BBD Bank Bradesco
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 statement of financial position as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related 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 of Brazil” or BCB) 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 of Brazil; 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.
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;
1 Form 20-F – December 2020
· 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 the real and/or interest rates, which could adversely affect our margins;
· the effectiveness of our risk management policies;
· increases in compulsory deposits and reserve requirements;
· competitive conditions in the banking, financial services, credit card, payment methods, 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;
· our ability to implement, in a timely and efficient manner, any measure necessary to respond to, or reduce the impacts of, the Covid-19 pandemic on our business, operations, cash flow, prospects, liquidity and financial condition;
· effects from socio-environmental issues, including new and/or more stringent regulations relating to these issues; and
· changes by the Central Bank of Brazil 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.
We present below our selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016, which have been prepared in accordance with IFRS as issued by the IASB. The financial data as of December 31, 2020 and 2019 and for the years ended 2020, 2019 and 2018 is derived from our consolidated financial statements included in this annual report. The financial data as of December 31, 2018, 2017 and 2016 and for the years ended December 31, 2017 and 2016 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 prior periods.
|6 Form 20-F – December 2020|
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”.
|Year ended December 31,||R$ in thousands|
|Data from the Consolidated Statement of Income|
|Interest and similar income||119,743,371||124,417,705||122,053,139||126,232,328||147,700,375|
|Interest and similar expenses||(48,575,687)||(58,617,986)||(55,244,669)||(75,589,415)||(91,037,386)|
|Net interest income||71,167,684||65,799,719||66,808,470||50,642,913||56,662,989|
|Net fee and commission income||24,936,454||25,337,676||23,831,590||22,748,828||20,341,051|
|Net gains/(losses) on financial instruments at fair value through profit or loss||(18,586,403)||(1,090,917)||(11,676,573)||-||-|
|Net gains/(losses) on financial instruments classified as held for trading||-||-||-||9,623,108||16,402,770|
|Net gains/(losses) on financial instruments at fair value through other comprehensive income||(1,716,879)||655,832||1,073,563||-||-|
|Net gains/(losses) on financial instruments classified as available for sale||-||-||-||570,358||(1,341,400)|
|Losses on investments held-to-maturity||-||-||-||(54,520)||-|
|Net gains/(losses) on foreign currency transactions||(1,010,972)||323,774||1,096,826||1,422,957||150,757|
|Net income from insurance and pension plans||7,578,707||8,254,939||7,656,872||6,239,990||4,155,763|
|- Insurance and pension income||68,410,501||71,191,410||66,270,095||70,046,635||65,027,122|
|- Insurance and pension expenses||(60,831,794)||(62,936,471)||(58,613,223)||(63,806,645)||(60,871,359)|
|Other operating income||(13,735,547)||8,143,628||(1,849,312)||17,801,893||19,367,890|
|Impairment of loans and advances||-||-||-||(16,860,835)||(15,350,278)|
|Expected credit losses for loans and advances||(18,711,841)||(12,532,133)||(15,091,975)||-||-|
|Expected losses with other financial assets||(833,434)||(1,472,394)||(1,172,860)||-||-|
|Other administrative expenses||(15,484,126)||(16,489,578)||(16,873,962)||(16,882,461)||(16,149,563)|
|Depreciation and amortization||(5,921,030)||(5,865,768)||(4,808,255)||(4,568,568)||(3,658,413)|
|Other operating income/(expenses)||(18,822,246)||(29,597,586)||(15,500,258)||(11,144,283)||(14,766,966)|
|Other operating expense||(78,738,154)||(87,101,027)||(71,029,108)||(69,168,486)||(66,166,199)|
|Income before income taxes and share of profit of associates and joint ventures||3,630,437||12,179,996||17,761,640||22,025,148||30,205,731|
|Share of profit of associates and joint ventures||444,858||1,201,082||1,680,375||1,718,411||1,699,725|
|Income before income taxes||4,075,295||13,381,078||19,442,015||23,743,559||31,905,456|
|Income tax and social contribution||11,958,666||7,792,129||(2,693,576)||(6,428,956)||(13,912,730)|
|Net income for the year||16,033,961||21,173,207||16,748,439||17,314,603||17,992,726|
|Attributable to shareholders||-||-||-||-||-|
|Year ended December 31,||R$, except for number of shares|
|Data on Earnings and Dividends per Share (1)|
|Earnings per share (2)|
|Dividends/interest on equity per share (3)|
|Weighted average number of outstanding shares (1)|
|(1) Adjusted for corporate events occurred in the periods. For more information about the company events, see "Item 9.A. Offer and Listing Details;"|
|(2) None of our outstanding liabilities are exchangeable for or convertible into equity securities. Therefore, our diluted earnings per share do not differ from our earnings per share. Accordingly, our basic and diluted earnings per share are equal in all periods presented; and|
|(3) Holders of preferred shares are entitled to receive dividends per share in an amount 10.0% higher than the dividends per share paid to common shareholders. For purposes of calculating earnings per share according to IFRS, we used the same criteria adopted for dividends per share. For a description of our two classes of shares. see "Item 10.B. Memorandum and Articles of Association."|
|Year ended December 31,||In US$|
|Dividends/interest on equity per share (1)|
|(1) Amounts stated in U.S. dollars have been translated from Brazilian reais at the exchange rate disclosed by the Central Bank at the end of each fiscal year.|
3.A. Selected Financial Data
|As of December 31,||R$ in thousands|
|Data from the Consolidated Statement of Financial Position|
|Cash and balances with banks||107,602,594||109,610,999||107,209,743||81,742,951||72,554,651|
|Financial assets at fair value through profit or loss||275,986,689||249,759,777||246,161,150||-||-|
|Financial assets held for trading||-||-||-||241,710,041||213,139,846|
|Financial assets at fair value through other comprehensive income||185,841,975||192,450,010||178,050,536||-||-|
|Financial assets available for sale||-||-||-||159,412,722||113,118,554|
|Financial assets at amortized cost||-||-||-||-||-|
|Loans and advances to banks, net of impairment||191,424,731||59,083,791||105,248,950||32,247,724||94,838,136|
|Loans and advances to customers, net of impairment||473,637,358||423,528,716||380,387,076||346,758,099||367,303,034|
|Securities, net of impairment||179,623,894||166,918,360||140,604,738||-||-|
|Other financial assets||52,416,117||56,101,781||43,893,309||-||-|
|Investments held to maturity||-||-||-||39,006,118||43,002,028|
|Financial assets pledged as collateral||-||-||-||183,975,173||155,286,577|
|Non-current assets held for sale||1,202,488||1,357,026||1,353,330||1,520,973||1,578,966|
|Investments in associates and joint ventures||7,386,840||7,635,612||8,125,799||8,257,384||7,002,778|
|Premises and equipment||14,071,129||14,659,222||8,826,836||8,432,475||8,397,116|
|Intangible assets and goodwill, net of accumulated amortization||14,669,464||14,724,647||16,128,548||16,179,307||15,797,526|
|Taxes to be offset||15,330,420||15,685,801||13,498,264||10,524,575||7,723,211|
|Deferred income tax assets||76,984,262||59,570,055||48,682,569||43,731,911||45,116,863|
|Liabilities at amortized cost|
|Deposits from banks||267,280,167||227,819,611||247,313,979||285,957,468||301,662,682|
|Deposits from customers||545,292,743||366,227,540||340,748,196||262,008,445||232,747,929|
|Funds from issuance of securities||144,903,825||170,727,564||148,029,018||135,174,090||151,101,938|
|Other financial liabilities||75,528,047||79,121,127||62,598,235||-||-|
|Financial liabilities at fair value through profit or loss||18,697,682||14,244,083||16,152,087||-||-|
|Financial liabilities held for trading||-||-||-||14,274,999||13,435,678|
|Provision for expected losses|
|- Loan Commitments||3,859,316||2,318,404||2,551,676||-||-|
|- Financial Guarantees||2,318,930||1,970,321||719,216||-||-|
|Technical provisions for insurance and pension plans||279,465,384||268,302,691||251,578,287||239,089,590||215,840,000|
|Current income tax liabilities||1,596,284||2,595,277||2,373,261||2,416,345||2,130,286|
|Deferred income tax assets||1,249,650||1,080,603||1,200,589||1,251,847||1,762,948|
|Additional paid-in capital||70,496||70,496||70,496||70,496||70,496|
|Other comprehensive income||8,103,343||7,871,482||2,206,718||1,817,659||(398,708)|
|Equity attributable to controlling shareholders||145,620,218||135,099,466||124,275,455||117,403,831||105,302,444|
|Total liabilities and equity||1,604,653,790||1,378,527,685||1,305,543,714||1,224,353,440||1,192,029,656|
|8 Form 20-F – December 2020|
In light of the complexity of our business and the range of products and services offered to our customers in all segments of the market, we are exposed to various types of risks. This aim of this item is to present, in a non-exhaustive way, the material risks that may affect our activities or our shares.
Summary of Risk Factors
This section is intended to be a summary of more detailed discussions contained elsewhere in this Form 20-F. The risks described below are not the only ones we face. Our business, results of operations or financial condition could be harmed if any of these risks materialize.
Summary of Risks Relating to Brazil
|·||Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the current Covid-19 pandemic, which had a significant impact on our 2020 results from the end of the first quarter.|
|·||The government exercises influence over the Brazilian economy, and Brazilian political and economic conditions have a direct impact on our business.|
|·||Brazil continues to experience political instability and macroeconomic recession, which can adversely affect us.|
|·||If Brazil experiences substantial inflation in the future, our revenues and our ability to access foreign financial markets may be reduced.|
|·||Changes in the base interest rate by the Central Bank of Brazil may materially adversely affect our margins and results of operations.|
|·||Developments and the perception of risk in Brazil and other countries, especially emerging market countries, may adversely affect the market price of Brazilian securities, including our shares, preferred share ADSs and common share ADSs.|
|·||Our investments in debt securities issued by the Brazilian government expose us to additional risks associated with Brazil.|
|·||Changes in taxes and other fiscal assessments may adversely affect us.|
|·||Currency exchange variations may have an adverse effect on the Brazilian economy and on our results and financial condition.|
|·||The exit of the United Kingdom from the European Union could adversely impact global economic or market conditions.|
|·||Certain reference rates, including LIBOR and EURIBOR may be discontinued or reformed in the future – including the potential demise of LIBOR after 2021, and there may be risks associated with this discontinuation.|
Summary of Risks Relating to us and the Brazilian Banking Industry
|·||Losses 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.|
|·||Our trading activities and derivatives transactions may produce material losses.|
We may experience increases in our level of past due loans as our loans and advances portfolio becomes more seasoned.
|·||We may incur losses associated with counterparty exposures.|
|·||We may face significant challenges in possessing and realizing value from collateral with respect to loans in default.|
|·||We may incur losses due to impairments on goodwill from acquired businesses.|
|·||Adverse 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.|
|·||Changes in regulations regarding reserve and compulsory deposit requirements may reduce operating margins.|
|·||Our losses in connection with insurance claims may vary from time to time. Differences between the losses from actual claims, underwriting and reserving assumptions and the related provisions may have an adverse effect on us.|
|·||We are jointly liable for claims of our customers if our reinsurers fail to meet their obligations under the reinsurance contracts|
|·||A failure in, or breach of, our operational, security or technology systems could temporarily interrupt our businesses, increasing our costs and causing losses.|
|·||We may be subject to negative consequences in the event of an adverse judgment in the judicial proceedings related to Operation Zealots.|
|·||Financial institutions, such as us, may be subject to legal proceedings arising due to certain actions by third parties related to anticorruption, money laundering and terrorism financing (AML/TF).|
|·||Third parties may use us for criminal activities without our knowledge, which could expose us to additional liability and could have a material adverse effect on us.|
|·||The government regulates the operations of Brazilian financial institutions and insurance companies. Changes in existing laws and regulations or the imposition of new laws and regulations may negatively affect our operations and revenues.|
|10 Form 20-F – December 2020|
|·||The 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.|
|·||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.|
|·||We may incur penalties in case of non-compliance with data protection laws.|
|·||The STF is currently deciding cases relating to the application of inflation adjustments which may increase our costs and result in losses.|
|·||The increasingly competitive environment in the Brazilian banking and insurance segments may have a negative impact on our business prospects.|
|·||Possible need of financial support for entities with which we interact, either by lack of capital and/or liquidity, relevant operational problems and by dependence on the provision of services performed by suppliers/partners, may negatively impact the performance of our business.|
|·||Cyber risk in an environment of third parties/service providers may cause temporary unavailability, loss or leakage of our information or disruption in data confidentiality/integrity and/or services.|
|·||Funding for large projects carried out by customers can generate socio-environmental impacts that could affect our results and reputation negatively.|
Summary of Risks Relating to our Risk Management and Other Risks
|·||Our risk management structure may not be fully effective.|
|·||A majority of our common shares are held, directly and indirectly, by one shareholder and our Board of Directors is composed of 09 members, including three independent members; accordingly, non-independent members may have conflicting interest with our other investors.|
Summary of Risks relating to our shares, preferred share ADSs and common share ADSs
|·||The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders.|
|·||Under Brazilian Corporate Law, preferred shareholders have limited voting rights; accordingly, preferred share ADS holders will have similar limitations on their ability to vote.|
|·||The 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.|
|·||Our shares, preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend.|
|·||As a preferred share ADS holder and common share ADS holder you will have fewer and less well defined shareholders’ rights than in the United States and certain other jurisdictions.|
|·||It may be difficult to bring civil liability causes against us or our directors and executive officers outside of Brazil.|
|·||If we issue new shares or our shareholders sell shares in the future, the market price of your preferred share ADSs and common share ADSs may be reduced.|
|·||The 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).|
|·||You may be unable to exercise preemptive rights relating to our shares.|
|·||If you exchange your preferred share ADSs or common share ADSs for their underlying shares, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.|
Risks Relating to Brazil
3.D.10 Macroeconomic risks
We continually monitor the macroeconomic risks that could materially impact our business, financial condition and results of operations. These risks are assessed through processes carried out through our governance structure.
