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BBD Bank Bradesco


 
 

 

TABLE OF CONTENTS

 

 

 


 
 

 

 

3 Bradesco


 

Table of Contents

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Form 20-F

 

 

 PRESENTATION OF FINANCIAL AND OTHER INFORMATION

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

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

Our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018 and the corresponding notes, which are included under “Item 18. Financial Statements” of this annual report, were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

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

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

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

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

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

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

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

 

4 Form 20-F – December 2019


 
 
Table of Contents 
   

Form 20-F

 
 

FORWARD‑LOOKING STATEMENTS

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

·      the current instability in Brazilian macroeconomic conditions, together with political, economic and business uncertainties, as well as instabilities in global markets;

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

·      our level of capitalization;

·      cost and availability of funds;

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

·      loss of customers or other sources of income;

·      our ability to execute our investment strategies, capital expenditure plans and to maintain and improve our operating performance;

·      our revenues from new products and businesses;

·      adverse claims, legal or regulatory disputes or proceedings;

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

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

·      any failures in, or breaches of, our operational, security or technology systems;

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

·    the duration and severity of the novel coronavirus (“Covid-19”) outbreak and its impacts on the global and Brazilian economy and our business; and

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

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

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

5 Bradesco


 

Table of Contents

 

PART I

Form 20-F

 

 

PART I

 

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

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

3.A.Selected Financial Data

We present below our selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, which have been prepared in accordance with IFRS as issued by the IASB. The financial data as of December 31, 2019 and 2018 and for the years ended 2019, 2018 and 2017 is derived from our consolidated financial statements included in this annual report. The financial data as of December 31, 2017, 2016 and 2015 and for the years ended December 31, 2016 and 2015 are derived from our consolidated financial statements, which are not included herein.

In 2019, we adopted IFRS 16 – Leases, replacing IAS 17 Leases, IFRIC 4, SIC 15 and SIC 27, establishing that lessees account for all leases according to a single model, similar to the accounting entry for financial leases in IAS 17. The adoption was mandatory starting from January 1, 2019 and as a result, certain tables in this annual report containing financial data which were impacted by the adoption of IFRS 16 and the resultant consolidated amounts for 2019 are not comparable with prior periods. For further information, see Note 41 to our Financial Statements in “Item 18. Financial Statements”.

 In 2018, we adopted IFRS 9 – Financial instruments, which replaced IAS 39, which established a new approach for the classification and measurement of financial assets and liabilities, impairment, which replaces incurred losses with expected losses and hedge accounting.This adoption had its effects applied as of January 1, 2018, as a result, in certain tables containing financial data in this annual report, in the cases impacted by the adoption of IFRS 9, the consolidated amounts for 2019 and 2018 are not comparable with previous periods.

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

 

6 Form 20-F – December 2019


 
Table of Contents 
   

Form 20-F

 
 
 

Year ended December 31,

 R$ in thousands

2019

2018

2017

2016

2015

Data from the Consolidated Statement of Income

 

 

 

 

 

Interest and similar income

   124,417,705

   122,053,139

   126,232,328

   147,700,375

   127,048,252

Interest and similar expenses

   (58,617,986)

   (55,244,669)

   (75,589,415)

   (91,037,386)

   (71,412,210)

Net interest income

65,799,719

66,808,470

50,642,913

56,662,989

55,636,042

Net fee and commission income

25,337,676

23,831,590

22,748,828

20,341,051

17,820,670

Net gains/(losses) on financial instruments at fair value through profit or loss

 (1,090,917)

   (11,676,573)

  -  

  -  

  -  

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

 -  

  -  

   9,623,108

16,402,770

  (8,252,055)

Net gains/(losses) on financial instruments at fair value through other comprehensive income

  655,832

   1,073,563

  -  

  -  

  -  

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

 -  

  -  

   570,358

  (1,341,400)

  (671,810)

Losses on investments held-to-maturity

 -  

  -  

(54,520)

  -  

  -  

Net gains/(losses) on foreign currency transactions

  323,774

   1,096,826

   1,422,957

   150,757

  (3,523,095)

Net income from insurance and pension plans

  8,254,939

   7,656,872

   6,239,990

   4,155,763

   5,497,505

Other operating income

   8,143,628

  (1,849,312)

17,801,893

19,367,890

  (6,949,455)

Impairment of loans and advances

 -  

  -  

   (16,860,835)

   (15,350,278)

   (14,721,152)

Expected credit losses for loans and advances

  (12,532,133)

   (15,091,975)

  -  

  -  

  -  

Expected losses with other financial assets

 (1,472,394)

  (1,172,860)

  -  

  -  

  -  

Personnel expenses

   (24,526,318)

   (18,871,462)

   (20,723,265)

   (17,003,783)

   (14,058,047)

Other administrative expenses

   (16,489,578)

   (16,873,962)

   (16,882,461)

   (16,149,563)

   (13,721,970)

Depreciation and amortization

  (5,865,768)

  (4,808,255)

  (4,568,568)

  (3,658,413)

  (2,942,003)

Other operating income/(expenses)

   (26,214,836)

   (14,210,594)

   (10,133,357)

   (14,004,162)

   (12,988,553)

Other operating expense

   (87,101,027)

   (71,029,108)

   (69,168,486)

   (66,166,199)

   (58,431,725)

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

12,179,996

17,761,640

22,025,148

30,205,731

   8,075,532

Share of profit of associates and joint ventures

  1,201,082

   1,680,375

   1,718,411

   1,699,725

   1,528,051

Income before income taxes

13,381,078

19,442,015

23,743,559

31,905,456

   9,603,583

Income tax and social contribution

  7,792,129

  (2,693,576)

  (6,428,956)

   (13,912,730)

   8,634,322

Net income for the year

21,173,207

16,748,439

17,314,603

17,992,726

18,237,905

Attributable to shareholders

 

 

 

 

 

Controlling shareholders

21,023,023

16,583,915

17,089,364

17,894,249

18,132,906

Non-controlling interest

   150,184

  164,524

   225,239

  98,477

   104,999

 

Year ended December 31,

R$, except for number of shares

2019

2018

2017

2016

2015

Data on Earnings and Dividends per Share(1)

 

 

 

 

 

Earnings per share (2)

 

 

 

 

 

Common

  2.49

  1.97

  2.03

  2.12

  2.36

Preferred

  2.74

  2.16

  2.23

  2.33

  2.60

Dividends/interest on equity per share(3)

 

 

 

 

 

Common

  1.88

  0.87

  0.85

  0.83

  0.79

Preferred

  2.07

  0.95

  0.94

  0.91

  0.87

Weighted average number of outstanding shares(1)

 

 

 

 

 

Common

   4,025,988

   4,025,988

   4,025,988

   4,025,988

   3,660,187

Preferred

   4,007,025

   4,007,025

   4,007,025

   4,007,025

   3,645,500

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

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

(3) Holders of preferred shares are entitled to receive dividends per share in an amount 10.0% higher than the dividends per share paid to common shareholders. In 2019, we made an extraordinary dividend payment of R$ 8.0 billion, paid on October 23, 2019.

For purposes of calculating earnings per share according to IFRS, we used the same criteria adopted for dividends per share. For a description of our two classes of shares. see "Item 10.B. Memorandum and Articles of Association."

 

Year ended December 31,

In US$

 

 

 

 

2019

2018

2017

2016

2015

Dividends/interest on equity per share(1)

 

 

 

 

 

Common

0.47

0.22

0.26

0.25

0.20

Preferred

0.51

0.25

0.28

0.28

0.22

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

 

7 Bradesco


 

Table of Contents

 

3.A. Selected Financial Data

Form 20-F

 

   

As of December 31,

R$ in thousands

2019

2018

2017

2016

2015

Data from the Consolidated Statement of Financial Position

 

 

 

 

 

Assets

 

 

 

 

 

Cash and balances with banks

 109,610,999

  107,209,743

81,742,951

72,554,651

72,091,764

Financial assets at fair value through profit or loss

 249,759,777

  246,161,150

  -  

  -  

  -  

Financial assets held for trading

 -  

-  

  241,710,041

  213,139,846

  159,623,449

Financial assets at fair value through other comprehensive income

 192,450,010

  178,050,536

  -  

  -  

  -  

Financial assets available for sale

 -  

-  

  159,412,722

  113,118,554

  117,695,450

Financial assets at amortized cost

 -  

-  

  -  

  -  

  -  

Loans and advances to banks, net of impairment

59,083,791

  105,248,950

32,247,724

94,838,136

35,620,410

Loans and advances to customers, net of impairment

 423,528,716

  380,387,076

  346,758,099

  367,303,034

  344,868,464

Securities, net of impairment

  166,918,360

  140,604,738

  -  

  -  

  -  

Other financial assets

56,101,781

   43,893,309

  -  

  -  

  -  

Investments held to maturity

  -  

-  

39,006,118

43,002,028

40,003,560

Financial assets pledged as collateral

 -  

-  

  183,975,173

  155,286,577

  144,489,921

Non-current assets held for sale

 1,357,026

  1,353,330

  1,520,973

  1,578,966

  1,247,106

Investments in associates and joint ventures

 7,635,612

  8,125,799

  8,257,384

  7,002,778

  5,815,325

Premises and equipment

14,659,222

  8,826,836

  8,432,475

  8,397,116

  5,504,435

Intangible assets and goodwill, net of accumulated amortization

14,724,647

   16,128,548

16,179,307

15,797,526

  7,409,635

Taxes to be offset

15,685,801

   13,498,264

10,524,575

  7,723,211

  6,817,427

Deferred income tax assets

59,570,055

   48,682,569

43,731,911

45,116,863

45,397,879

Other assets

  7,441,888

  7,372,866

50,853,987

47,170,370

40,118,697

Total assets

  1,378,527,685

  1,305,543,714

  1,224,353,440

  1,192,029,656

  1,026,703,522

Liabilities

 

 

 

 

 

Liabilities at amortized cost

 

 

 

 

 

Deposits from banks

  227,819,611

  247,313,979

  285,957,468

  301,662,682

  293,903,391

Deposits from customers

  366,227,540

  340,748,196

  262,008,445

  232,747,929

  194,510,100

Funds from issuance of securities

 170,727,564

  148,029,018

  135,174,090

  151,101,938

  109,850,047

Subordinated debt

49,313,508

   53,643,444

50,179,401

52,611,064

50,282,936

Other financial liabilities

79,121,127

   62,598,235

  -  

  -  

  -  

Financial liabilities at fair value through profit or loss

14,244,083

   16,152,087

  -  

  -  

  -  

Financial liabilities held for trading

 -  

-  

14,274,999

13,435,678

19,345,729

Provision for expected losses

 

 

 

 

 

- Loan Commitments

  2,318,404

  2,551,676

  -  

  -  

  -  

- Financial Guarantees

  1,970,321

  719,216

  -  

  -  

  -  

Technical provisions for insurance and pension plans

 268,302,691

  251,578,287

  239,089,590

  215,840,000

  170,940,940

Other reserves

25,239,929

   19,802,171

18,490,727

18,292,409

15,364,317

Current income tax liabilities

  2,595,277

  2,373,261

  2,416,345

  2,130,286

  2,781,104

Deferred income tax assets

  1,080,603

  1,200,589

  1,251,847

  1,762,948

  772,138

Other liabilities

34,023,453

   34,157,435

97,816,824

96,965,515

78,038,058

Total liabilities

  1,242,984,111

  1,180,867,594

  1,106,659,736

  1,086,550,449

  935,788,760

Shareholders’ equity

 

 

 

 

 

Capital

75,100,000

   67,100,000

59,100,000

51,100,000

43,100,000

Treasury shares

(440,514)

(440,514)

(440,514)

(440,514)

(431,048)

Capital reserves

35,973

35,973

35,973

35,973

35,973

Profit reserves

51,986,423

   53,267,584

49,481,227

50,027,816

49,920,020

Additional paid-in capital

70,496

70,496

70,496

70,496

70,496

Other comprehensive income

  7,871,482

  2,206,718

  1,817,659

(398,708)

(4,002,724)

Retained earnings

  475,606

  2,035,198

  7,338,990

  4,907,381

  2,096,710

Equity attributable to controlling shareholders

 135,099,466

  124,275,455

  117,403,831

  105,302,444

90,789,427

Non-controlling interest 

  444,108

  400,665

  289,873

  176,763

  125,335

Total equity

  135,543,574

  124,676,120

  117,693,704

  105,479,207

90,914,762

Total liabilities and equity

  1,378,527,685

  1,305,543,714

  1,224,353,440

  1,192,029,656

  1,026,703,522

 

8 Form 20-F – December 2019


 
Table of Contents 
   

Form 20-F

 
 
 

3.B.Capitalization and Indebtedness

 

Not applicable.

 

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

 

Not applicable.

 

3.D.Risk Factors

 

3.D.10Macroeconomic risks

 

3.D.10.01Domestic Environment

 

3.D.10.01-01The impact of the COVID-19 pandemic on the global and domestic economy may negatively affect our operations and financial position.

 

The recent COVID-19 pandemic has generated great challenges and uncertainties around the world. It is the largest health crisis of our time, according to the WHO. 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 rates in addition to fiscal expansion. However, it is not yet possible to affirm whether these measures will be sufficient to prevent a global recession in 2020.

The scenario being traced for Brazil at the beginning of 2020 was positive, with projections that the country would have a substantial acceleration in GDP growth acceleration with additional advances in the reform agenda and the maintenance of interest rates at historically low levels. However, the Brazilian economy is not immune to a global crisis of such large proportions. Following confirmation of the first case of COVID-19 in Brazil in January, the number of infections have increased rapidly.

The impact of the pandemic has generated certain negative impacts on the Brazilian economy, including: (i) higher risk aversion, with pressures on the exchange rate; (ii) greater difficulties in foreign trade; and (iii) an increase in the uncertainties of economic agents. These impacts have been intensifying over time. As a response to the crisis, regional governments in most parts of Brazil imposed restrictions that largely paralysed economic activity in Brazil. In order to combat some of the economic effects of the pandemic, Committee of the Central Bank (Comitê de Política Monetária – "COPOM") and the Central Bank have also implemented various measures, such as a decrease in the base interest rate from 4.25% to 3.75% (a new historic minimum – this reduction occurred in a context of well anchored inflationary expectations, core inflation at levels below the inflation target and high idle capacity in the economy, which had been gradually reducing in the previous quarters).

In addition, the CMN, the Central Bank and the Federal Government have implemented a variety of measures to help the Brazilian economy face the adverse effects caused by the virus by means of:

9 Bradesco


 

Table of Contents

 

3.D. Risk Factors

Form 20-F

 

 

 

·     Resolution No. 4,782/20, which aims to facilitate the renegotiation of loans to companies, allowing for adjustments in the cash flows of companies and not requiring the banks to increase the provisioning;

·     Resolution No. 4,783/20, which reduced the minimum capital requirements, in order to enhance the lending capacity of banks;

·     Resolution No. 4,784/20, which extends the effects of the 'tax assets arising from tax losses' in the calculation of the 'prudential adjustments' – as originally stipulated in Resolution No. 4,680/18;

·     Resolution No. 4,786/20, which aims to ensure the maintenance of adequate levels of liquidity in the National Financial System, allowing the Central Bank to grant loans through the Special Temporary Liquidity Line ("LTEL"), regulated by Circular No. 3,994/20;

·     Resolution No. 4,803/20, amendments to the criteria the measurement of provisions  for doubtful debtors of the renegotiated operations by financial institutions and others authorized by the Central Bank, due to the COVID-19 pandemic. With this Resolution, the reclassification of the renegotiated operations is permitted between March 1 and September 30, 2020 to the level they were classified into on February 29, 2020;

·     Circular No. 3,991/20, which dismissed the advance notification of the amendment of the opening hours and compliance with the mandatory and uninterrupted hours in the case of multiple banks, like ours;

·     Circular No. 3,993/20, which reduced the percentage of the compulsory on time deposits and perfects the rules of the Liquidity Coverage Ratio ("LCR"). The practical and joint effect of these measures is the improvement in the liquidity conditions of the National Financial System; and

·     Provisional Measure No. 930/20, which aims to eliminate the asymmetry of tax treatment between the results of the exchange rate variation on investments of banks abroad and the result of the hedge/overhedge for the foreign exchange hedging of these investment. In moments of higher volatility, like the current one, the exchange rate variations cause the overhedge to increase the consumption of capital of banks and extend the market volatility, with negative effects for its functionality. The proposed measure aims to correct this imbalance, eliminating this negative effect on the foreign exchange market and on banks.

Legislative Powers have also 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 loan and the deferral of payment of PIS/COFINS) and granting tax benefits to the sectors of the economy/workers most affected.

However, projections estimate that Brazil will face an economic downturn in 2020. As the vast majority of our operations are conducted in Brazil, our results are significantly impacted by macroeconomic conditions in Brazil.

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 and revenue. Initially, we expect our assets and liabilities to be impacted as a result of the COVID-19, however, considering the current stage of the crisis and the approved date of the financial statements in IFRS it was not possible to estimate the impacts of the COVID-19.

However, our activities are in full operational capability. Since the beginning of the pandemic, our actions have taken into account the guidelines of the Ministry of Health. We have established a crisis committee formed by the Chief Executive Officer, all Vice-Presidents and the Chief Risk Officer (CRO), which meets daily and reports periodically, to the Board of Directors, evaluations on the evolution of Covid-19 and its effects on 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 (PCN), and since the second half of March 2020, we have intensified internal and external actions, in a consistent and timely manner, with the aim of minimizing the impacts involved, of which we highlight:

·     giving leave to employees of 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;

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·     defining the protocol, together with our Medical Area, for employees and family members who have symptoms of COVID-19; and

·     intensifying the communication with our branches, providing guidance to our customers and employees about the prevention measures and the remote means of customer service.

Below we highlight the main items of our balance sheet which may potentially be impacted:

 

·       Financial instruments: whose fair value may vary significantly given the price volatility of these assets, especially those issued by private companies that have a higher credit risk;

·       Loans and advances and other credit exposures: we expect an increase in our level of arrears in the payment of loans, to the extent that the economic situation will deteriorate further, as well as facing significant challenges to take possession and realize the collateral resulting from guarantees related to loans in default;

·       Deferred tax assets: whose recoverability depends on future taxable profits, 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 plans: depending on the evolution of the crisis these may 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 possible that we could experience a greater volume of civil processes, mainly involving reviews and contract renewals.

One of the main objectives of our structure of risk management is 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 the 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 this annual report, were immaterial.

We will continue to measure the future financial and economic impacts related to the pandemic, although, they possess a certain level of uncertainty and depend on the development of pandemic, as 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 could negatively affects the results of financial institutions and consequently the performance of our operations.

 

3.D.10.01-02The government exercises influence over the Brazilian economy, and Brazilian political and economic conditions have a direct impact on our business.

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

In the past, the Brazilian government has often changed monetary, fiscal, taxation and other policies to influence the course of Brazil's economy. We have no control over, and cannot predict, what measures or policies the government may take in response to the current or future Brazilian economic situation or how government intervention and government policies will affect the Brazilian economy and our operations and revenues.

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

·      exchange rate fluctuations;

·      base interest rate fluctuations;

·      domestic economic growth;

·      political, social or economic instability;

·      monetary policies;

·      tax policy and changes in tax regimes;

·      exchange controls policies;

·      liquidity of domestic financial, capital and credit markets;

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

·      decreases in wage and income levels;

·      increases in unemployment rates;

·      macroprudential measures;

·      inflation;

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

·      the impact of widespread health developments, such as Covid-19, and the governmental, commercial, consumer and other responses thereto; and

·      other political, diplomatic, social and economic developments, natural disasters, public health concerns, epidemics and pandemics within and outside of Brazil that affect the country.

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

Historically, the country's political landscape has influenced the performance of the Brazilian economy and the political crises have affected the confidence of investors and the general public, which has resulted in a slowdown in the economy and greater volatility in the securities of Brazilian companies issued abroad.

Until the outbreak of Covid-19, the current government had been conducting an economic agenda with actions to reduce government spending, preparing the economy to compete in international markets, improving the commercial environment and promoting privatizations and infrastructure concessions. The macroeconomic priorities during the Covid-19 pandemic, however, are focused on mitigating human and economic risks, which will result in temporary changes or interruptions to this economic agenda.

The uncertainty surrounding the implementation of the government's economic agenda and when this may resume after the Covid-19 pandemic, as well as the direction economic policy may take in the future, influence the perception of risk in Brazil among foreign investors, which in turn may adversely affect the market value of our common shares, preferred share ADSs and common share ADSs. For example, the market value of Brazilian companies has become more volatile during the previous presidential elections.

 

 

3.D.10.01-03 IfBrazil experiences substantial inflation in the future, our revenues and our ability to access foreign financial markets may be reduced.

 

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

The memory of, and the potential for inflation, is still present, despite the monetary stability achieved in the mid-1990s, intensified as a result of the adoption of inflation targeting norms, with concerns that inflation levels might rise again. Current economic policy in Brazil is premised on a monetary regime which the Central Bank oversees in order to assure that the effective rate of inflation keeps in line with a predetermined and previously announced target. Brazil's rates of inflation reached 4.3% in 2019 and 3.8% in 2018, as measured by the Extended Consumer Price Index – "IPCA" (Índice Nacional de Preços ao Consumidor Amplo).

Faced with high expectations and high economic inactivity, which had been gradually reducing since 2017, inflation has remained below the middle of the target (4.0% for 2020). Despite recent exchange rate pressure, the more fragile economic activity resulting from the Covid-19 pandemic has brought inflation to levels closer to the target floor (2.5%), which could eventually lead to further decreases in interest rates.

Decreases in the base interest rate ("SELIC") set by theCOPOM may have an adverse effect on us by reducing the interest income we receive from our interest-earning assets and lowering our revenues and margins. Increases in SELIC rate may also have an adverse effect on us by reducing the demand for our credit, and increasing our cost of funds, domestic debt expense and the risk of customer default.

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

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3.D.10.01-04Changes inthebase interest rate by the Central Bank may materially adversely affect our margins and results of operations.

The stabilization of inflation allowed the Central Bank to reduce the basic interest rate to the lowest level in history. The SELIC, which in the first quarter of 2019 remained at 6.5% per annum ("p.a."), was reduced several times in the second quarter, having been progressively reduced and closing the year at 4.5% p.a. In February, the SELIC was reduced to 4.25%, and the Central Bank signaled the interruption of the loosening cycle. However, in March, in light of the intensification of risks due to the Covid-19 pandemic, the monetary authority made a further reduction to 3.75%, a new historical low. However, actions related to the reduction of compulsory fees and increasing liquidity in general were adopted as a stimulus in response to the shutdown of the economy.

This process of reducing the SELIC to its lowest historic level was influenced by the high level of inactivity in the goods and labor markets, but it was a credible move by the Central Bank, which has also advanced in its agenda of modernizing and reducing distortions in the Brazilian financial system. Such modernization includes a reduction in compulsory fees, a reduction in informational asymmetries and increased competition in the banking market. Changes in the base interest rate may affect our results of operations as we have assets and liabilities indexed to the SELIC. At the same time, high base interest rates may increase the likelihood of customer delinquency, due to the deceleration in the economic activity. Similarly, low base interest rates may increase the leverage of borrowers, generating additional risk to financial system.

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

 

 

3.D.10.01-05Developments and the perception of risk in Brazil and other countries, especially emerging market countries, may adversely affect the market price of Brazilian securities, including our shares, preferred share ADSs and common share ADSs.

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

 

 

3.D.10.01-06Our investments in debts securities issued by the Brazilian government expose us to additional risks associated with Brazil.

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

 

 

3.D.10.01-07Changes in taxes and other fiscal assessments may adversely affect us.

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

 

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3.D.10.02External Environment

 

 

3.D.10.02-01Currency exchange variations may have an adverse effect on the Brazilian economy and on our results and financial condition.

Fluctuations in the value of thereal may impact our business. After an extended period of appreciation, interrupted only in late 2008 as a result of the global crisis, the Brazilianreal started to weaken in mid-2011, a trend which continued until mid-2016. After a brief period of stable exchange rates, thereal was once again devalued against the dollar. Weaker currency periods make certain local manufacturers (particularly exporters) more competitive, but also make managing economic policy, particularly inflation, increasingly difficult, even with a slowdown in growth. A weakerreal also adversely impacts companies based in Brazil with U.S. dollar indexed to and/or denominated debt.

 

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As of December 31, 2019, the net exposure in relation to our assets and liabilities denominated in, or indexed to, foreign currencies (primarily U.S. dollars) was 39.7% of our net asset. If the Brazilian currency devaluates or depreciates, we risk losses on our liabilities denominated in, or indexed to, foreign currencies, such as our U.S. dollar denominated long-term debt and foreign currency loans, and experience gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated intoreais. Accordingly, if our liabilities denominated in, or indexed to, foreign currencies significantly exceed our monetary assets denominated in, or indexed to, foreign currencies, including any financial instruments entered into for hedging purposes, a large devaluation or depreciation of the Brazilian currency could materially and adversely affect our financial results and the market price of our shares, preferred share ADSs and common share ADSs, even if the value of the liabilities has not changed in their originated currency. In addition, our lending transactions depend significantly on our capacity to match the cost of funds indexed to the U.S. dollar with the rates charged to our customers. A significant devaluation or depreciation of the U.S. dollar may affect our ability to attract customers on such terms or to charge rates indexed to the U.S. dollar.

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

 

3.D.10.02-02The exit of the United Kingdom (the "U.K") from the European Union could adversely impact global economic or market conditions.

On June 23, 2016, the U.K.'s electorate voted in a general referendum in favor of the U.K.'s exit from the European Union (so-called "Brexit"). After a formal notification made by the United Kingdom pursuant to Article 50 of the Treaty on European Union ("EU"), the United Kingdom left the European Union on January 31, 2020, at 11 pm local time. At the meeting of the Special European Council (Article 50) of April 10, 2019, it was agreed that the Brexit would be postponed until October 31, 2019. At that moment, the EU treaties no longer applied to the United Kingdom. However, as part of the withdrawal agreement (the "Withdrawal Agreement"), the United Kingdom now finds itself in a period of implementation (the "Transition Period") during which the EU legislation still applies to the United Kingdom, which continues to be part of the single EU market, until the end of 2020 (with the possibility of extension).

The terms for the United Kingdom to leave the EU, including the future relationship and access to the European Market, are not clear. The Withdrawal Agreement does not address, in general, the future relationship between the EU and the United Kingdom that should be the object of a separate agreement that has not yet been negotiated.

To the extent that the United Kingdom determines what EU laws to replace or replicate, the Brexit can lead to diverging national laws and regulations. The uncertainty as to the terms of the Brexit and their possible effects, once implemented, can negatively affect the confidence of investors, and the economic conditions ofthe European or the global market. This, in turn, may adversely affect our business and/or the market value of our shares, preferred share ADSs and common share ADSs.

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3.D.20Risks relating to us and the Brazilian banking industry

 

3.D.20.01Market Risk

 

3.D.20.01-01Losses in our investments in financial assets at fair value through profit or loss and at fair value through other comprehensive income may have a significant impact on our results of operations and are not predictable.

The fair value of certain investments in financial assets may decrease significantly and may fluctuate over short periods of time. As of December 31, 2019, the investments classified as "fair value through profit or loss" and as "fair value through other comprehensive income" represented 32.1% of our assets, and realized and unrealized gains and losses originating from these investments have had and may continue to have a significant impact on the results of our operations. The amounts of these gains and losses, which we record when investments in securities are sold, or in certain limited circumstances when they are recognized at fair value, may fluctuate considerably from period to period.

Despite impacting our investment policies, asset and liability management (“ALM”) and risks, the models adopted may not prevent certain more abrupt oscillations in the movements of the market, so that the profitability of the operations is feasible, in certain moments, from effects that negatively affect its contribution in our income and shareholders’ equity.

 

3.D.20.02Credit Risk

 

3.D.20.02-01We may experience increases in our level of past due loans as our loans and advances portfolio becomes more seasoned.

Historically, our loans and advances to customer portfolios registered an increase, interrupted in 2017 due to recession in the Brazilian economy experienced during the year, and resuming growth in 2018. Any corresponding rise in our level of non-performing loans and advances may lag behind the rate of loan growth, as loans typically do not have due payments for a short period of time after their origination. Levels of past due loans are normally higher among our individual clients than our corporate clients.

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Our delinquency ratios, calculated based on information prepared in accordance with accounting practices adopted in Brazil ("BR GAAP"), which is defined as the total loans overdue for over ninety days in relation to the total portfolio of loans and advances decreased to 3.3% as of December 31, 2019, compared to 3.5% as of December 31, 2018.

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

 

 

3.D.20.02-02We may incur losses associated with counterparty exposures.

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

 

 

3.D.20.02-03We may face significant challenges in possessing and realizing value from collateral with respect to loans in default.

If we are unable to recover sums owed to us under secured loans in default through extrajudicial measures such as restructurings, our last recourse with respect to such loans may be to enforce the collateral secured in our favor by the applicable borrower. Depending on the type of collateral granted, we either have to enforce such collateral through the courts or through extrajudicial measures. However, even where the enforcement mechanism is duly established by the law, Brazilian law allows borrowers to challenge the enforcement in the courts, even if such challenge is unfounded, which can delay the realization of value from the collateral. In addition, our secured claims under Brazilian law will in certain cases rank below those of preferred creditors such as employees and tax authorities. As a result, we may not be able to realize value from the collateral, or may only be able to do so to a limited extent or after a significant amount of time, thereby potentially adversely affecting our financial condition and results of operations.

 

 

3.D.20.02-04We may incur losses due to impairments on goodwill from acquired businesses.

We record goodwill from acquisitions of investments whose value is based on estimates of future profitability pertaining to business plans and budgets prepared by us. Annually, we assess the basis and estimates of profitability of the Cash-Generating Units ("Unidades Geradoras de Caixa" or "UGC") in respect of which the premiums are allocated. These evaluations are made through cash flow projections based on growth rates and discount rates, with those projections then being compared to the value of the premiums in order to conclude whether there is a basis to record impairments in relation to these assets. However, given the inherent uncertainty in relation to predictions of future cash flow projections, we cannot provide assurances that our evaluations of premiums will not require impairments to be recorded in future, which may negatively affect, the result of our operations, our financial condition and the market value of our shares, preferred shares ADSs and common shares ADSs.

 

 

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3.D.20.03Liquidity Risk

 

3.D.20.03-01Adverse conditions in the credit and capital markets, just like the value and/or perception of value of Brazilian government securities, may adversely affect our ability to access funding in a cost effective and/or timely manner.

Volatility as well as uncertainties in the credit and capital markets have generally decreased liquidity, with increased costs of funding for financial institutions and corporations. These conditions may impact our ability to replace, in a cost effective and/or timely manner, maturing liabilities and/or access funding to execute our growth strategy.

Part of our funding originates from repurchase agreements, which are largely guaranteed by Brazilian government securities. These types of transaction are generally short-term and volatile in terms of volume, as they are directly impacted by market liquidity. As these transactions are typically guaranteed by Brazilian government securities, the value and/or perception of value of the Brazilian government securities may be significant for the availability of funds. For example, if the quality of the Brazilian government securities used as collateral is adversely affected, due to the worsening credit risk, the cost of these transactions could increase, making this source of funding inefficient for us. For further information about obligations for repurchase agreements, see "Item 5.B. Liquidity and Capital Resources – 5.B.20. Liquidity and funding".

If the market shrinks, which could cause a reduction in volume, or if there is increased collateral credit risk and we are forced to take and/or pay unattractive interest rates, our financial condition and the results of our operations may be adversely affected.

 

3.D.20.03-02Our trading activities and derivatives transactions may produce material losses.

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

 

3.D.20.03-03Changes in regulations regarding reserve and compulsory deposit requirements may reduce operating margins.

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

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

·

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

·

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

Rules related to compulsory deposits have been changed from time to time by the Central Bank, as described in "Item 4.B. Business Overview – 4.B.70.02-05 – Compulsory Deposits".

As of December 31, 2019, our compulsory deposits in connection with demand, savings and time deposits and additional compulsory deposits were R$90.6 billion. Reserve requirements have been used by the Central Bank to control liquidity as part of monetary policy in the past, and we have no control over their imposition. Any increase in the compulsory deposit requirements may reduce our ability to lend funds and to make other investments and, as a result, may adversely affect us.

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3.D.20.04Underwriting Risk

 

3.D.20.04-01Our losses in connection with insurance claims may vary from time to time. Differences between the losses from actual claims, underwriting and reserving assumptions and the related provisions may have an adverse effect on us.

The results of our operations depend significantly upon the extent to which our actual claims are consistent with the assumptions we used to assess our potential future policy and claim liabilities and to price our insurance products. We seek to limit our responsibility and price our insurance products based on the expected payout of benefits, calculated using several factors, such as assumptions for investment returns, mortality and morbidity rates, expenses, persistency, and certain macroeconomic factors, such as inflation and interest rates. These assumptions may deviate from our prior experience, due to factors beyond our control such as natural disasters (floods, explosions and fires), man-made disasters (riots, gang or terrorist attacks) or changes in mortality and morbidity rates as a result of advances in medical technology and longevity orincreases in mortality rates as a result of  the covid-19 pandemic,among others. Therefore, we cannot determine precisely the amounts that we will ultimately pay to settle these liabilities, when these payments will need to be made, or whether the assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for payment of these liabilities. These amounts may vary from the estimated amounts, particularly when those payments do not occur until well in the future, which is the case with certain of our life insurance products. Accordingly, the establishment of the related provisions is inherently uncertain and our actual losses usually deviate, sometimes substantially, from such estimated amounts. To the extent that actual claims are less favorable than the underlying assumptions used in establishing such liabilities, we may be required to increase our provisions, which may have an adverse effect on our financial condition and results of operations.

 

3.D.20.04-02We are liable for claims of our customers if our reinsurers fail to meet their obligations under the reinsurance contracts.

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

 

3.D.20.05Operational Risk

 

3.D.20.05-01A failure in, or breach of, our operational, security or technology systems could temporarily interrupt our businesses, increasing our costs and causing losses.

We operate to provide security for the proper running of the business and to achieve the objectives established in accordance with applicable laws and regulations, ensuring processes have efficient controls. We constantly invest in the improvement and evolution of safety controls, resilience, continuity andmanagement of our information technology systems and as a result have created an environment with a high capacity to process data for our operating systems and our financial and accounting systems.

Due to the nature of our operations, the wide range of products and services offered and the significant volume of activities and operations performed, as well as the global context, where there is an ever-increasing integration among platforms, dependency on technology and on the internet, our information technology systems are exposed to various types of risks, due to both internal or external factors.

