decision of the related procedure was published in Section 2 of the Diário Oficial da União (Federal Official Gazette) on February 3, 2020. The decision given by the Official of the Ministry of Economy accepted in full the Final Report of the Processing Committee, the Opinion of the National Treasury Attorney General’s Office and the Joint Order of the General Coordination of Management and Administration, and of the Leadership of the Advisory and Judgment Division, which confirmed, expressly recognizing, the lack of evidence that Bradesco had promised, offered or given, directly or indirectly, an unfair advantage to public agents involved in the related operation, in accordance with the provisions laid down in Article 5, section I, of Law No. 12,846/13.

 

8. On March 1, 2021, Provisional Measure No. 1,034 / 2021 was issued, which increased the Social Contribution rate on Net Income by five percent, effective for the period from July 1, 2021 to December 31, 2021 , for financial institutions and private insurance companies, capitalization companies and credit unions, the impacts of this Provisional Measure are being assessed.

 

Bradesco 163

 

 

 

 

For further information, please contact:

 

 

 

 

 

 

 

Leandro Miranda

 

Executive Deputy Officer and Investor Relations Officer

 

 

 

 

 

Carlos Wagner Firetti

Market Relations Officer

Phone: +55 11 2194-0922

investidores@bradesco.com.br

 

 

 

 

Cidade de Deus, s/nº Prédio Vermelho 3º andar

 

 

Osasco – SP

Brazil

 

 

 

banco.bradesco/ri

 

 

 

 


 

 

 

 

 

 

 

SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 9, 2021
 
BANCO BRADESCO S.A.
By:
 
/S/Leandro de Miranda Araujo

    Leandro de Miranda Araujo
Executive Deputy Officer and
Investor Relations Officer.
 
 
FORWARD-LOOKING STATEMENTS

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.


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