3.D.10.01 Domestic Environment
3.D.10.01-01 Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the current Covid-19 pandemic, which had a significant impact on our 2020 results from the end of the first quarter.
The Covid-19 pandemic has generated great challenges and uncertainties worldwide, and Brazil has been strongly impacted both in terms of the number of cases and deaths. In the economic sphere, the government stimuli used throughout 2020, in scope and magnitude not seen before, contributed to the resumption of growth in the second half of 2020. Direct transfers of income, temporary suspension of certain taxes, incentives for the expansion of loans and the renegotiation of debts and subsidies, were some of the instruments used. Risks arising from the economic impacts of the Covid-19 pandemic allowed the Central Bank to reduce the basic interest rate from 4.5% per annum at the end of 2019 to 2.0% per annum at the end of 2020, the lowest historical level. This process has been corroborated by the increase of idleness of the goods and labor markets and by a deceleration in inflation. At the end of 2020, specific price pressures on electrical energy and food accelerated the inflation to the consumer: the Extended Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA) ended the year with a high of 4.52%, above the center of the goal – determined by the National Monetary Council (CMN) at 4.0% - but still within the tolerance intervals. A process is expected for 2021, of reduction of part of the monetary stimuli, in a context of economic recovery. At the same time, the gross debt increased from 74% of the GDP at the end of 2019, to 89% at the end of 2020. Once the challenges posed by the Covid-19 pandemic are overcome, it is expected that the fiscal deterioration will be reversed. This premise is essential so that the expected process of normalization of the monetary policy may be gradual, keeping the financial conditions at comfortable levels.
|12 Form 20-F – December 2020|
At the end of 2020 and at the beginning of 2021, the resurgence of the Covid-19 pandemic, in Brazil and in the world, increased the short-term risks of the economic activity. As a result, a contraction of the domestic GDP is expected in the first quarter. Even though the base scenario has as premise an acceleration of immunization of the population in the coming months, a possible worsening of the Covid-19 pandemic could generate negative impacts on the business, especially in the service sector, employment, income and banking delinquency, with possible adverse consequences on on our results of operations and financial condition. Accordingly, a new round of the emergency aid (through a direct transfer of income to the most disadvantaged people), approved in March by the Congress, should minimize these impacts. The same proposal for renewal of the aid (Emergency PEC – Proposed Constitutional Amendment) brought some tax counterparts, for moments in which public spending is growing above established limits.
Once the expectation of advancement in the immunization of the Brazilian population is maintained, the scenario of the resumption of the economic activity throughout the subsequent quarters should still be present. A fundamental aspect for the materialization of this scenario is the improvement in perceptions especially in comparison to the fiscal policy, in an environment of increasing demand of society for the increase of public expenditure. The perspective that Brazil should go ahead at the beginning of the normalization of the monetary policy in relation to its peers and the expected resumption of the agenda of structural reforms, should contribute to the exchange rate appreciation over the coming months. The scenario of a gradual return to normality in the global economy and the maintenance of commodity prices at high levels tend to maximize this trend.
As a result of the various economic stimuli adopted, as discussed above, our loan portfolio expanded at a much higher rate. This was particularly evident in the growth of our portfolio of loans to companies. For 2021, we expect certain changes in the components of our growth, with an acceleration of loans for families and a deceleration in the loan portfolio for companies. However, we believe that the prospects remain favorable, with the institutions that integrate the National Financial System (SFN) remaining well capitalized and liquid. The delinquency indicators also remain relatively low as a result of the debt renegotiation. As a result of the Covid-19 pandemic, provision expenses increased in 2020, totaling R$25.8 billion, of which R$9.1 billion were in connection with the adverse economic scenario resulting from the Covid-19 pandemic. However, as we cannot guarantee the duration, future impacts or measures implemented by the government to combat the economic effects of the Covid-19 pandemic, we cannot assure that our financial and operating performance will not be adversely affected in the future.
3.D.10.01-02 The government exercises influence over the Brazilian economy, and Brazilian political and economic conditions have a direct impact on our business.
Abrupt changes in monetary or fiscal policies, which are not justified by changes in the economic scenario, can generate uncertainties about economic policy, leading to the deterioration of expectations, amplifying the volatility and negatively impacting the prices of domestic assets. In this sense, actions and signs of economic policy that are credible and transparent tend to maintain macroeconomic volatility at low levels.
Historically, the country’s political scenario 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 deceleration in the economy and greater volatility in the securities of Brazilian companies issued abroad. Any uncertainties about the economic policies, especially fiscal, can generate negative impacts on the prices of domestic assets, such as the depreciation of the currency, elevation of long rates of interest and the retreat of the stock exchange. In this sense, it becomes relevant to signalize the credible commitment on the part of the government, with decreasing trajectories for public debt.
Until the outbreak of Covid-19, the government had been following an economic agenda to reduce government spending, preparing the economy to compete in international markets, improving the commercial environment and promoting privatizations and infrastructure concessions. At the beginning of 2021, with the outbreak of the second wave of the Covid-19 virus, tax concerns returned to investors’ radar, with negative impacts on the domestic prices of assets. This process accelerated with the perception of greater interventionism of the government in state-owned companies.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, results of operations and financial condition. In addition, uncertainties about the current Brazilian government can influence market perception of risk of foreign investment in Brazil, which in turn may adversely affect the market value of our securities. For example, the market value of Brazilian companies experienced volatility during the recent presidential elections. The current weakness in Brazilian macroeconomic conditions and market perception of certain economic and political risks and uncertainties relating to Brazil, including high-profile anti-corruption investigations, may have a material adverse effect on our financial condition and results of operations.
3.D.10.01-03 Brazil continues to experience political instability and macroeconomic recession, which can adversely affect us.
Brazil showed signs of incipient recovery from a recent prolonged economic recession at the beginning of 2020, when the serious economic consequences of the Covid-19 pandemic plunged the economy back into recession, with weaknesses and material imbalances continuing to threaten the macroeconomic stability and the future prospects of the Brazilian economy. The persistence or intensification of the economic crisis in Brazil and the uncertainty about whether the Brazilian government is prepared and willing to implement changes in the policy or regulations to address today's economic challenges can affect us adversely. The uncertainty about whether the Brazilian government will implement changes in policies and regulations can be aggravated by political instability.
Since 2014, Brazil has experienced a magnified economic and political instability derived from several investigations currently underway on allegations of money laundering and corruption, including the largest of these investigations, known as Operation Car Wash (Lava-Jato), which negatively impacted the Brazilian economy and the political environment and contributed to a decline in market confidence in Brazil.
The Brazilian markets have repeatedly experienced an increase in volatility due to the uncertainty related to investigations surrounding allegations of corruption. These are being conducted by the Federal Police and the Public Prosecution (Department of Public Prosecution) in Lava-Jato, Zealots, Greenfield, and Shooting Star investigations, among others. Members of the Federal Government and the Legislature, in addition to leaders of large corporations, are accused and, in some cases, indicted for corruption and other illegal activities. In addition, politicians and other public officials are being investigated for illegal conduct and unethical behaviors identified during these investigations.
As a result of these investigations, a number of politicians, including members of Congress and senior executives of large corporations and state-owned enterprises in Brazil, were arrested and convicted of various charges related to corruption, entered into leniency agreements with the Federal Public Prosecutor and/or resigned or were dismissed from their positions. The individuals involved in the investigations of Lava-Jato would have accepted a bribe by means of kickbacks in contracts awarded by the government to various companies of infrastructure, oil and gas and construction. The profits of these kickbacks allegedly financed the political campaigns of political parties, whose funds were not recorded or disclosed publicly. These resources would also have been intended for the personal enrichment of certain people.
The potential result of Lava-Jato, as well as of other investigations related to corruption in progress, is uncertain, but has already had an adverse impact on the image and reputation of the companies involved, as well as the general perception of the Brazilian market, economy, political environment and the Brazilian capital market. We do not control, and we cannot predict whether such investigations or allegations will lead to more political instability that could have a material impact on the Brazilian economy, our business, financial conditions and operating income and the market price of our shares, preferred share ADSs and common share ADSs.
3.D.10.01-04 If Brazil experiences substantial inflation in the future, our revenues and our ability to access foreign financial markets may be reduced.
Brazil has, in the past, experienced extremely high rates of inflation. Inflation and governmental measures to combat inflation have had significant negative effects on the Brazilian economy and have 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 measures, with concerns that inflation levels might rise again. Current economic policy in Brazil is premised on a monetary regime which the Central Bank of Brazil oversees in order to ensure that the effective rate of inflation stays in line with a predetermined and previously announced target. Brazil’s rates of inflation reached 4.5% in 2020 and 4.3% in 2019, as measured by the Extended Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA).
|14 Form 20-F – December 2020|
Faced with high expectations and high levels of economic inactivity, which had been gradually reducing since 2017, inflation had been maintained below the middle of the target, but it was above the center of the target in 2020 (4.0% for 2020). For 2021, an inflation target of 3.75% was set, with a tolerance interval of 1.50 percentage points above and below the target, by means of Resolution No. 4,671/18. Despite the short-term risks to economic activity, due to the worsening of the pandemic, the Central Bank began in March 2021 the process of normalizing monetary policy, with the basic rate rising from 2.0% to 2.75%, above expectations. In the assessment of the Monetary Policy Committee (Copom), the risk balance has become asymmetrical towards the direction of higher inflation. Accordingly, given that the Covid-19 pandemic will have temporary effects and given the risks to inflation, the Central Bank of Brazil signaled a "partial normalization" of monetary policy. Analysts' expectations point to an increase in interest rates in the coming months, but to levels below those observed in the recent history (14.25% in 2015). The evolution of the fiscal trends will play a relevant role in the magnitude of this increase, as has been explained by the Central Bank of Brazil.
Between the end of 2020 and the beginning of 2021, inflation concerns were more evident, reflected mainly by the increase in international prices of commodities and exchange rate depreciation. The discourse of the Central Bank of Brazil, whose independence was recently passed in February 2021, significantly changed, pointing to greater concern of the risks of secondary effects from price shocks. Thus, in March 2021, the process of normalizing monetary policy began, with an initial increase in the basic interest from 2.0% to 2.75%, which was greater than expected. This process of monetary normalization is expected to continue in 2021, reducing the stimulus of negative real interest, but without the expectation of returning to the levels of interest verified in 2015-2016, of 14.25% per year. Accordingly, we expect an increase in the final cost of credit in Brazil, which might be mitigated as competition intensifies.
If Brazil experiences inflation rate fluctuations in the future, our costs and net margins may be affected and if investor confidence lags, the price of our securities may fall. Inflationary pressures may also affect our ability to access foreign financial markets and may lead to counter-inflationary policies that may have an adverse effect on our business, financial condition, results of operations and the market price of our shares, ADSs preferred share ADSs and common share ADSs.
3.D.10.01-05 Changes in the base interest rate by the Central Bank of Brazil may materially adversely affect our margins and results of operations.
The economic impacts of the Covid-19 pandemic created the conditions available for the Central Bank of Brazil to reduce the basic interest rate to its lowest level in history, leveraging other actions of stimulus, tax and credit. This movement was possible due to a combination of risks of severe recession, anchoring of inflation expectations and adoption of monetary stimulus, in Brazil and in the world, in view of the expectations of an unprecedented crisis. The SELIC (Special System for Settlement and Custody) rate, which closed 2019 at 4.5%, was reduced to 2.0% in August 2020, where it remained until December 31, 2020. The monetary authority issued a forward guidance, signaling that the interest would be kept stable if certain predetermined conditions continued to be present, including the maintenance of the tax regime.
This process of reducing the SELIC to the lowest historical level was influenced by the high level of inactivity in the goods and labor markets, despite the initial strong exchange rate depreciation between April and May 2020, reflecting the risk aversion of investors in the most recent critical period of the Covid-19 pandemic. We have no control over the basic interest rates established by the Central Bank of Brazil or the frequency with which they are adjusted.
In January 2021, recognizing the increase in inflationary pressures, the Central Bank of Brazil withdrew its forward guidance, without yet generating an automatic increase in interest rates. In March, the institution begins the process of normalizing monetary policy, with the basic rate going from 2.0% to 2.75%. Despite the short-term risk associated to the outbreak of the pandemic in the country, this process is expected to continue in the course of the year, given the expectation of a resumption of economic activity in the coming quarters. The risk in relation to the high magnitude of the basic interest are very much associated with the fiscal evolution, which perceptions have deteriorated in the last months.
Increases in the basic SELIC interest rate fixed by COPOM may have an adverse effect on us, reducing the demand for our credit and increasing our funding costs, internal debt expenses and the risk of default by customers. Reductions in the SELIC rate may also have an adverse effect on us, reducing the interest income we earn on our interest-earning assets and reducing our revenues and margins.
3.D.10.01-06 Developments and the perception of risk in Brazil and other countries, especially emerging market countries, may adversely affect the market price of Brazilian securities, including our shares, preferred share ADSs and common share ADSs.