We and other financial institutions, including governmental entities, have already experienced cyber security events in relation to our information technology systems. Due to the controls, we have in place, we

 

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have not experienced any material loss of data from these attacks to date, neither from hardware nor from a data information loss perspective. However, considering the use of new technologies, the increasing dependency on the internet and the changing and sophisticated nature of cyber security events, it is not possible to predict all the means that will be used by individuals or organizations with harmful intent.

We believe that risk management is essential to ensure the long-term stability of financial institutions, whose processes involves several areas with specific assignments, ensuring an efficient structure. Item 4.B deals with other existing controls to mitigate the risks in more detail.

 

3.D.20.06Compliance, Conduct and Ethics Risk

 

3.D.20.06-01We may be subject to negative consequences in the event of an adverse judgment in the judicial proceedings related to Operation Car Wash and Operation Zealots, including the related class-action lawsuits.

Due to the so-called Operation Zealots or "Operação Zelotes", which investigates the alleged improper performance of members of the Administrative Council of Tax Appeals ("CARF"), a criminal proceeding against two former members of ourDiretoria Executiva 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 we are currently awaiting the decision of the first instance court.

Our Management conducted a careful internal evaluation of records and documents related to the matter and found no evidence of any illegal conduct by its representatives. We have provided all relevant information as requested to the competent authorities and regulatory bodies, both in Brazil and abroad.

As a result of the news about the Operation Zealots, a Class Action was filed against us and members of ourDiretoria Executiva before the District Court of New York ("Court"), on June 3, 2016, based on Section 10 (b) and 20 (a) of the Securities Exchange Act of 1934. On July 1, 2019, we and the Lead Plaintiff entered into an agreement ("Agreement") to terminate the Class Action, with the payment of US$14.5 million by us. The Agreement was finally approved by the Court on November 18, 2019 and the case was closed in relation to us and the former members of ourDiretoria Executiva. The Agreement does not represent the recognition of guilt or admission of liability by us, and we only entered into it to avoid uncertainties, costs and onus related to the progression of the Class Action.

Also as a result of Operation Zealots, the General Internal Affairs of the Ministry of Finance (Corregedoria Geral do Ministério da Fazenda) began an administrative investigation to verify the need to file an Administrative Accountability Process ("PAR"). The filing decision of the related procedure was published in Section 2 of theDiário Oficial da União(Federal Official Gazette) on February 3, 2020. The decision 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 we 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.

In 2014 our subsidiary Banco Bradesco BBI S.A. (“Bradesco BBI”) was included as a party to legal proceedings filed in the United States against Petrobras and other defendants, due to its role as underwriter in a note offering of Petrobras. The agreement proposed by Petrobras was definitively approved by the American Court and the lawsuit was dropped.

The progress of the “Operation Car Wash” investigation and the unfolding events and the possibility of new accusations may significantly change the Brazilian political and economic climate.

 

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Form 20-F

 
 
 

3.D.20.06-02Financial institutions can be legally involved in lawsuits originating from actions related to anti-corruption and money laundering to terrorism financing ("PLD/FT").

In light of the on-going anti-corruption agenda in Brazil, including the prevention of money laundering and the financing of terrorism ("PLD/FT"), may result in new investigations or legal proceedings in respect of alleged PLD/FT. Financial institutions, including us, could be involved in legal actions resulting from the actions perpetrated by individuals orcorporate entitiesrelated to the inappropriate use of the financial system for various purposes or unlawful acts, despite us being in compliance with our current obligations. Involvement in these actions may result in negative publicity for us, and adverse conclusions may negatively affect our financial condition, our results of operations and the market value of our shares, preferred shares ADSs and common shares ADSs.

For example, in 2019, in the context of the Operation Over and Out, an offshoot of “Operation Car Wash” (“Operação Lava Jato”), two of our former managers were investigated and reported by the Federal Attorney's Office for alleged involvement in the opening and maintenance of current accounts of companies with irregular features. We conducted a thorough internal investigation and adopted the governance measures we deemed necessary, putting ourselves at the disposal of the authorities to contribute to the verification of the facts. We cannot assure you that we will not be subject to further investigations or similar accusations in the future.

 

3.D.20.06-03The government regulates the operations of Brazilian financial institutions and insurance companies. Changes in existing laws and regulations or the imposition of new laws and regulations may negatively affect our operations and revenues.

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

·        minimum capital requirements;

·        compulsory deposit/reserve requirements;

·        investment limitations in fixed assets;

·        lending limits and other credit restrictions;

·        earmarked loan operations, such as housing loans and rural loans;

·        accounting and statistical requirements;

·        minimum coverage;

·        mandatory provisioning policies;

·        limits and other restrictions on rates; and

·        limits on the amount of interest that banks can charge and the period for which they can capitalize on interest.

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

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

 

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3.D. Risk Factors

Form 20-F

 

 

3.D.20.06-04The Brazilian Constitution used to establish a ceiling on loan interest rates and if the government enacts new legislation with a similar effect in the future, our results of operations may be adversely affected.

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

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

With the enactment of Law No. 10,406/02 (or the "Civil Code"), unless the parties to a loan have agreed to use a different rate, in principle the interest rate ceiling has been pegged to the base rate charged by the National Treasury Office (Tesouro Nacional). There is currently an uncertainty as to whether such base rate which is referred to in the Civil Code is: (i) the SELIC rate, the base interest rate established by COPOM, which was 4.5%p.a.as of December 31, 2019 and 6.5%p.a. as of December 31, 2018; or (ii) the 12.0%p.a. rate established in Article 161, paragraph 1, of Law No. 5,172/66, as amended ("Brazilian Tax Code"), which is the default interest rate due when taxes are not paid on time.

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

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

On November 27, 2019, Resolution No. 4,765/2019 was amended by the CMN that regulates overdraft facilities granted by financial institutions for a demand deposit account, providing, among other matters, the limit for the interest rates on the amount of the overdraft used. For further information, see "Item 4.B. Business Overview – 4.B.70 Regulation and Supervision – 4.B.70.02 Banking Regulations – 4.B.70.02-14 - Use of the overdraft". Since this is a very recent change, it is still unclear if this will affect our operating results positively or negatively.

 

3.D.20.06-05We may incur penalties in case of non-compliance with data protection laws.

In August 2018, Law No. 13,709/18 – General Data Protection Law ("LGPD", in Portuguese) was enacted, which creates a set of rules for the use, protection and transfer of personal data in Brazil, in the private and public spheres, and establishes responsibilities and penalties in the civil sphere. In addition to including existing rules on the subject, the LGPD followed the global trend of strengthening the protection of personal data, restricting its unjustified use, and guaranteeing a series of rights to holders of data, as well as imposing important obligations on so-called "treatment agents". In particular, the LGPD was inspired by recent European legislation on the subject, reproducing central points of the Directive No. 95/46/EC and of the General Data Protection Regulation ("GDPR").

The impact of the law will be significant as any processing of personal data will be subject to the new rules, whether physical or digital, by any entity established in Brazil, any entity who has collected personal data in Brazil, any individual located in Brazil – even if not residents – or any entity that offers goods and services to Brazilian consumers. In short, the adaptation to the LGPD will require structural changes in virtually all internal areas of Brazilian companies. The LGPD has been in force since December 28, 2018 as regards the creation of the National Data Protection Authority (Autoridade Nacional de Proteção de Dados or “ANPD"), the public administrative body responsible for ensuring, implementing and supervising compliance with the LGPD and the National Council for the Protection of Personal Data and Privacy, created by Provisional Measure converted in 2019 into Law No. 13,583/19. The remainder of the law was expected to come fully into force from August 2020, however, as a result of the COVID-19 pandemic, the National Congress approved Bill No. 1,179/20 postponing the entry into force of Law No. 13,583/19 until January 2021, with fines and sanctions applying from August 1, 2021. It is worth mentioning that this bill was approved with amendments by the Federal Senate, accordingly, it has yet to be passed by the Chamber of Deputies and, following approval, needs to be sanctioned by the President of Brazil.

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Form 20-F

 
 
 

We operate in a preventive, detective and corrective manner in order to protect our own and our clients' information. As a result, we have evolved our security framework in light of the new digital environment, with a focus on cyber security being key and pillar of our processes to establish data protection for our clients, resiliency, and structure to identify threats, detection, and response and recovery procedures in cases of cyber-attacks.

However, possible failures or attacks on our systems and processes of prevention and/or detection and/or correction may lead to non-compliance with applicable legislation, which may in turn negatively affect our reputation, our financial condition, the result of our operations and the market value of our shares, preferred shares ADSs and common shares ADSs. See item 3.D.20.05-01 "A failure in, or breach of, our operational, security or technology systems could temporarily interrupt our businesses, increasing our costs and causing losses".

 

3.D.20.06-06The Brazilian Supreme Court is currently deciding cases relating to the application of inflation adjustments which may increase our costs and cause losses.

The STF, which is the highest court in Brazil and is responsible for judging constitutional matters, is currently deciding whether savings account holders have the right to obtain adjustments for inflation related to their deposits due to the economic plansBresser,part of Verão, Collor I andCollor II, implemented in the 1980s and 1990s, before thePlano Real, in 1994. The trial began in November 2013 but was interrupted without any pronouncement on the merits of the subject under discussion by its Members. According to the institutions representing the account holders, banks misapplied the monetary adjustments when those economic plans were implemented, and should be required to indemnify the account holders for the non-adjustment of those amounts.

The STF gave a ruling on an individual case, in the sense that the sentences on class actions proposed by associations questioning inflationary purges only benefit consumers who: (i) were associated with the associations at the time of filing of the class action; and (ii) had authorized the filing of the class action. This reduced the number of beneficiaries in class actions because, until then, it was understood that these decisions should benefit all consumers affected by the practices (i.e., all consumers that are current account holders and that had suffered losses related to inflationary purges, irrespective of whether those losses were associated with the association, plaintiff of the class action).

In addition, in connection with a related sentence, the Brazilian Supreme Court Justice ("STJ") decided, in May 2014, that the starting date for counting default interest for compensating savings account holders must be the date of summons of the related lawsuit (rather than the date of settlement of the judgment), therefore increasing the amount of possible losses for the affected banks in the event of an unfavorable decision by the STF.

In December 2017, with the mediation of the Executive branch's attorney (Advocacia Geral da União), or ("AGU") and the intervention of the Central Bank, the representatives of the banks and the savings account holders entered into an agreement related to the economic plans aiming to finalize the claims and established a timeline and conditions for the savings account holders to accede to such agreement. The STF affirmed the agreement on March 1, 2018. This approval determined the suspension of legal actions in progress for the duration of the collective bargaining agreement (24 months). On March 11, 2020,the signatories to the collective bargaining agreement agreed to an amendment extending the agreement for a further 60 months. The amendment was taken to the Supreme Court for approval, having already been made by Minister Gilmar Mendes in extraordinary appeals No. 631,363 and No. 632,212, leaving the approval to the other Rapporteurs (Ministers Carmem Lucia and Ricardo Lewandowski). As this is a voluntary settlement, we are unable to predict how many savings account holders will accede to it.

 

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3.D. Risk Factors

Form 20-F

 

 

3.D.20.07Strategy Risk

 

3.D.20.07-01The increasingly competitive environment in the Brazilian banking and insurance segments may have a negative impact on our business prospects.

The markets for financial, banking and insurance services in Brazil are highly competitive. We face significant competition in all of our main areas of operation from other large banks and insurance companies, both public and private based in Brazil and abroad, in addition to new players, such as fintechs and startups that begin to operate with a differentiated and reduced level of regulation. It should be noted that major technology companies are also strong competitors, seeking to invest in online payment systems and financial transactions tools by means of various types of applications.

This competitive environment combined with the accelerated process of digital innovation in the institutions could result in a lack of specialized labor with an impact on the growth capacity or extraordinary costs for new business models, which may negatively affect our financial condition, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.

 

3.D.20.08Third Party Risk

 

3.D.20.08-01Eventual dependence on services rendered by outsourced companies and suppliers/partners may negatively impact our business performance.

Due to the complexity of some services, we may become dependent on outsourced companies and suppliers. We may encounter difficulty replacing some outsourced companies or suppliers/partners. We are also subject to operational risks that are beyond our control but that nonetheless may impact negatively on our operations, making the delivery of products and services to our customers more difficult. Possible interruptions in the provision of our services due to the difficulty of finding replacements for some suppliers or other issues beyond our control arising from outsourced companies, may adversely affect the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.

 

3.D.20.09Cyber Risk

 

3.D.20.09-01Cyber risk in an environment of third parties/service providers, may cause temporary unavailability, loss or leakage of information of the Organization or disruption in data confidentiality/integrity and/or services.

We treat cyber security at the highest strategic levels – the Board of Directors,Diretoria Executiva, Risk Committee, and the Executive Committee of PLD-FT/Sanctions and Security of Information/Cyber. We have a set of controls, represented by procedures, processes, structures, policies, standards and IT solutions that meet the principles of protection relating to confidentiality, availability and integrity of information. In addition, We believe we have adopted the best market practices and frameworks in processes, methodology in the management of cyber risk, as well as prevention and treatment of information and cybersecurity incidents. Accordingly, the following procedures are carried out: identification of threats, protection against attacks, detection, responses and recovery from attacks. We defined the cyber risk as the possibility of cyber incidents that may compromise the confidentiality, integrity and/or availability of critical business processes, assets and/or critical IT infrastructure of the Organization.

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Form 20-F

 
 
 

The structure of cyber risk management aims to ensure governance compatible with our size, risk profile and business model, to ensure that our assets and critical IT infrastructure are capable of withstanding cyber-attacks. Such a structure is adopted corporately and the theme of Cyber Security is managed by the Department of Corporate Security and Department of IT infrastructure, with the involvement of various areas of the Organization, which have specific assignments, ensuring an efficient structure in the control and mitigation of risks, allowing them to be identified, measured, processed and communicated, contributing so that the strategic objectives are achieved.

To mitigate cyber risk with respect to relevant service providers, we include the appropriate contractual clauses, aligned with the requirements of cybersecurity and in accordance with the requirements of Resolution No. 4,658/18 of the Central Bank. In addition, we have policies formalizing the responsibility for disseminating the culture of cybersecurity with training programs and periodic assessment of personnel. The costs to us of addressing cyber risk and security vulnerabilities could be significant and remedying the issues may result in interruptions, delays and may affect clients and partners.

 

3.D.30 Social and Environmental Risks

 

The social and environmental risk is represented by the potential damage that an economic activity can cause to society and to the environment. The social and environmental risks associated with financial institutions are mostly indirect and stem from business relationships, including those with the supply chain and with customers, through financing and investment activities, observing the principles of relevance and proportionality of our activities.

 

3.D.30.01Funding for large projects carried out by clients can generate socio-environmental impacts that could affect the results and the reputation of the Organization negatively.

We promote credit and financing operations, acting in several sectors, which may significantly affect an entire ecosystem, involving communities and the local flora and fauna. If a client, in the development of their activities, causes environmental impacts, such as the contamination of soil and water pollution above the legally acceptable limit and/or environmental disasters, it has a direct obligation to repair the damage caused financially. Consequently, depending on the magnitude of the socio-environmental impact, this client can have their economic-financial structure compromised, which could adversely affect our financial results, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.

 

3.D.40Risks relating to our shares, preferred share ADSs and common share ADSs

 

3.D.40.01The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders.

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3.D. Risk Factors

Form 20-F

 

 

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

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

 

3.D.40.02Under Brazilian Corporate Law, holders of preferred shares have limited voting rights, accordingly, holders of preferred share ADSs will have similar limitations on their ability to vote.

Under the Brazilian Corporate Law (Law No. 6,404/76, as amended by Law No. 9,457/97, as amended, which we refer as "Brazilian Corporate Law") and our Bylaws, holders of our preferred shares are not entitled to vote at our shareholders' meetings, except in limited circumstances (see "Item 10.B. Memorandum and Articles of Association – 10.B.10 Organization – 10.B.10.04 Voting Rights", for further information on voting rights of our shares). As such, in contrast to holders of common shares, holders of preferred shares are not entitled to vote on corporate transactions, including any proposed merger or consolidation with other companies, among other things.

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

 

3.D.40.03The relative volatility and low liquidity of the Brazilian securities markets may substantially limit your ability to sell shares underlying the preferred share ADSs and common share ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in more developed countries, and these investments are generally considered more speculative in nature. The Brazilian securities market is substantially smaller and less liquid than major securities markets, such as the United States, and may be more volatile. Although you are entitled to withdraw our shares, underlying the preferred share ADSs and common share ADSs from the depositary bank at any time, your ability to sell our shares underlying the preferred share ADSs and common share ADSs at a price and time acceptable to you may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets such as the United States or other countries. Theten largest companies in terms of market capitalization, according to B3, accounted for 47.1% of the aggregate market capitalization in December 2019.

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Form 20-F

 
 
 

 

3.D.40.04Our shares, preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend.

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

Pursuant to our Bylaws, our preferred shares are entitled to dividends 10.0% higher than those of our common shares. Although under our current Bylaws we are obligated to pay our shareholders at least 30.0% of our annual adjusted net income, the shareholders attending our Annual Shareholders' Meeting may decide to suspend this mandatory distribution of dividends if the Board of Directors advises that payment of the dividend is not compatible with our financial condition. Neither our Bylaws nor Brazilian law specify the circumstances in which a distribution would not be compatible with our financial condition, and our controlling shareholders have never suspended the mandatory distribution of dividends. However, Brazilian law provides that a company need not pay dividends if such payment would endanger the existence of the company or harm its normal course of operations.

In March 2013, CMN Resolution No. 4,193/13 was issued in an effort to further implement the Basel III Accord in Brazil. Pursuant to such rule, a restriction of dividend and interest payments on equity may be imposed by the Central Bank in the event of non-compliance with the additional capital requirements established by the Central Bank, as further described in "Item 5.B. Liquidity and Capital Resources – 4.B.70.02-03 Capital adequacy and leverage".

In light of the consequences of the COVID-19 pandemic, the Central Bank issued Resolution No. 4,797/20, which, among other measures, established that financial institutions may not declare payment of interest on own capital or dividends above the minimum level required by their respective bylaws.

 

3.D.40.05As a holder of preferred share ADSs and common share ADSs you will have fewer and less well‑defined shareholders' rights than in the United States and certain other jurisdictions.

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

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

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3.D. Risk Factors

Form 20-F

 

 

3.D.40.06It may be difficult to bring civil liability causes against us or our directors and executive officers.

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

 

3.D.40.07If we issue new shares or our shareholders sell shares in the future, the market price of your preferred share ADSs and common share ADSs may be reduced.

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

 

3.D.40.08The payments on the preferred share ADSs and common share ADSs may be subject to U.S. withholding under the Foreign Account Tax Compliance Act ("FATCA").

The United States has enacted rules, commonly referred to as FATCA, that generally impose a reporting and withholding regime with respect to certain U.S. source payments (including interest and dividends), gross proceeds from the disposition of property that can produce U.S. source interest and dividends and certain payments made by entities that are classified as financial institutions under FATCA. The United States has entered into an Intergovernmental Agreement regarding the implementation of FATCA with Brazil (the "IGA"). Under the current terms and conditions of the IGA, we do not expect payments made on or with respect to the preferred share ADSs or common share ADSs to be subject to withholding under FATCA. However, significant aspects of when and how FATCA will apply remain unclear, and no assurance can be given that withholding under FATCA will not become relevant with respect to payments made on or with respect to the preferred share ADSs or common share ADSs in the future. Similar to the FATCA, the Common Reporting Standard ("CRS") is the instrument developed by the Convention on Mutual Assistance in Tax Matters of the Organization for Economic Cooperation and Development ("OECD") and the Multilateral Competent Authority Agreement, applicable to the countries signatory to the norm. The financial institutions and entities subject to it should ensure the identification, investigation and reporting of information to the competent bodies. Prospective investors should consult their own tax advisors regarding the potential impact of FATCA and CRS. For more information about FATCA and CRS, see "Item 4.B. Business Overview – 4.B.70 Regulation and Supervision".

 

3.D.40.09You may be unable to exercise preemptive rights relating to our shares.

You will not be able to exercise preemptive rights relating to our shares underlying your preferred share ADSs and common share ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Similarly, we may from time to time distribute rights to our shareholders. The depositary bank will not offer rights to you as a holder of the preferred share ADSs and common share ADSs unless the rights are either registered under the Securities Act or are subject to an exemption from the registration requirements. We are not obligated to file a registration statement with respect to the shares or other securities relating to these rights, and we cannot assure you that we will file any such registration statement. Accordingly, you may receive only the net proceeds from the sale by the depositary bank of the rights received in respect of the shares represented by your preferred share ADSs and common share ADSs or, if the preemptive rights cannot be sold, they will be allowed to lapse. You may also be unable to participate in rights offerings by us, and your holdings may be diluted as a result.

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Form 20-F

 
 
 

3.D.40.10If you exchange your preferred share ADSs or common share ADSs for their underlying shares, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.

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

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

 

3.D.40.11A majority of our common shares are held, directly and indirectly, by one shareholder and our Board of Directors is composed of 10 members, including two independent members; accordingly, non-independent members may have conflicting interest with our other investors.

In March 2020, Fundação Bradesco directly and indirectly held 58.8% of our common shares. As a result, Fundação Bradesco has the power, among other things, to prevent a change in control of our company, even if a transaction of that nature would be beneficial to our other shareholders, Fundação Bradesco may also elect the majority of the Board of Directors of the Company, as well as to approve related party transactions or corporate reorganizations. Under the terms of Fundação Bradesco's bylaws, members of ourDiretoria Executiva, that have been working with us for more than ten years serve as members of the Board of Trustees of Fundação Bradesco. The Board of Trustees has no other members.

Our Board of Directors has ten members, two of which are independent, in other words they are not associated with Fundação Bradesco, in accordance with the criteria included of Law No. 6,404/76, in the regulation issued by the CVM (Brazilian Corporate Law). The Brazilian Corporate Law states that only individuals may be appointed to a company's Board of Directors. Accordingly, there is no legal or statutory provision requiring us to have independent directors, however, to exercise good corporate governance, our Board of Directors has two independent directors. Since the majority of members are not independent, the interests of our Board of Directors may not always be aligned with the interests of part of our other shareholders and these holders do not have the same protections they would have if most of the directors were independent. Furthermore, our non-independent directors are associated with Fundação Bradesco and circumstances may arise in which the interests of Fundação Bradesco, and its associates, conflict with our other investors' interests.

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

 

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ITEM 4. INFORMATION ON THE COMPANY

Form 20-F

 

 

3.D.50Risk Management

 

3.D.50.01Our risk management structure may not be fully effective.

We fully incorporate the risk management process into all of our activities, developing and implementing methodologies, models and other tools for the measurement and control of risks, looking to continuously improve them in order to mitigate the risks that we identify. However, there may be limitations to this risk management framework in foreseeing and mitigating all the risks to which we are subject, or may in the future become, subject. If our risk management structure is not completely effective in adequately preventing or mitigating risks, we could suffer material unexpected losses, adversely affecting our financial condition and results of operations. For more information on our risk management structure, see "Item 4.B. – Business Overview – 4.B.20.01 Corporate Process of Risk Management".

 

 

ITEM 4. INFORMATION ON THE COMPANY

 

 

4.A. History and Development of the Company

 

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

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

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

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

 

 

 

30 Form 20-F – December 2019


 
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Form 20-F

 
 
 

4.A.10Acquisitions, divestments and other strategic alliances

 

4.A.10-01 Recent Acquisitions

 

ØBAC Florida Bank

 

In May 2019, we announced to the market, that we entered into a Share Purchase Agreement with the controlling shareholders of BAC Florida Bank ("BAC Florida"), a bank that has offered various financial services in the United States for 45 years, especially to non-resident high net worth Individuals.Once the acquisition is complete,we will assume the operations of BAC Florida, with the main objective of expanding our offering of investments in the United States to our high net worth clients (Prime and Private Bank), in addition to other banking services, such as checking accounts, credit card and mortgages, as well as the opportunity to expand business related to corporate and institutional clients.

In September 2019, the Central Bank authorized us to complete the transaction. The completion of the transaction is subject to approval by the competent U.S. regulatory agencies and compliance with legal formalities.

 

ØBBC Processadora S.A. (formerly Fidelity Processadora e Serviços S.A.)

 

In December 2018, we and the Fidelity Group terminated our joint venture in BBC Processadora S.A. (formerly Fidelity Processadora e Serviços S.A.) ("Processing Company"). As a result, we will become the sole shareholder of the Processing Company, whose shareholders' equity is composed exclusively of the assets and liabilities relating to the provision of credit card processing services for us. The operation (a) aims to reduce the costs of processing and increase the efficiency of the credit card business; (b) will not have any impact on our activities and our clients; and (c) did not involve any financial values.Fidelity Serviços S.A. is a company that provides call center services, collection, fraud prevention, support and other related services. Our and Fidelity Group’s association with Fidelity Serviços S.A. was discontinued folowing the sale of Fidelity Serviços S.A. (currently Chain Services and Contact Center S.A.).

 

4.A.10-02 Recent divestments

 

ØChain Serviços e Contact Center S.A.(formerly Fidelity Serviços S.A)

 

In September 2019, we signed a contract for the sale of all of the shares held in Chain Serviços e Informática S.A. ("Chain") to Almaviva do Brasil Telemarketing e Informática S.A. Chain has as its object the provision of call center and collection activities. The operation was approved by the competent authorities, and the transaction was closed on January 14, 2020.

 

ØNCR Brasil – Indústria de Equipamentos

 

In June 2019, we entered into an agreement to sell the entire minority interest we indirectly held in NCR Corporation. The operation was approved by the competent authorities, and the transaction was completed on October 28, 2019.

 

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4.A. History and Development of the Company

Form 20-F

 

 

4.A.10-03 Other strategic alliances

 

Ø RCB Investimentos S.A.

 

In October 2018, we formalized a strategic partnership with RCB Investimentos S.A. (“RCB”), one of the principal credit management and recovery companies in Brazil, and with its controlling company PRA Group Brazil Investimentos e Participações, a company of the PRA Group Inc. (“PRA Group”), a global leader in the acquisition and management of non-performing credits. The transaction includes: (i) our acquisition of 65% of the shares issued by RCB, in which the founding members will remain as partners and directors of RCB, together with us; and (ii) the constitution of two FDICs (Investment Funds in Credit Rights) for the acquisition of non-performing credit portfolios, where the management of the recovery of these credits remains with RCB. The FIDCs will continue to be held by the PRA Group and the founders, with our minority participation. The transaction was approved by the Administrative Council for Economic Defense (“CADE”) and by the Central Bank.The operation was closed on December 20, 2018.

 

Ø Swiss Re Corporate Solutions Ltd.

 

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

 

Ø Company to manage credit intelligence

 

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

 

Ø IRB Brasil

 

In May 2017, we, together with the other shareholders of IRB Brasil RE ("IRB"), authorized IRB to request to the CVM: (i) registration as a publicly-traded company and authorization to conduct an Initial Public Offer (IPO) of IRB, in accordance with CVM Instructions No. 400/03 and No. 480/09; and (ii) registration to perform a secondary offering of common shares, in accordance with CVM Instruction No. 400/03. In July 2017, we announced that the documents were filed to meet the requirements made by the CVM in relation to the Public Offer of Secondary Distribution of common shares of IRB and the closure of the bookbuilding procedure of the offer. We, after the sale of part of our shares in the public offer in July 2017 now hold an indirect shareholding of 15.23% stake in the share capital of IRB (stake calculated excluding shares held in treasury).

 

Ø BRAM

 

Our subsidiary, BRAM has developed important alliances as part of its internationalization strategy. Through personal management and investment advisory agreements, we offer Brazilian investors theopportunity to invest in global equity funds, with a focus on the U.S., Europe and Asia, besides the global funds. In Europe, BRAM offers to overseas investors funds domiciled in Luxembourg with different strategies under the Bradesco Global Funds family, launched in 2009. In Japan, Mitsubishi Kosukai UFJ Asset Management (“MUKAM”), our partner since 2008, offers funds managed by BRAM to retail investors wishing to invest in the Brazilian market.

32 Form 20-F – December 2019


 
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4.B. Business Overview

 

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

 

4.B.10Business strategy

The strategy and vision for our future are founded on four pillars that guide our trajectory:

·        Customer Relationship;

·        Sustainable growth with profitability;

·        Efficiency and innovation; and

·        Human Capital.

Below, we present each one of our pillars and the main strategic objectives of 2019:

 

Ø   Customer Relationship.

We serve all audiences, with the goal of being the first bank and the first insurer of our customers, and strengthen our commitment to each one of them, ensuring the recommendation of products, services or operations in accordance with each profile, considering their needs, interests and goals. For example, we created our Ombudsman in 2005, two years before CMN Resolution No. 3,477/07, which made the establishment of an Ombudsman mandatory, because we understand its important and impartial role in the relationship with the customer.

There are several initiatives that reinforce the importance of customers (individual and legal entity) for the continuity of the business. After creating an area dedicated to customers who are non-account holders in 2018, we launched thePortal Não Correntista (Portal for Non-Account Holders) in 2019, which allows non-account holders to purchase our products and services online even if they do not have a current account. In the segment of corporate entities, Bradesco created the MEI Portal, helping self-employed professional to formalize their business without costs and bureaucracy.

Another highlight is our pending acquisition of BAC Florida Bank, headquartered in Miami (United States), which will allow us to expand financial services and products in the United States to our customers from various segments. The conclusion of the operation is still awaiting regulatory approval.

 

Ø   Sustainable growth with profitability.

We aim to grow in a diversified and sustainable manner, generating value to all stakeholders through what we believe to be the best balance between risk and return.

Our efforts are aimed at optimizing our processes and technologies in order to accelerate the changes necessary to improve the customer experience, anticipate their needs and offer products and services tailored to their profile.

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4.B. Business Overview

Form 20-F

 

 

Our goal is to always seek the best balance between risk and return, essential aspects for the sustainability of the business.

 

Ø   Efficiency and innovation.

We emphasize the importance of promoting efficiency and the best experience for clients, encouraging the use of technology and innovation in our business models. We seek to guarantee that different profiles of customers are catered for with appropriate business models.

We offer customer service channels in all the cities of Brazil, adapted to the development potential of the various regions and we periodically review the model that is more appropriate for each location and/or customer profile. Our digital channels evolve in a sustained manner – in 2019, 96% of all transactions made by our customers were via digital channels. A great ally in the digital universe is BIA (Bradesco Artificial Intelligence), which began interacting with our customers in the second half of 2017. We also launched the digital bank Next, at the end of 2017. Next offers a differentiated value proposition, addressed to a hyper-connected audience. In the first quarter of 2020, it will have its own administration and physical structure, gaining agility and flexibility, We also highlight inovabra, innovation ecosystem that fosters innovation through collaborative work with employees, business areas, customers, businesses, startups, technology partners, investors and mentors, with the aim of meeting the needs of our customers and ensuring the sustainability of business in the long term.

We also revitalized Ágora – Investment House, a company 100% owned by us, in order to become our official platform, with 100% digital onboarding, it offers more choices of products and specialized advice for customers to do their investments with convenience and reliability.

 

Ø   Human Capital.

The basis of our strategy is grounded on people. Accordingly, we seek to improve our ability to attract, train and retain appropriate talents for each line of business, with the goal of making our corporate strategy feasible.

We highlight the importance of people management for the implementation of our corporate strategy. As part of this strategy we aim to implement policies aligned to the needs of the current employment market, with the objective of ensuring diversified results, a solid balance sheet and consistent profitability.

Our succession plan maps the critical positions of each area and identifies professionals with the potential to take on strategic positions in the future (leadership positions or key positions of specific knowledge).

Our actions and public commitment in the face of diversity reaffirm our belief in the transformative potential of each person, respecting individuality and plurality. We encourage our professionals to use their full potential, since we believe that good results are a consequence of individual values and goals aligned to the organizational strategy.

We have implemented the following guidelines and practices: performance assessment and mapping of competences for 100% of the staff; structuring of individual development plans (“PDIs”) and training and professional developments supported by Unibrad – our corporate university. We also highlight the actions related to health and well-being, through thePrograma Viva Bem (live well program), and our program that encourages participation in volunteer initiatives,Voluntários Bradesco (Volunteers).

Our strategy is focused on adapting our culture and aligning it with modern people management practices, ensuring we are aligned with the new demands of the labor market, as well as making the human resources department be increasingly perceived as a strategic partner of the different business lines.

 

34 Form 20-F – December 2019


 
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4.B.20 Business management

In order to ensure our operational activities align with our strategies, we have developed management processes that are aligned with best market practices and business models, including:

 

4.B.20.01 Corporate risk management processes

Risk management is of great strategic importance to us due to the increasing complexity of services and products and the globalization of our business. In August 2017, CMN Resolution No. 4,595/17 was amended to include provision for compliance policies. Under this resolution, financial institutions authorized to operate by the Central Bank should implement and maintain compliance policies compatible with the nature, size, complexity, structure, risk profile and business model of the institution, in order to ensure the effective management of its compliance risk. Compliance risk must be managed in an integrated manner with all other risks incurred by the institution, in accordance with the specific rules. The rule also permits the drafting of a single compliance policy per conglomerate.

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

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

 

4.B. 20.01-01  Risk and Capital Management Structure

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

We have an Integrated Risk Management and Capital Allocation Committee (“COGIRAC”), which advises the Board of Directors in relation to the performance of its duties related to management policies and limits of exposure to risks, and to ensure we are compliant with the processes, policies, rules related to and compliance with regulations and legislation applicable to us.

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

Our governance structure also includes a Risk Committee, whose main objective is to evaluate our risk management framework and, eventually, to propose improvements.

COGIRAC and the Risk Committee assist the Board of Directors in the performance of its duties in the management and control of risks, capital, internal controls and compliance.

 

4.B. 20.01-02 Credit risk

Credit risk is represented by the possible losses associated with the non-fulfilment of the borrower or counterparty’s respective financial obligations under any agreement, as well as the devaluation of the credit contract due to the deterioration in the borrower’s risk classification, the reduction in gains or remuneration, benefits gained in renegotiation, the recovery costs and other amounts related to the non-fulfilment of the counterparty’s financial obligations. In addition, it includes the Country/Transfer Risk, represented by the possibility of losses related to non-compliance with obligations associated with the counterparty or mitigating instrument located outside the country, including sovereign risk and the possibility of losses due to obstacles in the currency conversion of amounts received outside the country associated with the operation subject to credit risk. Counterparty Credit Risk is represented by the possibility of loss due to non-compliance by a given counterparty with settlement obligations related to transactions involving the trading of financial assets, including the settlement of derivative financial instruments or by the deterioration in the credit quality of the counterparty, and Concentration Risk is represented by the possibility of losses due to significant exposures to a counterparty, risk factor, product, economic sector or geographic region.