The market value of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities from issuers based in Brazil. Crises in other emerging market countries may diminish investor interest in securities from 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.10.01-07 Our investments in debt 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 our operations, which may affect the market value of our shares, preferred share ADSs and common share ADSs.
3.D.10.01-08 Changes in taxes and other fiscal assessments may adversely affect us.
The government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, the 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 the 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.
In times of constantly changing fiscal trends, with increased public spending and public debt increasing as a proportion of GDP, interest rates may rise at a pace higher than expected, hampering loan expansion and increasing volatility. Moreover, the risk of changes in taxes and fiscal assessments may materialize as the government may target taxation towards certain sectors, such as the financial markets, with negative impacts on the results and investments of businesses operating in the segment, such as ours.
3.D.10.02 External Environment
3.D.10.02-01 Currency exchange variations may have an adverse effect on the Brazilian economy and on our results and financial condition.
Fluctuations in the value of the real may impact our business. After an extended period of appreciation, interrupted only in late 2008 as a reflection of the global crisis, the Brazilian real started to weaken in mid-2011, a trend which continued until mid-2016. After a brief period of stable exchange rates, the real was once again devalued against the U.S. dollar, which was intensified in 2020 because of the increased global aversion to risk, due to the Covid-19 pandemic. Looking at 2021, we expect a partial standardization of domestic monetary policy and certain progress in the reform agenda, resumption of the trajectory of sustainable public debt and a gradual return to normality in the global scenario tend to favor the appreciation of the Brazilian currency against the U.S. 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 decelerated growth. A weaker real also adversely impacts companies based in Brazil with U.S. dollar indexed to and/or denominated debt.
|16 Form 20-F – December 2020|
If the Brazilian currency devalues or depreciates, we may incur losses on our liabilities denominated in, or indexed to, foreign currencies, such as our long-term debt denominated in U.S. dollars and loans in foreign currency, and experience gains on our monetary assets denominated or indexed to foreign currencies, since liabilities and assets are converted into reais. Consequently, 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 significantly and adversely affect our financial results, and the the market value of our shares, preferred share ADSs and common share ADSs, even if the value of the liabilities has not changed in their original currency. In addition, our credit operations depend significantly on our ability 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 these terms or to charge rates pegged to the U.S. dollar.
On the other hand, when the Brazilian currency appreciates, we may incur losses on our monetary assets denominated in, or indexed to, foreign currencies, such as the U.S. dollar, and we may experience reductions in our liabilities denominated in or indexed to foreign currencies, as liabilities and assets are converted into reais. Therefore, if our monetary assets denominated or indexed to foreign currencies significantly exceed our liabilities denominated or indexed in foreign currencies, including any financial instruments entered into for hedge purposes, a large appreciation of the Brazilian currency could be material and adversely affect our financial results, even if the value of monetary assets has not changed in their original currency.
3.D.10.02-02 The exit of the United Kingdom from the European Union could adversely impact global economic or market conditions.
The Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland (the UK), from the European Union granted to UK a transitional period until December 31, 2020, during which the UK was bound by the rules of the European Union (EU), although it was not a member state and remained in the single market, while the future terms of the UK’s relationship with the EU was being negotiated.
On December 24, 2020, the EU and the UK reached an agreement on the Trade and Cooperation Agreement (the Trade and Cooperation Agreement), which establishes the principles of relations between the EU and the UK after the end of the period of transition. The UK left the European Union on January 31, 2020 and the European Union Treaty and the Treaty on the Functioning of the European Union no longer apply to the UK. The European Commission has proposed to apply the Trade and Cooperation Agreement for a limited period until February 28, 2021, the date on which the Trade and Cooperation Agreement must be approved by the European Parliament.
Given the recent agreement on the wording of the Trade and Cooperation Agreement and its provisional application, from the date of filing of this report, the exact terms of the Trade and Cooperation Agreement, its practical application and the general relationship of the UK and the EU are not entirely clear. Any delays in the approval of the Trade and Cooperation Agreement by the European Parliament, their potential problematic provisions or their potential uncertain interpretation could significantly adversely affect the economic conditions either of the European or world market and could contribute to instability in the global financial markets and exchange rates. In addition, it would probably create legal uncertainty and divergent national laws and regulations. Any one of these effects, and others that could not be foreseen, may adversely affect our business, results of our operations, our financial condition, the market value of our shares, preferred share ADSs and common share ADSs.
3.D.10.02-03 Certain reference rates, including LIBOR and EURIBOR may be discontinued or reformed in the future – including the potential demise of LIBOR after 2021, and there may be risks associated with this discontinuation.
The London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR) and other interest rates or other types rates and indices deemed to be benchmarks are the subject of discussions and national and international regulatory proposals in progress for reform. Some of these reforms are already in force whilst others are yet to be implemented.
Regulation (EU) No. 2016/1011 (the EU Benchmark Regulation) and Regulation (EU) No. 2016/1011, because it is part of the domestic law of the United Kingdom due to the Law of Withdrawal from the European Union in 2018 (the UK Benchmark Regulation) apply to the provision of benchmarks, to the contribution of input data for a benchmark and for the use of a benchmark, in the EU and in the United Kingdom, respectively. The EU Benchmark Regulation and the UK Benchmark Regulation may have a material impact on any Notes linked to LIBOR, EURIBOR or any other fee or index of reference, in particular, if the methodology or other terms of reference are amended in order to comply with the terms of the EU Benchmark Regulation or the UK Benchmark Regulation, and such changes could (among other things) have the effect of reducing or increasing the rate or level, or affect the volatility of the published rate or level of the reference index. More broadly, any one of the proposals of national or international reform, or other, or the increase in the general regulatory scrutiny of references, could increase the costs and risks of administering or otherwise participating in the definition of a reference and complying with such regulations or requirements. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain “benchmarks”, triggering changes in the rules or methodologies used in certain “benchmarks” or leading to the discontinuance or unavailability of quotations of certain "benchmarks".
As an example of such benchmark reforms, on March 5, 2021, the UK Financial Conduct Authority confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings and immediately after June 30, 2023, in the case of the remaining US dollar settings. The announcement indicates that the continuation of LIBOR on the current basis (or at all) cannot and will not be guaranteed after 2021. In addition, on November 29, 2017, the Bank of England and the FCA announced that, from January 2018, its working group on Sterling risk free rates has been mandated with implementing a broad-based transition to the Sterling Overnight Index Average (SONIA) over the next four years across sterling bond, loan and derivative markets so that SONIA is established as the primary sterling interest rate benchmark by the end of 2021.
On September 21, 2017, the European Central Bank announced that it would be part of a new working group responsible for the identification and adoption of a "risk-free overnight rate" that can serve as a basis for an alternative to the current benchmarks used in a variety of instruments and financial contracts in the Euro area. On September 13, 2018, the working group on the rates without risk of the Euro has recommended a new short-term rate for the Euro (€ STR) as the new rate without risk for the Euro area. The € STR was published for the first time on October 2, 2019. Although the EURIBOR has been reformed to comply with the terms of the Regulation of the Reference Index, it remains uncertain how long it will continue in its current form, or if it will be reformed or replaced by € STR or an alternative benchmark.
The elimination of LIBOR or any other reference rate, or changes in the form of management of any reference rate, may require or result in these benchmarks performing differently than in the past, or disappearing entirely, or having other consequences, which cannot be fully anticipated. Any of these developments and any future initiatives to regulate, reform or change the administration of referrals can result in adverse consequences for the return, value and market of loans, mortgages, bonds, derivatives and other financial instruments whose returns are linked to any reference, including those issued, financed or held by us.
3.D.20 Risks relating to us and the Brazilian banking industry
In face of the complexity of our business and the range of products and services offered to our customers in all segments of the market, we are exposed to various types of risks, either due to internal or external factors. Among the main types of risks, we highlight:
3.D.20.01 Market Risk
This relates to the possibility of financial loss due to changes in prices and interest rates of our financial assets, as our asset and liability portfolios may have mismatches in amounts, maturities, currency and indexes.
|18 Form 20-F – December 2020|
3.D.20.01-01 Losses 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, 2020, the investments classified as “fair value through profit or loss” and as “fair value through other comprehensive income” represented 28.8% 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.
Eventually, investment prices in financial assets, which are supported by models, may not predict some more sharp fluctuations in market movements, so that the profitability of these operations is likely to, at certain times, cause negative effects on our profit and equity, despite the fact that reflect the investment policies, asset and liability management (ALM) and appetite for defined risks for the Organization.
3.D.20.01-02 Our trading activities and derivatives transactions may produce material losses.
We engage in the trading of securities, buying debt and equity securities principally to sell them in the short 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. However, these investments and transactions may also expose us to the possibility of significant financial losses in the future, since they are subject to fluctuations in value.
3.D.20.02 Credit Risk
This 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.
3.D.20.02-01 We 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 customers portfolios registered an increase due to new operations, interrupted in 2017 due to the 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 customers than our corporate customers.
Our delinquency ratio, 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 2.2% as of December 31, 2020, compared to 3.3% as of December 31, 2019. The reduction in the default rate continues to be related to the effects of the loan renegotiation policies we adopted throughout 2020, to give liquidity to our customers, aiming at the readjustment of their cash flows during the Covid-19 pandemic, in addition to the extension of loans in previous quarters, leading to a reduction in our level of past due loans. For further information about loan renegotiatons, see "Item 5.B. Liquidity and Capital Resources – 5.B.50 Capital Management".
Since December 2020, we believe we are seeing the return to historical levels of the loans overdue from 15 to 90 days, due to the normalization of the usual policies for granting and managing the credit portfolio, in addition to all methodological aspects and technical improvements in the credit concession processes.
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.20.02-02 We may incur losses associated with counterparty exposures.
We face the possibility that a derivative counterparty will be unable to honor its contractual obligations. 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.20.02-03 We 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 provided, 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, the Covid-19 pandemic may also affect the timing of resumption and sale of collateral, due to restrictions on economic activities. 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 our operations.
3.D.20.02-04 We 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 goodwill is 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 goodwill 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 evaluation of goodwill 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.
|20 Form 20-F – December 2020|
3.D.20.03 Liquidity Risk
This is represented by the possibility of the institution not being able to fully meet its obligations, without affecting its daily operations and incurring significant losses, as well as the possibility of the institution not being able to trade a position at market price due to its significant size when compared to the usually traded volume or due to some market discontinuation.
3.D.20.03-01 Adverse 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 and uncertainties in the credit and capital markets have generally decreased liquidity, with increased costs of funding for institutions. 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. We did not observe this impact as a result of the Covid-19 pandemic as our liquidity was mitigated by actions implemented by the Central Bank of Brazil, which reduced the need for compulsory deposits and avoided account holders withdrawing their money from the large banks.
Part of our funding originates from repurchase agreements, which are largely guaranteed by Brazilian government securities. These types of transactions 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 of the credit risk of the Brazilian government, the cost of these transactions can 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.20.03-02 Changes in regulations regarding reserve and compulsory deposit requirements may reduce operating margins.
The Central Bank of Brazil 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 part of our compulsory deposits with the Central Bank of Brazil do not bear interest; and|
|·||the remainder is paid at the SELIC rate or rate of return of the savings account.|
Rules related to compulsory deposits have been changed from time to time by the Central Bank of Brazil, as described in “Item 4.B. Business Overview – 4.B.70.02 Banking Regulations – 4.B.70.02-05 – Compulsory Deposits”.
As of December 31, 2020, our compulsory deposits in connection with demand, savings and time deposits and additional compulsory deposits were R$ 83.8 billion. Compulsory reserve requirements were used by the Central Bank of Brazil to control liquidity as part of monetary policy in the past, and we have no control over such 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.
3.D.20.04 Insurance Risk
Is the risk arising from an adverse economic situation, which contradicts both the expectations of the insurance company at the moment of agreeing on the insurance policies commercial terms, and the uncertainties that exist in the estimation of provisions, it includes the risk of pension funds, represented by the materialization of the need for emergency contributions to cover shortfalls of funds administered by Closed Complementary Social Security Entities (EFPC), for which we became responsible as a result of some of our previous business acquisitions.
3.D.20.04-01 Our losses in connection with insurance claims may vary from time to time. Differences between the losses from actual claims, underwriting and reserving assumptions and the related provisions may have an adverse effect on us.
The results of our operations 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, cancellations, conversion into pension income, administrative, operational, brokerage and claims 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), changes in mortality and morbidity rates as a result of advances in medicine and increased longevity, pandemics such as the Covid-19 pandemic, which can have a systemic effect on the business (particularly insurance products), or related and economic effects (other products), 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 incurred losses 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 our operations.
3.D.20.04-02 We are jointly liable for claims of our customers if our reinsurers fail to meet their obligations under the reinsurance contracts.
The purchase of reinsurance does not hold us harmless against our liability towards our customers 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.20.05 Operational Risk
This is represented by the possibility of incurring losses from failures, deficiencies or the inadequacy of internal processes, people, systems and external events.
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.
One of our objectives is to provide adequate 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 and management of our information technology systems and as a result have created an environment with a high capacity to process data for our business 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 internal or external factors.
|22 Form 20-F – December 2020|
Our capacity to maintain and implement our security systems depends on our capacity to attract and retain qualified professionals in various areas of activity, such as, but not limited to, the area of information technology (IT), which is undergoing a period of great demand on the part of employees in all markets (not restricted to the financial market). We cannot guarantee that we will succeed in attracting and retaining qualified staff to integrate our security systems, nor that there will be market demands for specific professionals (such as IT professionals), which may have a significant adverse effect on our operations and on our capacity to implement strategies.
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 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. As a result, all the risks mentioned above could result in customer attrition, regulatory fines, penalties or intervention, reimbursement or other administrative penalties and damage to our reputation.
3.D.20.06 Compliance Risk
This is the risk arising from legal or administrative sanctions, financial losses, damage to reputation and other damages, arising out of breach or failure to comply with the legal framework, the infra-legal regulation, recommendations of the regulator and self-regulator entities and codes of conduct and ethics applicable to our activities.
3.D.20.06-01 We may be subject to negative consequences in the event of an adverse judgment in the judicial proceedings related to Operation Zealots
Due to the so-called “Operação Zelotes” (Operation Zealots), which investigates the alleged improper performance of members of the Federal Administrative Council of Tax Appeals (Conselho Administrativo de Recursos Fiscais, or CARF), a criminal proceeding was opened against two former members of our Diretoria Executiva in 2016 and received by the 10th Federal Court of Judicial Section of the Federal District. The investigation phase of the process has already been completed, and we are currently awaiting the decision of the court of first instance. We are not party to this proceeding.
Our management conducted a careful internal evaluation of records and documents related to the matter and found no evidence of any illegal conduct carried out by our former representatives.
As a result of Operation Zealots, the General Internal Affairs of the Ministry of Finance (Corregedoria Geral do Ministério da Fazenda) initiated an administrative investigation to determine whether there are grounds to file an Administrative Accountability Proceeding (Processo Administrativo de Responsabilização, or PAR) against us. On February 3, 2020, the decision, given by the Official of the Ministry of Economy, was published in Section 2 of the Federal Official Gazette (Diário Oficial da União). The decision fully accepted the final report of the processing commission, 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 and expressly recognized a lack of evidence that we had promised, offered or given, directly or indirectly, an improper advantage to public agents involved in the operation, in accordance with article 5, section I, of Law 12,846 of 2013.
The progress of Operation Zealots and other on-going investigations or investigations that may be initiated in the future, any consequent events and the possibility of new accusations may negatively affect our reputation, our financial condition and the market value of our shares, preferred share ADSs and common share ADSs.
3.D.20.06-02 Financial institutions, such as us, may be subject to legal proceedings arising due to certain actions by third parties related to anticorruption, money laundering and terrorism financing (AML/TF).
Brazil’s anti-corruption agenda, which includes the prevention of money laundering and the financing of terrorism (AML/TF), include the lead of operations and investigations by regulatory and supervisory authorities. Despite our current unconditional commitment, engagement and our compliance with the applicable anti-corruption obligations (including internal policies), financial institutions, including ourselves, could be involved in such operations and investigations, including legal proceedings, as a result of the actions of individuals or legal entities including the inappropriate use of financial systems or other unlawful acts. Involvement in these actions, a risk inherent to the activities of financial institutions, may result in negative publicity for us, and any adverse judgement may negatively affect our financial condition, operational results and the market value of our shares.
In 2019, as part of operation “Câmbio Desligo”, a follow on from operation Lava-Jato, two of our former managers were investigated and indicted by the Public Prosecutor’s Office for alleged involvement in the opening and maintenance of current accounts for companies with irregularities. We subsequently conducted a thorough internal investigation and adopted the required governance measures as well as making ourselves available to the authorities to contribute to the verification of the facts.
3.D.20.06-03 Third parties may use us for criminal activities without our knowledge, which could expose us to additional liability and could have a material adverse effect on us.
We are required to comply with applicable anti-money laundering, or (AML), anti-terrorism, anti-bribery and corruption, sanctions and other laws and regulations applicable to us. These laws and regulations require us, among other things, to conduct full customer due diligence (including sanctions and politically exposed person screening) and keep our customer, account and transaction information up to date. We have implemented financial crime policies and procedures detailing what is required from those responsible. We are also required to conduct AML training for our employees and to report suspicious transactions and activity to appropriate law enforcement following full investigation by the corporate security area.
Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML, anti-bribery, anti-corruption and sanctions laws and regulations are increasingly complex and detailed. The Basel Committee is now introducing guidelines to strengthen the interaction and cooperation between prudential and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT supervisors). Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel.
We maintain updated policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. However, such policies and procedures may not prevent third parties from using us (and our relevant counterparties) as a conduit for illegal activities, without our knowledge. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires ongoing changes to systems and operational activities. Financial crime is continually evolving and, as noted, is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities without our knowledge. In addition, we rely heavily on our employees and systems to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti-financial crime operations, we remain responsible and accountable for full compliance and any breaches.If the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes are not effectively applied,there remains a risk of regulatory breach.
Additionally, in 2015 and early 2016, pursuant to a new resolution issued by the United Nations Security Council, as well as recently enacted laws and regulations issued by the Brazilian Central Bank requiring the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.
|24 Form 20-F – December 2020|
If a financial institution, including us, is unable to fully comply with applicable laws, regulations and expectations, according to Brazilian Laws our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on such financial institution, including requiring a complete review of its business systems, day-to-day supervision by external consultants and ultimately the revocation of licenses.
The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-bribery, anti-corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ data and bank products and services from being accessed or used for illegal or improper purposes.
In addition, we rely heavily on our relevant counterparties to maintain and apply their own appropriate compliance measures, procedures and internal policies. Such measures may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (or our relevant counterparties’) knowledge. If a financial institution, including us, is associated with, or even accused of being associated with, breaches of AML, anti-terrorism, or sanctions requirements, our reputation could suffer and/or it could become subject to fines, sanctions and/or legal enforcement (including being added to “blocked lists” that would prohibit certain parties from engaging in transactions with it), any one of which could have a material adverse effect on our operating results, financial condition and prospects.
3.D.20.06-04 The government regulates the operations of Brazilian financial institutions and insurance companies. Changes in existing laws and regulations or the imposition of new laws and regulations may negatively affect our operations and revenues.
Brazilian banks and insurance companies 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 loans, such as housing loans and rural loans;|
|·||accounting and statistical requirements;|
|·||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 have a materially adverse effect on 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 of Brazil 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.
3.D.20.06-05 The 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 by Súmula Vinculante No. 7, a final binding decision enacted in 2008 by the Brazilian Supreme Court (STF), in accordance with such Court’s prior understanding on this matter. Since 1988, several attempts were made to regulate the limitation on loan interest, and especially bank loan interest rates, but none of them were implemented nor have been confirmed by Brazilian superior courts.
On May 29, 2003, Constitutional Amendment No. 40 (EC 40/03) was enacted and revoked all subsections and paragraphs of Article 192 of the Brazilian Constitution. This amendment allows the Brazilian Financial System to be regulated by specific laws for each sector of the system rather than by a single law relating to the system as a whole.
With the enactment of Law No. 10,406/02 (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 2.0% p.a. as of December 31, 2020 and 4.5% p.a. as of December 31, 2019; 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.
3.D.20.06-06 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. 4,765/19 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.20.06-07 We 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 this law has been 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 required structural changes in our customer relationship, business partners, service providers and employees, and 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 came fully into force without administrative sanctions on September 18, 2020. As a result of the Covid-19 pandemic, the National Congress approved Law No. 14,010/20 postponing the entry into force of Articles 52, 53 and 54 of Law No. 13,583/19 until August 1, 2021, concerning administrative penalties.
|26 Form 20-F – December 2020|
We operate in a preventive, detective and corrective manner in order to protect our own and our customers’ 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 a pillar of the technology and processes to establish data protection for our customers, resiliency, and structure for threat identification, detection, and response and recovery procedures in cases of cyber-attacks.
However, possible failures or attacks on our systems and processes of prevention, detection and/or correction in the fight against fraud and in providing information security, and the consequent 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.20.06-08 The STF is currently deciding cases relating to the application of inflation adjustments which may increase our costs and result in 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 plans Bresser, part of Verão, Collor I and Collor II, implemented in the 1980s and 1990s, before the Plano Real, in 1994. The trial began in November 2013 but was interrupted without any pronouncement on the merits of the subject under discussion by its Members. According to the institutions representing the savings account holders, banks misapplied the monetary adjustments when those economic plans were implemented, and should be required to indemnify the savings account holders for the non-adjustment of those amounts.
In addition, in connection with a related sentence, the Brazilian Supreme Court of 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 of Brazil, 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, its extension was approved by the plenary of the court, on May 28, 2020, for a period of 30 months (renewable for a further 30 months), from March 12, 2020, to adhere to the terms of the agreement by means of a digital platform specially created for this purpose. As this is a voluntary settlement, which does not oblige the savings account holder to join, we are unable to predict how many savings account holders will accede to it.
3.D.20.07 Strategy Risk
Strategic risk is represented by the uncertainty in achieving the predetermined objectives. This may be due to adverse changes in the business environment, to the use of inappropriate assumptions in the decision-making process or the implementation of the strategy in a different way to what was planned.
3.D.20.07-01 The 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 “bigtechs” are also strong competitors, seeking to invest in online payment systems and financial transactions tools by means of various types of applications. In addition, we note that the implementation of Open Banking in Brazil, in 2021 may further intensify this competition through the possibility of sharing information between institutions.
This competitive environment combined with the accelerated process of digital innovation observed in the sector may impact our speed of adaptation to this ecosystem and consequently the performance of certain lines of business, 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.20.08 Contagion Risk
This is represented by the possibility of financial loss resulting from relationships (contractual, or not) with subsidiaries, associates, parallel structures (which make investments in companies outside the insurance banking sector), controllers, investment funds, foundations, suppliers and partners, not consolidated in the Prudential Conglomerate.
3.D.20.08-01 Possible need of financial support for entities with which we interact, either by lack of capital and/or liquidity, relevant operational problems and by dependence on the provision of services performed by suppliers/partners, may negatively impact the performance of our business.
Due to the relationships we have with companies related to investment funds, we may decide to provide financial support for these entities if they run into financial difficulties, equity imbalances, a reduction in financial results, and insufficient liquid assets, among other situations. In addition, our reputation may be adversely affected as a result of any adverse situation occurring in entities in which we have invested.
In the relationship with suppliers/partners, due to the complexity of some services, we may become dependent or encounter difficulty replacing some 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. There is also the possibility of 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.
These situations may adversely affect our reputation, our financial condition, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.
|28 Form 20-F – December 2020|
3.D.20.09 Cyber Risk
This is represented by the possibility of cyber incidents, including attacks, intrusions, and leaks that may compromise the confidentiality, integrity and/or availability of processes, assets and/or critical infrastructure.
3.D.20.09-01 Cyber risk in an environment of third parties/service providers, may cause temporary unavailability, loss or leakage of our information or disruption in data confidentiality/integrity and/or services.
CyberSecurity and its risk in relevant service providers in the Bradesco Organization, is treated at the highest strategic level, in the Board of Directors, Executive Board and in the Executive Committees of Risks, Risk Monitoring and AML-TF/Sanctions and Information Security/Cyber. In February 2020, cyber risk in relevant service providers was scaled as Very High and due to concern about the difficulty of visibility and monitoring on the control environment of relevant service providers. The possibility of loss, theft or alteration of data processed and stored in relevant service providers due to the exploitation of vulnerabilities and weaknesses in systems, devices, networks or other digital media in the third environment was considered to be elevated. (E.g. Ransomware)
The risk in service providers include so but not limited to: hacking into Information Technology systems and platforms by malicious third parties, infiltration of malware such as computers with viruses into our systems, intentional or accidental contamination of our networks and systems by third parties with whom we exchange data, unauthorized access to confidential customer data, and or organization data , and cyber attacks can cause service degradation and or outage that can result in business losses.
The Department of Corporate Security - Information Security for Third Parties, performs the prior analysis in the environment of third-party controls. New contracts and or renewal of relevant data processing and storage and cloud computing services contain specific cybersecurity clauses for the protection of Information Assets, including after termination of the contract.
Brazilian regulatory bodies have stepped up data leakage regulations that include high fines for non-compliance events with terms and conditions of the General Data Protection Law. A failure to protect data stored on our systems and third-party systems could adversely affect us. If the risk materializes in a cyber security incident, we have adequate capital allocation to the Organization's appetite.
3.D.20.10 Social and Environmental Risk
This is represented by the potential damage that we may 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.
3.D.20.10-01 Funding for large projects carried out by customers can generate socio-environmental impacts that could affect our results and reputation negatively.
Across several sectors, we promote loan and financing operations, which may significantly affect an entire ecosystem, involving communities and the local flora and fauna. If a customer, 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 is responsible for environmental disasters, it has a direct obligation to repair the damage caused financially. Consequently, depending on the magnitude of the socio-environmental impact, this customer can have their economic-financial structure compromised. Such events could adversely affect our reputation, financial condition, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.
3.D.30 Risk Management
3.D.30.01 Our risk management structure may not be fully effective.
Our objective is to 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”.
3.D.40 Other Risks
3.D.40.01 A majority of our common shares are held, directly and indirectly, by one shareholder and our Board of Directors is composed of 09 members, including three independent members; accordingly, non-independent members may have conflicting interest with our other investors.
As of March 10, 2021, Fundação Bradesco directly and indirectly held 59.07% 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 our Board of Directors, as well as approve related party transactions or corporate reorganizations. Under the terms of Fundação Bradesco’s bylaws, members of our Diretoria 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 nine members, three of which are independent, in other words they are not associated with Fundação Bradesco, in accordance with the criteria included in Law No. 6,404/76, in the regulation issued by the CVM (Brazilian Corporate Law). 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 three 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.
|30 Form 20-F – December 2020|
3.D.50 Risks relating to our shares, preferred share ADSs and common share ADSs
3.D.50.01 The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders.