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4.B. Business Overview

Form 20-F

 

 

Credit risk management is a continuous and evolving process of mapping, developing, assessing and diagnosing through the use of models, instruments and procedures that require a high degree of judgment, discipline and control during the analysis of operations in order to preserve the integrity and independence of the processes.

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

In order to avoid compromising the quality expected from the portfolio, committees monitor all relevant aspects of the process of lending, concentration, collateral requirements, maturities, and other aspects.

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

 

4.B. 20.01-02.01 Credit Risk Management Process

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

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

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

 

4.B. 20.01-02.02 Control and monitoring

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

In addition to committee meetings, the department holds monthly meetings with officers and heads of products and segments to ensure they are informed about the evolution of the portfolio of loans, delinquency, adequacy of the provision for non-performing loans, credit recovery, gross and net losses, portfolio limits and concentrations, allocation of economic and regulatory capital and other items. This information is also reported monthly to the Executive Committee for Risk Monitoring and the Audit Committee.

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

Both the governance process and limits are validated by COGIRAC, submitted for approval by the Board of Directors, and reviewed at least once a year.

 

36 Form 20-F – December 2019


 
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4.B. 20.01-03 Market Risk

Market risk is the possibility of a loss of income due to fluctuations in prices and market interest rate of the financial instruments retained by the Organization resulting from mismatched amounts, currencies and indexes of our asset and liability operations.

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

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

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

In line with the best practices of corporate governance and in order to preserve and strengthen our management of market and liquidity risks, as well as to meet the requirements of CMN Resolution No. 4,557/17, the Board of Directors approved the Market Risk Management Policy, which is reviewed at least once a year by the relevant committees and the Board of Directors itself, providing the main operational guidelines for accepting, controlling and managing market risk.

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

·    classification of operations;

·    reclassification of operations;

·    trading in government or private securities;

·    use of derivatives; and

·    hedging.

 

4.B. 20.01-03.01 Market Risk Management Process

Our market risk management process is managed on a corporate wide basis, ranging from business areas to the Board of Directors. This process involves several areas to ensure an efficient structure, with the measurement and control of market risk being performed centrally and independently. This process allowed us to be the first financial institution in the country authorized by the Central Bank to use, since January 2013, in-house models of market risk to check the regulatory capital requirement. The management process, approved by the Board of Directors, is also reassessed at least annually by the relevant committees and the Board of Directors itself.

 

4.B. 20.01-03.02 Definition of limits

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

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

The trading portfolio is monitored by limits of:

·    Value at Risk (VaR);

·    stress (measure of the negative impact of extreme events, based on historical and prospective scenarios);

·    results; and

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·    financial exposure/concentration.

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

The banking portfolio is monitored by the variation in economic value due to interest rate variation - ∆EVE (Economic Value of Equity) and variation in net interest income due to interest rate variation - ∆NII (Net Interest Income).

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

In addition to daily reports, the positions of the trading portfolio are discussed every 15 days by the Treasury Executive Committee and the positions of the banking portfolio and liquidity reports are handled by the Treasury Executive Committee for the Management of Assets and Liabilities. In both forums, the results and the risks are evaluated and the strategies are discussed. Both the governance process and the existing limits are validated by COGIRAC and submitted for approval by the Board of Directors, which are reviewed at least once a year.

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

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

 

4.B. 20.01-04 Liquidity risk

Liquidity risk is represented by the possibility of the institution failing to effectively comply with its obligations, without affecting its daily operations and incurring significant losses, as well as the possibility of the institution failing to trade a position at market price, due to its larger size as compared to the volume usually traded or in view of any market interruption.

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

 

4.B. 20.01-04.01 Liquidity Risk Management Process

We manage our liquidity risk on a group-wide basis. This process involves a number of areas with specific responsibilities, and the liquidity risk is measured and controlled on a centralized and independent basis, with daily monitoring of available funds and compliance with liquidity levels, according to the risk appetite established by the Board of Directors, as well as the contingency and recovery plan for potential high-stress situations.

Our Policy for Liquidity and Risk Management, approved by the Board of Directors, is mainly aimed at ensuring the existence of standards, criteria and procedures to guarantee the development of the Short-Term Liquidity Ratios (LCR – Liquidity Coverage Ratio), in compliance with Resolution No. 4,401/15, and Long-Term Net Stable Funding Ratio(NSFR), in compliance with Resolution No. 4,416/17,as well as the strategy and action plans for liquidity crisis situations. The policy and controls we established fully comply with CMN Resolution No. 4,557/17.

We also have rules for the daily monitoring of liquidity levels through a warning flag system that triggers the submission of reports and the actions to be taken given the risk presented.

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

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Since October 2017 we have used the Short-Term Liquidity Ratio (LCR) as a standard for internal management, as provided in the CMN Resolution No. 4,401/15 and the Central Bank’s Circular No. 3,749/15.

In the third quarter of 2018 we started monitoring structural long-term liquidity risk, through the NSFR, pursuant to CMN Resolution No. 4,616/17 and Central Bank’s Circular No. 3,869/17.

Liquidity risk is monitored daily by business and control areas and at meetings of the Treasury Executive Committee for Asset Liability Management, which controls liquidity levels. Additionally, COGIRAC and by the Board of Directors monitor liquidity levels reports which are shared with the Risk Committee.

 

4.B. 20.01-05 Operational Risk

Operational risk is represented by the possibility of incurring losses 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.

 

4.B. 20.01-05.01 Operational Risk Management Process

The Organization adopts the ‘Three Lines of Defense’ model, which consists of identifying and assigning specific responsibilities to each department so that essential operational risk management tasks are performed in an integrated and coordinated manner. The following activities are carried out for that purpose:

·    identify, evaluate and monitor the operational risks inherent to our activities;

·    evaluate the operational risks inherent to new products and services in order to adapt them to legislation and procedures and controls;

·    mapping and treating operational loss records for the composition of the internal database;

·     provide analysis and quality information to departments, aiming the improvement of the operational risk management;

·    evaluate scenarios and indicators for the composition of the economic capital and improvement of the risk maps of the Organization;

·    evaluate and calculate the need for regulatory and economic capital for operational risk; and

·    report on operational risk and its main aspects in order to support the Organization's strategic decisions.

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

Operational risk is controlled and monitored primarily by an independent area, the Integrated Risk Control Department, and is supported by several areas that are part of the process of managing this risk.

In February 2020, Circular No. 3,979/20 was published by the Central Bank, effective as of December 1, 2020, which provides for the constitution of Base of Risks and Operating Losses ("BRPO"), its update and remittance to the Regulator. According to circular, the database must reflect the risk profile and management practices. Among the requirements, we highlight the periodic remittance, historical base formation (between 10 and 5 years), adoption of complete and robust layout, accounting traceability and the standardization of the structure for the collection and processing of information. All information must be kept at the available to the Brazilian Central Bank for at least 10 years, with the first remittance scheduled for 2021 relative to the base date of December 2020.

 

4.B.20.02Independent Validation of Management and Measurement Models of Risk and Capital

We employ regulatory models as well as internal models based on statistical, economic, financial, and mathematical theories and the expertise of specialists in the management of risks and provisions and in the measurement of capital, aiming to synthesize processes or complex issues and large quantities of information and providing standardization, objectivity and efficiency to the decisions.

All models have inherent risks that can be derived from potential adverse consequences arising from decisions based on incorrect or obsolete estimates, improper calibration of parameters or inappropriate use of the risk models. In order to detect, mitigate and control these risks, there is the process of independent validation, which carefully evaluates various aspects, challenging the development process (which includes the assumptions adopted, the methodology and the results) and the use of models (including the quality of the input data, adherence to the regulatory requirements and the robustness of the environment in which they are implanted). The results are reported to the managers, Internal Audit, Model Evaluation Committee, Risk Control Committee, Executive Committee for Monitoring of Risks, Risk Committee and the Integrated Risk Management and Capital Allocation Committee (“COGIRAC”).

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4.B. Business Overview

Form 20-F

 

 

 

4.B.20.03Internal controls

The efficacy of our internal controls is supported by trained professionals, well-defined and implemented processes and technology as determined by our business needs, in accordance with CMN Resolution No. 2,554/98.

Internal controls are based on the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission ("COSO"), and is also in line with the guidelines established by the Information Systems Audit and Control Association ("ISACA") through the Control Objectives for Information and Related Technology ("COBIT 5"), and with the procedures described by the Public Company Accounting Oversight Board ("PCAOB") for analysis of the Entity Level Controls ("ELC").

The existence, enforcement and efficacy of controls that ensure the levels of risk in our processes are acceptable is certified by the area responsible for the execution of the adherence tests of the controls. The results of the adherence tests are conveyed to the Audit, Risk Monitoring and Risk Management Committees, as well as to the Board of Directors, to provide reasonable assurance that business transactions are carried out appropriately and achieve defined objectives, in accordance with external laws and regulations, internal policies, rules and procedures, as well as applicable codes of conduct and self-regulation.

 

4.B.20.04 Management and Processes in Cybersecurity

We consider cyber and information security at the highest strategic levels in order to protect our technological infrastructure against attacks, unauthorized access and malicious codes. We operate to prevent, detect and correct in order to protect the information of our Organization and of our clients.

Accordingly, we have developed our security framework, considering the new digital environment, where the focus on cybersecurity is a key aspect and one of the pillars of technology and processes, ensuring data protection for our clients, resilience, and structures to identify and detect threats, and have in place response and recovery procedures in the event of cyber-attacks.

With regards to the technical aspects, preparing for and anticipating IT security and cyber threats, requires continuous investments like the reformulation of the critical updates of servers and workstations, inspection of source codes in the development cycle, establishment of a lab for security tests and use of technology and tools.

We have systems to prevent attacks from external connections and the internet, systems for the analysis of fraudulent behavior, unauthorized access, malicious codes, analysis of network behavior, intrusion detection, firewall, antivirus and antispam systems, all of which provide protection for our IT systems. We continuously upgrade the security of our software and hardware, digital certification in WEB servers and the encryption equipment, in addition to performing frequent resilience tests.

We continuously monitor these measures and we have security operational centers ("SOCs"), focusing on the identification of potential vulnerabilities and establishing an active defense with the use of cognitive intelligence. Additionally, we have a cyber intelligence team working to identify threats and check the necessary corrective measures.

We adopt strict procedures to ensure our client information is secure. The interactions and synergies between management and technical areas aims to create solutions to provide secure access to service channels and to minimize exposure. We have a range of security devices and technologies, including biometrics, chip cards, 2D digital validation/QR code and OTP devices (physical and cell phone token, etc.), which are used to prevent fraud and unauthorized access. Educating clients on cyber risks is a key component of our strategy in this regard. We have developed awareness campaigns through the client channels and on social media. On our website there are several guidelines for the public, including videos of the web series "Protect Yourself" with prevention tips on current key scams/fraud, which aims to improve the security barriers for users. Those contents are not incorporated by reference in the 20F.

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In conjunction with technical measure, we ensure that employees and prepared and engaged with the issue of cybersecurity. The culture of security is a fundamental basis for the measures, processes and technologies to be effective. For this reason, we invest in training and awareness for employees, associates and customers so they are aware of the issue and prepared for the inherent risks and threats.

We also have continuous training programs and other awareness campaigns on the aspects of security and an executive committee dedicated to the issue, which develops the strategies and ensures the development and effectiveness of actions, focusing on the protection of technological infrastructure against attacks, unauthorized access, theft of information and insertion of malicious codes.

The CMN amended Resolution No. 4,658/18 and Circular No. 3,909/18, with the aim of enhancing cyber security and data storage, and established principles and guidelines that seek to ensure the confidentiality, integrity and availability of data and information systems, through the implementation of policies for cyber security, in addition to the requirement of hiring processing and data storage services. In essence, the resolution establishes (i) that the contracting of relevant processing anddata storage services must be communicated within 10 days of the contract, as well as communicating any contractual alterations; and (ii) in the event of non-existence of an agreement for the exchange of information between the Central Bank of Brazil and the supervisory authorities of the countries where the services may be provided, authorization must be requested from the Central Bank for the contract and relevant contractual alterations. We currently comply with the provisions of these rules.

In August 2018, Law No. 13,709/18 – General Data Protection Law ("LGPD") – was enacted, which creates a set of rules for the use, protection and transfer of personal data in Brazil, in the private and public spheres, and establishes responsibilities and penalties in the civil sphere. In addition to including existing rules on data protection, the LGPD followed the global trend of strengthening the protection of personal data, restricting its unjustified use, and guaranteeing a series of rights to holders of data, as well as imposing important obligations on so-called "treatment agents".

The impact of the law will be significant as any processing of personal data will be subject to the new rules, whether physical or digital, by any entity established in Brazil, or who has collected personal data in Brazil, or individuals located in Brazil – albeit not residents – or, even, that offer goods and services to Brazilian consumers. In short, the adoption of the LGPD will require structural changes in virtually all internal areas of Brazilian companies. The LGPD has been in force since December 28, 2018 creating the ANPD, the public administrative body responsible for ensuring, implementing and supervising compliance with the LGPD and the National Council for the Protection of Personal Data and Privacy, created by Provisional Measure converted into Law No.13,583/19 in 2019. The remainder of the law was expected to come fully into force from August 2020, however, as a result of the COVID-19 pandemic, the National Congress approved Bill No. 1,179/20 postponing the entry into force of Law No. 13,583/19 until January 2021, with fines and sanctions valid from August 1, 2021. It is worth mentioning that this bill was approved with amendments by the Federal Senate, accordingly, it has yet to be passed by the Chamber of Deputies and, following approval, needs to be sanctioned by the President of Brazil.

 

4.B.20.05Corporate security

Our Corporate Security Department's mission is to promote security solutions by creating, implementing, and maintaining rules and processes which are aligned with our business.

To achieve our strategic objectives, we focus on Information Security and Cybernetics, Access Management, Prevention of Electronic, Debit Card and documentary frauds. We also systemically implement security procedures in Electronic Channels, Systems and Information to assess and propose improvements. In addition, the department is responsible for Technical Opinions, in connection with strategic security issues, implementation of products, services or processes and PLD/FT.

We highlight the main areas and activities:

·      the Information Security Department's purpose is to establish the Information Security Corporate Policy and Rules; identify and evaluate the risks of Information Security; ensure good governance and generate Cryptographic Keys; maintain the Registration Authority ("RA") for theissuance of Digital Certificates related to the Brazilian Public Key Infrastructure ("ICP Brasil"). Establish criteria for the assessment of compliance of Information Security and data protection, maintain the Corporate Program of Awareness and Education in Information Security, giving in-company lectures to employees as well as lectures at external events; maintain the Time Stamp Authority in the context of the ICP Brasil, which will support our digital and digitalization processes of documents;

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4.B. Business Overview

Form 20-F

 

 

·    the Governance of Cyber Security and Incidents to develops, monitors and controls the mapping and development of risks to information security in order to be aligned with our strategic guidelines and new business models, risks and cyber threats and regulatory bodies. In addition, it also manages the Operational Model of Information Security (“MOSI”), acts in Preventing Data Leakage via Data Loss Prevention (“DLP”) and Incidents, in order to have a global and integrated overview of our information security;

·      the Electronic Fraud-Prevention (Bradesco Celular, Internet Banking, Net Empresa, Fone Fácil and Debit Card Product), Document Fraud Prevention (Opening Accounts, Bradesco App, Next, Consigned Credit, Financing of Vehicles and Consortium) manage security processes and projects to detect and mitigate risks of any financial losses or image crisis. They operate by monitoring the transactions of Electronic Service Channels and carrying out preventive and reactive analysis of documents, in addition to performing strategic and corporate actions. They are supported by the Area of Data Analysis and Modeling with analytical solutions and statistics methodologies, in order to propose solutions to Managers of technical and business areas that aim to balance use and security for Electronic Channels Access and for Debit Card Product;

·      Identification Management and Access is responsible for the strategy and operational direction of the identification process and access to corporate applications. This area aims to protect the system resources and information against unwanted access, honoring the principles of segregation of duties and definition of automated controls;

·      the Security Devices division assesses the need for systems, service channels, business managers and users, in relation to authentication factors, managing and monitoring projects, assisting in the acquisition and performing the control and logistics of Biometrics, M-Token, Token and TAN Code;

·      the Security for Access to Information by Third Parties division develops security rules and principles applied to outsourced services, ensuring the evaluation, centralized and appropriate processes and governance for the protection of our information;

·      the PLD/FT division is responsible for policies, standards, procedures and specific systems, which establish guidelines to prevent and detect the misuse of our structure and/or products and services. This Program is supported by the PLD/FT Executive Committee, which evaluates the work according to its effectiveness as well as the need to align procedures and controls with the regulations and with the best national and international practices. Suspicious or atypical cases identified are forwarded to the Commission for the Evaluation of Suspicious Transactions for analysis, which is composed of Segments, Departments and Related Companies, to be able to assess the need to report to the Regulatory Bodies in compliance with the legal requirements.

·      Program for the implementation of the General Data Protection Law (LGPD), responsible for the appropriateness of processes and systems for the rights of the holder of the data and compliance with the requirements required by law; and

·      The Physical and Property Security division is responsible for maintaining the structure with specialized material and human resources and safety devices for the implementation of Security Standards in accordance with Law No. 7,102, of June 20, 1983, and with the "Security Plan" determined by the Federal Police. Keep on constant evaluation the devices and logistics of vulnerable points, offering a 24-hour call center service, aiming to prevent and guide actions to minimize the effects of any claims.

In addition to the activities developed by the corporate security area, we have a department for fraud prevention, as part of our credit card area, whose mission is to provide security solutions aligned to our business, through the creation, implementation, and maintenance of preventive rules, processes and technologies. This fraud prevention department takes strategic action in respect of the security of the use and service channels, systems and processes of products, assessing and suggesting improvements. The department also issues technical opinions in connection with strategic security issues and the implementation of products, services or processes.

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

·      the area responsible for preventing credit card fraud has the purpose of identifying and mitigating the risk of financial losses and negative reputational impacts for the Bank. It develops prevention strategies for documental and transactional fraud, monitoring and alerting in real time for all transactions made through the customer service and use channels. The measures are based on behavioral analyses of fraud, supported by statistical methodologies and predictive models of fraud, in order to ensure controls are aligned to the business. The area also works on the diagnosis of losses to identify systemic and operational weaknesses, recommending preventive actions andalignment with the current strategy where necessary;

·       the projects and processes area establishes controls to identify risks and is responsible for evaluating the risk of fraud and issuing recommendations for new projects, processes and products. The area proposes to the managers of the business and technical areas solutions that aim to balance the use and the security of the products and access to service channels, as well as corporate and strategic actions, which follow the best practices of the market focused on preventive actions; and

·      the portfolio analysis area is responsible for managing and providing information from the fraud prevention area to the other areas of our Organization.

 

4.B.20.06Data processing

 

·

We have a state of the art information technology ("IT") environment supported by a Data Center (CTI –Centro de Tecnologia da Informação) located in Cidade de Deus, Osasco, SP, especially built to harbor our IT infrastructure and has protections in place designed to ensure the uninterrupted availability of our services.

·

Data is continually replicated in a processing center (secondary site) located in Alphaville, in the city of Barueri – SP, which has equipment with enough capacity to take over the main system's activities in the event of a problem at our Technology Center (CTI). All service channels have telecommunications services that work with one of the two processing centers.

·

We hold annual simulation exercises in which our IT center is rendered out of service in order to test that we have effective contingency structures, processes and procedures in place. All these exercises are monitored by our business managers. In addition to all backup copies of electronic files stored and maintained at our IT center, second copies are saved and maintained in the Alphaville processing center, where all the activities related to the development of systems are located. We regularly test the media and processes in force to ensure compliance with environmental regulations. Data protection aims to ensure the confidentiality, integrity and availability of information in accordance with its level of criticality.

·

If the public energy supply is interrupted, both centers have sufficient capacity to operate independently for 72 hours non-stop. After this period, the technology centers can operate continuously, depending on the amount of fuel available to operate the generators that supply electricity.

·

Our infrastructure includes systems to prevent attacks from external connections and the internet, systems for the analysis of fraudulent behavior, unauthorized access, malicious codes, analysis of network behavior, protection against invasion (intrusion detector), firewall, antivirus and antispam systems, all to provide protection to our IT environment. We continuously upgrade the security for our software and hardware, digital certification in WEB servers and the encryption equipment.

·

We have a Security Operations Center (SOC) in the area of IT Security that treats and responds to security incidents, monitors the environment (24/7) and develops prevention measures through sources of intelligence information.

·

Our safety tools monitor software, hardware and share information from stations and servers. In addition, we have a system for the prevention of loss of Information Data, the DLP, designed to ensure the protection of company data. Annually, a "Penetration Test" is performed by an independent audit firm and the IT security processes are certified by the ISO 27000 – Information Security.

 

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Form 20-F

 

 

 

·

Our internet systems have a separate infrastructure, enabling different customer segments (individuals, corporate, staff) to use resources independently in order to provide better services.

·

The IT structure is also backed by processes implemented in light of the ITIL (IT Infrastructure Library) and COBIT (Control Objectives for Information and related Technology). We apply recognized practices for IT service management and our system is certified by the ISO 20000 – Service Management.

·

Physical security of the data center is maintained by a baffle gate and a double contention door that isolates the entrance between the doors. Video cameras monitor the entrance and internal areas of the datacenter, and access is restricted and authorized through the authentication of passes and vascular biometrics.

 

4.B.20.07 Bradesco Integrity Program

We are committed to maintain integrity and:

·      to conduct our business and develop our various relationships based on ethics, integrity and transparency, concepts that permeate our organizational culture, values and principles which are ratified by the Corporate and Sector-based Codes of Ethical Conduct and supported by Senior Management; and

·      to prevent and combat all forms of corruption, especially bribery.

These commitments are permanently upheld through the Bradesco Integrity Program, which corresponds to a set of mechanisms and measures made up by the Code of Ethical Conduct, the Corporate Anticorruption Policies and Standards, and other standards, as well as procedures, processes, and control established therein, aimed at preventing, detecting, and remedying any harmful acts of corruption and bribery, including fraud against the Government.

The program, supported by the Integrity and Ethical Conduct Committee and by the Board of Directors, determines the guidelines, responsibilities, procedures, and controls regarding gifts, freebies, entertainment, sponsorship, third parties and due diligence, bids with the Brazilian Government, political contributions, relationships with public agents, denunciations and non-retaliation against whistleblowers acting in good faith, in accordance with laws and regulations applicable in Brazil and in countries where we have business units.

The Integrity Program covers our managers, employees, interns, apprentices, suppliers, service providers, banking correspondents in Brazil and business partners, controlled companies and companies that are members of the Bradesco Organization in its interactions and daily decisions, highlighting our principles of high standards of conduct and ethics. We continuously evaluate the Program to align its governance with the best national and international anti-corruption practices.

We always promote an ethical culture and integrity based on the code of ethical conduct, which has been implemented internally through programs and training events, raising awareness among employees and the service providers. In 2019 the Policies, Rules, Standards, Integrity Program, Manuals, Training and Systems were reinforced.

We also intensified communication with suppliers, service providers, and correspondents in Brazil and with business partners. We gave anti-corruption training to Senior Management, employees in areas with higher exposure to risk, and third parties.

In May 2019, we held a meeting at which focused on the Integrity of departments and associated companies, which included participation fromDiretoria Executiva and an external lecturer. In December 2019, on the International Day against Corruption, we promoted Bradesco Integrity Week, with involvement from the Chairman of the Board of Directors and the Chief Executive Officer, an external lecturer and a panel of our Executive members.

 

4.B.20.08Treasury activities

The main objective of the Treasury Department is to maximize results with available resources and managing risks, by complying with the limits set by our Senior Management and the guidelines issued by ourintegrated risk control unit.

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The main activities are as follows:

·      planning and managing our local and foreign currency cash flows;

·      developing and implementing our asset and liability management strategy;

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

·      calculating operational costs from both the assets and liabilities sides;

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

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

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

 

4.B.20.09Inovabra

Inovabra is the innovation ecosystem designed to support our corporate strategy, fostering innovation through collaborative work with companies, startups, technology partners, investors and mentors. The platform facilitates sharing future visions for business, accelerating the search for new solutions and materializing innovation in our Organization, with the aim of meeting the needs of our customers and ensuring the sustainability of our business in the long term. Inovabra is composed of eight complementary programs:

 

·      inovabra centers:an internal innovation program which encourages our employees to practice creativity and entrepreneurship, spreading the culture of innovation inside our Organization;

·      inovabra startups:this program is an open innovation program, intended to enable strategic partnerships between us and startups that have applicable solutions or with the possibility of adaptation for financial and non-financial services that may be offered or used by us or partner companies;

·      inovabra ventures:is a proprietary capital fund, currently with R$400 million of capital. It is managed by the Private Equity area and intends to invest in startups with technology and/or innovative business models;

·     inovabra pesquisa (research):a multidisciplinary team, with analysts and researchers who conduct an in depth study of new technologies and business models to be on the frontier of knowledge. The team constantly interacts with partners, universities and research institutes in Brazil and abroad and supports inovabra in conducting the innovation process. Responsible for conducting research on emerging technologies such as Artificial Intelligence, blockchain, IoT (internet of things) and quantum computing and their impacts on financial services and products;

·      inovabra lab:is an environment which centralizes 16 laboratories in the areas of technology, designed to operate in a model of collaborative work with large technology partners, residents in this environment. This model allows for operating efficiencies and accelerates the processes of evaluation and certification of new technologies (hardware and software), prototyping, testing, proof of concept, launches and solutions to new challenges;

·      inovabra international:the program is structured in an environment of innovation based in New York and with connections in London, monitoring the global ecosystem of innovation and entrepreneurship; and

·      inovabra habitat and digital hub platform:a building with more than 22 thousand square meters, located in the large economic innovation and cultural center of São Paulo, between Avenida Angélica and Rua da Consolação, close to Avenida Paulista, where large companies, startups, investors and mentors work collaboratively to innovate and generate business. In addition to fostering entrepreneurship in Brazil and a culture of innovation in organizations. In addition, through the digital hub platform, it is possible to select startups without geographical barriers. The entrepreneurs who are registered on the platform have access to business opportunities with us and our major partner companies.

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4.B.30Business segment

The data for these segments was compiled from reports prepared for Management to assess performance and make decisions on allocating funds for investments and other purposes. Our Management uses various data, including financial data in conformity with BR GAAP and non-financial metrics compiled on different bases. For further information on differences between the results on a consolidated basis and by segment, see “Item 5.A. Operating Results – 5.A.20.01 Results of operations for the year ended December 31, 2019 compared with the year ended December 31, 2018”.

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

 

Years Ended December 31,

R$ in thousands

2019

2018

2017

Banking

 

 

 

Interest and similar income from loans and advances(1)

66,973,129

61,418,259

64,083,962

Fees and commissions

31,135,507

30,022,769

28,566,371

Insurance and pension plans

 

 

 

Premiums retained from insurance and pension plans

77,599,270

72,476,844

76,098,164

Fees and commissions

   2,028,371

   2,169,807

   2,063,187

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

 

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

We do not break down our revenues by geographic regions within Brazil, and less than 4.0% of our revenues come from international operations. For more information on our international operations, see “4.B.30.01-02.10 International banking services”.

As of December 31, 2019, according to the sources cited in parentheses below, we were:

·      one of the leading banks in terms of savings deposits, with R$114.2 billion, accounting for 13.2% of Brazil’s total savings deposits (according to the Central Bank);

·      the leader in BNDES onlendings, with R$5.0 billion in disbursements (according to BNDES);

·      one of the leaders in automobile financing loans, with a market share of 14.2% (according to the Central Bank);

·      the leading bank in payments for over 11.4 million benefits to INSS retirees and beneficiaries, accounting for 32.1% of the total number of payments made by the INSS;

·      one of the leaders in leasing transactions in Brazil, with an outstanding amount of R$2.7 billion; through our subsidiary Bradesco Leasing S.A. Arrendamento Mercantil, or “Bradesco Leasing” (according to ABEL);

·      one of Brazil’s largest private fund and investment managers, through our subsidiary BRAM, with R$627.9 billion in assets under management (according to ANBIMA), taking into account managed portfolios;

·      one of the leaders in the third-party asset management business, with R$1.0 trillion in assets, of which R$399.3 billion are managed through our subsidiary and BEM DTVM (according to ANBIMA);

·      the leader in number of outstanding purchasing consortium quotas, through our subsidiary Bradesco Administradora de Consórcios Ltda., or “Bradesco Consórcios”, with 1,616,675 quotas in three segments, including: (i) automobiles and motorcycles, with 1,279,755 quotas; (ii) real estate, with 266,265 quotas; and (iii) trucks, with 70,655 quotas (according to the Central Bank);

·      the leader in imports and exports and one of the leaders in the consolidated primary market ranking (according to the Central Bank), additionally, leader in "foreign trade – trade finance"; and

·      the largest company operating in the Brazilian insurance market, operating in all lines of this segment, with a 24.0% market share (according to SUSEP/ANS), through Grupo Bradesco Seguros, which mainly comprises: Bradesco Seguros S.A., or “Bradesco Seguros” and its subsidiaries: (i) Bradesco Vida e Previdência S.A., or “Bradesco Vida e Previdência”; (ii) BradescoCapitalização S.A., or “Bradesco Capitalização”; (iii) Bradesco Auto/RE Companhia de Seguros S.A., or “Bradesco Auto/RE”; and (iv) Bradesco Saúde S.A., or “Bradesco Saúde”. Our total revenues were R$77.7 billion in insurance premiums, pension plan contributions and capitalization bond income.

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4.B.30.01 Banking

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

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

The following table shows the bank income statement and other selected financial data for our banking segment for the periods indicated.

Year ended December 31,

 Banking - R$ in thousands

2019

2018

2017

Revenue from financial intermediation

   113,402,430

   110,639,034

   130,015,483

Expenses from financial intermediation

(49,683,456)

(52,958,441)

(67,744,701)

Financial margin

  63,718,974

  57,680,593

  62,270,782

Allowance for loan losses

(18,891,493)

(18,319,973)

(25,210,020)

Gross income from financial intermediation

 44,827,481

  39,360,620

  37,060,762

Fee and commission income

  31,135,507

  30,022,769

  28,566,371

Personnel expenses

(23,072,600)

(18,102,452)

(19,919,896)

Other administrative expenses

(20,327,502)

(19,126,128)

(18,845,656)

Tax expenses

  (6,203,188)

  (5,660,519)

  (5,440,571)

Share of profit (loss) of unconsolidated and jointly controlled companies

 12,921

6,620

(22,657)

Other operating income / expenses

(21,082,041)

(11,943,485)

  (9,910,746)

Operating profit

   5,290,578

  14,557,425

  11,487,607

Non-operating income

  (537,428)

  (929,396)

  (729,584)

IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests

 10,431,415

  (1,134,166)

  (1,836,636)

Net Income

  15,184,565

  12,493,863

   8,921,387

Total assets

   1,264,627,391

   1,251,749,713

   1,146,536,514

Loans

   457,392,375

   411,492,655

   373,813,665

Deposits from customers

   366,227,540

   340,748,196

   262,008,445

Investment Funds and Managed Portfolios

  1,000,818

   940,538

   870,702

Other funding sources(1)

   606,477,819

   586,990,407

   602,362,784

(1) Includes securities sold under agreements to repurchase, borrowing and on-lending obligations, funds from issuance of securities and subordinated debt. For more information about our funding sources, see “Item 5.B.20 Liquidity and funding”.

 

4.B.30.01-01 Segmentation of Clients

Our client base included 72.0 million clients at the end of 2019. We have a segmented structure, for both individuals andcorporate entities, in order to offer flexibility and convenience in all areas in which we operate, ensuring we meet each client's needs. To meet the needs of the biggest number of people we have democratized access to products and services, encouraging the process of financial inclusion, access banking services, social mobility and entrepreneurship

We do not make distinctions, we supply every client with the same level of excellence and we continuously improve the way we provide services. We are aware of each client's profile and we havecontinuously improved the scale and diversification of our current model. These values extend to clients who are non-account holders, due to their significance and the potential of growth.

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Ø   Bradesco Corporate

The Corporate segment is responsible for serving business groups and focused on both large and medium-sized companies. Its offices are located in the main financial centers and with a value proposal based on physical proximity and relationship with clients, offers customized services with a global reach and counts on a highly skilled team to fulfill customers' needs through a wide portfolio of products, structured solutions and financial services.

To anticipate the solutions, it is important to strengthen the relationship with clients and to deliver a robust value proposal, Corporate is highly segmented by sectors, markets, sizes, nature of the companies, among other criteria, and these segments are combined into three large areas:

·      Large Corporate:a highly qualified team offer customized consultancy to serve clients in Brazil and worldwide;

·      Corporate:a specialized service for large companies, organized by market sector and physical structure in various cities in Brazil and abroad; and

·      Corporate One:focused mainly on the middle market it also has a team focused on providing services to large companies. This area has a national presence in Brazil and a regionalized structure, composed of 70 Units located in the main cities and capitals distributed in 15 regional sectors and another 98 Corporate Spaces throughout Brazil.

 

Ø   Institutional

The Institutional Segment is responsible for serving the Resource Managers, Pension Funds and Stock Brokers, offering Prime Brokerage services, which is centered on a team of professionals specialized in providing secure and efficient access to financial products and solutions to meet the needs of institutional customers.

 

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Ø   Bradesco Private Bank

Bradesco Private Bank offers exclusivity and works side by side with clients to maintain and manage family wealth across generations.

Designing innovative solutions to meet the ambitions and individual needs of each of our clients, we have a complete structure of Wealth Management involving liquid and illiquid assets, the best tools and investment structures to ensure the longevity of the family’s estate.

Clients have access to a complete platform, open and varied investments, local and international, exclusive funds, always counting on an experienced team of managers, economists and advisors, in addition to all of our business solutions including, among others, Banco de Investimentos BBI, Credit, Insurance, Broker, and Pension Plans.

Bradesco Private Bank currently has 14 offices located in: São Paulo, Rio de Janeiro, Belo Horizonte, Blumenau, Campinas, Cuiabá, Curitiba, Fortaleza, Goiânia, Manaus, Porto Alegre, Recife, Ribeirão Preto and Salvador, thus ensuring a nation-wide presence, in addition to the support of the units abroad located in Cayman, New York, Luxembourg, London and Miami.