The voting rights of preferred share ADS holders and common share ADS holders are governed by the Deposit Agreements. Those Deposit Agreements provide that the depositary bank shall mail voting instructions to holders only if we authorize and direct the depositary bank to do so. If we do not provide that authorization and direction to the depositary bank, preferred share ADS holders and common share ADS holders 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 preferred share ADS holders and common share ADS holders, 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.50.02 Under Brazilian Corporate Law, preferred shareholders have limited voting rights, accordingly, preferred share ADS holders will have similar limitations on their ability to vote.
Under the Brazilian Corporate Law (Law No. 6,404/76, amended by Law No. 9,457/97, which we refer to as Brazilian Corporate Law) and our Bylaws, our preferred shareholders 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 common shareholders, preferred shareholders are not entitled to vote on corporate transactions, including any proposed merger or consolidation with other companies, among other things.
As discussed above in “3.D.50.01 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 preferred shareholders have limited voting rights, any ability to vote that we may extend to preferred share ADS holders corresponding to preferred shares pursuant to the applicable Deposit Agreement would be similarly limited.
3.D.50.03 The 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. The ten largest companies in terms of market capitalization, according to B3, accounted for 45.8% of the aggregate market capitalization as of December 30, 2020.
3.D.50.04 Our shares, preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend.
Holders of our shares and, consequently, our preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend. Pursuant to the Deposit Agreements, if the depositary (as holder of the common shares and preferred shares underlying the common share ADSs and preferred share ADSs) receives any cash dividend or distribution from us, it shall distribute a corresponding U.S. dollar amount, net of depositary fees and certain withholding tax adjustments as described in the Deposit Agreements, to holders of our common share ADSs and preferred share ADSs as promptly as practicable. However, if we do not pay dividends to holders of our common shares or preferred shares then there will be no payment of dividends to holders of our common share ADSs or preferred share ADSs.
Pursuant to our Bylaws, our preferred shares are entitled to dividends 10.0% higher than those of our common shares. Although under our current Bylaws we are obligated to pay our shareholders at least 30.0% of our annual adjusted net income, the shareholders attending our Annual 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 this rule, a restriction of dividend and interest payments on equity may be imposed by the Central Bank of Brazil in the event of non-compliance with the additional capital requirements established by the Central Bank of Brazil, as further described in “Item 4.B. Business Overview – 4.B.70 Regulation and Supervision – 4.B.70.02 Banking Regulations – 4.B.70.02-03 Capital adequacy and leverage”.
In light of the adverse economic consequences of the Covid-19 pandemic, Central Bank of Brazil issued Resolution nº 4,885/20, allowing remuneration of equity in the equivalent amount to 30% of the adjusted net income or the amount equivalent to the minimum mandatory dividend established by the Brazilian Corporate Law, in case of corporations, or that established into the articles of incorporation, in case of limited companies.
3.D.50.05 As a preferred share ADS holder and common share ADS holder 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.
|32 Form 20-F – December 2020|
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.
3.D.50.06 It may be difficult to bring civil liability causes against us or our directors and executive officers outside of Brazil.
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.50.07 If we issue new shares or our shareholders sell shares in the future, the market price of your preferred share ADSs and common share ADSs may be reduced.
Sales of a substantial number of shares, or the belief that this may occur, could decrease the market price of our shares, preferred share ADSs and common share ADSs, by diluting their value. If we issue new shares or our existing shareholders sell the shares they hold, the market price of our shares and therefore the market price of our preferred share ADSs and common share ADSs, may decrease significantly.
3.D.50.08 The 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.50.09 You may be unable to exercise preemptive rights relating to our shares.
You will not be able to exercise preemptive rights relating to our shares underlying your preferred share ADSs and common share ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Similarly, we may from time to time distribute rights to our shareholders. The depositary bank will not offer rights to you as a holder of the preferred share ADSs and common share ADSs unless the rights are either registered under the Securities Act or are subject to an exemption from the registration requirements. We are not obligated to file a registration statement with respect to the shares or other securities relating to these rights, and we cannot assure you that we will file any such registration statement. Accordingly, you may receive only the net proceeds from the sale by the depositary bank of the rights received in respect of the shares represented by your preferred share ADSs and common share ADSs or, if the preemptive rights cannot be sold, they will be allowed to lapse. You may also be unable to participate in rights offerings by us, and your holdings may be diluted as a result.
3.D.50.10 If you exchange your preferred share ADSs or common share ADSs for their underlying shares, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.
Brazilian law requires that parties obtain registration with the Central Bank of Brazil 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 of Brazil 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 of Brazil 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.
We are a sociedade anônima organized under the laws of Brazil. Our headquarters are in Cidade de Deus, Vila Yara, 06029-900, Osasco, São Paulo, Brazil, and our telephone number is (55-11) 3684-4011. Our 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 real estate financing, investment bank and consumer credit subsidiaries to become a multiple service bank and changed our name to “Banco Bradesco S.A.”.
|34 Form 20-F – December 2020|
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 surrounding economically active regions and other important conditions for our business. This knowledge helps us assess and mitigate risks in loans, 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, deposit-taking, credit card issuance, purchasing consortiums, insurance, capitalization, leasing, payment collection and processing, pension plans, asset management and brokerage services.
4.A.10 Acquisitions, divestments and other strategic alliances
4.A.10-01 Recent Acquisitions
|Ø||BAC 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 over 45 years, especially to non-resident high net worth Individuals.
In October 2020, we announced to the market that the acquisition was completed, taking control of the operations of BAC Florida, with the objective of expanding our investment offering in the USA to our high net worth (Prime) and Private Bank customers, in addition to other banking services, such as checking accounts, credit card and mortgages, also providing the opportunity to expand business related to corporate and institutional customers.
|Ø||BBC 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 became the sole shareholder of the Processing Company, which has a shareholders’ equity composed exclusively of the assets and liabilities relating to the provision of credit card processing services for our Organization. The operation (i) aimed to reduce the costs of processing and increase the efficiency of the credit card business; (ii) did not have any impact on our activities and customers; and (iii) did not involve any financial values. In addition, we and the Fidelity Group have maintained our association in Fidelity Serviços S.A., which continued to provide services to us with call center services, collection, fraud prevention, support and other related services. The association was only discontinued following the sale of Fidelity Serviços S.A. (currently Chain Serviços e Contact Center S.A.) by us.
4.A.10-02 Recent divestments
|Ø||Chain 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 Contact Center S.A. (Chain) to Almaviva do Brasil Telemarketing e Informática S.A. Chain has as its objective 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, discontinuing our association with the Fidelity Group.
4.A. History and Development of the Company
|Ø||NCR Brasil – Indústria de Equipamentos|
In June 2019, we entered into an agreement to sell our entire minority interest indirectly held in NCR Brasil – Indústria de Equipamentos para Automação S.A. to NCR Corporation. The operation was approved by the competent authorities, and the transaction was completed on October 28, 2019.
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 managers of RCB, together with us; and (ii) the constitution of two FDICs (Investment Funds in Credit Rights) for the acquisition of non-performing loan portfolios, where the management of the recovery of these loans remain 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 of Brazil. The operation closed on December 20, 2018.
|Ø||Bradesco Asset Management S.A (BRAM)|
Our subsidiary, BRAM has developed important alliances. Something that is also increasingly important in the context of its internationalization strategy. Through personal management and agreements with partners, we offer Brazilian investors the opportunity to invest in fixed and non-fixed equity funds, balanced and alternative, with global, regional and thematic exposure, as well as global ESG (Environmental, Social and Governance) strategies. In Europe, BRAM offers funds domiciled in Luxembourg with different strategies under the Bradesco Global Funds family, launched in 2009, to overseas investors. In Japan, Mitsubishi UFJ Kokusai Asset Management (MUKAM), our partner since 2008, offers funds managed by BRAM to retail investors wishing to invest in the Brazilian market.
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.10 Business strategy
Our strategy is based on delighting our customers. In 2020, we reviewed our corporate strategy to further align our actions towards a single direction: understanding the needs of our customers to meet their expectations and delivering an excellent service at all stages of our customer's interaction with us.
From this review, we based our strategy on four pillars that guide our trajectory towards business continuity (i) Customer – our inspiration; (ii) Digital Transformation – how we do what we do; (iii) People – our team; and (iv) Sustainability – made to last. Below, we present each one of our four pillars:
|36 Form 20-F – December 2020|
|Ø||Customer – our inspiration|
Our main goal is to earn admiration, trust and relationship of our customers, serving them with excellence, based on their needs and goals, to contribute to their achievements.
In order to accomplish this, we implemented a number of initiatives placing the customer at the center of our strategy, respecting their individuality and improving our knowledge of our customers with data intelligence and by offering complete business solutions.
We developed initiatives aimed at better understanding our customers and their expectations and requirements at every stage of their interaction with our organization. This enables us to provide tailor made offers in accordance with our customers ' profile to enhance the customer experience, integrate journeys and processes, supported by new real time decision technologies.
With the move to open banking, we allow our customers to check their balance and make payments to their account from alternative platforms, other than the traditional channels. One example is via PIX, an innovative payment method created by the Central Bank that allows customers to make payments, transfers and receive deposits at any time of the day.
Further, the MEI platform is a pioneering initiative that offers micro-entrepreneurs a portfolio of the financial and non-financial solutions they need to facilitate their day-to-day operations, including formalization, training, consulting and performance entrepreneurship, in partnership with startups and companies specializing in the subject.
In 2020, we acquired BAC Florida Bank in the United States through which we offer traditional banking services, such as a complete checking account, cards, credit operations and investments in the United States.
|Ø||Digital Transformation – how we do what we do|
We have a digital mindset and outlook that allows our actions that we believe, contribute to simple, efficient, agile and innovative. We search to maximize our operational efficiency, encouraging the use of technology and innovation in our business models. Our strategy also highlights the management of expenditure, developing actions and projects aimed to optimize our operations and reducing the cost of providing services.
In the context of digital transformation, we aim to make the banking experience even more convenient, fast and secure for the customer. Innovation, agility, connectivity, modernization and security are fundamental drivers to achieve this and are present in our day-to-day operations. We are committed to maximizing value for our customers by developing a culture focused on continuous improvement and excellence. Our next digital bank is an example of this, complementing our ecosystem of solutions and offering an alternative value proposition for our customers that operate in a hyperconnected world. It also complements Bitz, a new group company that operates in the Brazilian digital wallet and payment accounts market. We also highlight inovabra, a hub for promoting startups, especially fintechs, which develop innovative solutions for the group's products and services. Ágora – Casa de Investimentos is our open platform of investment products for account holders and non-account holders with 100% digital onboarding through the Ágora app / website, Bradesco, next applications and Bradesco internet banking with more product options and specialized advice for each customer that makes their investments, with convenience and reliability.
In addition, the capabilities of BIA (Bradesco Artificial Intelligence) are increasingly sophisticated translating into a customer experience across our digital channels.
|Ø||People – our team|
We want to be the employer of choice for high-performing professionals to progress their career. Our strategy is founded on the people who work here. We seek to continuously improve our ability to attract, train and retain appropriate talents in each of our business areas, with the goal of making our corporate strategy feasible.
We have an organizational culture based on ethics, transparency and respect for others and we have made significant investments to achieve an innovative, challenging and diverse working environment.
We highlight the importance of actions related to the health and well-being of our employees, through the Viva Bem Program, the employee incentive empowering our staff to volunteer through the Bradesco Volunteer Portal and the online platform, integra rh, enabling them to be protagonists of their own careers.
|Ø||Sustainability – made to last|
Our focus is to generate value for all our stakeholders and we are committed to growing in a diversified and sustainable manner, by a Corporate Governance that seeks considering the best balance between risk and return, a robust capital and liquidity structure and preparing of our organization for the new challenges. Further, the actions we take and our commitment to increasing diversity reaffirm our belief in the transformative potential of people, respecting individuality and plurality. Inclusion and financial education are important drivers for us.
We have commitments related to Social-Environmental Sustainability in order to contribute to the sustainable development of our company, evidenced by our launch of the Amazonia Plan, a partnership of Bradesco, Itaú and Santander, acting in the promotion of the development of the Amazonia region. In addition, we became the first Brazilian bank to join the Partnership for Carbon Accounting Financials (PCAF), a global initiative to measure carbon emissions generated by financial institutions.
4.B.20 Business management
In order to ensure our operational activities are aligned 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 corporate compliance policies. Under this resolution, financial institutions authorized to operate by the Central Bank of Brazil should implement and maintain corporate 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 Corporate Compliance Policy was approved at the meeting of our Board of Directors on December 26, 2017, whose last review, with amendments, was recorded at the meeting of the Board of Directors on December 23, 2020.
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
Our risk and capital management structures consist of several committees, commissions and departments that support the Board of Directors, the CEO, the CRO and the Diretoria Executiva in making 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, related rules and compliance with regulations and legislation applicable to the Organization.
The committee is assisted by the Executive Committees for: (i) Risk Monitoring; (ii) Risk Management; (iii) AML-TF/Sanctions and Information Security/Cyber Security; and (iv) Bradesco Seguros’ Risk Management, Actuarial Control and Compliance. 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.
|38 Form 20-F – December 2020|
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, mitigation, etc.
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.
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 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 Executive Risk Management 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.
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, terms, 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.
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, as amended, 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
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 of Brazil to use, since January 2013, in-house models of market risk to check the regulatory capital requirement. The management process is reassessed at least annually by the relevant committees and also approved by the Board of Directors itself.
|40 Form 20-F – December 2020|
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
· financial exposure/concentration.
|Ø||Banking portfolio: comprises transactions not qualifying for our trading portfolio, deriving from our other businesses and their respective hedges.|
The risks of our banking portfolio are monitored through:
|§||the variation in economic value due to interest rate variations – ∆EVE (Economic Value of Equity); and|
|§||variation in net interest income due to interest rate variations – ∆NII (Net Interest Income).|
Market risk is controlled and monitored by an independent business unit, the DCIR, 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 DCIR, 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 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 Ratio (LCR – Liquidity Coverage Ratio), in compliance with Resolution No. 4,401/15, and Long-Term Liquidity Ratio (NSFR – Net Stable Funding Ratio), in compliance with Resolution No. 4,616/17, 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 DCIR 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.
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 of Brazil’s Circular No. 3,749/15, amended by Circular No. 3,986/20.
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 of Brazil’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 and Liability Management, which controls liquidity levels. Additionally, COGIRAC and 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.
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 DCIR, and is supported by several areas that are part of the process of managing this risk.
|42 Form 20-F – December 2020|
On December 1, 2020, Circular No. 3,979/20 published by the Central Bank of Brazil came into force, which provides for the constitution of Base of Risks and Operating Losses (BRPO).
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 five and 10 years), adoption of complete and robust layout, accounting traceability and the standardization of the structure for the collection and processing of information.
On October 29, 2020, Normative Instruction No. 33/20 was published establishing the procedures for forwarding information related to events of operational risk to the Regulator stated in the Circular.
All information must be kept at the available to the Central Bank of Brazil for at least 10 years, with the first remittance scheduled for June 2021 relative to the base date of December 2020.
4.B.20.02 Independent 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 risk and provision management and in the capital measurement with the objective of synthesizing processes or complex issues from large quantities of information. The use of such models provides standardization, objectivity and efficiency to the decisions.
However, 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, Risk Monitoring Executive Committee, Risk Committee and the Integrated Risk Management and Capital Allocation Committee (COGIRAC).
4.B.20.03 Internal 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, as amended.
Our internal controls methodology is based on the Frameworks issued by the COSO – Committee of Sponsoring Organization of the Treadway Commission ((Internal Control - Integrated Framework- 2013 and Enterprise Risk Management Integrated Framework - 2017) and based on the guidelines established by the Information Systems Audit and Control Association (ISACA) through the Control Objectives for Information and Related Technology (COBIT 5 - 2012).
The existence, 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 (residual risks) are inputs for the preparation of the Corporate Risk Guidelines, periodically 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 in a preventive, detective and corrective way to combat fraud and information security in order to protect the information of our Organization and of our customers.
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 customers, resilience, and structures to identify and detect threats, and have in place response and recovery procedures in the event of cyber-attacks.
With regard to the technical aspects, in order to prepare for and anticipate IT security and cyber threats, the IT department promotes 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 its customer information is secure. The interactions and synergies between management and technical areas aim 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 customers on cyber risks is a key component of our strategy in this regard. We have developed awareness campaigns through the customer channels and on social media. On our “seguranca.bradesco” 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, since the risk of protection breach during access occurs precisely in the elements of the process that are out of reach by our management: the behavior and equipment of customers.
In conjunction with technical measures, we ensure that employees are 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 can be prepared and up to date 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 and data 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 of Brazil for the contract and relevant contractual alterations. We currently comply with the provisions of these rules. Furthermore, we observed the provisions of the Security Manual of Open Banking, which establishes the minimum security requirements for APIs (Application Programming Interface) and other systems related to Open Banking, of which we are compulsory participants according to Communication No. 36,480/20, instituted by BCB Normative Instruction No. 37/20.
As of July 1, 2021, Resolution No. 4,658/18 shall be revoked, being replaced by CMN Resolution No. 4,893/21, issued on February 26, 2021, which outlines cybersecurity policy and the requirements for hiring services for data processing & storage and cloud computing to be observed by institutions authorized to operate by the Central Bank of Brazil. Resolution No. 4,893/21 improves the current devices regarding the policy of cybersecurity, without changing its essence, which highlighted the need for financial institutions to document criteria that configure a crisis situation on grounds of a cyberattack and interruption of relevant services, in addition to the communication to the Central Bank of Brazil already provisioned.
|44 Form 20-F – December 2020|
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 has been significant as any processing of personal data are 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 requires 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, and came into force, without sanctions in August 2020. As a result of the Covid-19 pandemic, the National Congress approved Law No. 14,010/20 postponing the entry into force of articles 52, 53 and 54 of Law No. 13,583/19 concerning administrative penalties until January 2021.
4.B.20.05 Corporate security
Our Corporate Security Department’s mission is to promote security solutions by creating, implementing and maintaining rules and processes aligned with our business.
To achieve our objectives, we focus on Information Security and Cyber Security, 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, processes and AML/TF.
We highlight the main areas and activities:
|·||the Information Security Department’s purpose is to create and maintain Department Policies and Standards to support Corporate needs, perform governance and generate Symmetric Cryptographic Keys, do the management and provide support on the theme of Certification/Digital Signature and issue Digital Certificates, ICP-Brasil standard, for employees and services of the Organization;|
|·||identify and assess the risks of Information Security, maintain and 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 to support our digital and digitalization processes of documents;|
|·||Governance of Cyber Security and Incidents has the mission to accomplish the Second Line of Defense for Cyber Security managing the Security Framework (MOSI – Operational Model of Information Security), which establishes and monitors the Integrated Vision of Security and Cybernetics, elaborates and monitors the Master Plan of Information Security (PDSI), to consolidate and report on the Metrics of performance and risk, as well as to report on these risks and cyber threats to the appropriate Committees. Allied to this, it also operates in the Monitoring and Data Leakage Prevention, Management of Information Security Incidents and Cybernetics and provides services of the Computer Security Incident Response Team (CSIRT) for prevention, detection, treatment and response to security incidents;|
|·||the Electronic Fraud-Prevention (Bradesco Celular, Internet Banking, Net Empresa, Fone Fácil and Debit Card Product), Document Fraud Prevention (Opening Accounts, Bradesco App, next, Payroll-Deductible Loans, Vehicles Financing and Consortium) manage processes, security projects and preventive communication to detect and mitigate risks of reputational damage and financial losses. They operate by monitoring transactions, preventive and reactive analysis of profiles, 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;|
|·||Access Management: 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, required access 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 mission of the Information Security for third parties is to provide Governance, according to rules and principles of Information Security, applied to suppliers and partners through processes/systems of appropriate evaluations for the protection of our information;|
|·||the AML/TF 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 AML/TF 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 communicated to the Financial Intelligence Unit in compliance with the regulatory/legal requirements;|
|·||Governance and Privacy Management: responsible for ensuring and protecting the privacy of data collected, implement and manage the Privacy Program in the Organization providing strategic guidelines, procedures, information, training and general guidelines to the Organization to meet the compliance with the General Law of Data Protection; and|
|·||the Physical and Property Security division is responsible for maintaining the structure with specialized human resources and safety devices for the implementation of Security Standards in accordance with Law No. 7,102/83, Ordinance No. 3,233/2012 of the Head Office of the Federal Police Department (DG/DPF) and the “Security Plan” determined by the Federal Police. It keeps the security devices and potential vulnerable points on constant evaluation, 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.
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 and alignment 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.20.06 Data 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, with an area of 11,900 square meters, especially built to harbor our IT infrastructure and has protections in place designed to ensure the uninterrupted availability of our services.|
|46 Form 20-F – December 2020|
|·||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 and followed by independent audits. 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 (cyber), 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.|
|·||Our internet systems have a separate infrastructure, enabling different customer segments (individuals, corporate and 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 (restricted environments).|
4.B.20.07 Bradesco Integrity Program
Our main corporate integrity commitments are:
|·||to conduct our business and develop our various relationships based on integrity and ethics, 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 and 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 Policy and Standard, 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, meals, travel, accommodation and entertainment, sponsorship, third parties and due diligence, bids with the Brazilian Government, political contributions, relationships with government agents and Politically Exposed Person (PEP), merger and acquisition, licenses and permits, whistle blowing 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, 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 aim to continually promote an ethical culture and integrity based on the code of ethical conduct and integrity program, which has been implemented through dissemination, communication, training, raising awareness among administrators, employees, apprentices, interns, suppliers and the service providers. Accordingly, our Policies, Rules, Standards, Integrity Program, Manuals, Training and Systems are continuously revised.
In September 2020, we held the IV Meeting of Integrity Ambassadors (focal points) with departments and associated companies, which included participation from Diretoria Executiva and an internal lecturer. In September and December 2020, on the International Day against Corruption, with the partnership of Unibrad and the participation of Grupo Bradesco Seguros, we promoted Bradesco Virtual Integrity Week, with involvement from the Chairman of the Board of Directors and the Chief Executive Officer, both with video messages, external lecturers and panels of members of our Board of Directors.
4.B.20.08 Treasury 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 our integrated risk control unit.
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.|
Inovabra is the innovation ecosystem designed to support our corporate strategy, fostering innovation through collaborative work with employees, business areas, customers, 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 several complementary programs:
|·||inovabra centers: established in 2012, inovabra centers is an internal innovation program encouraging our employees to engage in intra-entrepreneurship, spreading the culture of innovation inside our Organization. The innovation projects are prioritized, structured and conducted from the stage of conception, passing through the whole process of case construction and validation of the business model. There are more than 200 employees from various areas of business, interacting among themselves and with external startups, focused on generating innovative solutions to enable better experiences for our customers;|
|48 Form 20-F – December 2020|
|·||inovabra startups: launched in 2014, this program is an open innovation program enabling strategic partnerships between us and startups that have applicable solutions or are able to adapt financial and non-financial services that may be adopted by our Organization. 75 proofs of concept have already been carried and a total of 20 startups have been contracted. For startups, it offers the opportunity of working with actual customers, testing their solutions in practice and growing in scale;|
|·||inovabra ventures: is a proprietary capital fund launched in 2016, 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, particularly those developing solutions meeting the needs of our customers, contributing to their growth and entrepreneurial environment. Until now, we have invested in ten startups;|
|·||inovabra pesquisa (research): a multidisciplinary team, with analysts and researchers who conduct an in-depth study of new technologies and business models to keep our Organization on the frontier of knowledge. The team constantly interacts with partners, universities and research institutes in Brazil and abroad and supports inovabra with specific knowledge for decisions about the portfolio of innovation processes. Responsible for conducting research on emerging technologies such as Artificial Intelligence, blockchain, IoT (internet of things), quantum computing among others, as well as their impacts and applications on financial services and products;|
|·||inovabra lab: inaugurated at the end of 2017, it is an environment of 1.7 thousand square meters located at our offices in Alphaville (SP) and 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 reduces up to 60% the time in the processes of evaluation and certification of new technologies (hardware and software), prototyping, testing, proof of concept, launches and solutions to new challenges. In addition, it provides favorable conditions to connect the areas of business with the areas of IT and partners of technology, bringing the Organization closer to the borders of emerging technologies. 666 certifications have been completed and 159 proof of concept (POC);|
|·||inovabra international: at the beginning of 2018, we inaugurated the international inovabra, 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. A dedicated team of employees works in a collaborative space in partnership with a specialized company and eight global banks, aiming to identify solutions that add value to the business of the Organization, and to monitor trends of new business, technological and behavioral models. More than 1,500 startups have already been evaluated and 38 cases of innovation are in progress in the inovabra lab, inovabra centers and inovabra startups; and|
|·||inovabra habitat and digital hub platform: in February 2018, we launched the inovabra habitat, 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. We are part of the environment of more than 174 startups and 78 large companies, totaling more than 1.2 thousand people working collaboratively to innovate. More than 430 contracts were closed between the companies, startups residents at the space and us. In addition to fostering entrepreneurship in Brazil and a culture of innovation in organizations, habitat tends to contribute with the Country in the search for a position of greater prominence in the global innovation. Since September 2020, the model of operation of inovabra habitat was also extended to digital. The new format, in addition to the physical, can house startups and companies across the country that want to have access to open innovation. The search and connection with other startups from various regions of Brazil, for accessing business opportunities with us and our partner companies, is carried out via the digital platform inovabra hub. Currently, there are more than 2.6 thousand startups registered that can be analyzed to participate in specific business challenges.|
4.B.30 Business 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 Income – 5.A.20.01 Results of operations for the year ended December 31, 2020 compared with the year ended December 31, 2019”.
The following table summarizes our main gross revenues by segment for the periods indicated:
|Years Ended December 31,||R$ in thousands|
|Interest and similar income from loans and advances (1)||66,566,176||66,973,129||61,418,259|
|Fees and commissions||30,307,248||31,135,507||30,022,769|
|Insurance and pension plans|
|Premiums retained from insurance and pension plans||73,667,626||77,599,270||72,476,844|
|Fees and commissions||1,875,701||2,028,371||2,169,807|
|(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 5.0% 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, 2020, according to the sources cited in parentheses below, we were:
· one of the leading banks in terms of savings deposits, with R$136.7 billion, accounting for 13.0% of Brazil’s total savings deposits (according to the Central Bank of Brazil);
· the leader in BNDES onlendings, with R$6.2 billion in disbursements (according to BNDES);
· one of the leaders in automobile financing loans, with a market share of 13.3% (according to the Central Bank of Brazil);
· the leading bank in payments for over 11.6 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$2.5 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$611.0 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$429.2 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 1,529,142 quotas in three segments, including: (i) automobiles and motorcycles, with 1,223,164 quotas; (ii) real estate, with 234,952 quotas; and (iii) trucks, with 71,026 quotas (according to the Central Bank of Brazil);
· we were also highly ranked in Export, Import and Trade Finance; and
· the largest company operating in the Brazilian insurance market, operating in all lines of this segment, with a 22.4% 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) Bradesco Capitalização S.A., or “Bradesco Capitalização”; (iii) Bradesco Auto/RE Companhia de Seguros S.A., or “Bradesco Auto/RE”; and (iv) Bradesco Saúde S.A., or “Bradesco Saúde”. The total revenues of Grupo Bradesco Seguros were R$73.7 billion in insurance premiums, pension plan contributions and capitalization bond income.
|50 Form 20-F – December 2020|
In our banking segment, we offer a range of products and services to our customers including deposit-taking, granting of loans and advance payments, debit and credit card services and capital market solutions, through our extensive distribution network.