 

Ø   Bradesco Varejo

The Bradesco Varejo service network includes 4,185 branches, 3,997 service centers, 884 electronic service centers and 39,100 Bradesco Expresso banking correspondent units, in addition to thousands of ATMs.

Bradesco Varejo has a prominent role in the use of banking services by Brazilians.  By being present in all municipalities, including some municipalities which are difficult to access, we are frequently the first interaction a client has with a financial institution.  In this way we contribute to the development of individuals and the communities where they live.

 

Ø   Bradesco Prime

Bradesco Prime operates in the segment of high-income individuals and is present in all Brazilian capitals. It has a service network of 254 exclusive branches and 1,007 “Bradesco Prime Spaces”. The clients count on a full relationship model that fits the profile and needs of each client, providing effective financial planning, with customized solutions, evaluated by qualified professionals, to assist our clients with their asset management.

Using Bradesco Prime the clients have the following benefits:

·      Program of benefits: exemption of up to 100% on the value of the Tariff Basket and exemption on annuity of our credit cards, in accordance with the volume of investments and/or concentration of the client’s spending, plus up to 12 days without interest in the Special Overdraft in accordance with the volume of investments;

·      Viva|Prime program: provides Bradesco Prime clients with unique experiences in the form of benefits and discounts in stores, restaurants and partner brands;

·      Recommended investment portfolios: recommended based on the analysis of the investor’s profile (API) that seeks to diversify the best ratio between risk and return;

·      Capillarity: wide network of branches and Bradesco Prime Spaces throughout the country;

·      Relationship manager: qualified professionals who support the client in managing their resources, considering their needs and moment of life;

·      Exclusive Spaces in whole country: network of exclusive branches and “Bradesco Prime Spaces” offering convenience and total privacy so clients can tend to their business affairs; and

·      PIC - Prime International Center:remote service for foreign clients in Brazil.

Bradesco Prime has been, throughout its existence, investing in technology, in the improvement of therelationship with clients and in the training of its professionals and one of its main assets is to provide the best experience to its clients. It established a prominent position in the Brazilian market of banking services for high-income clients and has consolidated its position as one of the largest banks in the segment.

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4.B. Business Overview

Form 20-F

 

 

 

Ø   Non-Account Holders

In 2018, we created an area dedicated to strengthening the relationship with individual and legal entity clients who used at least one of our products. By recognizing the client's profile and portfolio combination, we seek to provide financial products with personalized offers through both physical and digital channels.

The purpose of the area is to coordinate offers and approaches, as well as facilitate the access to financial products, creating new channels and experiences supported by innovation in processes and technology.

In 2019, we focused on the adequacy of proprietary channels of the bank to sell digital products to non-account holders, and we launched the sales portal in November 2019.

 

4B.30.01-02 Products and banking services

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

 

 

4.B.30.01-02.01 Deposit accounts

We offer a variety of deposit accounts to our customers, including:

·       checking accounts, such as:

Conta Fácil(Easy Account) – a checking account and a savings account under the same bank account number using the same card, for individuals andcorporate entities;

Click Conta(Click Account)– checking accounts for children and young people from 0 to 17 years of age, with an exclusive website, debit card, automatic pocket money service and free online courses and exclusive partnerships, among other benefits; and

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

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

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

As of December 31, 2019, we had 30.1 million checking account holders, 28.4 million of which were of individuals and 1.7 million of which were ofcorporate entities. As of the same date, we had 63.9 million savings accounts.

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

 

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Form 20-F

 
 
 

 

December 31,

 R$ in thousands, except %

2019

2018

2017

Deposits from customers

 

 

 

 

 

 

Demand deposits

   37,283,988

10.2%

   34,178,563

10.0%

   33,058,324

12.6%

Reais 

   35,982,521

9.8%

   32,605,941

9.6%

   30,392,388

11.6%

Foreign currency

1,301,467

0.4%

1,572,622

0.5%

2,665,936

1.0%

Savings deposits

114,177,799

31.2%

111,170,912

32.6%

103,332,697

39.4%

Reais 

114,177,799

31.2%

111,170,912

32.6%

103,332,697

39.4%

Time deposits

214,765,753

58.6%

195,398,721

57.3%

125,617,424

47.9%

Reais 

198,077,456

54.1%

181,698,519

53.3%

115,684,855

44.2%

Foreign currency

   16,688,297

4.6%

   13,700,202

4.0%

9,932,569

3.8%

Total

366,227,540

100.0%

340,748,196

100.0%

262,008,445

100.0%

 

 

4.B.30.01-02.02 Loans and advances to customers

The following table shows loans and advances to customers broken down by type of product on the dates indicated:

December 31,

% of total portfolio

 R$ in thousands

2019

2019

2018

2017

Companies

49.6%

226,976,385

218,944,963

199,940,296

Financing and On-lending

22.8%

104,138,378

105,672,794

101,449,452

Financing and export

10.4%

   47,484,556

   47,626,728

   38,272,982

Housing loans

3.7%

   16,822,185

   22,415,363

   26,539,317

Onlending BNDES/Finame

3.6%

   16,643,236

   18,947,583

   24,263,448

Vehicle loans

2.6%

   12,040,355

7,828,417

4,901,102

Import

1.8%

8,398,252

6,850,465

5,318,043

Leases

0.6%

2,749,794

2,004,238

2,154,560

Borrowings

24.3%

111,327,898

102,614,435

   87,873,248

Working capital

12.7%

   57,887,358

   55,739,546

   52,409,785

Rural loans

1.2%

5,525,886

5,459,694

5,683,215

Other

10.5%

   47,914,654

   41,415,195

   29,780,248

Operations with limits(1)

2.5%

   11,510,109

   10,657,734

   10,617,596

Credit card

0.9%

4,000,712

3,105,494

2,708,517

Overdraft for corporates/ Overdraft for individuals

1.6%

7,509,397

7,552,240

7,909,079

Individuals

50.4%

230,415,990

192,547,692

173,873,369

Financing and On-lending

17.2%

   78,615,264

   67,861,394

   60,302,622

Housing loans

9.7%

   44,175,642

   38,179,023

   33,338,566

Vehicle loans

6.2%

   28,350,727

   23,246,610

   20,354,966

Onlending BNDES/Finame

1.3%

5,872,331

6,222,532

6,392,218

Other

0.0%

216,564

213,229

216,872

Borrowings

23.0%

105,427,418

   83,968,350

   74,382,441

Payroll-deductible loans

13.8%

   63,144,951

   51,284,334

   43,968,511

Personal credit

5.3%

   24,338,888

   16,858,123

   14,184,488

Rural loans

1.9%

8,543,433

7,894,249

7,838,314

Other

2.1%

9,400,146

7,931,644

8,391,128

Operations with limits(1)

10.1%

   46,373,308

   40,717,948

   39,188,306

Credit card

9.0%

   41,353,388

   36,447,880

   34,860,468

Overdraft for corporates/ Overdraft for individuals

1.1%

5,019,920

4,270,068

4,327,838

Total portfolio

100.0%

457,392,375

411,492,655

373,813,665

(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.

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

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4.B. Business Overview

Form 20-F

 

 

December 31,

2019

2018

2017

Borrower size

 

 

 

Largest borrower

1.9%

2.2%

2.5%

10 largest borrowers

7.7%

9.1%

8.2%

20 largest borrowers

11.3%

12.9%

12.2%

50 largest borrowers

16.7%

18.6%

17.8%

100 largest borrowers

20.1%

22.9%

22.2%

 

Ø   Financing and On-lending

 

·        Import and export financing

Our Brazilian foreign-trade related business consists of providing financial services to our clients in their export and import activities.

In import financing/refinancing, we directly transfer funds in foreign currency to foreign exporters, fixing the payment in local currency for Brazilian importers. In export finance, exporters obtain advances in reais on closing an export forex contract for future receipt of foreign currency on the contract due date. Export finance arrangements prior to shipment of goods/performance of services are known locally as Advances on Exchange Contracts or "ACCs", and the sums advanced are used to manufacture goods or provide services for export. If advances are paid after goods/performance of services have been delivered, they are referred to as Advances on Export Contracts, or "ACEs".

There are other forms of export financing, such as Export Prepayments, onlendings from BNDES-EXIM funds, Export Credit Notes and Bills (referred to locally as "NCEs" and "CCEs"), and Export Financing Program with rate equalization – "PROEX".

Our foreign trade portfolio is funded primarily by credit lines from correspondent banks. We maintain relations with various American, European, Asian and Latin American financial institutions for this purpose, using our network of approximately 1,176 correspondent banks abroad, 43 of which extended credit/guarantee lines as of December 31, 2019.

 

·        Housing loans

As of December 31, 2019, we had 219.3 thousand active financing units.

Housing loans are provided for: (i) the acquisition of residential and commercial real estate, and urban plots; and (ii) construction of residential and commercial developments.

Financings for the acquisition of residential real estate have a maximum term of up to 30 years and annual interest rates of 7.3% to 12.0% p.a., plus TR, while commercial real estate financings have a maximum term of up to ten years and annual interest rates of 13.0% to 15.0% p.a. plus TR.

Financings for construction, also known as the Businessman Plan, have a construction term of up to 36 months and interest rate of 12.0% to 16.0%per annum, plus TR, and a six-month grace period for the realization of transfers to borrowers.

Central Bank regulations require us to provide at least 65.0% of the balance of savings accounts in the form of housing loans. The remaining funds are to be used for financings and other operations permitted under the terms of the legislation in force.

 

·        Onlending BNDES /Finame

The BNDES is the main instrument of the Federal Government to support entrepreneurs of all sizes, including individuals, in carrying out their plans for modernization, expansion and implementation of new business, with the potential of generating jobs, income and social inclusion in Brazil. Its portfolio has certainproducts and programs to provide government-funded long-term loans with different interest rates, focusing on economic development.

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Form 20-F

 
 
 

We are one of the structuring agents of BNDES funds, to borrowers in several sectors of the economy. We determine the margin of return on the loans based on the borrowers' credit. Although we bear the risk for these BNDES and Finame onlending transactions, these transactions are always secured. According to BNDES, in 2019, we disbursed R$5.0 billion, 90.0% of which were loaned to micro, small and medium-sized companies.

 

·        Vehicle loans

We acting through partnerships, in the consumer financing for the purchase of new and used vehicles for individuals and corporations in the chain, which comprises assembler, dealers and consumers. In addition to offering theses services through our extensive network of branches, Bradesco Financiamentos also offers loans and leasing for the acquisition of light vehicles, motorcycles, trucks, buses, machinery and equipment.

 

·        Leases

As of December 31, 2019, we had 6,494 outstanding leasing agreements. According to ABEL, our leasing companies were among the sector leaders, with a 23.0% market share in Brazil, of an available market of R$12.4 billion on the same date.

Most of our leasing are financial, primarily involving the leasing of trucks, cranes, aircraft, ships and heavy machinery. As of December 31, 2019, 36.6% of our outstanding leasing transactions were for vehicles (car, bus, micro-buses, trucks). We conduct our leasing transactions through our primary leasing subsidiary, Bradesco Leasing and also through Bradesco Financiamentos.

 

Ø   Borrowings

 

  • Working Capital

 

Line of credit destined to companies with the aim of covering expenses or investments inherent in the company's working capital, such as: payment of 13th salary, stock renewal, training and other.

 

·        Personal Loans / Payroll-Deductible Loans

 

They are loan operations with a pre-approved limit to meet needs without a specific purpose. It also includes payroll-deductible loans to Social Security National Service (INSS) pension plan beneficiaries and retirees, to public servants and to private the private sector.

The average term of these operations is 52 months and interest rates range from 1.6% to 3.2%p.a., as of December 31, 2019.

 

·        Rural loans

The provision of loans and financing to the agribusiness sector is carried out with resources:

o   From the demand deposit, where there is a requirement bytheCentral Bank for the investment of 30%of the Value Subject to Collection (“VSR”), which is called RO – Obligatory Resources, with a portfolio of R$8.9 billion on December 31, 2019, with maximum rates from 3.0%p.a. to 8.0%p.a. as the rule of investment of the MCR (Manual of Rural Credit), whereby the average rate of the portfolio is 6.9%p.a.;

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4.B. Business Overview

Form 20-F

 

 

o   From the Bank’s Treasury for the operations, with a portfolio of R$5.2 billion on December 31, 2019 and the average rate of the portfolio of 8.6%p.a.;

o   BNDES onlending, through lines directed to the sector of Agribusiness, destined for investments in equipment, machinery, infrastructure, recovery of pasture, etc., with a term of up to 10 years and an average rate of 7.6%p.a.

The majority of loans have half-yearly or annual payments with payment terms matched to periods of the harvest cycle. The guarantees are usually aligned with the property/mortgage and machines, the latter being valid for the financing of goods.

 

Ø   Operations with limits

 

·        Credit card

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

We earn revenues from our credit card operations through:

o

fees on purchases carried out in commercial establishments;

o

issuance fees and annual fees;

o

interest on credit card balances;

o

interest and fees on cash withdrawals through ATMs; and

o

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

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

o

cards issued for use restricted to Brazil;

o

credit cards accepted nationwide and internationally;

o

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

o

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

o

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

o

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

o

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

We hold 50.01% of the shares of Elopar, an investment holding company which investments include Alelo (benefit cards, prepaid and money card), Livelo (coalition loyalty program), as well as participations in Elo Serviços (brand) and Banco CBSS (credit card issuance and other financial products). We hold 30.06% of the shares of Cielo S.A.

We also have a card business unit abroad, Bradescard Mexico, one of the highlights of which is a partnership with C&A.

As of December 31, 2019, we had several partners with whom we offered co-branded, affinity and private label/hybrid credit cards. That has allowed us to integrate our relationships with our customers andoffer our credit card customers banking products, such as financing and insurance.

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Form 20-F

 
 
 

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

 

 

In millions

2019

2018

2017

Volume traded - R$

205,845.0

189,155.0

176,893.5

Number of transactions

  2,262.9

  2,104.8

  1,991.0

 

·        Overdraft for individuals

The overdraft limit is a line of credit available on current accounts with automatic renewal for emergency situations when there is no available balance in the account. For corporate customers, we offer a business check to meet the emergency needs of companies.

The interest rates vary from 2.8% to 14.2% per month, as of December 31, 2019.

 

·        Overdraft for companies

The overdraft for companies is a revolving credit limit for corporate entities to meet the emergency needs of a customer. The limit of the guaranteed account allows the negotiation of more attractive rates. However, in most cases, it requires a guarantee which can be; a surety, disposal of assets, guarantees of contracts or anticipation of receivables, and investments, among others.

 

·        Emergency Employment Maintenance Program

In April 2020 the president of the Republic amended Provisional Measure No. 944/20, instituting the Emergency Employment Maintenance Program, for the implementation of loans for entrepreneurs, corporations and cooperatives, with the exclusion of loan companies, to finance the payment of their payroll to their employees. Provisional Measure No. 944/20 establishes the requirements for the lines of credit to be granted as part of the framework of the Emergency Program, which will cover the entire payroll of the contractor, for a period of two months, limited to the equivalent of up to two times the minimum salary per employee. The provisional measure also establishes the requirements that financial institutions must observe when lending under the program, which has (i) an interest rate of 3.75% per annum on the amount granted; (ii) a period of 36 months for the payment; and (iii) a grace period of six months to start paying, with capitalization of interest during this period.

As a result of the provisional measure, the CMN issued Resolution No. 4,800, which provides for guidelines, limits and conditions for participation in loans to finance as part of the framework of the Emergency Program. The financial institutions that participate in the Emergency Program will fund the payroll, but their payroll must be processed by the financial institution itself, and should observe the annual gross revenues of the entity financed, in addition to conditions relating to amounts, maturity and interest.

 

Ø   Creditpolicy

Our credit policy is focused on:

o   ensuring the safety, quality, liquidity and diversification of asset allocation;

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4.B. Business Overview

Form 20-F

 

 

o   pursuing flexibility and profitability in business; and

o   minimizing risks inherent to loans and advances.

Our credit policy defines criteria for lending and setting operational limits. Credit decisions are made at the branch level and, if necessary, higher levels of authority including our Board of Directors depending on the rules in our internal policy. In reviewing loan applications, ourDiretoria Executiva also approves the models of assessment and credit processes used by our branches and departments for each type of loan.

Our transactions are diversified and target individuals and companies that show ability to pay and stay in good standing. In all cases, we aim to have them secured by appropriate collateral for risks involved, from the point of view of uses of funds and repayment periods, as well as risk ratings. The Central Bank's risk rating system has nine categories ranging from "excellent" to "very poor". In line with our commitment to the ongoing development of our methodologies, the credit risk rating for our clients/economic groups is based on a range of 18 levels, of which 14 represent accrual loans. This ensures greater adherence to the requirements set forth in the Basel Accords. For more information, see "Item 4.B. Business Overview – 4.B.70 Regulation and Supervision – 4.B.70.02 Banking Regulations – 4.B.70.02-11 Treatment of Loans and Advances".

The lending limits set for our branches reflect size and collateral provided for loans. However, branches have no authorization to approve an application for credit from any borrower who:

o   is rated less than “acceptable” under our internal credit risk classification system (score and rating);

o   has an outdated record; and

o   has any relevant credit restrictions.

 

We have credit limits for each type of loan and we pre-approve credit limits for our individual andcorporate entities and presently extend credits to the public sector only under very limited circumstances. In all cases, funds are only granted once the appropriate body has approved the credit line.

We review the credit limits of our large corporate customers every 180 days. Credits extended to other customers, including individuals, small and mid-sized corporations, are reviewed every 90 days.

Our maximum exposure per client (e.g. individuals, companies or other economic groups) is determined by client rating and the aggregate maximum exposure is limited to 15.0% of ourReference Equity.

Any cases in which the maximum level of exposure per client exceeds the thresholds as set out in the table below or in which the total exposure equals or exceeds R$3.0 billion are required to be submitted to the Board of Directors for approval.

 

Client Rating

As a % of Shareholders´ Equity

AA1

15

AA2

12.5

AA3

11

A1

9.5

A2

8.5

A3

7

B1

5.5

B2

4.5

B3

3

C1

1.5

C2

0.9

C3

0.7

C4

0.5

D

0.4

 

Our credit policy is continuously developing and as part of our risk management process, we continue to improve our credit granting procedures, including procedures to gather data on borrowers, calculate potential losses and assess applicable classifications. Additionally, we assess our institutional credit risk management in view of the recommendations by the Basel Accords, including:

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o   restructuring our methodology to calculate possible losses;

o   identifying and implementing changes in our reporting processes to improve our loan portfolio management;

o   restructuring our information control structure; and

o   assessing the organizational structure of our loan assessment practices, including analyzing the demand for technology and addressing new issues.

 

·        Loans and advances to individualcustomers

For individual customers, depending on the proposed collateral, the size of the branch and suitable credit parameters, branches may authorize loans of up to R$50,000. If the value and type of collateral are not within the limits established for approval at branch level, an application is submitted to the Credit Department and, if necessary, higher levels of authority. The following table shows individual loan limits for approval by branch managers, depending on the value and type of collateral offered:

 

Total Risk Amount

R$ in thousands

Loan with no collateral

Loan with collateral

Decision‑making authority

 

 

Manager of very small branch(1)

up to 5

up to 10

Manager of small branch(2)

up to 10

up to 20

Manager of average branch(3)

up to 15

up to 30

Manager of large branch(4)

up to 20

up to 50

(1) Branch with total deposits equal to or below R$1,999,999;

(2) Branch with total deposits equal to or between R$2,000,000 and R$5,999,999;

(3) Branch with total deposits equal to or between R$6,000,000 and R$14,999,999; and

(4) Branch with total deposits equal to or above R$15,000,000.

 

We use a specialized Credit Scoring evaluation system to analyze these loans, allowing us to build a level of flexibility and accountability, besides standardizing the procedures in the process of analyzing and deferring loans. All models are constantly monitored and revised whenever necessary. Our Credit Department has a dedicated team developing models and working on the continuous improvement of these tools.

We provide our branches with tools that allow them to analyze loans and advances for individual clients in a rapid, efficient and standardized manner and to produce the corresponding loan contracts automatically. With these tools, our branches can respond quickly to clients, keep costs low, and control the risks inherent to consumer credit in the Brazilian market.

The following table shows limits established for approval of loans to individuals outside the discretion of our branches:

Total Risk Amount

R$ in thousands

Decision‑making authority

 

Credit department

up to 20,000

Credit director

up to 25,000

Decision Credit Meeting

up to 40,000

Executive credit committee (Daily Meeting)

up to 150,000

Executive credit committee (Plenary Meeting)

up to 3,000,000

Board of Directors

over 3,000,000

 

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4.B. Business Overview

Form 20-F

 

 

·        Loans and advances to corporations

For corporate customers, depending on the collateral proposed, the size of the branch and suitability in terms of credit parameters, loans of up to R$400,000.00 may be approved at the branch level. If value and type of collateral are not within the limits established for approval at the branch level, an application is submitted to the Credit Department and, if necessary, higher levels of authority.

The following table shows limits within which branch managers may approve business loans, depending on the amount and type of credit support offered:

 

Total Risk Amount

R$ in thousands

Loan with no collateral

Loan with collateral

Decision‑making authority

 

 

Manager of very small branch(1)

up to 10

up to 60

Manager of small branch(2)

up to 20

up to 120

Manager of average branch(3)

up to 30

up to 240

Manager of large branch(4)

up to 50

up to 400

Manager of Bradesco Empresas branch(5)

up to 100

up to 400

(1) Branch with total deposits equal to or below R$1,999,999;

(2) Branch with total deposits equal to or between R$2,000,000 and R$5,999,999;

(3) Branch with total deposits equal to or between R$6,000,000 and R$14,999,999;

(4) Branch with total deposits equal to or above R$15,000,000; and

(5) Branch with exclusive middle market companies.

 

The following table shows limits established for approval of loans to corporate customers outside the discretion of our branches:

 

Total Risk Amount

R$ in thousands

Decision‑making authority

 

Credit department

up to 20,000

Credit director

up to 25,000

Decision Credit Meeting

up to 40,000

Executive credit committee (Daily Meeting)

up to 150,000

Executive credit committee (Plenary Meeting)

up to 3,000,000

Board of Directors

over 3,000,000

 

In order to serve our customers' needs as soon as possible and securely, the Credit Department uses segmented analyses with different methodologies and instruments for credit analysis in each segment, in particular:

o

in the "Varejo", "Prime" and "Private – Individuals" segments, we consider the individual's reputation, credit worthiness, profession, monthly income, assets (goods and real property, any liabilities or interests in companies), the bank indebtedness and history of their relationship with us, checking loans and advances for repayment dates and rates as well as the guarantees involved;

o

in the"VarejoEmpresas e Negócios"segment, in addition to the points mentioned above, we focus on the owners of the relevant company, as well as considering the length of time in business and monthly revenues;

o

in the "Corporate One", "Corporate" and "Large Corporate" segments, management capability, the company/group's positioning in the market, its size, the economic development, cash flow capability, and business perspectives, our analysis always includes the applicant, its parent company/subsidiaries, and the type of business; and

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o

our analysis also extends to social and environmental risks for projects that require customers to show compliance with social and environmental regulations and the Equator Principles, consisting of socio-environmental criteria required as conditions for loans, which was introduced in 2002 by the International Finance Corporation ("IFC"), the World Bank's financial arm.

 

 

·        Collection and Loan Recovery

We have a department that focuses on the collection and recovery of loans, seeking to reduce the rates of delinquency and losses, as well as to maintain our relationship with clients. By using our own statistical models, updated periodically, which separate debtors according to levels of risk and likelihood of payment, our collection strategies are more assertive and efficient.

Collection occurs sequentially through our network of branches, call centers, digital channels, and friendly and judicial collection offices. In addition, specialized regional teams tailor their operations and submit significant cases to the collective authority limits in the Commission or Executive Committee for Collection and Credit Recovery, respecting the governance of the established authority level.

 

 

4.B.30.01-02.03CashManagement Solutions

 

Ø

Management of accounts payable and receivable–In order to meet the cash management needs of our customers in both public and private sectors, we offera broad portfolio of high quality products and services of accounts payable and receivable, supported by our network of branches, bank correspondents and electronic channels and mobile, all of which aim to improve speed, stability and security for customer data and transactions. Our solutions include: (i) receipt and payment services; and (ii) resource management, enabling our customers to pay suppliers, salaries, and taxes and other levies to governmental or public entities.

 

These solutions, which can also be customized, facilitate our customers' day-to-day tasks and help to generate more business. We also earn revenues from fees and investments related to collection, custody of checks, credit order, collection and payment processing services, and by funds in transit received up to its availability to the related recipients.

Ø

Solutions for receipts and payments– In 2019, we settled 1.2 billion invoices through the services ofCobrançaBradesco and 590.2 million of receipts by the tax collection systems and utility bills (such as water, electricity, telephone and gas), checks custody service, identified deposits and credit orders. The corporate systems processed 1.2 billion documents related to payments to suppliers, salaries and taxes.

Ø

Global Cash Management –Global Cash Management aims at structuring solutions to foreign companies that want to operate in the Brazilian market and to Brazilian companies making business in the international market. By way of customized solutions, partnerships with international banks and access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, our exclusive customer service team offer customized products and services to identity solutions for companies.

Ø

Niche Markets– We operate in various niche markets, such as franchise business, Individual Micro Entrepreneur (MEI), education, health, condominiums, country clubs, transportation, religion,andamong others, where our clients have the support of a specialized team with the mission of structuring custom solutions that add value to their business.

 

As an example, the franchising niche has a team of franchising specialists that, through their relationship with franchising companies, identify opportunities for financing and providing services to all franchisees and their employees. The partnership with the franchise networks occurs throughstructured commercial activities in synergy with the managing departments, commercial segments, and affiliated companies. The focus on the peculiarities of this sector creates a competitive and sustainable position by structuring appropriate solutions and, in particular, through the strategy of providing differentiated and specialized service. We have approximately 485 agreements in place with franchising companies, generating numerous opportunities to open new current accounts and leveraging business with the respective franchisees.

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Form 20-F

 

 

Another important feature in this area is the support we provide towards the development of Local Production Arrangements (“APLs”), by providing service to businesses and assistance to these clients. Participating in an APL strengthens the companies, because together they can form an articulated and important group for local development, allowing for greater competitive and sustainable advantages for micro and small businesses. Currently, we service 423 APLs throughout the country.

Micro-entrepreneurs use the MEI Portal in addition to products and services that fit their business, including free services provided by partners to meet their day to day needs. In 2019, the Portal received a global award from the Gartner Eye on Innovation as an Open Banking Project

 

 

4.B.30.01-02.04 Public authority solutions

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

Our exclusive website developed for our customers offers corporate solutions for federal, state and municipal governments for payments, receipts, human resources and treasury services. In addition, the website also features exclusive facilities for public employees and the military, showing all of our products and services for our customers.

Our commercial relationships with such public authorities are developed by specialized business managers located in distribution platforms throughout the country, which can be identified on our website. We have nine specialized platforms to assist governments, capitals, courts, class councils, chambers, prosecutors, public defenders and 100 largest municipalities according to the Brazilian GDP, in addition to 34 Platforms that operate in the Retail sector providing services to the City Halls and other Authorities.

In 2019, we took part and were successful in payroll bidding processes sponsored by the Brazilian government. Furthermore, according to INSS, we continue to be leaders in payments of INSS benefits, with more than 11.4 million retirees and pensioners.

 

 

4.B.30.01-02.05Management and administration of third-party funds

BRAM manages third-party funds through:

·        mutual funds;

·        managed portfolios;

·        exclusive funds; and

·        receivable funds (FIDCs –Fundos de Investimento em Direitos Creditórios), FIIs (Real Estate Investment Funds)and ETFs (Exchange Traded Funds).

 

Ø

Management of funds and portfolios– On December 31, 2019, BRAM managed 1,282 funds and 490 portfolios, providing services to 3.1 million investors. Among its biggest customers are all the main segments of Bradesco, like Prime, Corporate One, Corporate, Large Corporate, Private and Varejo (Retail) (for more information on our segmentation, see “4.B.30.01-01 Segmentation of Clients”) and Grupo Bradesco Seguros, in addition to institutional investors in Brazil and abroad. These funds comprise a wide group of fixed-income, non-fixed income, investments abroad and multimarket funds, among others.

 

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

Equity under Management by Typeof Investment
 
as of December 31

R$ in thousands

2019

2018

Investment Funds

 

 

Fixed income

492,730,111

548,781,839

Variable income

   18,592,866

  9,498,103

Multimarket

   49,102,026

   48,565,323

Total

560,425,003

606,845,265

Managed Portfolios

 

 

Fixed income

   57,832,718

   53,121,126

Variable income

  9,631,860

  7,591,523

Total

   67,464,578

   60,712,649

Overall Total

627,889,581

667,557,914

 

As of December 31,

2019

2018

Number

Quotaholders

Number

Quotaholders

Investment Funds

  1,282

  3,137,303

  1,230

  3,468,304

Managed Portfolios

  490

  1,079

  300

  1,138

Overall Total

  1,772

  3,138,382

  1,530

  3,469,442

 

Ø

Administration of third-party funds–On December 31, 2019, BEM and Bradesco administered 3,308 funds, 490 portfolios and 66 investment clubs, providing services to 3.2 million investors.

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

Equity under Administration byType of Investment
 
as of December 31

R$ in thousands

2019

2018

Investment Funds

 

 

Fixed income

724,190,789

745,188,895

Variable income

   86,296,909

   51,958,073

Third party share funds

   98,960,275

   59,262,618

Total

909,447,973

856,409,587

Investment Clubs and Managed Portfolios

 

 

Fixed income

   57,832,718

   53,121,193

Variable income

  9,631,860

  7,591,523

Third party share funds

   23,905,685

   23,415,776

Total

   91,370,263

   84,128,491

Overall Total

1,000,818,236

940,538,078

 

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Form 20-F

 

 

As of December 31,

2019

2018

Number

Quotaholders

Number

Quotaholders

Investment Funds

  3,308

  3,182,488

  3,043

  3,510,515

Managed Portfolios

  490

-  

  300

-  

Investment Clubs

   66

  589

   90

  841

Overall Total

  3,864

  3,183,077

  3,433

  3,511,356

 

4.B.30.01-02.06Services related to capital markets and investment banking activities

As our investment bank, "Bradesco BBI" is responsible for (i) originating and executing project financing operations; (ii) originating and executing mergers and acquisitions; (iii) originating, structuring, syndicating and distributing fixed income transactions of securities in Brazil and abroad; and (iv) originating, structuring, syndicating and distributing issuances of securities of equity in Brazil and abroad.

In 2019, Bradesco BBI received awards in the following categories: "Best Investment Bank in Brazil" by Global Finance, "Most Innovative Investment Bank from Latin America" by The Banker and "LatAm M&A Firm of the Year and Brazil M&A Firm of the Year" by Global M&A Network.

In 2019, Bradesco BBI advised customers in a total of 223 operations across a range of investment banking products, totaling approximately R$236.6 billion.

 

Ø

Mergers and acquisitionsBradesco BBI provides advisory services in merger and acquisition and corporate sale transactions, including the sale of companies and assets, private placements, creation of joint ventures, financial and corporate restructuring, and privatizations. In 2019, Bradesco BBI advised on 25 disclosed transactions that amounted to R$23 billion.

 

Equity –Bradesco BBI coordinates public offerings of shares in national and international markets. In 2019, Bradesco BBI coordinated 23 stock market operations with bids totalling over R$44.9 billion.

Ø

Fixed income –Bradesco BBI coordinates public offerings of securities of fixed income in local and international capital markets and international debt. In 2019, Bradesco BBI coordinated a total of 175 transaction – totaling US$16.5 billion in the international capital markets and R$50.3 billion in the local capital market. We can also highlight in fixed income:

 

·

Project financeBradesco BBI acts as advisor and structuring agent in the areas of “Project” and “Corporate Finance”, seeking to optimize financing solutions for projects across various industries through both credit and capital markets operations. In 2019, Bradesco BBI successfully participated in the launch of 50 projects, totalling R$13.4 billion in investments.

·

Structured operationsBradesco BBI structures customized financial solutions for its customers in terms of their needs such as: investments, acquisitions, corporate reorganization, share repurchase, improved financial ratios, capital structure streamlining, and assets and risk segregation, by offering a number of funding tools to companies. Additionally, Bradesco BBI has a strong presence in the acquisition finance segment.

 

4.B.30.01-02.07 Complete Investment Platform

We operate a complete investment platform with a value proposition supported by three pillars: broad portfolio of products, investment portfolios and specialized consultancy, whose role is to generate value to the

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client through a complete offer of products and investment solutions, as well as meet the needs of our investor clients, account holders and non-account holders, according to their age, equity and profile, through different service channels.

The investment management platform, in addition to using the services of the branch network managers, has a specialist team providing advice on the demands of banking products, investment funds, capital market products, broker and private pension. The clients also benefit from suggested portfolios, that combine a diversity of financial products and are established monthly, based on national and international market perspectives. For more information on pension products, see “Item 4.B. Business Overview – 4.B.30.02 Insurance, pension plans and capitalization bonds”.

 

4.B.30.01-02.08 Intermediation and trading services

 

Ø    Ágora Investimentos

 

Bradesco’s Investment House Ágora CTVM S/A or “Ágora Investimentos” offers a broad portfolio of products, with investments selected for each investor’s profile and stage of life. With a specialized board of trustees who assist with the selection of the best products and investments from a list of more than 200 products, including variable income, futures markets, Direct Treasury (Tesouro Direto), COE, funds, public and private securities of fixed income, private pension and recommended portfolios.  They also offer specialized advice and recommend customized portfolios, exclusive content on the market and modern digital, secure platforms.

Ágora Investimentos has a full range of services in investment analysis with coverage of the main sectors and companies of the Brazilian market offering exclusive daily content and recommendations to customers.

In 2019, Ágora Investimentos took over the retail operations for individual and non-institutional legal entity clients, with R$43.5 billion in assets under custody and was classified as the third in the ranking of custody of individuals of B3.

Through modern trading platforms, either directly through the Website or the Ágora App, via Bradesco Internet Banking or Bradesco Mobile, the investor has a complete list of products available, in which the client can negotiate, obtain information and check their position anywhere. If they still need advice, they can count on a team of specialists who will find the most appropriate investment according to the profile and purpose of each client.

Ágora Investimentos was awarded by B3, within the Operational Qualifying Program (“PQO”), three excellence seals (Carrying Broker, Execution Broker and Retail Broker), indicating the high quality of the operational services rendered the market and customers investors.  Ágora Investimentos also has the seal Certifies propitiating safety and transparency in the investments registered in B3.

 

Ø   Bradesco Corretora

 

With the centralization of retail operations in Ágora Investimentos, Bradesco S.A. CTVM, or “Bradesco Corretora” now provides services exclusively to the institutional segment, offering a full service of investment analysis which covers the main industries and companies in the Brazilian market, with a team composed of 36 sector specialists who fairly disclose their opinions to the customers by way of follow-up reports and instruction guides, with a wide range of projections and comparison multiples.  Bradesco Corretora also has a team of its own economists dedicated to the customers’ specific demands, focused on the capital market.  Over 400 reports, in English and Portuguese, are forwarded on a monthly basis to the most important investors domiciled in Brazil, the United States, Europe and Asia.

Bradesco S.A. CTVM, or “Bradesco Corretora”, operates in the financial market, and has as its objective the mediation of the purchase and sale of shares, commodities futures contracts, financial assets, indexes, options, share rental, Swaps and forward contracts, in the primary and secondary market,negotiations in B3 and in the organized over-the-counter market, which are tailored to the needs of large corporates and institutional investors.

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Form 20-F

 

 

In 2019, Bradesco Corretora traded R$490.4 billion in the B3 equities market and ranked sixthin Brazil in terms of total trading volume.

In addition, in the same period, Bradesco Corretora traded 56.7 million futures, forwards, swaps and options totaling R$6.7 trillion on the B3.  In 2019, Bradesco Corretora ranked sixteenth in the Brazilian market, in relation to the number of futures contracts, terms, swaps and options executed.

Bradesco Corretora offered its clients the ability to trade securities on the Internet through its “Home Broker” service.  In 2019, “Home Broker” trading totaled R$19 billion.

Bradesco Corretora was awarded by B3, within the Operational Qualifying Program (“PQO”), five excellence seals (Agro Broker, Carrying Broker, Execution Broker, Retail Broker and Nonresident Investor Broker), indicating the high quality of its future market transactions.  Bradesco Corretora is also certified by CETIP (Clearing House for the Custody and Financial Settlement of Securities, currently “B3”).

 

4.B.30.01-02.09Capital market solutions

In 2019, we were one of the main providers of capital markets services and we maintained our leadership position in the domestic and global market according to the ANBIMA’s ranking of custody of assets.

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

We have Quality Management System ISO 9001:2015 certifications and GoodPriv@cy certifications. We also hold an ISAE 3402 (International Standard on Assurance Engagements) certification, which comprises assurance reports on controls at a service organization under international standards. These certifications expand our structures of controls, increasing the level of effectiveness and quality of processes.

As of December 31, 2019, the set of the services provided by us, which we call “Bradesco Custódia” was composed of:

 

ØCustody and controllership services for investment funds and managed portfolios involving:

·        R$1.9 trillion in assets under custody;

·        R$2.6 trillion in assets under controllership; and

·        R$202.0 billion in market value, related to 28 ADR(American Depositary Receipts)programs and 4 GDR (Global Depositary Receipts) programs.

 

Ø      Fiduciary administration for funds, investment clubs and manages portfolios involving:

·        R$1.0 trillion total shareholders’ equity of investment funds under fiduciary administration by Banco Bradesco and BEM – DTVM in investment funds, portfolios and investment clubs.

 

ØSecurities bookkeeping:

·        238 member companies of the Bradesco Book-entry Stock System, with 6.3 million shareholders;

·        448 companies with 696 issues in the Bradesco’s Book-Entry debentures system, with a market value of R$618.7 billion;

·        963 investment funds in the Bradesco Book-Entry Quotas System (value of R$89.4 billion); and

·        33 BDR (Brazilian Depositary Receipts) programs managed, with a market value of R$973.6 million.

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ØDepositary (Escrow Account – Trustee):

·        23,654 contracts, with a financial volume of R$14.1 billion.

 

4B.30.01-02.10 International banking services

As a private commercial bank, we offer a wide range of international services, such as foreign trade finance and foreign currency loans, foreign exchange operations and international sureties, lines of credit and banking.

As of December 31, 2019, we had 3 foreign Branches, 9 Subsidiaries and 2Representative offices.

Branches

New York

Banco Bradesco

Grand Cayman

Banco Bradesco

London

Banco Bradesco Europa

Subsidiaries

Buenos Aires

Banco Bradesco Argentina S.A.U.

Luxembourg

Banco Bradesco Europa S.A.

New York

Bradesco North America LLC

Bradesco Securities, Inc.

London

Bradesco Securities UK Limited

Hong Kong

Bradesco Securities Hong Kong Limited

Bradesco Trade Services Limited

Grand Cayman

Cidade Capital Markets Ltd.

Jalisco

Bradescard México Sociedad de Responsabilidad Limitada

Representative Office

Miami

Banco Bradesco

Hong Kong

Banco Bradesco

Our International and Exchange Area in Brazil coordinates our international transactions with support from 12 operational units specialized in foreign exchange and 18 points of service which are part of the Bradesco Corporate Segment (Segmento Bradesco Corporate). This structure is located at major exporting and importing areas nationwide.

 

ØForeign branches and subsidiaries

Our foreign branches and subsidiaries principally provide financing in foreign currency (particularly foreign trade finance operations) to Brazilian and non-Brazilian customers. Total assets of the foreign branches, considering the elimination of intra-group transactions, were R$46.8 billion, as of December 31, 2019, denominated in currencies other than the real.

 

 Funding required for financing or Brazilian foreign trade is primarily obtained from the international financial community, through credit lines granted by correspondent banks abroad. We issued debt securities in international capital markets as an additional source of funding, which amounted to R$19.1 billion (US$4.7 billion) during 2019.

The following is a brief description of our subsidiaries abroad:

·

Bradesco Europa– Through its unit in Luxembourg and its branch in London, it is also dedicated to providing additional services to clients of the private banking segment.

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·

Bradesco Argentina – It was set up with the purpose of granting assistance, largely to multinational companiesacting in bilateral trades.

·

Cidade Capital Markets – In February 2002, Bradesco acquired Cidade Capital Markets in Grand Cayman, through to the acquisition of its parent company in Brazil, Banco Cidade.

·

Bradesco Securities (U.S., U.K. and H.K.) – Bradesco Securities, our wholly owned subsidiary, is a broker dealer in the United States, England and Hong Kong:

o

Bradesco Securities U.S. focuses on facilitating the purchase and sale of shares, primarily in the form of ADRs and common shares. It also offers financial operations including bonds, commercial paper and deposit certificates, among other assets, and may provide investment advisory services;

o

Bradesco Securities U.K. focuses on the intermediation of equities and fixed income operations for Brazilian companies with global institutional investors; short-term fund-raising activities for Banco Bradesco S.A. in Euro Certificate of Deposit (“Euro CD”) and Medium-Term Note (“MTN”) programs; and sale of research reports and services of corporate access by subscriptions to institutional investors in Europe; and

o

Bradesco Securities H.K. focuses on the trading of ADRs and public and private securities issued by Brazilian companies to global institutional investors.

·

Bradesco North America LLC – It serves as a holding company for our investments in non-bank businesses in the United States.

·

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

·

Bradescard Mexico– The business unit of credit cardissuance,one of the highlights of which was a partnership with C&A.

 

ØRevenues from Brazilian and foreign operations

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

For the years ended December 31,

2019

2018

2017

R$ in thousands

%

R$ in thousands

%

R$ in thousands

%

Brazilian operations

144,446,167

96.5%

141,319,794

96.9%

146,014,854

98.0%

Overseas operations

5,309,214

3.5%

4,564,935

3.1%

2,966,302

2.0%

Total

149,755,381

100.0%

145,884,729

100.0%

148,981,156

100.0%

 

ØBanking operations in the United States

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

 

ØImport and export financing

See information in “Financing and Onlending Operations - Financing for import and export”, item “4.B.30.01-02.02 Loans and advances to customers”.

 

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ØForeign exchange products

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

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

·        working capital abroad;

·        WEB exchange contracts;

·        collecting import and export receivables;

·        cross border money transfers;

·        advance payment for exports;

·        accounts abroad in foreign currency;

·        domestic currency account for foreign domiciled customers;

·        cash holding in other countries;

·        structured foreign currency transactions: through our overseas units;

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

·        prepaid cards with foreign currency (individual andcorporate entities);

·        purchasing and selling of foreign currency paper Money;

·        cashing checks denominated in foreign currency; and

·        clearance certificate (international financial capacity certificate).

 

4.B.30.01-02.11Consortia

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

Bradesco Administradora de Consórcios manages groups of consortia and, as of December 31, 2019, registered total sales of 1,616,675 outstanding quotas; net income of R$1.4 billion; and fees from consortiums of R$1.9 billion. The company also administers a total volume of transactions of over R$81.1 billion.

 

4.B.30.02 Insurance, pension plans and capitalization bonds activities

We offer insurance products, pension plans and capitalization bonds through severalcorporate entities, which we refer to collectively as “Grupo Bradesco Seguros”, is a leader in the Brazilian insurance market.

The following table shows selected financial data for our insurance, pension plans and capitalization bonds segment for the periods indicated:

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As of and for the year ended December 31,

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

2019

2018

2017

Financial income from insurance, pension plans and capitalization bonds

14,941,642

13,567,258

12,181,182

Fee and commission income

2,028,371

2,169,807

2,063,187

Personnel expenses

(2,030,224)

(1,643,734)

(1,591,949)

Other administrative expenses

(1,495,894)

(1,609,750)

(1,702,816)

Tax expenses

(1,110,470)

(960,453)

(973,477)

Share of profit (loss) of unconsolidated and jointly controlled companies

276,165

206,272

205,278

Other operating income / expenses

(734,635)

(998,070)

(513,611)

Operating profit

11,874,955

10,731,330

9,667,794

Non-operating income

26,800

32,145

251,368

IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests

(4,490,945)

(4,374,553)

(4,384,760)

Net Income

7,410,810

6,388,922

5,534,402

Total assets

325,767,085

304,004,114

289,461,412

Technical provisions for insurance, pension plans and capitalization bonds

274,764,876

258,755,207

246,652,565

 

4B.30.02-01 Insurance products and services, pension plans and capitalization bonds

With the objective of meeting the needs of each client, we offer a range of products and services, such as:

 

4B.30.02-01.01Life and personal accident insurance

We offer life and personal accident insurance, as well as insurance against miscellaneous events, such as job loss, through our subsidiary Bradesco Vida e Previdência. As of December 31, 2019, there were 33.1 million life insurance policyholders.

 

4B.30.02-01.02Health insurance

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

On December 31, 2019, Bradesco Saúde and its subsidiary Mediservice Administradora de Planos de Saúde S.A. (Mediservice) had more than 3.6 million beneficiaries covered by company plans and individual/family plans. Approximately 146 thousand companies in Brazil pay into plans provided by Bradesco Saúde and its subsidiaries, including 43 of the top 100 largest companies in the country.

Bradesco Saúde currently has one of the largest networks of providers of health services in Brazil. As of December 31, 2019, it included 10,971 laboratories, 17,169 specialized clinics, 15,175 physicians and 2,063 hospitals located throughout the country.

 

4B.30.02-01.03Automobiles and property/casualty insurance

We provide automobile and property/casualty insurance through our subsidiary Bradesco Auto/RE.

 

Automobile insurance may cover losses arising from damage caused to the insured vehicle in cases of collision, larceny, theft and fire, in addition to injury to passengers and third parties.  For automobile insurance directed at individuals and companies, we highlight the “Seguro Auto Light”, which is a 100% digital product, and “Bradesco Seguro Auto Correntista”, which is a product that offers discounts, benefits and exclusive coverage to account holders of Banco Bradesco.

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Retail property/casualty insurance is for individuals, particularly those with residential and/or equipment related risks and small- and medium-sized companies whose assets are covered by multi-risk business insurance. Of the various property/casualty lines for individuals, our residential policy (Bilhete Residencial) is a relatively affordable and highly profitable product. Forcorporate entities, Bradesco Auto/RE offers Bradesco Seguro Empresarial (business insurance), which is adapted to meet our customers’ and business needs, according to their industry sector, and “Bradesco Seguro Condomínio” customized according to the reality of each undertaking.

As of December 31, 2019, Bradesco Auto/RE had 1.5 million insured automobiles and 1.4 million property/casualty policies and notes, making it one of Brazil’s main insurers.

 

4B.30.02-01.04 Supplementary Pension plans

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

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

As of December 31, 2019, Bradesco Vida e Previdência accounted for 22.8% of the pension plan and VGBL market in terms of contributions, according to SUSEP. On December 31, 2019, Bradesco Vida e Previdência accounted for 25.1% of all supplementary pension plan assets under management: 23.7% of VGBL, 23.0% of PGBL and 49.7% of traditional pension plans, according to FenaPrevi.

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

We manage pension and VGBL plans covering 2.9 million participants, 60.8% of whom have individual plans, and the remainder of whom are covered by company plans. The company plans account for 15.6% of technical reserves.

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

VGBL and PGBL plans may be acquired by companies in Brazil for the benefit of their employees. In December 2019, Bradesco Vida e Previdência managed R$176.7 billion in VGBL and R$38.4 billion in PGBL plans. Bradesco Vida e Previdência also managed R$27.8 billion in traditional pension plans.

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

Bradesco Vida e Previdência earns revenues primarily from:

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

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

·      interest income.

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4.B. Business Overview

Form 20-F

 

 

4.B.30.02-01.05Capitalization bonds

Bradesco Capitalização is the leader among private sector capitalization bond companies, according to SUSEP and offers its customers capitalization bonds with the option of a lump-sum or monthly contributions. Plans vary in value (from R$20 to R$50,000), form of payment, contribution period, and periodicity of draws for cash prizes of up to R$1.4 million (net premiums). Plans are adjusted based on the Reference Rate (TR) plus interest over the value of the mathematical provision, which may be redeemed by the shareholder at the end of the grace period. As of December 31, 2019, we had around 7.5 million “traditional” capitalization bonds and around 14.7 million incentive capitalization bonds. Given that the purpose of the incentive capitalization bonds is to add value to the products of a partner company or even to provide an incentive for its customer to avoid delinquency, the plans are for short-terms and grace periods with low unit sales value. At the end of 2019, Bradesco Capitalização had approximately 22.2 million capitalization bonds and 2.7 million customers.

The investment grade rating of Bradesco Capitalização on a domestic scale is “brAA-/Stable/--”, assigned by S&P Global rating agency.

 

4.B.40Distribution channels

 

4.B.40.01Banking

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

 

Distribution Channels(1)-Units

2019

2018

2017

Service Stations

80,222

76,122

73,411

- Branches

4,478

4,617

4,749

- PAs - Service Points

3,997

3,816

3,899

- PAEs - ATMs located on a company´s premises

874

907

928

- Banco24Horas Network (2)

14,763

12,697

11,050

- Bradesco Expresso (Banking Correspondents)

39,100

39,100

38,708

- Bradesco Financiamentos

16,938

14,912

14,002

- Losango Customer Service Points

58

60

63

- Branches, Subsidiaries and Representation Office, Abroad

14

13

12

ATMs

57,720

58,099

56,849

- Bradesco Network

33,900

34,997

35,590

- Banco24horas Network

23,820

23,102

21,259

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

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

 

 

4B.40.02Insurance, pension plans and capitalization bonds activities

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

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

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% of total sales, per product

2019

2018

2017

Insurance products

 

 

 

Sales through the branches

38.1%

38.0%

38.5%

Sales outside the branches

61.9%

62.0%

61.5%

Pension plans products

 

 

 

Sales through the branches

86.0%

87.1%

88.1%

Sales outside the branches

14.0%

12.9%

11.9%

Capitalization bonds

 

 

 

Sales through the branches

86.4%

85.7%

86.1%

Sales outside the branches

13.6%

14.3%

13.9%

 

4.B.40.03Partnerships with retail companies – Bradesco Expresso

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

The main services we offer through Bradesco Expresso are:

·      receipt and submission of account application form;

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

·      withdrawals from checking account and savings account;

·      Social Security National Service (INSS) benefit payments;

·      checking account, savings account and INSS balance statement;

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

·      prepaid mobile recharge.

As of December 31, 2019, the Bradesco Expresso network totaled 39,100 service stations, of which 8,415 are new service stations implemented during 2019, with an average of 42.1 million monthly transactions or 2.0 million transactions per business day.

 

4.B.40.04 Digital Channels

The Digital Channels offer mobility and autonomy to customers so that they may use the Bank from wherever they are and expand their businesses with us.

In addition to traditional and consolidated service channels, such as Automatic Teller Machines (“ATMs”), telephone service, and Internet Banking, clients have access to an extensive portfolio of products and services through the Bradesco App, available from the simplest to the most sophisticated devices.

Below is a brief description of our digital channels:

Ø

Bradesco Celular–Our presence on mobile phones has been growing exponentially.Through apps for individuals and corporate entities, we make payment transactions, transfers, balance inquiries, loans, and many other conveniences available. Clients that access their accounts through their mobile phone are not charged by their data package due to an agreement made with Brazil’s major mobile network operators.

 

Among the products and services available through Bradesco Celular, we highlight:

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4.B. Business Overview

Form 20-F

 

 

·

Opening Accounts:available in the Bradesco Applications (Classic), it allows new clients to open an account through their mobile phone, without going to the branch,including the sending of documents by mobile phone. In 2019, 341.0 thousand individual accounts were opened, an increase of 339% in comparison to the 78 thousand individual accounts and 21.1 thousand legal entity accounts in 2018;

·

Housing Loan Simulator:the client can request a quote for a real estate financing through the application andapproved it within one hour;

·

Bradesco Net Empresa Celular (Bradesco Net Company Mobile Banking):allows corporate entities to manage their corporate banking at any time and  from anywhere;

·

Consortium: simulation and purchase of real estate, automotive and heavy vehicle consortium;

·

Purchase of Foreign Currency: purchases up to 10 thousand dollars or the equivalent in Euro can be done directly via the App; and

·

Insurance:contracting of life, home, dental and travel insurance.

ØBIA – Bradesco Artificial Intelligence (Bradesco Inteligência Artificial) interacts with the user, answers questions about products and services and assists with transactions. In 2019, BIA recorded 268.6 million interactions, of which 93.9 million were via WhatsApp, where we offer transactional services, such as balance check, balance transfer and payment operations through our own channels and partner channels, such as Facebook Messenger, Google Assistant, Amazon Alexa and Apple Business Chat. BIA already answers questions on more than 89 of our products and services. It is available for employees and clients, and provides faster, practical and autonomous services. We were a pioneer in Brazil in the use of IBM's cognitive computing platform, Watson.

ØInternetShowing pioneering and innovative spirit, we were the first financial institution in Brazil to have an electronic address on the internet and provide financial services to our clients through this channel in 1996.

We can divide this communication platform into two main areas of access and dissemination of content:

·

Bradesco Institutional Website: the website has simplified content and language adapted for digital media and provides clients and the public at large access to a wide range of information and clarification on various financial products and services. Currently, we have 39 institutional websites in this format, 28 are for Individuals and 11 for Companies. We also have the MEI Portal, which is an intuitive portal dedicated to Individual Micro-entrepreneurs, with banking and non-banking solutions; and

·

Bradesco Internet Banking for Financial Services: we have 16 transaction websites, 10 for individuals and 6 for companies, access is available with credentials and personal security devices for current accountholders and CPF (Individual Taxpayer’s Registry) and password for non-accountholders.

We currently use our own domain, "banco.bradesco", and we are one of the few Brazilian companies to have a top-level domain or generic top-level domain ("gTLDs"), an initiative of the Internet Corporation for Assigned and Numbers, a body responsible for internet protocols which regulates addresses on the worldwide internet. Using these proprietary addresses, access to our content is more practical and intuitive.

ØSelf-service– Our self-service channel provides convenience to clients, giving access to transactions outside the branch’s internal environment and enabling the marketing of our products with the challenge of consolidation as a business channel.

Our Self-service Network has 33,900 machines, of which 4,439 are machines with immediate deposit and the recycling of bank notes and a further 159 allow for withdrawals in U.S. dollar and Euro. In addition, our clients have access to 23,820 ATMs under the Banco24Horas network to make withdrawals, check balances, obtain statements, contract loans, pay bills, make transfers between Bradesco accounts and use DOC/TED (types of bank transfers), Prepaid Card, and "proof of life" for INSS (physical proof of pensioner status or survivor status to maintain the right to social benefits

Our ATMs have highly advanced security technology: biometric reading that identifies customers and authenticates ATM transactions works through a sensor/invisible light beam that captures the imageof the vascular pattern of the palm of the hand.The biometric reading enables our customers to, for example, carry out transactions without a card, by simply using the palm of their hand and their six-digit password, providing convenience and speed without compromising security.

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ØTelephone services –Fone Fácil (Contact Center) –Fone Fácil Bradesco allows clients to bank by telephone, which can be accessed by choosing electronic service or personalized service.

In the electronic service, we provide a sophisticated service system powered by voice command, which provides clients the experience of doing what they want to do through simple voice commands, without the need for listening to various service options and having to choose them by typing the option on the telephone. The client can request the desired service directly.

Through this channel we offer our main financial services, such as payments, transfers between Bradesco accounts, DOC/TED, investments, credit contracting, support and registration of the security device in the mobile phone, among others.

By callingFone Fácil, clients can access other relationship centers, such as for credit cards, private pensions, capitalization, credit, private and internet banking, among others.

 

ØSocial Networks –Since 2004, our pioneering and innovative use of social networks has become a market benchmark focusing on relationships, content co-creation and monitoring of our brand. We are a reference bank in content for the entire community and we have our own team of social media specialists working shifts to cater for demand from customers and non-customers on a 24/7 basis.

In 2019, 96.3% of our banking transactions were performed through digital channels. The tables below show the number of transactions carried out through digital channels, the credit authorized through these channels and the quantity of current account holders:

Year ended December 31,

In millions of transactions

% Change

2019

2018

Mobile Individuals + Companies

   11,802

   10,259

15.0%

Internet Individuals + Companies - with WebTA(1)

 5,546

  5,670

(2.2)%

ATMs

  1,914

  1,939

(1.3)%

Telephone Banking (Fone F��cil)

134

156

(14.1)%

Total

   19,396

   18,024

7.6%

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

 

In 2019, the volume of loans authorized though digital channels represented 23.6% of the total originated loan (considering the same products as are available via digital channels), an increase of 47% for individuals and 40% for companies. It is worth highlighting the important developments of loans authorized through mobile channels, which represents 61% of the total authorized for individuals and 12% for companies as part of our Digital Channels.

Year ended December 31,

2019

2018

2017

Loans authorized in the Digital Channels - In R$ billion

 

 

 

Individuals

   25.5

   17.4

   11.8

Companies

   30.1

   21.5

   17.0

Total

   55.6

   38.9

   28.8

Digital Account Holders - In million

 

 

 

Individuals

   15.8

   14.1

   12.6

Companies

1.3

1.2

1.1

Total

   17.1

15.3

13.7

 

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4.B. Business Overview

Form 20-F

 

 

4.B.40.05Next

 

On October 30, 2017, we officially launched Next to complement the ecosystem of solutions of the Bradesco Organization.  It was developed as a 100% digital platform and is accessed by the client through an app for iOS and Android.  Our goal is for Next to cater to a new range of clients, the “hyper-connected generation”, thus complementing our existing ecosystem of solutions.

Next interacts with users on a predictive basis depending on his or her behavior and using interactive and innovative tools, to offer the best user experience and relationship with the client, with the aim of providing intelligent solutions to achieve goals and day-to-day practicalities. Next uses the most modern Technology solutions, User Experience, Analytics and Artificial Intelligence.

By the end of 2019, we surpassed 1.8 million accounts, with Next reaching clients in 100% of the municipalities in Brazil. Over the course of 2019, clients executed more than 376 million transactions, a volume 317% higher than the previous quarter, which shows that, in addition to opening accounts in a consistent way, clients are becoming more and more engaged with Next.

 

4.B.50 Seasonality

We generally have some seasonality in certain parts of our business. There is certain seasonality in our consumer financing business (including our credit card business, financing of goods and others), with increased levels of credit card transactions and financing of goods at the end of the year and a subsequent decrease of these levels at the beginning of the year. We also have certain seasonality in our fee collections at the beginning of the year, which is when taxes and other fiscal contributions are generally paid in Brazil. For our PGBL and VGBL business, seasonality happens at the end of the year, when the Christmas bonuses and profit sharing distributions are usually paid.

 

4.B.60 Competition

We face significant competition in all of our principal areas of operation, since the Brazilian financial and banking services markets are highly competitive and have undergone an intensive consolidation process in the past few years.

The following table presents the market share of our main products and services in the periods indicated:

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Market Share - Em %

2019

2018

2017

Source: Bacen

 

 

 

Bank

 

 

 

Demand Deposits

12.2

12.7

11.3

Savings Deposits

13.3

13.8

14.1

Time Deposits

14.0

13.9

10.8

Loans

12.2

11.5

11.0

Loans - Private Institutions

23.1

23.6

23.9

Loans - Vehicles Individuals (CDC + Leasing)

14.2

13.8

13.8

Payroll-Deductible Loans

16.4

15.3

14.1

Social Security Institute (INSS)

21.2

19.7

20.6

Private Sector

16.5

15.6

13.9

Public Sector

13.4

12.3

10.0

Real Estate Financing

8.1

8.1

8.1

Consortia

 

 

 

Real Estate

26.7

28.7

29.5

Auto

33.3

32.5

31.8

Trucks, Tractors and Agricultural Implements

20.1

18.3

16.5

Internacional Area

 

 

 

Export Market

24.0

24.1

22.4

Import Market

23.9

24.4

21.4

Source: Insurance Superintendence (Susep), National Agency for Supplementary Healthcare (ANS) and National Federation of Life and Pension Plans (Fenaprevi)

 

 

 

Insurance Premiums, Pension Plan Contributions and Capitalization Bond Income

24.0

24.9

25.9

Insurance Premiums (including Long-Term Life Insurance - VGBL)

23.6

24.2

25.1

Life/Personal Accident Insurance Premiums

19.8

19.0

19.9

Auto/P&C Insurance Premiums

7.8

7.9

8.7

Auto/Optional Third-Party Liability Insurance Premiums

11.4

11.1

11.7

Health Insurance Premiums

51.0

52.1

47.8

Income f rom Pension Plan Contributions (excluding VGBL)

27.4

31.5

35.2

Capitalization Bond Income

26.8

29.5

29.1

Technical provisions for insurance, pension plans and capitalization bonds

24.2

25.6

26.8

Income f rom VGBL Premiums

22.3

24.3

26.9

Income f rom Unrestricted Benef its Pension Plans (PGBL) Contributions

25.8

26.0

32.4

Pension Plan Investment Portfolios (including VGBL)

25.1

26.7

28.3

Source: Anbima

 

 

 

Investment Funds and Managed Portfolios

18.6

20.5

21.5

Source: Social Security National Institute (INSS)/Dataprev

 

 

 

Benef it Payment to Retirees and Pensioners

32.1

31.6

31.1

Source: Brazilian Association of Leasing Companies (ABEL)

 

 

 

Lending Operations

21.7

19.3

18.7

 

As of December 31, 2019, state-owned financial institutions held 39.9% of the National Financial System’s (“SFN”) assets, followed by domestic private financial institutions (taking into consideration financial conglomerates) with a 43.8% share and foreign-controlled financial institutions, with a 16.3% share.

Public-sector financial institutions play an important role in the banking sector in Brazil. Essentially, they operate within the same legal and regulatory framework as private-sector financial institutions, except that certain banking transactions involving public entities must be made exclusively through public-sector financial institutions (including, but not limited to, depositing federal government funds or judicial deposits).

By means of the Circular No. 3,590/12, the operations for transfer of corporate control, acquisitions, mergers, transfer of business and other acts of concentration should be analyzed by the Central Bank with respect to their effects on competition and to the stability of the financial system.

Through Resolution No. 4,122/12, the CMN set out new requirements and procedures for incorporation, authorization for operations, cancellation of authorization, changes of control, corporate restructurings and conditions for exercising positions in statutory or contractual bodies of financial institutions and other entities authorized by the Central Bank of Brazil.

In April 2018, the CMN regulated the credit fintechs through Resolution No. 4,656/18, which providesthat on the establishment and operation of the Direct Loan Companies (“SCD”) and Interpersonal Loan Companies (“SEP”), regulating loan operations and financing between people using electronic platforms. In summary, SCD and SEP have to be constituted in the form of joint stock companies and may meet less stringent criteria than those of other financial institutions to obtain authorization. However, the SCD can only perform loan operations and financing using their own resources, while the SEP cannot make use of operations with its own resources, acting as an intermediary between creditors and debtors, and providing other services established in the Resolution.

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4.B. Business Overview

Form 20-F

 

 

In 2019, the CMN created new rules for the Credit Society for Microentrepreneurs and Small Business (“SCMEPP”), through Resolution No. 4,721/19 which provides for the constitution, authorization for operation, corporate restructuring and cancellation of authorization for operation. The SCMEPP has the role of granting funding to individuals, micro companies and small businesses based on the viability of their projects. The SCMEPP cannot raise money from the public, nor can it issue bonds and securities to place bids and public offerings.

In these circumstances, the fintechs that are already expanding in the Brazilian market may act in a regulated manner and independently from a financial institution already constituted, as an SCD or SEP.  The process of obtaining authorization for operation of the SCD, SEP and SCMEPP has fewer requirements than those of a multiple bank; in contrast, these entities have a more limited scope of action.  Despite this, these new rules and types of financial institutions will stimulate competition between financial institutions and thus, in particular in the credit market, will adversely affect the Bank.

In 2020, the CMN, through Resolution No. 4,792/20, amended Resolution No. 4,656/18 which relates to SCD and SEP, and the new provisions shall enter into force on May 4, 2020. In relation to the SCD, the possibility of issuing the payment instrument post-payment and financing their activities with resources from the BNDES is included and was expanded to types of investment funds that can finance the operations of the SCD and SEP.

Open banking is also seen as one of the ways of fostering innovation. The movement, which started in the United Kingdom, is being developed in Brazil, with participation from the Central Bank in partnership with the Febraban and its associates. The premise of open banking is that is the customer’s right to decide which institutions can use their data, in other words, it may authorize other companies to access their balance and bank statements, or vice the customer may authorize other companies to share information with us.

Since 2017, we have followed the regulatory movements and new business in relation to open banking. Working groups have already been created in conjunction with the technical, control and business areas with the goal of establishing new business models and to be in compliance with the regulation of the Central Bank, which should enter into force in the second half of 2020.

 

4.B.60.01Deposits 

The deposit market is highly concentrated, with our main competitors being are Itaú Unibanco, Caixa Econômica Federal, Banco do Brasil and Santander. The five largest institutions hold 77.8% of deposits in the Brazilian market, according totheCentral Bank.

 

4.B.60.02Loans and advances

Competition in loans and advances has been increasing in recent years. Our main competitors are Itaú Unibanco, Banco do Brasil and Santander Brasil.

 

4.B.60.03Credit cards

The credit card market in Brazil is highly competitive. Our primary competitors in the market are Banco do Brasil, Itaú Unibanco, and Santander Brasil. Management believes that the primary competitive factors in this area are card distribution network, the services and benefits offered.

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4.B.60.04Consortia

In December 2019, according to Central Bank, the consortia market included 146 administrators, divided between the bank, manufacturer and independent administrators.

Our main competitors are Porto Seguro and Caixa Econômica Federal in the real estate segment; Banco do Brasil and Itaú in the automobile segment; and Randon and Conseg in the trucks segment.

One of our competitive advantages is the credibility of the Bradesco brand and our extensive distribution network, with the largest service network in the entire whole of Brazil.

 

4.B.60.05 Investment Bank

The investment bank market in Brazil is very competitive, involving the participation of national and international financial institutions. Among the main players are Itaú BBA, BTG Pactual, Santander and other international institutions. Bradesco BBI has nonetheless achieved significant success in this market, obtaining recognition from renowned international agencies that follow the sector globally.

 

4.B.60.06 Leasing

In general, our main competitors in the Brazilian leasing marketare Santander Leasing, Banco IBM, HP Financial Service and Daycoval Leasing. Our belief is that we currently enjoy certain competitive advantages, as we have a larger service network than any of our private sector competitors.

 

4.B.60.07 Fund management

On December 31, 2019, the fund management industry in Brazil managed funds worth R$5.4 trillion in shareholders’ equity according to ANBIMA’s investment funds management ranking. BRAM held a portion of R$560.4 billion or 10.3% of market share. We are one of the leading institutions as measured by the number of investment fund quotaholders with 3.1 million. Our main competitors are BB DTVM and Itaú Unibanco.

 

4.B.60.08 Insurance

According to SUSEP, in 2019, we were the leader of the Brazilian insurance market. Grupo Bradesco Seguros faces growing competition from several domestic and multinational companies in all branches of this sector, which has changed in Brazil in recent years, as foreign companies have begun to form associations with national insurers. In this respect, the main competitive factors are price, financial stability, and recognition of the name and services provided by companies. With respect to services, competition primarily involves the ability to serve the branches that market such services, including the level of claims handling automation, and development of long-term relationships with customers.

Our principal competitors are BB Seguridade, Itaú Unibanco Seguros S.A., SulAmérica Seguros, Porto Seguro, Caixa Seguros and Zurich/Santander, which account for a combined total of approximately 51.4% of all premiums generated in the market, as reported by SUSEP, in 2019.

We believe that the penetration of our service network, present in all municipalities in Brazil, gives Grupo Bradesco Seguros a significant competitive edge over most insurance companies, thereby promoting cost savings and marketing synergies.

Regarding the healthcare sector, although most insurance activities are carried out by companies with nationwide operations, there is also competition from companies that operate locally or regionally.

 

 

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4.B. Business Overview

Form 20-F

 

 

4.B.60.09 Pension plans sector

The Brazilian government’s monetary stabilization policies stimulated the pension plan sector and attracted new international players.

Bradesco Vida e Previdência’s main competitive advantages are the “Bradesco” brand, our extensive branch network, our strategy and our record of being in the forefront of product innovation.

Our main competitors are BB Seguridade, Itaú Unibanco Seguros, Caixa Seguros and Zurich/Santander.

 

4.B.60.10 Capitalization bonds sector

Our competitive strengths in this sector include our offering of low-cost products with a higher number of prize drawings, security, financial stability, and brand recognition.