We have a diverse customer base that includes individuals and small, mid-sized and large corporates in Brazil. Historically, we have cultivated a strong presence among the broadest segment of the Brazilian market, middle- and low-income individuals.
The following table shows the bank income statement and other selected financial data for our banking segment for the periods indicated.
|Year ended December 31,||Banking - R$ in thousands|
|Revenue from financial intermediation||74,335,609||113,402,430||110,639,034|
|Expenses from financial intermediation||(23,937,104)||(49,683,456)||(52,958,441)|
|Expected Credit Loss Associated with Credit Risk expense||(25,268,087)||(18,891,493)||(18,319,973)|
|Gross income from financial intermediation||25,130,418||44,827,481||39,360,620|
|Fee and commission income and income from banking fees||30,307,248||31,135,507||30,022,769|
|Other administrative expenses||(19,349,706)||(20,327,502)||(19,126,128)|
|Share of profit (loss) of unconsolidated and jointly controlled companies||(271)||12,921||6,620|
|Other operating income / expenses||(15,634,441)||(21,082,041)||(11,943,485)|
|Non-operating income/( expense)||(284,469)||(537,428)||(929,396)|
|IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests||14,508,637||10,431,415||(1,134,166)|
|Deposits from customers||545,292,743||366,227,540||340,748,196|
|Investment Funds and Managed Portfolios||1,023,287,047||1,000,818,236||940,538,078|
|Other funding sources (1)||631,387,903||606,477,819||586,990,407|
|(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 Customers
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 customer with the same level of excellence and we continuously improve the way we provide services. We are aware of each customer’s profile and we have continuously improved the scale and diversification of our current model. These values extend to customers who are non-account holders, due to their significance and the potential of growth.
We have a segmented structure, for both individuals and companies, in order to offer flexibility and convenience in all areas in which we operate, ensuring we meet each customers’ needs.
Our customer base was composed of 70.2 million customers by the end of 2020.
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 customers, offers customized services with a national 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 customers 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 four large areas:
|·||Large Corporate: a highly qualified team, with a sector approach, offer customized consultancy to serve the large Brazilian corporations in Brazil and worldwide;|
|·||Corporate: a specialized service for large companies, organized by market sector and physical structure in various cities in Brazil;|
|·||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 66 Units located in the main cities and capitals distributed in 15 regional sectors and another 97 Corporate Spaces throughout Brazil; and|
|·||Multi & 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. In addition, the segment also covers Multinationals who have a subsidiary in Brazil providing a differentiated service with specialized professionals who provide financial solutions and services for a better operation in the country.|
|Ø||Bradesco Private Bank|
Bradesco Private Bank offers exclusivity and works side by side with customers to maintain and manage family wealth across generations.
Designing innovative solutions to meet the ambitions and individual needs of each of our customers, 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.
Customers 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 13 offices located in: São Paulo, Rio de Janeiro, Belo Horizonte, Blumenau, Campinas, 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.
|52 Form 20-F – December 2020|
The Bradesco Varejo service network includes 3,049 branches, 708 business units, 3,915 service centers (PAs), 822 electronic service centers (PAEs) and 39,100 Bradesco Expresso units (banking correspondents), in addition to thousands of ATMs.
By being present in all Brazilian municipalities, Bradesco Varejo has a prominent role in the use of banking services by Brazilians, frequently being the first interaction, a customer has with a financial institution. In this way we contribute to the development of individuals and the communities where they live.
Bradesco Prime is tailored towards high-income individuals and operates across Brazil. Bradesco Prime uses a full relationship model to fit users' profiles and needs, providing access to effective financial planning and customized solutions evaluated by qualified professionals. Its mission is to be the customer's first choice bank, focusing on quality of service and the provision of appropriate solutions for its users.
|·||Program of benefits: exemption of up to 100% on the value of the Service Package and exemption on annuity of our credit cards, in accordance with the volume of investments and/or concentration of the customer’s spending, plus up to 12 days without interest in the Special Overdraft in accordance with the volume of investments;|
|·||Viva|Prime program: a relationship platform that offers discounts on gastronomy, entertainment, travel and miscellaneous products, exclusive experiences in Cinemark Rooms, Teatro Bradesco (theater), Livelo, Menu Program, among others;|
|·||Recommended investment portfolios: suggested by a certified and highly qualified team based on the analysis of the investor’s profile (API) that seeks to diversify the best ratio between risk and return;|
|·||Capillarity: wide Branch Network, Bradesco Prime Spaces and Platforms throughout the country, offering convenience and total privacy so customers can tend to their business affairs;|
|·||Relationship manager: qualified professionals who support the customer in managing their resources, considering their needs and moment of life; and|
|·||PIC (Prime International Center): remote service for foreign customers in Brazil.|
Bradesco Prime has been, throughout its existence, investing in technology, in the improvement of relationships and in the training of its professionals. One of its main assets is to always provide the best experience to its customers. It established a prominent position in the Brazilian market of banking services for high-income customers and has consolidated its position as one of the largest banks in the segment.
In 2018, we created an area dedicated to strengthening the relationship with individual and corporate customers who used at least one of our products. By recognizing the customer’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.
During 2020 we carried out adherence tests for the propensity models, using processes of continuous improvement focused on the commercial performance and analysis of the potential for consumption. The study was developed in conjunction with various areas and their distribution was performed by means of the digital channels of the Organization. The propensity (tendency) models currently used by the Department relate to the consumption of products, thus enabling us to be more assertive and efficient in the offer, adapting the product to the profile and moment of the customer's life.
Additionally, we made a further 16 products available to our customers digitally, thereby increasing our portfolio. In addition, we advanced in our discussions about the creation of the organizational marketplace and starting building this platform in 2021.
4.B.30.01-02 Products and banking services
In order to meet the needs of each customer, we offer the following 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:|
|o||Conta Fácil (Easy Account) – a checking account and a savings account under the same bank account number, using the same card, for individuals and companies;|
|o||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|
|o||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, or taxa referencial, known as the TR, plus 0.5% monthly interest in case the SELIC rate target is higher than 8.5% p.a. or TR plus 70.0% of the SELIC rate target if the SELIC rate target is equal to or 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, 2020, we had 32.3 million checking account holders, 30.6 million of which were of individuals and 1.7 million of which were of companies. As of the same date, we had 69.9 million savings accounts.
In 2020, in line with Circular No. 3,988/20 creating procedures and additional conditions for the opening, maintenance and closure of deposit accounts by financial institutions, we must suspend the authorization of the respective representative, agent or proxy to the transactions of the deposit accounts of a company's ownership we hold, if some serious irregularities are verified in the registration of these agents in the Individual Taxpayer’s ID (CPF).
The following table shows a breakdown of our deposits from customers by type of product on the dates indicated:
|December 31,||R$ in thousands, except %|
|Deposits from customers|
|54 Form 20-F – December 2020|
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|
|Financing and On-lending||21.1%||108,461,841||104,138,378||105,672,794|
|Financing and export||10.0%||51,461,844||47,484,556||47,626,728|
|Operations with limits (1)||1.6%||7,963,683||11,510,109||10,657,734|
|Overdraft for corporates/ Overdraft for individuals||0.8%||3,997,179||7,509,397||7,552,240|
|Financing and On-lending||18.1%||93,134,830||78,615,264||67,861,394|
|Operations with limits (1)||8.7%||44,615,928||46,373,308||40,717,948|
|Overdraft for corporates/ Overdraft for individuals||0.7%||3,386,133||5,019,920||4,270,068|
|(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:
|10 largest borrowers||7.5%||7.7%||9.1%|
|20 largest borrowers||10.9%||11.3%||12.9%|
|50 largest borrowers||15.7%||16.7%||18.6%|
|100 largest borrowers||19.2%||20.1%||22.9%|
|Ø||Financing and Onlending|
|·||Import and export financing|
Our Brazilian foreign-trade related business consists of providing financial services to our customers 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 financing, 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 914 correspondent banks abroad, 37 of which credit/guarantee lines as of December 31, 2020.
As of December 31, 2020, we had 259.3 thousand financing contracts.
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 6.7% 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 10.5% to 15.0% p.a. plus TR. In addition, in 2020 we launched the pricing in savings rate plus 3.99% p.a.
Financings for construction, also known as the Businessman Plan, have a construction term of up to 36 months and interest rate of 8.5% to 16% p.a. plus TR, and a six-month grace period for the realization of transfers to borrowers. We also launched for that line the pricing with floating rates.
Central Bank of Brazil 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.
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 certain products and programs to provide government-funded long-term loans with different interest rates, focusing on economic development. 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.
In 2020, we disbursed R$6.2 billion, 94.5% of which were loaned to micro, small and medium-sized enterprises.
We are acting through partnerships in the consumer financing for the purchase of new and used vehicles for individuals and companies in the chain, which comprises assembler, dealers and consumers. In addition to offering these 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.
|56 Form 20-F – December 2020|
As of December 31, 2020, we had 5,289 active leasing agreements. According to ABEL, our leasing companies were among the sector leaders, with a 23.3% market share in Brazil, considering the current value of R$11.3 billion on the market portfolio.
Financial leasing involves trucks, cranes, aircraft, ships and heavy machinery. In this same period, 33.0% of our transactions were for vehicles (vehicle, bus, micro-buses and trucks).
We conduct our leasing transactions through our primary leasing subsidiary, Bradesco Leasing and also through Bradesco Financiamentos.
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 credit / Payroll-Deductible Loans|
They are loans 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 the private sector.
The average term of these operations is 57 months and interest rates range from 1.5% to 3.0% p.a., as of December 31, 2020.
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 by the Central Bank of Brazil for the investment of 27.5% of the Value Subject to Collection (VSR), which is called RO – Obligatory Resources, with a portfolio of R$9.4 billion on December 31, 2020, with maximum rates from 2.75% p.a. to 6.0% p.a. as the rule of investment of the MCR (Manual of Rural Credit), whereby the average rate of the portfolio is 5.4% p.a.;|
|o||From the Bank’s Treasury for the operations, with a portfolio of R$3.9 billion on December 31, 2020 and the average rate of the portfolio of 7.9% p.a.; and|
|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 7.4% p.a.|
The majority of loans have semiannual 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.
In April 2020, Law No. 13,986/20 was enacted allowing Bank Credit Bills (CCB) and Rural Credit Bills (CCR) to be issued in book-entry form, as an alternative to written form, whereby the Central Bank of Brazil is responsible for establishing the conditions for the electronic bookkeeping activity, authorizing its exercise and supervising the entities that will execute it. Accordingly, the Central Bank of Brazil issued Circular No. 4,036/20, which regulates the bookkeeping activities by financial institutions. Under these new standards, the financial institutions may only perform the bookkeeping of CCBs and CCRs representing their own loans, in which the bookkeeping issuance of the CCB and CCR will be carried out through the electronic bookkeeping system of the financial institutions.
|Ø||Operations with limits|
We offer a comprehensive range of credit cards to our customers 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||exchange 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||interest 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||international credit cards for different audiences, accepted in Brazil and abroad;|
|o||credit cards directed toward high-net-worth customers, such as “The Platinum Card”, “Infinite”, “Black”, “Nanquim”, “Diners” and “Aeternum” from Elo, Visa, American Express and MasterCard brands;|
|o||cards destined for corporate customers, geared for business expenses and control of expenditure;|
|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||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 (method of payment brand) and Banco Digio (digital bank focused on 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, 2020, we had several partners with whom we offered co-branded and private label/hybrid credit cards. That has allowed us to integrate our relationships with our customers and offer our credit card customers banking products, such as financing and insurance.
The following table shows our volume of transactions and total number of transactions of credit cards for the years indicated:
|Transaction Volume - R$||192,814.1||205,845.0||189,155.0|
|Number of transactions||1,969.6||2,262.9||2,104.8|
|·||Overdraft for individuals|
The overdraft limit is a line of credit available on checking accounts with automatic renewal for emergencies when there is no available balance in the account. For corporate customers, we offer a business check to meet the emergency needs of companies.
|58 Form 20-F – December 2020|
|·||Overdraft for companies|
Overdraft for companies is a revolving credit limit for corporate entities to meet the emergency needs of a customer. The limit of the overdraft for companies 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 Support Program|
In April 2020, the President of the Republic amended Provisional Measure No. 944/20 (PM No. 944/20), instituting the Emergency Employment Support 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, converted into Law No. 14,043/20. Law No. 14,043/20 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 four months, limited to the equivalent of up to two times the minimum salary per employee. The law 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 No. 944/20, the CMN issued Resolution No. 4,800/20, later revoked by Resolution No. 4,846/20, which updated the provisions of Resolution No. 4,800/20 in line with conversion of PM No. 944/20 in Law No. 14,043/20. Such resolutions provide 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, and should observe the annual gross revenues of the entity financed, in addition to conditions relating to amounts, maturity and interest.