Our main competitors are BB Seguridade, Itaú Unibanco Seguros, Santander, Caixa Seguros and Icatu, which together represent approximately 57.6% of the total capitalization revenue generated in the market, according to information provided by SUSEP in 2019.

 

4.B.70Regulation and Supervision

The basic institutional framework of the Brazilian Financial System was established in 1964 by Law No. 4,595/64, known as the “Banking Reform Law”. The Banking Reform Law dealt with monetary, banking and credit policies and institutions, and created the CMN.

 

4.B.70.01Principal regulatory agencies

 

4.B.70.01-01 CMN

CMN is responsible for overall supervision of monetary, credit, budgetary, fiscal and public debt policies. CMN has the following functions:

·        regulating loans and advances granted by Brazilian financial institutions;

·        regulating Brazilian currency issue;

·        supervising Brazil’s reserves of gold and foreign exchange;

·        determining saving, foreign exchange and investment policies in Brazil; and

·        regulating capital markets in Brazil.

In December 2006, CMN asked the CVM to adopt a Risk-Based Supervision System (“SBR”), as a general guideline for the CVM’s activities, through Resolution No. 3,427/06.  This model is also regulated by CVM Resolution No. 757/16, which established the objectives of the SRB to: (i) identify risks to which the market is exposed; (ii) rank these risks in order of severity and the probability of the risks occurring; (iii) establish mechanisms for mitigating these risks and the losses they might cause; and (iv) control and monitor the occurrence of risk events.  Among other effects, this system allows for a fast-track reviewing process for the issuance of securities.

 

4.B.70.01-02 Central Bank

The Central Bank was created by Law No. 4,595/64 and is the primary executor of the guidelines ofthe CMN, responsible for ensuring the purchasing power of the national currency, including responsibility for:

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·

implementing currency and credit policies established by the CMN;

·

regulating and supervising public and private sector Brazilian financial institutions;

·

controlling and monitoring the flow of foreign currency to and from Brazil; and

·

overseeing the Brazilian financial markets.

The Central Bank’s chairperson is appointed by the President of Brazil for an indefinite term of office, subject to approval by the Brazilian senate.

The Central Bank supervises financial institutions by:

·

setting minimum capital requirements, compulsory deposit requirements and operational limits;

·

authorizing corporate documents, capital increases, acquisition of interest in new companies and the establishment or transfer of principal places of business or branches (in Brazil or abroad);

·

authorizing changes in shareholder control of financial institutions;

·

requiring the submission of annual and semiannual audited financial statements, quarterly revised financial statements and monthly unaudited financial information; and

·

requiring full disclosure of loans and advances and foreign exchange transactions, import and export transactions and other directly related economic activities.

 

4.B.70.01-03 CVM

The CVM is a local entity, linked to the Ministry of Finance, with its own legal personality and its own equity, independent administrative authority, absence of hierarchical subordination, fixed mandate, stability of its managers, and financial and budgetary autonomy. It was created on December 7, 1976 by Law No. 6,385/76 with the objective of overseeing, standardizing, regulating and developing the Brazilian securities markets in accordance with securities and capital-market policies established by CMN.

The CVM has power:

·

to regulate, with due observance of the policy defined by the CMN, the matters expressly provided for in Law No. 6,385/76 and Law No. 6,404/76;

·

to encourage the savings and their application in securities;

·

to supervise the activities and services of the securities market, as well as the publication of information relating to the market, to people participating in it, and the securities traded in it;

·

to propose to the CMN the possible fixing of maximum limits on prices, commissions, fees and any other benefits charged by intermediaries in the market;

·

to protect the holders of securities and investors from the market against irregular issuing of securities; illegal acts of administrators and shareholders of publicly traded companies, or administrators of the securities portfolio;

·

to prevent or discourage fraud or manipulation intended to create artificial conditions of demand, offer or price of securities traded on the market; and

·

to ensure the efficient operation and regulation of stock and OTC markets and the observance of fair trade practices in the securities market.

Thus, the main objectives of the CVM are:

·

to ensure the integrity of the capital markets;

·

to boost the efficiency of the capital markets; and

·

to promote the development of the capital markets.

 

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Form 20-F

 

 

The main focus of the CVM in overseeing and regulating the Brazilian capital markets is:

·        to promote a culture of investment in the Brazilian capital markets;

·        to increase the participation in the capital markets as a competitive source of financing;

·        to reduce the costs of observance of market participants;

·        to increase the liquidity of markets;

·        to improve the efficiency of supervision of the market; and

·        to increase the efficiency of the sanctioning action.

 

4.B.70.02Banking regulations

 

4.B.70.02-01 Principal limitations and restrictions on activities of financial institutions

Under applicable laws and regulations, a financial institution operating in Brazil:

·

may not operate without the prior approval of the Central Bank. In the case of foreign banks, approval of the Central Bank, pursuant to Decree No. 10,029/19, may be granted where it is considered to be in the national interest to do so. On January 22, 2020, the Central Bank issued Circular No. 3,977/20, which recognises the shareholding in the capital of financial institutions headquartered in Brazil, by natural persons or corporate entities resident or domiciled abroad, as in the interests of the Brazilian Government provided that the requirements and procedures provided for in the regulations of the Central Bank are met;

·

may not invest in the equity of any other company beyond regulatory limits;

·

may not conduct credit and leasing transactions or provide guarantees of more than 25.0% of their PR to a single person or group;

·

may not own real estate, except for its own use; and

·

according to Law No. 4,595/64 and CMN Resolution No. 4,693/18, financial institutions are prohibited from conducting loan operations with related parties. Exempted from the prohibition are loan operations with related parties that comply with all of the following conditions:

o

the loan operations with related parties, except for the cases provided for in the legislation or in specific regulations, may only be carried out under conditions compatible with the market, including the limits, interest rates, grace period, terms, guarantees required and criteria for risk classification for purposes of constitution of a provision for probable losses and write-off as loss, without additional benefits or differentiated as compared to operations accepted to other clients with the same profile as the respective institutions. The parameters adopted by the institution in loan operations of the same type for policyholders with the same profile and credit risk are considered compatible with the conditions of the market; and

o

the sum of the balances of loan operations contracted, directly or indirectly, between the related parties must not be greater than 10% of the value related to the shareholders’ equity adjusted by the accumulated revenues and expenses deducting the value of stake in institutions authorized to operate by the Central Bank and in financial institutions abroad, observing the following individual caps: (i) 1% for hiring an individual; and (ii) 5% for hiring a legal entity, safeguarding the exceptions established in the Resolution.

·        The following loan operations are also exempt from the prohibition provisioned in Law No. 4,595/64, respecting the limits and conditions established in the regulations:

o

the operations with companies controlled by the Government, in the case of federal public financial institutions;

o

the loan operations that have as counterpart a financial institution of the same prudential conglomerate, as long as certain conditions established in the legislation and the law are respected;

o

the interbank deposits regulated in the form of section XXXII of the caput of article 4 of Law No. 4,595/64;

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o

the obligations assumed between related parties as a result of the responsibility imposed on clearance members and other participants of chambers or providers of clearance and settlement systems authorized by the Central Bank or by the CVM and their counterparts in operations conducted in the scope of these chambers or service providers; and

o

the remaining cases authorized by the National Monetary Council.

·        For the purposes of CMN Resolution No. 4,693/18, the following are considered as related parties:

 

o

its controllers (individuals orcorporate entities), pursuant to Article 116 of Law No. 6,404/76;

o

its officers and members of statutory or contractual bodies;

o

spouses, partners and blood relatives up to the second degree of individuals specified in items I and II;

o

individuals with qualified equity interest; and

o

corporate entities:

a) with qualified equity interest;

b) in which capital, directly or indirectly, is qualified equity interest;

c) in which there is effective operational control or relevance in the deliberations, regardless of equity interest; and

d) that have an officer or member of the Board of Directors in common.

·

CMN Resolution No. 4,693/18 also brought a definition of qualified shareholding, which is considered a direct or indirect stake, owned by individuals or corporate entities in the capital of financial institutions and of leasing companies or of these institutions in the capital of corporate entities, equivalent to fifteen percent (15%) or more of the respective shares or quotas representing the capital stock.

 

The restrictions with respect to the concentration limit to a single person or group do not apply to interbank deposits entered into by financial institutions subject to consolidation of their financial statements.

 

 

4.B.70.02-02 Punitive instruments applicable to Financial Institutions

Law No. 13,506/17, which regulates the administrative sanctioning process in the sphere of activity of the Central Bank and CVM and, significantly amended the punitive instruments in the context of banking supervision, of the capital market, of the Brazilian Payment System, Payment Institutions and Consortium, in combination with the Central Bank’s Circular No. 3,857/17. We can highlight, among other things: (i) the caps of the fines provisioned by the Central Bank and CVM has maximum levels established, respectively, at R$2 billion (or 0.5% of revenues from services and financial products calculated in the year preceding the violation, whichever is higher) and R$50 million; (ii) forecast for the imposition of coercive or precautionary measures, with the possibility of applying a punitive fine capped at R$100 thousand per day (or 1/1000 of the revenue from financial services and products of the receiving institution, whichever is higher), limited to a maximum period of 60 days; (iii) the legal provision was re-established for purposes of typification of the violation involving prohibited operations, added to two pieces of news henceforth: (a) list, in an unprecedented manner, exceptions, or caveats regarding their characterization; and (b) restrict the range of crimes White Collar Law, to prohibit operations where the parties are under common control; (iv) prediction of the possibility for the proposition and conclusion of the Term of Commitment for those administrative violations related to the prevention of money laundering in the context of the Central Bank; (v) the non-necessity of confession of guilt for the conclusion of the Term of Commitment was re-established, both in the context of the Central Bank and CVM; (vi) adaptation was made to the original forecast of expiry of leniency to the possibility of concluding the “Agreement In the Process of Administrative Supervision”, without, however, making provision for any exemption from prosecution; (vii) have changed the caps on fines to be applied to any infractions on FX operations; and (viii) the types of criminal conduct involving the practice of insider trading and market manipulation were also changed.

 

 

 

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Form 20-F

 

 

4.B.70.02-03 Capital adequacy and leverage

Financial institutions based in Brazil are subject to capital measurement and standards based on a weighted risk-asset ratio, according to CMN Resolutions No. 4,192/13 and No. 4,193/13. The parameters of this methodology resemble the international framework for minimum capital measurements adopted for the Basel Accord. For further information on Basel III, see “Item 5.B – Liquidity and Capital Resources – 5.B.40 Capital Compliance – Basel III”.

In accordance with Basel III recommendations, Resolution No. 4,615/17, supplemented by Circular No. 3,748/15, provides for the minimum requirement for the Leverage Ratio ("LR") as a supplementary capital measure. It is a ratio that acts to limit the level of exposure to risk assumed by financial institutions and evaluates the leverage through its relation between Tier I Capital and the Total Exposure, calculated through the sum of assets registered in accounting values, added to off-balance exposures (limits, endorsements, guarantees and derivatives), as detailed in the circular. The relevant institutions classified in Segment 1 (S1) and Segment 2 (S2), must comply with the minimum requirement for LR of 3%.

In order to establish minimum quantitative requirements for the liquidity of financial institutions and limit excessive liquidity risk taking, Basel III introduced two liquidity indices: the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”).

The LCR corresponds to the ratio between the stock of high quality liquid assets (“HQLA”) and the total expected net cash outflows for a period of 30 days, and is intended to show that financial institutions maintain highly liquid resources to withstand a scenario of acute financial stress lasting one month. The NSFR, corresponding to the ratio between the amount of available stable funding (“ASF”) and the amount of stable required stable funding (“RSF”), and seeks to encourage institutions to finance their activities with more stable sources of funding, promoting and ensuring the alignment of the maturities of global assets and liabilities, both on and off balance sheet, reducing the dependencies of financial institutions in relation to funding in the money and short-term markets.

Thus, the LCR measures liquidity risk over the next 30 days, while the NSFR limits excessive liquidity risk taking over a longer time horizon, requiring banks to finance their activities with stable sources of funds, i.e. funds that have a low probability of redemption.

According to CMN Resolution No. 4,280/13, amended by Resolution No. 4,517/16, financial institutions, except for credit cooperatives, must keep consolidated accounting records (for calculating their capital requirements) of their investments in companies whenever they hold, directly or indirectly, individually or together with partners, a controlling interest in the investee companies. If their interest does not result in control of a company, financial institutions may choose to recognize the interest as equity in the earnings of unconsolidated companies instead of consolidating such interests.

Under certain conditions and within certain limits, financial institutions may include eligible instruments when determining their capital requirements in order to calculate their operational limits, provided that this instrument complies with the requirements of regulation in force.

Since January 2015, financial institutions based in Brazil are required to calculate their capital requirements on a consolidated basis with institutions that are part of their prudential conglomerate.

The CMN Resolution No. 4,280/13 defines that the following entities located in Brazil or abroad shall be considered in the prudential conglomerate of its direct or indirect controllers: (i) financial institutions and other institutions authorized to operate by the Central Bank; (ii) consortium administrators; (iii) payment institutions; (iv) organizations that acquire loan operations, including real estate and credit rights; and (v) othercorporate entitiesheadquartered in Brazil that are solely engaged in holding interests in the entities set out above.

In December 2014, the CMN changed the scope of the rules for the management of credit, market, operational and liquidity risks and capital management in order to apply such rules at the prudential conglomerate level which is now required as the basis for calculation of the capital requirements of financial institutions. The CMN Resolution No. 4,388/14 sets forth that risk management may be carried out by a single unit responsible for the prudential conglomerate and its respective affiliates(this applies only to market risk management). Further, this resolution also updates the application of the relevant thresholds for any calculations subject to foreign exchanges.

It is worth pointing out that, as a result of the spread of the COVID-19, the CMN, by means of Resolution No. 4,783/20, amended the percentages of application of the RWA for calculating the value of the Additional Conservation of Common Equity (“ACP Conservation”) in the following way: (i) 1.25% during the period from April 1, 2020 to March 31, 2021; (ii) 1.625% in the period from April 1, 2021 to September 30, 2021; (iii) 2.00% during the period from October 1, 2021 to March 31, 2022; and (iv) 2.5% from April 1, 2022. This measure aims to increase the lending capacity, to increase the capital surplus and give more room and security to banks to maintain their plans of lending, and gradually reestablish the ACP Conservation until March 31, 2022.

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In addition, as a result of the COVID-19 pandemic, the CMN, by means of Resolution No. 4,797/20, indefinitely prohibited the payment of dividends or interest on own capital above the minimum level (as specified in our Bylaws), as described in item 3.D.10.01-01 above. The prohibition of the payment of dividends or interest on own capital above the minimum level (as specified in our Bylaws) applies to all payments, including anticipated payments, (i) based on the results on the base dates between April 7, 2020 and September 30, 2020; or (ii) to be made from April 7, 2020 to September 30, 2020.

 

4.B.70.02-04 Risk Weighting

Pursuant to Circular No. 3,644/13, the Central Bank consolidated the risk-weighted assets ("RWA") applied to different exposures in order to calculate capital requirement through a standardized approach ("RWAcpad"). According to such rule, as amended, the risk weight factors vary from 0.0% to 1,250.0% and should be applied to credit risks, depending on the nature and characteristics of the exposure. Risk-weight factors applicable to different exposures are often changed by the Central Bank.

Subsequently, mitigation instruments were provided for the portion RWA related to the exposure to credit risk subject to the calculation of capital requirements through a RWAcpad, through Circular No. 3,809/16, and new criterion for application of the Fact of Risk Weighting ("FPR"), by Circular No. 3,921/18.

In addition, there are specific standards of the Central Bank to determine procedures to calculate the portion of risk-weighted assets related to other exposures.

The calculating the RWA, in connection with the calculation of the capital required for the operational risk by way of RWAopad, provided for by Central Bank Resolution No. 4,193/13, is calculated based on the risk of financial institutions and its direct and indirect controlled entities, based on the gross revenue for the past three years. The procedures for these calculations were established by Central Bank's Circular No. 3,640/13, as amended.

The total consolidated exposure of a financial institution in foreign currencies and gold, and in assets subject to exchange variation calculated through a standardized approach ("RWAcam"), according to the calculation procedures established by the Central Bank's Circular No. 3,641/13, may not exceed 30.0% of its Reference Equity, pursuant to Resolution No. 3,488/07. In addition, if its exposure is greater than 5.0% of its Reference Equity, the financial institution must hold additional capital at least equivalent to 100% of its exposure. Since July 2007, the amount internationally offset in opposite exposures (purchases and sales) in Brazil and abroad by institutions of the same conglomerate is required to be added to the respective conglomerate's net consolidated exposure.

For more information on our capital ratios, see “Item 5.B – Liquidity and Capital Resources –5.B.40Capital Compliance – Basel III”.

 

4.B.70.02-05 Compulsory Deposits

The Central Bank periodically sets compulsory deposit and related requirements for financial institutions based in Brazil. The Central Bank uses reserve requirements as a mechanism to control liquidity in the SFN.

According to the Central Bank's rules, we must place a percentage of the savings deposits and time deposits we receive from our customers with the Central Bank:

Ø Time deposits:in accordance with Central Bank Circular No. 3,993/20 for the calculation period beginning on March 16, 2020 and ending on March 20, 2020 we are required to deposit 17.0% of the average amounts recorded under time deposits and others operations, as described in the regulations, deducting R$30.0 million as per Central Bank's Circular No. 3,916/18. The amount required is deposited with the Central Bank in cash and we earn remuneration on the amount deposited at the SELIC rate. For the year ended December 31, 2019, this percentage was 25% and it was reduced to 17.0% as a result of the Covid-19 pandemic.From November 2020 onwards this percentage will revert again to 25%.

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In addition, for the calculation period from April 6 to April 9, 2020, where the adjustment will occur on April 20, 2020, Central Bank Circular No. 3,997/20 provides that the charges calculated in accordance with the rules in force and deducted from the balance blocked from the compulsory payment on time deposits, there will be a deduction of 15% of the debit balance restated, checked on the last business day of the period of calculation of the loans granted within the framework of the Emergency Employment Support Program.

 

Time deposits are represented by bank deposit certificates – CDBs and pay either a fixed or a floating rate, which is typically a percentage of the interbank interest rate. The breakdown between CDBs at pre-fixed rates and floating rates varies from time to time, depending on the market’s interest rate expectations.

ØDemand deposits – we are required to deposit 21.0% of the average daily balance of demand deposits, collection of receivables, payment of taxes, third party funds in transit and obligations for the provision of payment services, deducting R$500 million, pursuant the provisions of Circular No. 3,917/18.

ØSavings deposits – each week we are required to deposit in an account with the Central Bank an amount equivalent to 20.0%of the arithmetic average of the sum of the balances entered under the headings of Savings Deposits and Resources of Associated Savers, according to Circular No. 3,975/20. The balance of the account is remunerated by the “TR” plus interest, as detailed in the same circular.

In February 2013, the Central Bank defined rules for financial cost collection on non-compliance with compulsory deposit, reserve or compulsory assignment requirements. The financial cost charged to institutions that failed to comply with these requirements was adjusted to the SELIC rate plus 4.0%p.a.

Additionally, present Central Bank regulations require that we:

·

allocate a minimum of 30.0% of demand deposits to providing rural loans;

·

we maintain investments in targeted productive microcredit program operations, of at least 2.0% of demand deposits held by us; and

·

allocate a minimum of 65.0% of the total amount of deposits in savings accounts to finance residential real estate. Amounts that can be used to satisfy this requirement include direct residential housing loans, mortgage notes, charged-off residential real estate or housing construction loans and certain other financings, all as specified in guidance issued by the Central Bank.

 

Standards on compulsory deposits and additional reserve requirements are periodically altered by the Central Bank.

 

4.B.70.02-06 Asset composition requirements

According to the Resolution No. 4,677/18, as amended, financial institutions headquartered in Brazil must limit their exposure to a single client to a maximum amount of 25.0% of Tier 1 of its RE, or 15% of Tier 1 of its RE if the institution is listed as systemically important in the global scope by the Financial Stability Board.

From October 2017, with the enactment of Resolution No. 4,607/17, the following transactions are excluded from the calculation of the limits mentioned above: (i) loan and leasing operations of responsibility of the Government; (ii) credits arising from transactions with derivatives of responsibility of the Government; and (iii) installments of loan operations guaranteed by the government. Under the terms of Resolution No. 4,589/17, the amount of loan operations with organizations and entities of the public sector is limited to 45% of the Reference Equity, according to the regulations in force.

 

 

4.B.70.02-07 Repurchase transactions

Repurchase transactions are subject to operational capital limits based on the financial institution’s equity, as adjusted in accordance with Central Bank regulations. A financial institution may only hold repurchase transactions in an amount up to 30 times its Reference Equity. Within that limit, repurchase transactions involving private securities may not exceed five times the amount of the financial institution’sCapital. Limits on repurchase transactions involving securities issued by Brazilian governmental authorities vary in accordance with the type of security involved in the transaction and the perceived risk of the issuer as established by the Central Bank.

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In September 2016, the Central Bank prohibited the execution, extension or renewal of repurchase transactions with securities issued or accepted from associated institutions, or institutions that are members of the same prudential conglomerate. However, the execution, extension or renewal of repurchase transactions based on securities issued or accepted up until September 29, 2016 will be accepted until December 31, 2017, provided that the following are observed: (i) the maximum term of twelve months; and (ii) the maintenance of the accounting balance related to the total of transactions in an amount equal to or less than 110.0% of the total accounting balance calculated on the base date of August 31, 2016, whereby from May 1, 2017, the amount will be 50.0% of the total accounting balance calculated for the same base date.

In March 2020, the Central Bank issued Circular No. 3,990/20 establishing the criteria and conditions for the practice of repo operations in foreign currencies by the Central Bank, through the sale of sovereign bonds (Global Bonds) by a financial institution, with the seller simultaneously committing to repurchase securities with the same characteristics at a future date.

 

4.B.70.02-08 Onlending of funds borrowed abroad

Financial institutions and leasing companies are permitted to borrow foreign currency-denominated funds in the international markets (through direct loans or the issuance of debt securities) in order to on-lend such funds in Brazil. These onlendings take the form of loans denominated inreais but indexed to the U.S. dollar. The terms of the onlending transaction must reflect the terms of the original transaction. The interest rate charged on the underlying foreign loan must also conform to international market practices. In addition to the original cost of the transaction, the financial institution may charge onlending commission only.

Furthermore, the amount of any loan in foreign currency should be limited to the sum of foreign transactions undertaken by the financial institution to which loan funds are to be directed. Lastly, pursuant to the Central Bank’s Circular No. 3,434/09, the total of loans and advances made against these funds must be delivered to the Central Bank as collateral, as a condition for the release of the amount to the financial institution.

 

4.B.70.02-09 Foreign currency position

Operations in Brazil involving the sale and purchase of foreign currency may be conducted only by institutions authorized by the Central Bank to operate in the foreign exchange market.

Beginning in 1999, the Central Bank adopted a foreign exchange free float system, which gave rise to increased volatility. Since mid-2011 the Brazilianreal has depreciated against the U.S. dollar and the Central Bank has intervened in the foreign exchange market to control the foreign rate volatility.

The Central Bank does not impose limits on long positions in foreign exchange operations (i.e., in which the aggregate amount of foreign currency purchases exceeds sales) and short positions in foreign exchange operations (i.e., in which the aggregate amount of foreign currency purchases is less than sales) for banks authorized to operate in the foreign exchange market.

Standards that address foreign exchange markets are frequently changed by CMN and the Central Bank.In 2019, the Central Bank presented a draft bill to modernize the legislation for operations with foreign currencies in the country. The New Foreign Exchange Law, proposing, among other measures, the reduction of bureaucracies for contracting foreign exchange and the possibility of individuals and companies holding accounts in foreign currencies. The New Foreign Exchange Law aims to consolidate the foreign exchange legislation and simplify operations. The Central Bank foresees that the New Foreign Exchange Law will enable efficiency gains in accessing the market, the elimination of asymmetries of treatment and definition of proportionate requirements.

 

 

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Form 20-F

 

 

4.B.70.02-10 Registration of cross-border derivatives and hedging transactions and information on derivatives

In December 2009, the Central Bank issued specific rules that became effective in February 2010, requiring Brazilian financial institutions to register their cross-border derivative transactions with a clearing house regulated by the Central Bank and by the CVM. Specifically, cross-border derivative transactions must (i) be registered within two business days; and (ii) cover details of underlying assets, values, currencies involved, terms, counterparties, means of settlement and parameters used.

In January 2010, registration rules were extended to cover hedging transactions in foreign OTC markets or exchanges.

In November 2010, to facilitate management of derivatives-related risk incurred by financial institutions, the CVM stipulated that market participants should create mechanisms in order to share information on derivatives contracts traded or registered in their systems, subject to banking confidentiality rules.

 

 

4.B.70.02-11 Treatment of loans and advances

Financial institutions are required to classify their loans and advances into nine categories, ranging from AA to H, based on their risk. These credit risk classifications are determined in accordance with Central Bank criteria relating to:

·        the conditions of the debtor and the guarantor, such as their economic and financial situation, level of indebtedness, capacity for generating profits, cash flow, delay in payments, contingencies and credit limits; and

·        the conditions of the transaction, such as its nature and purpose, the type, the level of liquidity, the sufficiency of the collateral and the total amount of the credit.

In the case of corporate borrowers, the nine categories that we use are as follows:

Rating

Our Classification

Bradesco Concept

AA

Excellent

First‑tier large company or group, with a long track record, market leadership and excellent economic and financial concept and positioning.

A

Very Good

Large company or group with sound economic and financial position that is active in markets with good prospects and/or potential for expansion.

B

Good

Company or group, regardless of size, with good economic and financial positioning.

C

Acceptable

Company or group with a satisfactory economic and financial situation but with performance subject to economic variations.

D

Fair

Company or group with economic and financial positioning in decline or unsatisfactory accounting information, under risk management.

 

A loan and advance operation may be upgraded if it has credit support or downgraded if in default.

Doubtful loan operations are classified according to the loss perspective, as per E-H ratings as follows:

 

Rating

Bradesco Classification

E

Deficient

F

Bad

G

Critical

H

Uncollectible

 

A similar nine-category ranking system exists for transactions with individuals. We grade credit based on data including the individual’s income, net worth and credit history, as well as other personal data.

For regulatory purposes, financial institutions are required to classify the level of risk of their loan operations according to Central Bank criteria, taking into consideration both the borrower and guarantors’ characteristics and the nature and value of the transaction, among others, in order to identify potential credit losses. For more information, see “Expected losses of loans and advances”, Item 4.B.100.06 Loans andadvances to customers.

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This risk evaluation must be reviewed at least every six months for loans extended to a single customer or economic group whose aggregate loan amount exceeds 5.0% of the financial institution’s Capital, and once every twelve months for all loan operations, with certain exceptions.

Past due loans and advances must be reviewed monthly. For this type of loan, regulatory provisions set the following minimum risk classifications:

Number of Days Past Due(1)

Minimum Classification

15 to 30 days

B

31 to 60 days

C

61 to 90 days

D

91 to 120 days

E

121 to 150 days

F

151 to 180 days

G

More than 180 days

H

(1) These time periods are doubled in the case of loans with maturities in excess of 36 months.

 

Financial institutions are required to determine, whether any loans must be reclassified as a result of these minimum classifications. If so, they must adjust their regulated accounting provisions accordingly.

The regulations specify a minimum provision for each category of loan (local GAAP), which is measured as a percentage of the total amount of the loan and advance operation, as follows:

 

Classification of Loan

Minimum Provision %

AA

-

A

0.5

B

1.0

C

3.0

D

10.0

E

30.0

F

50.0

G

70.0

   H (1)

100.0

(1) Financial institutions must write off any loan six months after its initial classification as an H loan.

 

Loans and advances of up to R$50,000 may be classified by the method used by the financial institution itself or the arrears criteria, described above. Classifications should be at least level A, according to the Central Bank.

Financial institutions must make their lending and loan classification policies available to the Central Bank and to their independent accountants. They are also required to submit information relating to their loan portfolio to the Central Bank, together with their financial statements. This information must include:

·        a breakdown of the business activities and nature of borrowers;

·        maturities of their loans; and

·        amounts of rescheduled, written-off and recovered loans.

The Central Bank requires authorized financial institutions to compile and submit their loans and advances portfolio data.

 

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Form 20-F

 

 

4.B.70.02-12 Exclusivity in loans and advances to customers

In January 2011, the Central Bank’s Circular No. 3,522/11 prohibited financial institutions that provide services and loan operations from entering into agreements, contracts or other arrangements that prevent or restrict the ability of their customers to access loans and advances offered by other institutions, including payroll-deductible loans. The purpose of this rule is to increase competition among credit providers and prevent exclusivity agreements between state-owned banks and government bodies with respect to payroll-deductible loans. While there is some uncertainty as to whether the new rules affect existing contracts, all new contracts are covered by the new regulations, allowing market competition and enabling employees in the public and private sectors to obtain payroll-deductible loans from any authorized financial institution.

 

4.B.70.02-13 Debit balance of the credit card bill

Through CMN Resolution No. 4,549/17, which came into force in April 2017, the Central Bank started regulating the financing of the debit balance of the credit card invoice and other post-paid instruments, not settled in full at maturity.

 

According to the new standard, the credit card companies will no longer be able to finance the balance due from customers through the revolving credit for more than a month. Therefore, after the maturity of the bill in the following month, if there is still a debit balance due on the amount that is the object of the revolving credit, this can be financed by a line of credit in installments, to be offered by the financial institution, with better conditions or settled in full by the client.

 

In April 2018, the CMN issued Resolution No. 4,655/18 through which the charges that may be levied if there is a delay in payment or settlement of obligations related to invoices of cards were listed, which are: (i) compensatory interest, per day of delinquency, on the instalment in arrears; (ii) fines; and (iii) interest on arrears. In addition, it establishes that the form of levying such charges shall be included in the contract signed with the client.

 

4.B.70.02-14 Overdraft

In April 2018, the Self-Regulation Council of the FEBRABAN –Federação Brasileira de Bancos (Brazilian Federation of Banks), published the Regulatory Standard No. 19/18 (Regulatory Standard on the Conscious Use of Overdraft), with new guidelines to promote and stimulate the proper use of overdraft facilities.

Among the Regulatory Standard No. 19/18 main guidelines, we highlight that: (i) financial institutions which have signed the regulatory standard shall, at any time, provide more advantageous conditions to the consumer to settle his overdraft balance, including the possibility of instalment payments; (ii) if the consumer uses more than 15% of the overdraft limit available during 30 consecutive days, and as long as the value is above R$200.00, the financial institution shall proactively offer to the consumer alternatives for the settlement of the balance; and (iii) financial institutions shall promote financial guidance related to the overdraft, especially with respect to its use in emergency situations and on a temporary basis.

 

In November 2019, the CMN published Resolution No. 4,765/19, which provides for overdrafts granted by financial institutions for cash deposit accounts. This Resolution allows the collection of a fee for offering special overdraft facilities to the customer, noting that, for limits up to R$500.00, the charge is 0%, and 0.25% for credit limits above R$500.00 calculated on the amount exceeding the limit. On the other hand, the interest rates charged on the amount used are limited to 8% per month. This regulation came into force on January 6, 2020. To complement that resolution, the Central Bank's Circular No. 3,981/20 was published in February 2020 to provide adequate conditions for customers of financial institutions to monitor the use of the overdraft and for evaluation of the impact of interest charges and fees incurred by financial institutions. Accordingly, financial institutions are obliged to highlight in the account statement for deposit accounts, information regarding the overdraft,including the threshold, the debit balance of the overdraft, the values of the overdraft used daily, the value and the form of calculating the compensatory interest rate and the value of accrued interest. This Circular is expected to come in to force on June 1, 2020.

 

 

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4.B.70.02-15 Brazilian Clearing System (Sistema de PagamentosBrasileiro, or “SPB”)

The SPB was regulated and restructured under Law No. 12,865/13. These regulations are intended to streamline the system by adopting multilateral clearing and boost security and solidity by reducing systemic default risk and financial institutions’ credit and liquidity risks.

SPB comprises the entities, systems and procedures related to the processing and settlement of transactions of transfers of funds, operations with foreign currency or with financial assets and securities. The subsystems in the SPB are responsible for maintaining security mechanisms and rules for controlling risks and contingencies, loss sharing among market participants and direct execution of custody positions of contracts and collateral by participants. In addition, clearing houses and settlement service providers, as important components to the system, set aside a portion of their assets as an additional guarantee for settlement of operations.

Currently, responsibility for settlement of a transaction has been assigned to the clearinghouses or service providers responsible for it. Once a financial operation has been submitted for clearing and settlement, it generally becomes the obligation of the relevant clearinghouse and/or settlement service provider to clear and settle, and it is no longer subject to the risk of bankruptcy or insolvency on the part of the market participant that submitted it for clearing and settlement.

Financial institutions and other institutions authorized by the Central Bank are also required under the rules to create mechanisms to identify and avoid liquidity risks, in accordance with certain procedures established by the Central Bank. Under these rules, institutions are required to maintain, at least:

·

liquidity risk management policies and strategies, which are clearly evidenced and set operational limits and procedures aimed at exposure to liquidity risk at a level required by the Management;

·

processes to identify, assess, monitor and control liquidity risk exposure during different time frames, including intraday and comprising at least a daily assessment of transactions with settlement terms below 90 days;

·

an assessment, at least annually, of the processes described in the previous item;

·

funding policies and strategies that provide for adequate diversification of fund sources and maturity terms;

·

liquidity contingency plan, which is updated on a regular basis and sets responsibilities and procedures to face liquidity stress scenarios;

·

regular stress tests with short and long-term idiosyncratic and systemic scenarios, whose results should be considered when designing or revising policies, strategies, limits and the liquidity contingency plan; and

·

liquidity risk assessment as part of the process of approving new products, as well as an assessment of how compatible these products are with existing procedures and controls.

Payments are processed in real time, and since March 2013, the amounts over R$1,000 are being processed by electronic transfers between institutions with immediately available funds. If a transaction is made using checks, an additional bank fee will be charged.

The Central Bank and CVM have the power to regulate and supervise the SPB. The only members of the SPB are institutions of payments and payment arrangements that have high financial volumes. These volumes accumulated in the last 12 months are equivalent to R$500,000,000.00 in total value of transactions, 25,000,000 transactions, in the case of payment arrangements, and R$50,000,000.00 in resources kept in a pre-payment account payable in the case of a payment institution as issuer of electronic money. To achieve these volumes, the payment institution or of payment arrangement shall be subject to the requirements and procedures to authorize the operation, change the control, for corporate restructuring, cancellation of authorization and conditions to hold management positions, as established by Circular No. 3,885/18, and therefore subject to the regulation and supervision by the Central Bank. The regulation to govern the provision of payment services in the ambit of payment arrangements is governed by Circular No. 3,682/13, as amended.

In March 2020, the Central Bank, by means of Circular No. 3,989/20, instituted the BR Code, a rapid response code standard (QR Code) to be used by the payment arrangements, which must be offered in a standardized manner, in order to facilitate the interoperability, the internationalization and increased efficiency of retail payments.

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Form 20-F

 

 

In recent years, the Central Bank has led the process of implementation of the system for instant payments in Brazil, which includes the open arrangement established by the Central Bank, the PIX, the payment service providers participating in the arrangement (financial institutions and payment institutions), the unique platform that will settle transactions carried out between different participating institutions ("SPI") and the identifiers' directory of transactional accounts that will store the information of the tokens or nicknames that are used to identify the accounts of recipient users ("DICT"). Both the SPI and the DICT will be developed, operated and managed by the Central Bank. By means of Circular No. 3,985/20, the Central Bank established the criteria and modalities for participation in the PIX, in the SPI and in the DICT. This arrangement is established by the Central Bank and disciplines the provision of payment services related to instant payment transactions, of which we are obliged to participate. The arrangement of instant payment is composed by the payment service provider that maintains the transaction account (account maintained by an end-user in a payment service provider and used for purposes of payment or receipt of an instant payment, which may be a checking account, a savings deposit account or a prepaid payment account) and governmental entity that participates solely to make or receive their own payments. The PIX will be available to the public from November 2020.

 

4.B.70.02-16 Special Temporary Administrative, Intervention and Extrajudicial Liquidation Regimes – Under Law No. 6,024/74

 

ØIntervention

The Central Bank will intervene in the operations and management of any financial institution not controlled by the Federal Government if the institution:

·        suffers losses due to mismanagement, putting creditors at risk;

·        repeatedly violates banking regulations; or

·        is insolvent.

Intervention may also be ordered upon the request of a financial institution’s management and may not exceed 12 months. During the intervention period, the institution’s liabilities are suspended in relation to overdue obligations, maturity dates for pending obligations contracted prior to intervention, and liabilities for deposits in the institution existing on the date intervention was ordered.

 

ØAdministrative liquidation

The Central Bank will liquidate a financial institution if:

·        the institution’s economic or financial situation is at risk, particularly when the institution ceases to meet its obligations as they fall due, or upon the occurrence of an event that could indicate a state of bankruptcy;

·        management commits a material violation of banking laws, regulations or rulings;

·        the institution suffers a loss which subjects its unsecured creditors to severe risk; or

·        upon revocation of the authorization to operate, the institution does not initiate ordinary liquidation proceedings within 90 days, or, if initiated, the Central Bank determines that the pace of the liquidation may impair the institution’s creditors.

As a consequence of administrative liquidation:

·        lawsuits pleading claims on the assets of the institution are suspended;

·        the institution’s obligations are accelerated;

·        the institution may not comply with any liquidated damage clause contained in unilateral contracts;

·        interest does not accrue against the institution until its liabilities are paid in full; and

·        the limitation period of the institution’s obligations is suspended.

The Central Bank may end the extrajudicial settlement of a financial institution, in the following cases:

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·        full payment of unsecured creditors;

·        change of the institution’s scope to an economic activity that is not part of the SFN;

·        transfer of the institution’s control;

·        conversion into ordinary settlement; and

·        sale/loss of the institution’s assets, upon its completion and the distribution of the proceeds among the creditors, even if the debts are not fully paid; or

·        absence of liquidity or difficult completion of the institution’s remaining assets, as recognized by the Central Bank.

 

ØTemporary Special Administration Regime

The Temporary Special Administration Regime, known as “RAET”, is a less severe form of Central Bank intervention in financial institutions, which allows institutions to continue to operate normally. RAET may be ordered in the case of an institution that:

·        repeatedly makes transactions contravening economic or financial policies under federal law;

·        faces a shortage of assets;

·        fails to comply with compulsory deposit rules;

·        has reckless or fraudulent management; or

·        has operations or circumstances requiring an intervention.

 

4.B.70.02-17 Payment of creditors in liquidation

In the case of liquidation of a financial institution, employees’ wages, indemnities and tax claims have the highest priority among claims against the bankrupt institution. In November 1995, the Central Bank created theFundo Garantidor de Créditos –FGC to guarantee the payment of funds deposited with financial institutions in case of intervention, administrative liquidation, bankruptcy, or other state of insolvency. Members of the FGC are financial institutions that accept demand, time and savings deposits as well as savings and loans associations. The FGC is funded principally by mandatory contributions from all financial institutions based in Brazil accepting deposits from customers.

The FGC is a deposit insurance system that guarantees a certain maximum amount of deposits and certain credit instruments held by the same customer against a financial institution (or against member financial institutions of the same financial group). The liability of the participating institutions is limited to the amount of their contributions to the FGC, with the exception that in limited circumstances, if FGC payments are insufficient to cover insured losses, the participating institutions may be asked for extraordinary contributions and advances. The payment of unsecured credit and customer deposits not payable under the FGC is subject to the prior payment of all secured credits and other credits to which specific laws may grant special privileges.

 

CMN increased the maximum amount of the guarantee provided by the FGC in some circumstances.  The last maximum amount was R$250,000, maintained until the present date.  The extraordinary monthly contribution has also changed, as altered by CMN Resolution No. 4,653/18, and is currently applied to the equivalent of 0.01%.

CMN Resolution No. 4,653/18 was also responsible for instituting an additional monthly contribution to be collected when the Reference Value is 4 times higher than the Adjusted Shareholders’ Equity.  On November 27, 2019, the CMN amended Resolution No. 4,764/19, increasing the amount of the additional contribution and stating that such contribution shall be collected as from July 2020.

Central Bank amended Circular No. 3,915/18 establishing the obligation of providing information to the FGC by financial institutions and other institutions authorized to operate by the Central Bank, whereby these institutions should have systems and controls that can produce and supply such information in up to two working days in an electronic file with various data listed in the Circular.

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Form 20-F

 

 

According to CMN rules, the maximum value of the balance of such deposits is limited (with a maximum aggregate of R$3.0 billion) to: (i) for the balance of the deposits originally made without fiduciary assignment, the highest of the following amounts: (a) the equivalent of twice the regulatory Tier I capital, calculated yearly on the base date June earning interest monthly at the SELIC rate; (b) the equivalent of twice the regulatory Tier I capital, calculated as of December 2008, earning interest monthly at the SELIC rate as of May 2009; and (c) the equivalent of the sum of balances in time deposits plus balances of bills of exchange held in the bank in June 2008, earning interest monthly at the SELIC rate as of May 2009; and (ii) for the balance of the deposits made with fiduciary assignment, the following factors over the regulatory Tier I capital, calculated as of December of the previous year, adjusted by the SELIC rate: (a) 1.6 as of June 2013; and (b) 2.0 as of January 2014.

Furthermore, the limit on taking time deposits with special FGC guarantees without fiduciary assignment has been reduced, in accordance with the following schedule:

·        40.0% from January 1, 2013;

·        60.0% from January 1, 2014;

·        80.0% from January 1, 2015; and

·        100.0% from January 1, 2016.

 The rules relating to the FGC were subject to several changes, which are (i) an increase in the maximum amount of the guarantee provided by the FGC to R$250,000; (ii) the inclusion of agribusiness notes (“LCA”) in credits guaranteed by FGC;(iii) the changes in the limits of the operations of assistance and financial support and operations of liquidity with related institutions, in addition to sending information by the FGC to the Central Bank on these operations; (iv) the establishment of new parameters to qualify the institutions associated with the FGC; (v) the inclusion of assumptions on which the Board of Directors may exclude the entity from the members associated with the FGC; (vi) the inclusion of the duty of provision of information to the FGC; (vii) the inclusion of additional requirements for candidates for membership of the Board of Directors and Board of Executive Officers; (viii) the changes in the percentage of contribution for the formation of the Resolution Fund (“FR”) in the case of the FGC reaching the maximum limit established; and (ix) estimate that the revenues of any kind arising out of the investment of its equity constitute the resources of the FR.

In February 2019, Central Bank issued Circular No. 3,929/19, determining the calculation basis and collection of contributions from institutions associated with the FGC. The obligation to send information necessary to calculate due contributions and the application of a fine in the event of delay in the collection of the contributions. Circular No. 3,929/19 will come into force on July 1, 2020.

In March 2020, the CMN issued Resolution No. 4,785/20, which adjusted the special contribution to 0.03% per month of the amount of the balances of Time Deposits with Special Guarantee ("DPGE"), which may be 0.02% per month for the DPGE in which the FGC accepts conditional assignment of receivables in loan operations and leasing operations. This resolution also authorized the possibility of collection of these deposits without conditional assignment. The resolution adjusted the additional contribution to the FGC and altered the beginning of its recollection from July 2020 to begin as from July 1, 2021.

In April 2020, the CMN edited Resolution No. 4,799/20, changing the maximum value of the total credits relating to the DGPE for each individual or corporate entity against the same institution associated with the FGC, or against all member institutions of the same financial conglomerate from R$20,000,000.00 to R$40,000,000.00.

 

4.B.70.02-18 Internal compliance procedures

All financial institutions must have in place internal policies and procedures to control:

·        their activities;

·        their financial, operational and management information systems; and

·        their compliance with all applicable regulations.

The board of executive officers of a financial institution is responsible for implementing an effective structure for internal controls by defining responsibilities and control procedures and establishing corresponding goals and procedures at all levels of the institution. The board of executive officers is also responsible for verifying compliance with all internal procedures.

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4.B.70.02-19 Restrictions on foreign investment

The Brazilian Constitution allows foreign individuals or companies to invest in the voting shares of financial institutions based in Brazil only if they have specific authorization from the Brazilian government, declaring that the participation of foreign capital is in the interest of the Brazilian government by means of a presidential decree, pursuant to article 52, of the Act of Transitional Constitutional Provisions ("ADCT"). On September 26, 2019, the federal government published Decree No. 10,029, delegating to the Central Bank the power to recognize the government's interest in the viability of investment operations. On January 22, 2020, the Central Bank issued Circular No. 3,977/20, which recognizes the shareholding in the capital of financial institutions headquartered in Brazil, of natural persons orcorporate entitiesresident or domiciled abroad, as of interest to the Brazilian Government, provided that the requirements provided for in the regulations of the Central Bank are met, including: constitutional procedures, an operating permit, cancellation of the permit, control changes and corporate restructuring of financial institutions. Thus, the analysis regarding the shareholding of foreign capital in financial institutions will be performed in the same way as the analysis of composition of capital and shareholding, which financial institutions of national capital are submitted to. However, foreign investors that do not comply with the requirements and procedures laid down in the regulations of the Central Bank may acquire publicly traded non-voting shares of financial institutions based in Brazil or depositary receipts representing non-voting shares offered abroad. Any investment in common shares would depend on government authorization. In January 2012, the Central Bank authorized us to create an ADR program for our common shares in the U.S. market. Foreign interest in our capital stock is currently limited to 30.0%.

 

4.B.70.02-20 Anti-money laundering regulations, banking secrecy and financial operations linked to terrorism

Under Brazilian anti-money laundering rules and financial operations linked to terrorism, especially Law No. 9,613/98 and Law No. 13,260/16, which the Central Bank consolidated through Circular No. 3,461/09, as amended, to be replaced by Circular No. 3,978/20 from July 1, 2020, the financial institutions and other Institutions authorized to operate by the Central Bank of Brazil must:

·        keep up-to-date records regarding their customers;

·        maintain internal controls and records;

·        record transactions involving Brazilian and foreign currency, securities, metals or any other asset which may be converted into money;

·        keep records of transactions that exceed R$10,000 in a calendar month or reveal a pattern of activity that suggests a scheme to avoid identification;

·        keep records of all check transactions; and

·        keep records and inform the Central Bank of any cash deposits or cash withdrawals in amounts above R$50,000.

The financial institution must review transactions or proposals whose characteristics may indicate the existence of a crime and inform the Central Bank of the proposed or executed transaction and implement control policies and internal procedures. Records of multiple transactions must be kept for at least ten years, unless the bank is notified that a CVM investigation is underway, in which case the ten-year obligation may be extended.

The CVM directed special attention to politically exposed individuals through Instruction No. 463/08 and consolidated in Central Bank’s Circular No. 3,461/09, which refer to individuals politically exposed who hold or held prominent public positions in Brazil or abroad during the past five years and their relatives and representatives. Such individuals include heads of state and government, senior politicians and civil servants, judges or high-ranking military officers, and leaders of state controlled enterprises companies or political parties, members of the Judiciary, Legislative and Executive powers, as well as individuals who held or still hold relevant positions in foreign governments.

In 2008, the Central Bank expanded the applicable rules for controlling financial transactions related to terrorism. The Law No. 12,683/12 toughened the rules on money laundering offenses. According to the new law, any offense or misdemeanor – and not only serious offenses, such as drug traffic and terrorism – may bedeemed as a precedent to the money laundering offense. Additionally, the law expands, to a great extent, the list of individuals and corporate entities subject to the control mechanisms of suspicious transactions, which need to notify the Council for Financial Activities Control ("COAF"), including, among them, companies providing advisory or consulting services to operations in the financial and capital markets, under the penalty of fines of up to R$20 million. We have an obligation to send to the regulatory or inspection agency information regarding the non-existence of suspect financial transactions and other situations that generate the need for communications.

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Form 20-F

 

 

In 2014, the CVM issued Instruction No. 553/14 which, among other issues, (i) firmly states that any business relationship may only be initiated or kept after the arrangements related to the registration process and the “Conheça seu Cliente” (know your customer) policy are adhered to; and (ii) requires a statement on the purpose and nature of the business relationship with the institution.

In the same year, the Central Bank changed the procedures related to the Regulation of Anti-Money Laundering and Counter-Terrorism Financing ("AML/CTF") to be adhered to by the payment institutions, in order to meet international requirements set forth under the scope of the Financial Action Task Force ("FATF"), which is the body responsible for establishing AML/CTF standards to be adhered to by the countries of the G20. Accordingly, in addition to the AML/CTF procedures already required, payment institutions must also adopt procedures and controls to confirm the customer's identification and implement AML/CTF risk management systems. In December 2019, the CVM issued Normative Instruction No. 617/19, updating the standards of AML/TF, enhancement of the functions of the director responsible, definition of the stages linked to conducting the policy of getting to know your customer and greater details on the warning signs to be monitored, and the points that must integrate the analysis of the operation or atypical situation detected.

In addition, in November 2014, SUSEP established the Permanent Committee on Anti-Money Laundering and Counter-Terrorism Financing in the Insurance, Reinsurance, Capitalization and Private Pension Plan Markets ("CPLD"). The CPLD is a permanent governing body acting to prevent money laundering and curtail the financing of terrorism, both in connection with SUSEP and the insurance, reinsurance, capitalization and private pension plan markets.

In March 2019, Law No. 13,810/19 was enacted, which deals with the enforcement of sanctions imposed by the resolutions of the United Nations Security Council ("CSNU"), regulated by Central Bank's Circular No. 3,942/19.

In January 2020, the Central Bank issued Circular No. 3,978/20 which will come into force on July 1, 2020. The circular revokes Circular No. 3,461/09, enhancing the policy, procedures and internal controls to be adopted to give greater efficiency to the procedures practiced in the prevention of money laundering and terrorist financing. Among the main guidelines introduced by Circular No. 3,978/20, we highlight:

·

Internal risk assessment:guidelines that the regulated institutions use as subsidy, evaluations carried out by public entities of the country concerning the risk of money laundering and terrorist financing;

·

Registration of operations:maintenance of records of all operations, products and services contracted, including withdrawals, deposits, contributions, payments, receipts and transfers of resources, including the operations carried out in the context of the institution itself, indicating information enabling the identification of the parties of each operation and origin and destination of resources in cases of payment transactions, receipts and transfer of resources;

·

Operations in kind:a guideline was included requiring the inclusion of the identity of the sender where operations involving resources in kind of individual value exceed R$2,000.00;

·

Procedures to get to know customers:enhancement and inclusion of new procedures destined to get to know customers, in order to understand the identification, qualification and classification of the customer compatible with the risk profile and nature of the business relationship, in addition to the possibility, if necessary, of cross-checking information collected with those available on databases of public or private character. These procedures of identification and qualification shall also be adopted for administrators of legal entity customers and representatives of customers, compatible with the function exercised;

·

Politically Exposed People:expansion of the group of people characterized as politically exposed to the Executive, Legislative and Judicial Powers, the Public Attorney's Office and, in terms of state companies, at federal, state and municipal levels;

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·

Guidelines for hiring:inclusion in the PLD/FT policies of guidelines for the selection and hiring of employees, partners and service providers considering the risk of money laundering and terrorist financing;

·

Relationship with third parties:inclusion of forecast that if the institution establishes a business relationship with third parties not subject to the operating permit from the Central Bank, the institution's access to the identification of the final recipients of resources for purposes of the PLD/FT must be stipulated in the contract; and

·

Monitoring procedures:inclusion of specific situations to the non-exhaustive list of operations that, considering the parties involved, the values, the forms of implementation, the instruments used or the lack of economic or legal basis, may establish the existence of solid evidence of suspected money laundering or terrorist financing.

 

Given the new guidelines of Circular No. 3,978/20, we will need to adapt our processed to the new requirements, in particular those related to internal risk assessment of PLD/FT, until the entry into force of the Circular on July 1, 2020.

 

4.B. 70.02-21 Anticorruption Law

In August 2013, Law No. 12,846/13 was enacted to regulate civil and administrative liability ofcorporate entities for performing acts against public management, either domestic or foreign. Based on this legal provision,corporate entitiesshall be strictly liable, in both the administrative and civil spheres, for the practice of harmful acts in their exclusive or non-exclusive interest or benefit.

TheDecree No. 8,420/15 regulates the application of Law No. 12,846/13. Among others, it establishes the guidelines with respect to the calculation of the fines to be imposed in cases involving corruption scandals. The calculation base of the fine will be the company’s revenues, which may have “minimum” 0.1% and “maximum” 20%. Articles 17, 18, 19 and 20 of the Decree concern the “mid-term” of the fine, predicting “mitigating factors” and “aggravating factors”. In the first case, there are provisions on the non-consummation of the infraction, compensation for damages, level of cooperation, spontaneous communication, preparation of the program of governance and internal structure of compliance; in the second, as “aggravating factors”, it provides for the continuity of the conduct during the relevant period, any tolerance by the Board of the company, suspension of construction or public service and positive economic situation. If it is not possible to use the revenue as a parameter for the calculation of the fine, the values to be applied may be between R$6 thousand, minimum, and R$60 million, maximum. An additional 5% fine will be levied if within five years of the “corrupt” conduct such “corrupt” conduct is repeated.

 

 

4.B.70.02-22 Corporate Sustainability

Sustainability is one of the drivers of the way we do business and manage the Organization. In this sense, the management of environmental, social and governance ("ESG") issues has become key to our survival and growth in an environment that is increasingly dynamic and challenging. As we seek to generate shared and long-term value for investors, employees, suppliers, customers and society, we also contribute to the sustainable development of the country. In line with this vision, we have a set of policies and standards that guide our actions in relation to ESG issues. This normative framework is also in compliance with CMN Resolution No. 4,327/14, which introduces guidelines for the Social and Environmental Responsibility Policy ("PRSA") for financial institutions.

Our commitment to sustainability is reinforced in the establishment of dialogs with various stakeholders and through the incorporation of initiatives and voluntary commitments, such as: Global Compact Initiatives, Goals of Sustainable Development ("ODS"), Equator Principles, Principles for Responsible Investment ("PRI"), Principles for Sustainable Insurance ("PSI"), Principles for Banking Responsibility ("PRB"), Businesses for the Climate ("EPC"), Women's Empowerment Principles ("WEPs"), Task force on Climate-related Financial Disclosures ("TCFD"), among others.

We became a signatory of the Principles for Banking Responsibility ("PRB") of the United Nations ("UN") in 2019. A guide for the banking sector to respond, boost and benefit from an economy that is focused on sustainable development. In addition to being one of the first signatories, we were the only Brazilian Bankin the group of 30 financial institutions that since March 2018 have dedicated themselves to the construction of this project in alliance with the United Nations Environment Programme Finance Initiative – UNEP FI.

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Form 20-F

 

 

Our sustainability strategy was revised in 2019 and is based on the Principles for Responsible Banking. Six pillars of operation were developed: Sustainable Business; Climate Change; Customer Relationship; Diversity; Innovation; and Private Social Investment.

The main decisions and monitoring of the sustainability strategy are conducted by the Sustainability and Diversity Committee which meets quarterly and is made up of members of the Board of Directors and of the Diretoria Executiva, including the Chief Executive Officer. The Committee’s decisions are advised by the Sustainability Committee, an executive body composed of officers and managers from several areas, that guarantee the integrated application of the strategy to the businesses and operations, and help with the execution of plans and monitoring of projects.

We finished 2019 with advances in the ASG performance of the organization, being recognized by stock exchange indices and specialized rating agencies. For the 14th time, we are present in the Dow Jones Sustainability Indices (DJSI), in the World and Emerging Market portfolios, with performance above the world average. We were the best performing Brazilian private bank in 2019. We also integrated the Corporate Sustainability Index (“ISE”), of the B3, for the 15th consecutive edition. In addition, our performance was evaluated and classified by: VigeoEires – Best EM Performers, FTSE4Good, Bloomberg Gender-Equality Index, ISS ESG Corporate Rating (Prime), MSCI ESG Index, Sustainalytics’ ESG Ratings, among others.

As a result of the COVID-19 pandemic, we made donations, together with other major Brazilian banks, of: (i) 5 million rapid tests; (ii) 15 million masks; (iii) 30 CT scanners and other equipment, in addition to supporting Brazilian micro and small enterprises to expand the production of ventilators and equipment that will be sent to the Ministry of Health. Together with other companies, Bradesco Seguros is supporting the construction of a campaign hospital in Rio de Janeiro, with capacity for 200 beds, 100 of which are ICU beds.

 

4.B.70.02-23 Audit partner rotation requirements

Under Brazilian regulations, all financial institutions must:

·        be audited by an independent accounting firm; and

·        have the specialist in charge, officer, manager or audit team supervisor periodically replaced without the need to change the independent auditor firm itself. Rotation must take place after five fiscal years at most and replaced professionals may be reintegrated three years later. Terms of responsible specialists, officers, managers or audit team supervisors begin on the day the team begins work on the audit.

Each independent accounting firm must immediately inform the Central Bank of any event that may materially adversely affect the relevant financial institution’s status.

For the entities regulated by SUSEP, the applicable standards determine the replacement of the members responsible for the independent accounting audit, every five fiscal years. According to article 121, X, of CNSP Resolution No. 321/15, the member responsible for the independent accounting audit is the technical responsible, officer, manager, supervisor or any other member in a management function that is a member of the team responsible for independent accounting audit work. According to the applicable standards, the first mandatory replacement is expected to take place after the fiscal year ended December 31, 2019. A member responsible for the independent accounting audit can only return 3 years after being replaced.

For the entities regulated by ANS, the applicable standards in effect since 2016 determine that the professional responsible for signing the opinion should change at least every five fiscal years, requiring a minimum interval of three years from its replacement.

The members of the Board of Directors, elected in the form of article 141, paragraph 4 of the Brazilian Corporate Law, will have veto rights, provided that it is in a substantiated manner, the appointment or removal of our independent accounting firm.

For additional information on the auditors of the consolidated financial statements included in this annual report see “Item 16.C. Principal Accountant Fees and Services”.

 

 

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4.B.70.02-24 Auditing requirements

Because we are a financial institution and registered with the local stock exchange, we are required to have our financial statements audited every six months in accordance with BR GAAP, applicable to institutions authorized to operate by the Central Bank. Quarterly financial information filed with the CVM is also subject to review by independent auditors. Additionally, as required by CMN Resolution No. 4,776/20, which came into force on January 29, 2020, we are required to publish annual consolidated financial statements prepared in accordance with IFRS, accompanied by the independent auditors' report and the management report on social business and the main administrative facts for the period. The financial statements should also be disclosed in the Financial Statements of the Central Bank. Financial institutions and other institutions authorized to operate by the Central Bank, which, on the date of entry into force of Resolution No. 4,776/20, were not obliged to produce and disseminate financial statements in accordance with the above, will have to adhere fully to the terms of this resolution by January 1, 2022.

In January 2003, the CVM enacted regulations requiring audited entities to disclose information relating to their independent accounting firm’s non-auditing services provided to the entity whenever such services accounted for more than 5.0% of the amount paid to the external auditors.

The independent auditors must also declare to the audited company’s management that their provision of these services does not affect the independence and objectivity required for external auditing services.

In May 2004, the CMN enacted new regulations providing that we are required to appoint a member of our Management to be responsible for monitoring and supervising compliance with the accounting and auditing requirements set forth in the legislation.

Pursuant to this regulation, financial institutions having Reference Equity of more than R$1.0 billion, managing third party assets of at least R$1.0 billion or having an aggregate amount of third-party deposits of over R$5.0 billion are also required to create an Audit Committee consisting of independent members. According to the regulation, the number of members, their appointment and removal criteria, their term of office and their responsibilities must be specified in the institutions’ Bylaws. The Audit Committee is responsible for recommending to the Board of Directors which independent accounting firm to engage, reviewing the company’s financial statements, including the notes thereto, and the auditors’ opinion prior to public release, evaluating the effectiveness of the auditing services provided and internal compliance procedures, assessing Management’s compliance with the recommendations made by the independent accounting firm, among other matters. Our Bylaws were revised in December 2003 to stipulate the existence of an Audit Committee. In May 2004, our Board of Directors approved the internal regulations for the Audit Committee and appointed its first members. Our Audit Committee has been fully operational since July 2004. In October 2006, the CMN amended the Resolution No. 3,198/04, changing the minimum requirements to be observed by the financial institutions when electing members for the Audit Committee. In April 2014, the CMN changed certain rules related to audit committees in order to improve the composition and operational of such Committee. These rules provided that up to one third of its members may exercise another single consecutive term of office, granting more independence to the Audit Committees of privately-held institutions. See “Item 16.D. Exemptions from the listing standards for Audit Committees”.

We are required to publish a semi-annual summary of the Audit Committee report together with our financial statements.

 

 

4.B.70.02-25 Operations in other jurisdictions

We have branches and subsidiaries in several other jurisdictions, such as New York, London, Buenos Aires, the Cayman Islands, Hong Kong, Mexico and Luxembourg. The Central Bank supervises Brazilian financial institutions’ foreign branches, subsidiaries and corporate properties, and prior approval from the Central Bank is necessary to establish any new branch, subsidiary or representative office or to acquire or increase any interest in any company abroad. In any case, the subsidiaries activities should be complementary or related to our own principal activities. In most cases, we have had to obtain governmental approvals from local central banks and monetary authorities in foreign jurisdictions before commencing business. In each jurisdiction in which we operate, we are subject to supervision by local authorities.

 

 

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4.B.70.02-26 Asset management

Asset management is regulated by the CMN and the CVM.

In August 2004, the CVM issued Instruction No. 409/04, consolidating all previous regulations applicable to fixed-income asset funds and equity mutual funds. Prior to this ruling, fixed-income asset funds were regulated by the Central Bank, and equity mutual funds were regulated by the CVM.

In December 2014, the CVM enacted Instruction No. 555/14, which replaced Instruction No. 409/04, in order to improve electronic communications, rationalize the volume, content and manner of disclosing information, and to make investment limits less rigid for certain financial assets, particularly foreign financial assets. Additionally, CVM Instruction No. 555/14 addresses the following issues: (i) the framework for setting up funds without the need for executing an adhesion contract and the checking of the adequacy for investment in the fund to the customer’s profile in connection with funds investing over 95.0% of its shareholders’ equity in federal public debt bonds or equivalent risky securities; (ii) barring interest-bearing compensation that would jeopardize the independence of the asset management; (iii) providing more transparency to the distribution policy; (iv) improving performance fee regulation; and (v) providing safer rules for investments in foreign assets.

Pursuant to CVM limits and our Bylaws, our investment funds must keep their assets invested in securities and types of trades available in the financial and capital markets.

Securities, as well as other financial assets which are an integral part of the investment fund portfolio, should be duly registered in the registration system with a custodian or central depository, authorized by the Central Bank or the CVM to carry out such activities.

In addition to the limitations specified in each financial investment fund’s bylaws, they may not:

·        invest more than 10.0% of their shareholders’ equity in securities of a single issuer, if that issuer is: (i) a publicly-held institution; or (ii) another investment fund;

·        invest more than 20.0% of their shareholders’ equity in securities issued by the same financial institution authorized to operate by the Central Bank (including the fund administrator);

·        invest more than 5.0% of their shareholders’ equity if the issuer is an individual or corporate entity that is not a publicly-held company or financial institution authorized to operate by the Central Bank; and

·        be directly exposed to crypto assets. The CVM recommends avoiding also indirect exposure until the regulator issues a final rule on the matter.

There are no limits when the issuer is the government. For the purposes of these limits, the same issuer means the parent company, companies directly or indirectly controlled by the parent and its affiliates, or companies under common control with the issuer.

Under the previous regulation (CVM Instruction No. 409/04), the qualified investor funds required a minimum investment of R$1.0 million per investor and were subject to concentration limitations per issuer or per type of asset as long as this is stated in their bylaws. Under the current regulation (CVM Instruction No. 555/14), this privilege is eligible only for funds for professional investors.

CVM Instruction No. 555/14 states the limits to funds hold financial assets traded abroad in their portfolios, as follows: (i) no limits, for funds classified as “Fixed Income – Foreign Debt”, funds exclusively intended for professional investors that include in their denomination the suffix “Foreign Investment”, and certain funds exclusively intended for qualified investors; (ii) up to 40.0% of its shareholders’ equity for funds exclusively intended for qualified investors that do not follow certain provisions set forth in this Instruction; and (iii) up to 20.0% of its shareholders’ equity for general public funds.

Also in December 2014, the CVM established a new concept for qualified and professional investors.Corporate entitiesand individuals are to be deemed professional investors if they hold financial investments above R$10.0 million, and are deemed to be qualified investors if they hold financial investments above R$1.0 million. These definitions became effective in October 2015.

 

4.B.70.02-27 Brokers and dealers

Broker and dealer firms are part of the SFN and are subject to CMN, Central Bank and CVM regulation and supervision. Brokerage and distribution firms must be authorized by the Central Bank and are the onlyinstitutions in Brazil authorized to trade on Brazil’s stock exchanges and commodities and futures exchanges. Both brokers and dealers may act as underwriters for public placement of securities and engage in the brokerage of foreign currency in any exchange market.

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Brokers must observe B3 rules of conduct previously approved by the CVM, and must designate an executive officer responsible for observance of these rules.

Broker and dealer firms may not:

·        with few exceptions, execute transactions that may be characterized as the granting loans to their customers, including the assignment of rights;

·        collect commissions from their customers related to transactions of securities during the primary distribution; or

·        acquire assets, including real estate properties, which are not for their own utilization, with certain exceptions.

Broker and dealer firms’ employees, managers, partners, controlling and controlled entities may trade securities on their own account only through the broker they are related to.

On August 29, 2019, the CMN amended Resolution No. 4,750/19, changing the rules applicable to brokers and distributors. The new rule provides that these societies can make loans of assets of its equity to its clients to exclusively use the goods in the provision of guarantees for operations, provided that the requirements of said Resolution are met.

 

ØInternet brokerage services

The CVM approved regulations on Internet brokerage activities, which may be carried out only by registered companies. Brokers’ web pages must contain details of their systems, fees, security and procedures for executing orders. They must also contain information about how the market functions generally and the risks involved with each type of investment offered.

Brokers that carry out transactions over the Internet must guarantee the security and operability of their systems, which must be audited at least twice a year.

 

4.B.70.02-28 Leasing

The basic legal framework governing leasing transactions is established by Law No. 6,099/74, as amended (the “Leasing Law”) and related regulations issued periodically by the CMN. The Leasing Law provides general guidelines for the incorporation of leasing companies and the business activities they may undertake. The CMN, as regulator of the Financial System, is responsible for issuing Leasing Law related regulations and overseeing transactions made by leasing companies. Laws and regulations issued by the Central Bank for financial institutions in general, such as reporting requirements, capital adequacy and leverage regulations asset composition limits and treatment of doubtful loans, are also applicable to leasing companies.

 

4.B.70.03Insurance, health and pension plans regulation

 

4.B.70.03-01.01National Private Insurance Council

The CNSP is the agency responsible for establishing the guidelines and standards of private insurance policy. The agency is composed of representatives of the Ministry of Finance, the Ministry of Justice, the Ministry of Social Security and Social Assistance of the Superintendence of Private Insurance, the Central Bank and the CVM.

In addition to laying down the guidelines and standards of private insurance policy, it is theresponsibility of the CNSP:

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·

to regulate those exercising activities subordinate to the National Private Insurance System, as well as the application of penalties;

·

to establish the general characteristics of insurance, open private pension, capitalization and reinsurance contracts;

·

to establish the general guidelines of reinsurance operations; and

·

to prescribe the criteria for the establishment of Insurance Companies, of Capitalization, Open Private Pension Entities and Reinsurers.

 

4.B.70.03-01.02Private Insurance Superintendence

SUSEP is responsible for implementing and overseeing CNSP's policies and ensuring compliance with such policies by insurance companies, insurance brokers and insured individuals. SUSEP is linked to the Ministry of Finance and was created by Decree-Law No. 73 of November 1966.

Thus, for insurers to operate, they need government approval, as well as specific approval from the SUSEP to commercialize each of their products, where they may underwrite policies either directly to consumers or through qualified brokers (art. 13 and paragraph 2 of Law No. 4,594/64).

SUSEP is responsible for:

·

supervising the constitution, organization, functioning and operation of insurance companies, of capitalization, open private pension entities and reinsurers;

·

complying with and enforcing the deliberations of the CNSP and performing the activities delegated by it;

·

acting in order to protect the acquisition of popular savings that are made through the operations of insurance, open private pension, and of capitalization and reinsurance;

·

promoting the improvement of institutions and operational instruments;

·

promoting the stability of the markets under its jurisdiction, ensuring their expansion and the operation of the entities that operate in them;

·

ensuring the liquidity and solvency of companies that make up the insurance market; and

·

ensuring the protection of consumer interests of the markets supervised.

 

4.B.70.03-01.03National Supplemental Health Agency

The ANS is a municipality linked to the Ministry of Health, with operations throughout Brazil, as an agency of regulation, standardization, control and supervision of activities that ensure the qualification of health care in the supplemental health sector.

The main initiatives of ANS are to stimulate the quality of the supplemental health sector and encourage programs to promote and prevent diseases in the sector in which it operates.

To fulfill its objectives the following are incumbent upon the ANS:

·

regulation of the supplemental health care, creating general policies and guidelines, actions to standardize and foment actions that aim to protect the public interest and the sustainability of the supplemental health care market;

·

qualification of the supplemental health care, creating policies, guidelines and actions that seek, among others the qualification of the sector, in relation to the regulated market; and

 

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·        institutional articulation, creating policies, general guidelines and actions to optimize the internal and external institutional relations enabling the effectiveness of the regulatory process.

 

4.B.70.03-02 Insurance regulation

The Brazilian insurance business is regulated by Decree-Law No. 73/66, as amended, which created two regulatory agencies, the CNSP and SUSEP. SUSEP is responsible for implementing and overseeing CNSP’s policies and ensuring compliance with such policies by insurance companies, insurance brokers and insured individuals.Insurance companies require government approval to operate, as well as specific approval from SUSEP to offer each of their products. Insurance companies may underwrite policies both directly to consumers and through qualified brokers (article 13 and paragraph 2 of Law No. 4,594/64).

Insurance companies must set aside reserves in accordance with CNSP criteria. Investments covering these reserves must be diversified and meet certain liquidity criteria, rules for which were consolidated by CNSP Resolution No. 321/15, as amended, solvency and security criteria. Insurance companies may invest a substantial portion of their assets in securities. As a result, insurance companies are major investors in the Brazilian financial markets and are subject to CMN rules and conditions for their investments and coverage of technical reserves.

Insurance companies may not, among other activities:

·        act as financial institutions by lending or providing guarantees;

·        trade in securities (subject to exceptions); or

·        invest outside of Brazil without specific permission from the authorities.

Insurance companies must operate within certain retention limits approved by SUSEP pursuant to CNSP rules. These rules reflect the economic and financial situation of insurance companies and the conditions of their portfolios. Insurers must also meet certain capital requirements as provided by SUSEP regulations.

Under Complementary Law No. 126/07, the ceding party (local insurer or reinsurer) must offer local reinsurers preference when contracting reinsurance or retrocession in the percentage of 40% of risks ceded.

The Complementary Law also places more severe restrictions on ceding risk to foreign reinsurance companies and contracting of insurance abroad. Insurance companies must reinsure amounts exceeding their retention limits.

Since CNSP Resolution No. 168/07 was amended by CNSP Resolution No. 353/17, it does not require the insurance company to hire a minimum number of local reinsurers. However, in accordance with Article 15 of the CNSP Resolution No. 168/07, the insurance company must give preference to local reinsurers in at least 40% of the assignment of reinsurance agreements to each automatic or optional contract. In addition, as per CNSP Resolution No. 168/07 as amendment by CNSP Resolution No. 353/17, there are no more limits on the transference of risks by insurers to companies that belong to its financial conglomerate as long as the operations of reinsurance and retrocession ensure the effective transfer of risk between the parties, and are executed at arms-length.

In 2013, CNSP issued Resolution No. 302/13 which regulates the minimum capital requirement and to solvency regularization plans for insurance companies, capitalization bond entities, EAPCs, and local reinsurance companies. The main changes in such regulation were the following:

·        consolidation of the correction plans and the plans of solvency recovery into a single plan, as the solvency regularization plan (“PRS”);

·        establishment of a liquidity minimum ratio (20.0%) over the minimum capital requirement (“CMR”), so that the companies can promptly react to unexpected losses incurred by their capital;

·        changes to the base capital for EAPCs constituted as business corporations; and

·        exclusion of all references to solvency margin, once all risk portions were already established in the capital requirement rules.

The Resolution No. 321/15 provides for regulating technical provisions, assets which reduce the need for coverage of technical provisions, risk capital based on the underwriting, operating and market credit risks, adjusted shareholders’ equity, criteria for investments, accounting standards, accounting audit and independent actuarial audit and Audit Committee relating to insurance companies, EAPCs, capitalization companies and reinsurers.

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Insurance companies are exempt from ordinary financial liquidation procedures in case of bankruptcy, and instead follow the special procedure administered by SUSEP. Financial liquidation may be either voluntary or compulsory.

As was already the case in relation to entities subject to CMN, SUSEP issued rules in December 2008 with specific internal controls for preventing and fighting money laundering crimes. These rules include a series of provisions on notifying proposed transactions with politically exposed individuals and suppression of terrorist financing activities. These rules were amended and consolidated by Circular No. 445/12.

Resolution No. 383/20 issued by CNSP in March 2020, established that the operations of insurance, open pension plan, capitalization and reinsurance will be recorded in the registration system (i) previously approved by SUSEP; and (ii) managed by a registration entity accredited by SUSEP, in order to increase the control of the operations carried out by these companies.

There is currently no restriction on foreign investment in insurance companies.

 

4.B.70.03-02 Health insurance

Private health insurance and health plans are regulated by Law No. 9,656/98, as amended, which we refer to as the “Health Insurance Law”, containing general provisions applicable to health insurance companies and the general terms and conditions of agreements entered into between health insurance companies and their customers.

The ANS is responsible for regulating and supervising supplemental health services provided by health insurance companies pursuant to directives set forth by the Supplemental Health Council (Conselho de Saúde Suplementar).

Until 2002, SUSEP had authority over insurance companies, which were authorized to offer private health plans. Since 2002, pursuant to ANS regulations and supervision, only operators of private health plans may offer such plans. We created Bradesco Saúde in 1999 to fulfill this requirement.

 

4.B.70.03-03 Private pension plans

Open pension plans are subject, for purposes of inspection and control, to the authority of the CNSP and the SUSEP, which are under the regulatory authority of the Ministry of Finance. The CMN, CVM and Central Bank may also issue regulations pertaining to private pension plans, particularly related to assets guaranteeing technical reserves.

Private pension entities must set aside reserves and technical provisions as collateral for their liabilities.

EAPCs and insurance companies have been allowed to create, trade and operate investment funds with segregated assets since January 2006. Notwithstanding the above, certain provisions of Law No. 11,196/05 will only become effective when SUSEP and CVM issue regulatory texts. In September 2007, CVM issued Instruction No. 459/07, which addresses the setup, management, operation and disclosure of information on investment funds exclusively related to supplementary pension fund plans. In January 2013, the CMN determined new rules to govern the application of reserves, provisions and funds of insurance companies, capitalization companies and EAPCs. In December 2019, the CMN published Resolution No. 4,769/19, changing the limits for the investment of resources addressed in Resolution No. 4,444/15.

Currently, Resolution CNSP No. 349/17 and SUSEP Circular No. 563/17, in addition to the Supplementary Law No. 109/01, regulate the Pension Plan activity.

 

4.B.70.03-04 Reinsurance

Insurance companies must operate with reinsurers registered with SUSEP,and may, exceptionally, contractreinsurance or retrocession operations to reinsurers not authorized when the lack of capacity of thelocal reinsurers is proven.

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Currently, the Brazilian law provides that the insurer or the cooperative society, may concede up to 95% of premiums ceded in reinsurance, based on the totality of its operations in each calendar year. In the same way, the local reinsurer may also concede up to 95% of the premiums issued relating to risks they have underwritten, also calculated on the basis of the totality of its operations in each calendar year. It is worth noting that some lines or insurance modalities may have greater or lesser restrictions in the percentages of premiums that may be ceded in reinsurance.

The regulation of SUSEP establishes a minimum compulsory contracting of 15% of the reinsurance ceded, with Brazilian reinsurers. In addition, it provisions a limit to certain lines of up to 75%, so that a Brazilian-based insurer or reinsurer can transfer risks to related or foreign-based companies belonging to the same financial conglomerate.

Recently, CNSP Resolution No. 380/20 extended the list of people who can purchase reinsurance, including: (i) Open Pension Fund Entity ("EAPC") (art. 2, paragraph 1); and (ii) Closed Pension Fund Entity ("EFPC") and operators of private health care plan (art. 2, paragraph 3).

 

4.B.80 Taxes on our main transactions

 

4.B.80.01 Taxes on financial operations (“IOF”)

 

4.B.80.01-01 On loan operations

IOF levied on loan operations has as its taxable event the delivery of the obligation amount or value.

Rate applicable to loan and advances of any type, including credit opening is 0.0041% per day to legal entity borrowers and since January 2015, 0.0082% to individual borrowers.

This IOF rate will be charged on principal available to borrowers regarding the loans and advances, but for cases in which the amount of principal is not predetermined, in addition to the IOF levied on principal, there will be additional IOF at the same rate levied on interest and other charges, so that the calculation base will comprise the sum of daily outstanding debt balances calculated on the last day of each month.

Since January 2008, besides IOF on the transactions mentioned above, loans and advances have been subject to IOF additional rate of 0.38% irrespective of the repayment period or whether the borrower is an individual or a legal entity. Forcorporate entities, IOF rate calculation base is not the sum of outstanding debt balances, IOF shall not exceed 1.8765% and for individuals, it will not exceed a 3.373% rate, which corresponds to the result of applying the daily rate to each amount of principal stipulated for the transaction, multiplied by 365 days, plus an additional rate of 0.38% even if the loan is to be repaid by installment.

IOF on loan operations is levied on operations between individuals andcorporate entitiesdomiciled in Brazil, as well as on operations whose creditor resides in Brazil, even if the debtor is located abroad. However, the IOF is not levied on loan operations where the lender is located abroad, and the borrower is in Brazil.

 

4.B.80.01-02 On insurance operations

IOF levied on insurance operations has as its taxable event the receipt of premium. Applicable rates are as follows:

·    0.0% on: (i) reinsurance operations; (ii) operations related to mandatory insurance, linked to residential housing loans granted by an agent of the national housingsystem (SFH); (iii) insurance operations for export credits and international merchandise transportation; (iv) insurance operations entered into Brazil, related to the cover for risks relating to the launch and operation of the satellites Brasilsat I and II; (v) aeronautical insurance and civil liability of airlines; (vi) premiums intended to finance life insurance plans with survival coverage; and (vii) guarantee insurance;

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·      0.38% of premiums paid, in the case of life insurance and similar policies, for personal or workplace accidents, including mandatory insurance for personal injuries caused by vehicles or ships or cargo to persons transported or others;

·      2.38% private health insurance business; and

·      7.38% for all other insurance transactions.

 

4.B.80.02 Income and social contribution taxes on profit

Federal taxes on company profits include two components, income tax known as “IRPJ” and tax on net profits, known as “Social Contribution” or “CSLL”, both calculated on the adjusted net profit. Income tax charges are calculated based on a rate of 15.0% plus a surcharge of 10.0% on taxable income exceeding R$240 thousandper annum, corresponding to a combined rate around 25.0%. Social contribution tax payable by the majority of financial institutions is calculated based on a rate of 15.0% as from January 1, 2019. However, with the enactment of Constitutional Amendment No. 103/19, as of March 1, 2020, the banks of any kind and the development agencies began to be subject to the increased rate of 20%. For further information on our income tax expense, see Note 16 to our consolidated financial statements in “Item 18. Financial Statements”.

Companies based in Brazil are taxed based on their global income, and not just the income produced exclusively in Brazil. As a result, profits, capital gains and other income obtained abroad by Brazilian entities are computed in the determination of their taxable profits on an annual basis.

As rule, affiliates abroad will have their dividends (and not the corporate profit) taxed in Brazil at the time of effective distribution, except: (i) if they are domiciled in a tax haven or if they adopt a sub-taxation scheme, or (ii) they are treated as subsidiary. With regard to the subsidiaries, the controllercorporate entitiesin Brazil must: (i) record in sub accounts the investment account, in proportion to the stake held, the share of the adjustment of the investment value equivalent to corporate profits (calculated before local income tax), earned by the subsidiaries, directly and indirectly, in Brazil or abroad, concerning the calendar year in which they were calculated in the balance sheet; and (ii) compute these values in their calculation base of the IRPJ and Social Contribution.

Interest paid or credited by a company based in Brazil to: (i) an addressee domiciled abroad, whether or not holding equity interest in the company paying; or (ii) an addressee resident, domiciled or incorporated in a tax haven or locality with a low or privileged tax regime are subject to the deductibility limits imposed by thin-capitalization and transfer pricing rules.

Tax deductions for any payment to a beneficiary resident or domiciled in a country with tax haven are also subject to the following: (i) identification of the actual beneficiary of the person domiciled abroad; (ii) proof of the ability of the person located abroad to complete the transaction; and (iii) documented proof of payment of the respective price and of receipt of the assets, rights, or utilization of service.

The variation in the monetary value of companies’ credit rights and obligations in Brazil due to varying exchange rates can be calculated on a cash or accrual basis. The election of tax regime must be exercised in January of each calendar year and may only be altered during the fiscal year if there is “material variation in the exchange rate”, as published by a Finance Ministry Directive.

 

4.B.80.03PIS and Cofins

Two federal taxes are imposed on the gross revenues of corporate entities: PIS and Cofins. Nonetheless, many revenues, such as: dividends, equity earnings from unconsolidated companies, revenues from the sale of non-current assets (investments, fixed assets and intangible assets) and, as a general rule, export revenues paid in foreign currency are not included in the calculation base for PIS and Cofins. Revenues earned by corporations domiciled in Brazil are subject to PIS and Cofins taxes corresponding to interest on equity.

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Brazilian legislation authorizes certain adjustments to the calculation base of those taxes depending on the business segment and on other aspects.

Between 2002 (PIS) and 2003 (Cofins), the government implemented a non-cumulative collection system of PIS and Cofins taxes, allowing taxpayers to deduct from their calculation basis credits originating from certain transactions. In order to offset these credits, the rates of both PIS and Cofins were substantially increased. Subsequent to the changes made to PIS and Cofins, as of May 2004, both taxes are applicable on imports of goods and services when the taxpayer is the importing company domiciled in Brazil.

Since August 2004, the PIS and Cofins rates due on financial revenues were of 0.0%, including those arising from operations carried out for purposes of hedge, earned bycorporate entitiessubject to the system of non-accrual of these contributions. In April 2015, Decree No. 8,426/15 establishes that from July 2015, the rates shall be reestablished to 0.65% and 4.0%, respectively, including with respect to the revenue arising from hedge operations. However, even before the production of the effects of Decree No. 8,426/15, the normative was changed with the promulgation of Decree No. 8,451/15, which reassured the maintenance of the zero rate for contributions to PIS and Cofins, specifically in relation to financial revenues arising from: (i) monetary variation, depending on the exchange rate, of export operations of goods and services, as well as obligations incurred by the legal entity, including loans and financing; and (ii) of hedge operations carried out on the stock exchange, of commodities and of futures, or in the organized OTC market.

Certain economic activities are expressly excluded from the procedures of the non-accrual collection of the PIS and Cofins. This is the case of financial institutions, which shall remain subject to PIS and Cofins by the “accrued” procedures, which does not permit the discount of any credits, as provided by Article 10, paragraph I, of Law No. 10,833/03. In spite of this impossibility of accrual of credits, the legislation in force enables the exclusion of certain expenditure in the calculation by such entities of the bases of calculation of the PIS and Cofins (as is the case, for example, of the expenses incurred by the banks in financial mediation operations and expenditure on severance payments corresponding to accidents occurring in the case of private insurance companies). In such cases, the income received by the financial institutions is subject to Contribution to the PIS and Cofins at the rates of 0.65% and 4.0%, respectively.

In July 2010, the Brazilian tax authorities introduced digital tax records for PIS and Cofins taxes. Under this rule, financial and similar institutions must keep digital records for PIS and Cofins taxes relating to taxable events occurring as of January 2012.

In order to minimize the impacts of the COVID-19 pandemic on companies and businesses in Brazil, on April 3, 2020, RFB Decree No. 139/20 was amended, extending the period of collection of the PIS and Cofins taxes for March 2020 to August 25, 2020 and for April 2020 to October 25, 2020. In addition, in line with the postponement of the collection of these taxes, the deadlines for submission of their ancillary obligations (statement of debits and credits of federal taxes (“DCTF”) and EFD) were also extended.

 

4.B.80.04Compliance with the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) (Tax Compliance Laws for Foreign Accounts)

Our Organization observes the laws and regulations applicable to its business, whether at national or international level. In this sense, it complies with the FATCA and CRS provisions, which aim to enhance the transparency of fiscal information and to fight against tax evasion, practices of money laundering and the financing of terrorism, through the establishment of Compliance rules that require financial institutions to provide registration and financial data of people with fiscal residence in other participating countries.

FATCA is an American law that defines procedures and obligations applicable to foreign entities in order to identify financial resources of North American taxpayers (US Person) located abroad.

The Decree Law No. 8,506/15, signed and ratified the agreement between the Government of the Federative Republic of Brazil and the Government of the United States of America for the improvement of international tax compliance and implementation of the FATCA.

The CRS is the derivative instrument of the Convention on Mutual Assistance in Tax Matters, OECD and of the Multilateral Competent Authority Agreement, with goals aligned to the guidelines of the FATCA.

The Brazilian Federal Revenue (“RFB”) Normative Instruction No. 1,680/16, features on the identification of financial accounts in accordance with the CRS and regulates the procedures for identification, diligence and reporting to be made by financial institutions and entities subject to the norm.

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The financial institutions and entities subject should address this information to the RFB, through e-Financeira, following the obligations of Normative Instruction No. 1,571/15.

 

4.B.90Centralized Registration and Deposit of Financial Assets and Securities

In August 2017, the Brazilian Congress converted MP No. 775/17, issued by the President of Brazil in April 2017, into the Law No. 13,476/17. The new law consolidates the provisions on creation of liens over financial assets and securities. On the same day, the CMN issued Resolution No. 4,593/17 to regulate the provisions set by Law No. 13,476/17 and consolidate the regulation on centralized deposits and registry of financial assets and securities issued or owned by financial institutions and other institutions authorized to operate by the Central Bank. The CMN has established a deadline of 180 days for this rule to become effective. Resolution No. 4,593/17 presents a clearer definition of financial assets which includes, in addition to traditional financial instruments such as certificates and bank deposit receipts, credit securities subject to discount and credit card receivables. In addition, the rule establishes that the record of financial assets and securities is applicable to bilateral operations (meaning operations directly with clients), with some exemptions in certain situations; and the centralized deposit is applicable to credit securities with payment obligations and securities issued by financial institutions or other institutions authorized to operate by the Central Bank as a condition for engaging in certain negotiations and in assumption of custody. The Central Bank will issue regulations governing the implementation of such rules, including the creation of an electronic system for constitution of liens and encumbrances.

 

4.B.100Selected Statistical Information

Selected statistical information shown in this section for the years ended December 31, 2019 and 2018 is derived from our audited consolidated financial statements prepared in accordance with IFRS, included elsewhere in this annual report. The data for the years ended December 31, 2017, 2016 and 2015, is derived from our audited consolidated financial statements prepared in accordance with IFRS which are not included herein.

We have included the following information for analytical purposes. For a better understanding, read this information (for the years ended December 31, 2019, 2018 and 2017) in conjunction with “Item 5. Operating and Financial Review and Prospects” and with our consolidated financial statements in “Item 18. Financial Statements”.

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Form 20-F

 
 
 

4.B.100.01Average balance sheet and interest rate data

The following tables present the average balances of our interest-earning assets and liabilities, other assets and liabilities accounts, related interest income and expenses, and the average real yield/rate for each period. We calculate the average balances using the end-of-month account balances, which include related accrued interest.

 

ØInterest-earning and non-interest earning assets

For the year ended December 31,

R$ in thousands, except %

2019

2018

2017

Average balance

Interest and similar income

Average rate

Average balance

Interest and similar income

Average rate

Average balance

Interest and similar income

Average rate

Interest-earning assets

 

 

 

 

 

 

 

 

 

Financial assets at fair value through profit or loss

 240,554,612

   19,436,407

8.1%

  226,255,745

   17,538,227

7.8%

  -  

-  

 -

Financial assets held for trading

-  

-  

 -

-  

-  

 -

  209,289,723

   13,684,574

6.5%

Financial assets at fair value through other comprehensive income

 155,773,766

   12,567,751

8.1%

  182,237,700

   16,666,298

9.1%

  -  

-  

 -

Financial assets available for sale

-  

-  

 -

-  

-  

 -

  113,911,212

   11,351,320

10.0%

Financial assets at amortized cost

 150,042,781

   13,139,371

8.8%

  101,777,446

   12,120,868

11.9%

  -  

-  

 -

Investments held to maturity

-  

-  

 -

-  

-  

 -

41,836,244

4,883,103

11.7%

Financial assets pledged as collateral

-  

-  

 -

-  

-  

 -

  193,203,196

   21,268,934

11.0%

Loans and advances to banks

  97,965,424

6,874,429

7.0%

  119,022,489

9,546,878

8.0%

57,277,934

    5,073,435

8.9%

Loans and advances to customers

 415,669,729

   68,063,693

16.4%

  373,376,534

   62,200,740

16.7%

  363,674,189

   65,021,090

17.9%

Central Bank compulsory deposits

   79,302,914

4,304,875

5.4%

   68,226,005

3,916,299

5.7%

    58,875,557

4,881,319

8.3%

Other interest-earning assets

  546,050

   31,179

5.7%

  1,250,275

   63,829

5.1%

  871,012

   68,553

7.9%

Total interest-earning assets

  1,139,855,276

124,417,705

10.9%

  1,072,146,194

122,053,139

11.4%

 1,038,939,067

126,232,328

12.2%

 

 

 

 

 

 

 

 

 

 

Non-interest-earning assets

-  

-  

 -

-  

-  

 -

  -  

-  

 -

Cash and balances with banks

  16,124,897

-  

 -

   15,152,436

-  

 -

14,561,569

-  

 -

Central Bank compulsory deposits

  6,900,733

-  

 -

  6,587,662

-  

 -

  5,668,761

    -  

 -

Financial assets available for sale (shares)

  16,646,199

-  

 -

   13,999,412

-  

 -

10,426,747

-  

 -

Non-performing loans and advances to customers(1)

  17,576,507

-  

 -

   17,474,231

-  

 -

20,059,794

-  

 -

Impairment of loans and advances

-  

-  

 -

 -

-  

 -

   (34,631,652)

-  

 -

Expected losses for loans and advances

 (33,251,132)

-  

 -

  (28,130,043)

-  

 -

  -  

-  

 -

Investments in associates and joint ventures

 8,165,368

-  

 -

  8,385,253

-  

 -

 7,509,425

-  

 -

Property and equipment, net of accumulated depreciation

 9,531,260

-  

 -

  8,302,022

-  

 -

  7,660,382

-  

 -

Intangible assets and goodwill, net of accumulated amortization

  19,718,843

-  

 -

   15,587,020

    -  

 -

15,369,482

-  

 -

Current and deferred income tax

  63,292,404

-  

 -

   59,130,804

-  

 -

57,857,166

-  

 -

Other non-interest-earning assets

  87,113,632

-  

 -

   75,349,224

-  

 -

70,823,130

-  

 -

Total non-interest-earning assets

 211,818,711

-  

 -

  191,838,021

-  

 -

  175,304,804

-  

 -

 

 

 

 

 

 

 

 

 

 

Total assets

  1,351,673,987

-  

 -

  1,263,984,215

-  

 -

  1,214,243,871

-  

 -

(1) Overdue by more than 60 days.

 

 

107 Bradesco


 

Table of Contents

 

4.B. Business Overview

Form 20-F

 

 

ØInterest-bearing and non-interest-bearing liabilities

 

For the year ended December 31,

R$ in thousands, except %

2019

2018

2017

Average balance

Interest and similar expense

Average rate

Average balance

Interest and similar expense

Average rate

Average balance

Interest and similar expense

Average rate

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

Savings deposits

  108,975,557

  4,568,663

4.2%

  103,764,844

  4,646,528

4.5%

   96,511,751

  5,730,457

5.9%

Time deposits

  192,298,337

  7,974,767

4.1%

  158,396,848

  6,389,594

4.0%

  124,357,467

  7,688,711

6.2%

Obligations for repurchase agreements

  191,481,640

   11,784,845

6.2%

  211,937,370

   15,094,786

7.1%

  238,407,697

   22,564,515

9.5%

Borrowings and onlendings

   53,915,887

  4,400,636

8.2%

   51,448,829

  3,176,469

6.2%

   58,617,611

  3,068,552

5.2%

Funds from securities issued

  161,733,309

  9,250,005

5.7%

  146,183,351

  9,054,699

6.2%

  138,281,213

   13,262,613

9.6%

Subordinated debt

   53,387,035

  3,708,924

6.9%

   47,741,687

  3,517,067

7.4%

   52,065,114

  5,100,017

9.8%

Insurance technical provisions and pension plans

 258,822,232

   16,930,146

6.5%

  245,141,522

   13,365,526

5.5%

  226,765,103

   18,174,550

8.0%

Total interest-bearing liabilities

  1,020,613,997

   58,617,986

5.7%

  964,614,451

   55,244,669

5.7%

  935,005,956

   75,589,415

8.1%

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing liabilities

-  

-  

 -

-  

-  

 -

-  

-  

 -

Demand deposits

   32,764,740

-  

 -

   32,720,748

-  

 -

   31,014,556

-  

 -

Other non-interest-bearing liabilities

 165,177,418

-  

 -

  142,565,235

-  

 -

  138,586,108

-  

 -

Total non-interest-bearing liabilities

 197,942,158

-  

 -

  175,285,983

-  

 -

  169,600,664

-  

 -

 

 

 

 

 

 

 

 

 

 

Total liabilities

  1,218,556,155

-  

 -

  1,139,900,434

-  

 -

  1,104,606,620

-  

 -

 

 

 

 

 

 

 

 

 

 

Equity attributable to controlling shareholders

 132,706,804

-  

 -

  123,748,267

-  

 -

  109,139,400

-  

 -

Non-controlling interest

  411,028

-  

 -

  335,514

-  

 -

  497,851

-  

 -

Total liabilities and equity

  1,351,673,987

-  

 -

  1,263,984,215

-  

 -

  1,214,243,871

-  

 -

(1) Includes interbank deposits.

 

108 Form 20-F – December 2019


 
Table of Contents 
   

Form 20-F

 
 
 

4.B.100.02Changes in interest and similar income and interest and similar expense – volume and rate analysis

In 2018, we adopted IFRS 9, which replaces the guidelines contained in IAS 39 – Financial Instruments, with a new treatment for the classification and measurement of assets, in which the entity should focus on the business model that reflects the asset management of the Organization.

The following table shows the effects of changes in our interest income and expense arising from changes in average volumes and average yield/rates for the periods presented. Data related to the average balance of our interest-earning assets, interest-bearing liabilities and other assets and liabilities have been calculated based upon the average of the month-end balances during the relevant period. Likewise, information related to the interest income and expenses generated from our assets and liabilities and the average return rate for each of the periods indicated have been calculated based on income and expenses for the period, divided by the average balances calculated as indicated above. We allocated the net change from the combined effects of volume and rate proportionately to the average volume and rate, in absolute terms, without considering positive and negative effects.

 

For the year ended December 31,

R$ in thousands

2019/2018

Increase/(decrease) due to changes in

Average
volume

Average
yield/rate

Net change

Interest-earning assets

 

 

 

Financial assets at fair value through profit or loss

  1,136,486

   761,694

   1,898,180

Financial assets at fair value through other comprehensive income

 (2,262,805)

  (1,835,742)

  (4,098,547)

Financial assets at amortized cost

  4,771,599

  (3,753,096)

   1,018,503

Loans and advances to banks

 (1,565,198)

  (1,107,251)

  (2,672,449)

Loans and advances to customers

  6,941,051

  (1,078,098)

   5,862,953

Central Bank compulsory deposits

   609,956

  (221,380)

   388,576

Other interest-earning assets

(39,471)

   6,821

(32,650)

Total interest-earning assets

   9,591,618

  (7,227,052)

   2,364,566

 

 

 

 

Interest-bearing liabilities

 

 

 

Savings deposits

   226,777

  (304,642)

(77,865)

Time deposits

   1,262,246

   322,927

   1,585,173

Obligations for repurchase agreements

  (1,374,700)

  (1,935,241)

  (3,309,941)

Borrowings and onlendings

   158,674

   1,065,493

   1,224,167

Funds from securities issued

   920,267

  (724,961)

   195,306

Subordinated debt

   399,897

  (208,040)

   191,857

Insurance technical provisions and pension plans

  778,431

   2,786,189

   3,564,620

Total interest-bearing liabilities

   2,371,592

   1,001,725

   3,373,317

 

 

109 Bradesco


 

Table of Contents

 

4.B. Business Overview

Form 20-F

 

 

4.B.100.03Net interest margin and spread

The following table shows the average balance of our interest-earning assets, interest-bearing liabilities, and net interest and similar income, and compares net interest margin with net interest spread for the periods indicated:

 

For the year ended December 31,

R$ in thousands, except %

2019

2018

2017

Average balance of interest‑earning assets (A)

     1,139,855,276

      1,072,146,194

      1,038,939,067

Average balance of interest‑bearing liabilities

     1,020,613,997

         964,614,451

         935,005,956

Net interest income(1)(B)

          65,799,719

          66,808,470

          50,642,913

 

 

 

 

Interest rate on the average balance of interest‑earning assets (C)

10.9%

11.4%

12.2%

Interest rate on the average balance of interest‑bearing liabilities (D)

5.7%

5.7%

8.1%

Net yield on interest‑earning assets (C-D)

5.2%

5.7%

4.1%

 

 

 

 

Net interest margin (B/A)

5.8%

6.2%

4.9%

(1) Total interest income less total interest expenses.

 

4.B.100.04 Return on equity and assets

The following table shows selected financial indices for the periods indicated:

 

 

R$ in thousands, except % and per share information

For the year ended December 31,

2019

2018

2017

 

 

 

 

Net income in IFRS (A)

21,173,207

16,748,439

17,314,603

Accounting pratices diferences (IFRS X BRGAAP) (A - B)

(1,409,408)

(2,336,514)

2,656,848

Net income in BRGAAP (B)

22,582,615

19,084,953

14,657,755

Average total assets (IFRS) (C)

1,351,673,987

1,263,984,215

1,214,243,871

Average equity attributable to controlling shareholders (IFRS) (D)

132,706,804

123,748,267

109,139,400

Net income  in IFRS as a percentage of average total assets (A / C)

1.6%

1.3%

1.4%

Net income in IFRS as a percentage of average equity attributable to controlling shareholders (A / D)

16.0%

13.5%

15.9%

Dividends payout ratio to net income(1)

68.8%

34.2%

44.0%

(1) Dividends and Interest on Equity (net of taxes) divided by net income, discounting legal reserves, according to BR GAAP.

 

 

110 Form 20-F – December 2019


 
Table of Contents 
   

Form 20-F

 
 
 

4.B.100.05 Financial assets at fair value through income, at fair value through other comprehensive income and assets at amortized cost.

For theyears beginning after January 1, 2018, the following table sets our financial assets according to IFRS 9, which replaces the guidelines contained in IAS 39 – Financial Instruments. For the year ended December 31, 2017, we applied IAS 39. For more information about the treatment of our assets, see Notes 21, 24 and 25 to our consolidated financial statements included in “Item 18. Financial Statements”.

 

December 31,

R$ in thousands, except %

2019

2018

2017

Financial assets at fair value through profit or loss/Financial assets held for trading

 

 

 

Brazilian government securities

  200,835,878

  206,756,050

  202,249,272

Bank debt securities

   14,984,397

   10,164,454

  8,348,269

Derivative financial instruments

   14,511,190

   14,770,594

   13,866,885

Corporate debt and marketable equity securities

  13,391,018

  9,303,942

   12,339,790

Mutual funds

  5,518,833

  3,657,393

  4,377,508

Brazilian sovereign bonds

47,308

  659,603

  307

Foreign government securities

  471,153

  849,114

  528,010

Total financial assets held for trading

-  

-  

  241,710,041

Total financial assets at fair value through profit or loss

 249,759,777

  246,161,150

-  

Financial assets held for trading as a percentage of total assets

-  

-  

19.7%

Financial assets at fair value through profit or loss as a percentage of total assets

18.1%

18.9%

-  

 

 

 

 

Financial assets at fair value through other comprehensive income/Financial assets available for sale

 

 

 

Brazilian government securities

  161,066,901

  150,818,755

  103,281,758

Corporate debt  securities

  5,485,677

  5,975,194

   39,978,630

Marketable equity securities

  9,951,317

   10,929,483

   11,037,807

Bank debt securities

  5,512,479

  5,921,076

  1,183,853

Mutual funds

  2,231,810

  2,841,361

-  

Brazilian sovereign bonds

  1,746,932

  1,564,667

  728,127

Foreign government securities

  6,454,894

-  

  3,202,547

Total financial assets available for sale

-  

-  

  159,412,722

Total financial assets at fair value through other comprehensive income

 192,450,010

  178,050,536

-  

Financial assets available for sale as a percentage of total assets

-  

-  

13.0%

Financial assets at fair value through other comprehensive income as a percentage of total assets

14.0%

13.6%

-  

 

 

 

 

Financial assets at amortized cost/Investments held to maturity

 

 

 

Brazilian government securities

   89,114,107

   82,661,682

   26,738,940

Corporate debt  securities

   77,804,253

   57,943,056

   12,259,564

Brazilian sovereign bonds

-  

-  

  7,614

Total investments held to maturity

-  

-  

   39,006,118

Total financial assets at amortized cost

  166,918,360

  140,604,738

-  

Investments held to maturity as a percentage of total assets

-  

-  

3.2%

Financial assets at amortized cost as a percentage of total assets

12.1%

10.8%

-  

 

 

111 Bradesco


 

Table of Contents

 

4.B. Business Overview

Form 20-F

 

 

ØFinancial assets pledged as collateral

The following table shows the balances in 2017 of the financial assets pledged as collateral, which as per January 1, 2018, with the application of IFRS 9, the financial assets in this financial statement caption were included in the other financial statement captions according to the new classification and arepresented in the previous table. For additional information, seeNote 30, page 116 of our consolidatedfinancial statements as of December 31, 2018, available on the SEC website.

 

December 31,

R$ in thousands, except %

2017

Financial assets held for trading

 

Brazilian government securities

801,182

Total of financial assets held for trading

801,182

Financial assets held for trading as a percentage of total assets

0.1%

 

 </