Our credit policy is focused on:
|o||ensuring the safety, quality, liquidity and diversification of asset allocation;|
|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, our Diretoria 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 of Brazil’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 customers /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 loan 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 loan restrictions.|
We have credit limits for each type of loan and we pre-approve credit limits for our individual and corporate customers 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 customer, including individuals, small and medium-sized enterprises, are reviewed every 90 days.
Our maximum exposure per customer (e.g., individuals, companies or other economic groups) is determined by customer rating and the aggregate maximum exposure is limited to 15.0% of our Reference Equity.
Any cases in which the maximum level of exposure per customer exceeds the thresholds as set out in the table below or in which the total exposure equals or exceeds R$5.0 billion are required to be submitted to the Board of Directors for approval.
|Customer Rating||As a % of Tier I Capital|
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:
|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 individual customers|
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$50,000. If the value and type of collateral are not within the limits established for approval at branch level, an application is submitted to the Credit Department and, if necessary, higher levels of authority.
The following table shows individual loan limits for approval by branch managers, depending on the value and type of collateral offered:
|60 Form 20-F – December 2020|
|Total Risk Amount||R$ in thousands|
|Loan with no collateral||Loan with collateral|
|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$15,000,000.|
We use a specialized Credit Scoring evaluation system to analyze these loans, allowing us to build a level of flexibility and accountability, besides standardizing the procedures in the process of analyzing and deferring loans. All models are constantly monitored and revised whenever necessary. Our Credit Department has a dedicated team developing models and working on the continuous improvement of these tools.
We provide our branches with tools that allow them to analyze loans and advances for individual customers in a rapid, efficient and standardized manner and to produce the corresponding loan contracts automatically. With these tools, our branches can respond quickly to customers, keep costs low, and control the risks inherent to consumer credit in the Brazilian market.
The following table shows limits established for approval of loans to individuals outside the discretion of our branches:
|Total Risk Amount||R$ in thousands|
|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 5,000,000|
|Board of Directors||over 5,000,000|
|·||Loans and advances to corporate customers|
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|
|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|
|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 5,000,000|
|Board of Directors||over 5,000,000|
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 “Varejo – Empresas 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|
|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.|
|62 Form 20-F – December 2020|
|·||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 customers. 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.30.01-02.03 Cash Management 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 offer a broad portfolio of high-quality products and services of accounts payable and receivable, supported by our network of branches, banking correspondents, electronic channels and mobile, all of which provided more speed, stability and security for customer data and transactions. Our solutions include receipt and payment services; and 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, check custody, 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 2020, we settled 1.3 billion invoices through the services of Cobrança Bradesco and 538.6 million of receipts by the tax collection systems and utility bills (such as water, electricity, telephone and gas), check 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 identify solutions for companies.|
|Ø||Niche Markets – We operate in various niche markets, such as franchise business, Individual Microentrepreneur (MEI), education, health, condominiums, country clubs, transportation, religion, and among others, where our customers 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 through structured 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 512 agreements in place with franchising companies, generating numerous opportunities to open new checking accounts and leveraging business with the respective franchisees.
Another important feature in this area is the support we provide towards the development of Local Production Groups (APLs), by providing service to businesses and assistance to these customers.
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.
Microentrepreneurs 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.
4.B.30.01-02.04 Public authority solutions
We have a specific area dedicated to serving public administration, which offers specialized services to identify 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.
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 9 Specialized Platforms to assist governments, capitals, courts, class councils, chambers, prosecutors, public defenders and the largest municipalities according to the Brazilian GDP, in addition to 35 Platforms that operate in the Retail sector providing services to the City Halls and other Authorities.
In 2020, 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 11.5 million retirees and pensioners.
4.B.30.01-02.05 Management and administration of third-party funds
BEM DTVM and Bradesco provide fiduciary administration services to investments funds and managed portfolios, with regulatory responsibility for operation of investments funds.
BRAM also conducts the management of third-party resources, where it is responsible for investment decisions:
BRAM manages third-party funds through:
|·||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, 2020, BRAM managed 1,573 funds and 618 portfolios, providing services to 3.0 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 Customers”) 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.|
The following tables show the equity of funds, as calculated under the applicable accounting standards required by the CVM for each type of fund, and portfolios, which are under our management, the number of investors and the number of investment funds and managed portfolios for each period:
|64 Form 20-F – December 2020|
|Equity under Management by Type of Investment|
as of December 31
|R$ in thousands(1)|
|(1) Amounts shown are funds of third parties and are not derived from our books and records. We present these amounts in order to give an indication of the scale of our fund activities. We generally earn administration and/or management fees at a percentage of the equity amount of the fund.|
|As of December 31,||2020||2019|
|Ø||Administration of third-party funds – On December 31, 2020, BEM DTVM and Bradesco provided administration service to 3,828 funds, 518 portfolios and 64 investment clubs, providing services to 3.0 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 by Type of Investment|
as of December 31
|R$ in thousands (1)|
|Third party share funds||103,169,477||98,960,275|
|Investment Clubs and Managed Portfolios|
|Third party share funds||26,032,795||23,905,685|
|(1) Amounts shown are funds of third parties and are not derived from our books and records. We present these amounts in order to give an indication of the scale of our fund activities. We generally earn administration and/or management fees at a percentage of the equity amount of the fund.|
|As of December 31,||2020||2019|
4.B.30.01-02.06 Services 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 2020, Bradesco BBI received awards in the following categories: They are: “Best Investment Bank in Latin America” and “Best Fixed Income Investment Bank in Latin America” by Global Finance.
In 2020, Bradesco BBI advised customers in a total of 200 operations across a range of investment banking products, totaling approximately R$333.1 billion.
|Ø||Mergers and acquisitions – Bradesco 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 2020, Bradesco BBI advised on 23 disclosed transactions that amounted to R$86.8 billion.|
|Ø||Equity – Bradesco BBI coordinates public offerings of shares in national and international markets. In 2020, Bradesco BBI coordinated 31 stock market operations with bids totaling over R$97.2 billion.|
|Ø||Fixed income – Bradesco BBI coordinates public offerings of securities of fixed income in the local and international debt capital markets. In 2020, Bradesco BBI coordinated a total of R$149.1 billion in the capital market and a total of 146 transactions. We can highlight in fixed income:|
|·||Operations in the Local Market – Bradesco BBI ended the year with great prominence in the local fixed income market. In 2020, Bradesco BBI advised 65 local Fixed Income transactions involving a total amount of approximately R$47.1 billion;|
|·||Project finance – Bradesco 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 2020, Bradesco BBI successfully participated in the launch of 34 projects, totaling more than R$33.5 billion in investments;|
|·||Structured operations – Bradesco 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. In 2020, Bradesco advised 30 structured operations for different customers, with a total amount of more than R$18.4 billion; and|
|·||Operations in the International Market – Bradesco BBI also featured in the international capital market, advising 17 transactions, with an amount of R$50.1 billion.|
4.B.30.01-02.07 Investment Platform
We have an investment platform that aims to provide customers with differentiated investment advisory services, remotely and in person, covering all of Banco Bradesco's, Ágora Investimentos' and Pension Fund's products, considering the customer's needs and profile.
The investment advisory service, in addition to using the services of the branch network managers, has an investment specialist team. The customers also benefit from suggested portfolios that combine a diversity of financial products and are established monthly, based on the customer's profile and national and international market perspectives.
|66 Form 20-F – December 2020|
4.B.30.01-02.08 Intermediation and trading services
Ágora is an open and independent investment platform, which offers its own and third-party products to all types of investors (individuals or legal entities), account holders or non-account holders of Bradesco. Through the Ágora app or the agorainvestimentos.com.br website, it is possible to register completely digitally and online, and in a few minutes, the customer already has access to our platforms, reputing with curatorship in the selection of the best investment products on the market from a complete portfolio with more than 800 selected investment products so that our customers can invest with all security and convenience.
In addition, the Ágora customer has personalized advice, exclusive content, extensive coverage of companies listed on the stock exchange and information updated daily, including recommendations from our analysts and experts throughout the trading session, which assist in decision making to invest in various options according to their profile and objective, among more than 400 options between fixed income securities issued by the bank and privately, Tesouro Direto (Government or Treasury Bonds) and Public Securities; a diversified portfolio with more than 200 funds, gathering more than 70 renowned manager; exclusive COEs (Structured Operations Certificate) and private pension plans; in addition to our Home Broker that brings in an agile and dynamic way the entire stock market, futures, options, BDRs (Brazilian Depositary Receipts), ETFs and Real Estate Funds listed on B3.
Ágora also offers its clients the opportunity to enter the stock market, following their recommended stock portfolios, with 5 exclusive strategies (Top 10, Aggressive, Small Caps, Dividends and Top Green), whose criteria and indices are monitored and measured by the risk rating agency Standand & Poor's, being the only broker in the country to have this follow-up in recommended portfolios and we also offer the option to follow these strategies through exclusive funds with same strategies with initial application from R$ 1.00.
Over the last year Ágora has established relevant partnerships: it is the official investment house of next (with more than four million customers) and has consolidated a cross-platform project with Grupo Estado (with emphasis on the e-investor news portal), which offers high quality and independent content, capable of impacting about 31 million users.
At the end of 2020, Ágora reached 547,700 customers, with a growth of 49.2% compared to the end of 2019 (367,100 customers). In the same reference base, it reached R$ 62.4 billion in custody, representing a 9% growth in the period, maintaining the position of third largest retail broker in the country, according to the ranking of assets in the custody of individuals in B3.
In the Operational Qualifying Program (PQO) of B3, Ágora received the excellence seals (in Carrying Broker, Execution Broker and Retail Broker), indicating the high quality of its operational services rendered to the market and customers. Ágora also has the Certifies Seal, providing even more safety and transparency in the investments registered in B3.
In 2020, Bradesco S.A. CTVM, or Bradesco Corretora, provided 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 450 reports, in English and Portuguese, are forwarded on a monthly basis to the most important investors domiciled in Brazil, the United States, Europe and Asia.
Bradesco Corretora 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 corporate and institutional investors.
Regarding B3 variable income markets in 2020, Bradesco Corretora traded R$647.4 billion and ranked ninth in Brazil in terms of total trading volume.
In addition, in the same period, Bradesco Corretora traded 316.9 million futures, forwards, swaps and options totaling R$20.3 trillion in B3. In 2020, Bradesco Corretora ranked ninth in the Brazilian market, in relation to the number of futures contracts, terms, swaps and options executed.
Bradesco Corretora remains adherent to the Operational Qualifying Program (PQO), maintaining the five excellence seals (Agro Broker, Carrying Broker, Execution Broker, Retail Broker and Nonresident Investor Broker), confirming the high quality of its future transactions and variable income markets. Bradesco Corretora is also certified by CETIP (Clearing House for the Custody and Financial Settlement of Securities, currently B3).
4.B.30.01-02.09 Capital market solutions
In 2020, we were one of the main providers of capital market 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, 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 management for investment funds.
Bradesco Custódia has Quality Management System ISO 9001:2015 certifications and GoodPriv@cy certifications. We also hold an ISAE 3402 (International Standard on Assurance Engagements) certification, which includes the issuance of the Control Assurance report in a Service Provider Organization. These certifications expand our structures of controls, increasing the level of effectiveness and quality of processes.
As of December 31, 2020, the set of the services provided by us, which we call Bradesco Custódia was composed of:
|Ø||Custody and controllership services for investment funds and managed portfolios involving:|
|·||R$1.9 trillion in assets under custody;|
|·||R$2.8 trillion in assets under controllership; and|
|·||R$244.2 billion in market value, related to 31 ADR (American Depositary Receipts) programs and 4 GDR (Global Depositary Receipts) programs.|
|Ø||Fiduciary management for funds, investment clubs and managed portfolios involving:|
|·||R$1.0 trillion total shareholders’ equity of investment funds under fiduciary management by Banco Bradesco and BEM – DTVM in investment funds, portfolios and investment clubs.|
|·||245 member companies of the Bradesco Book-entry Stock System, with 9.6 million shareholders;|
|·||449 companies with 730 issues in the Bradesco Book-Entry Debenture System, with a market value of R$650.5 billion;|
|·||1,039 investment funds in the Bradesco Book-Entry Quotas System (value of R$96.4 billion); and|
|·||33 BDRs programs managed, with a market value of R$1.8 billion.|
|Ø||Depositary (Escrow Account – Trustee):|
|·||24,606 contracts, with a financial volume of R$15.1 billion.|
|68 Form 20-F – December 2020|
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, 2020, we had 3 foreign Branches, 12 Subsidiaries and 2 Representative offices.
Recently, we concluded the acquisition of BAC Florida Bank and its subsidiaries to offer a complete platform of banking and investments products and services also in the United States.
|New York||Banco Bradesco|
|Grand Cayman||Banco Bradesco|
|London||Banco Bradesco Europa|
|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|
|Florida||Bradesco BAC Florida Bank|
|Bradesco BAC Florida Investments|
|Bradesco Global Advisors|
|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.
|Ø||Foreign branches and subsidiaries|
Our foreign branches and subsidiaries principally provide financing in foreign currency (particularly foreign trade finance operations) to Brazilian and non-Brazilian customers. Total assets of the foreign branches, considering the elimination of intra-group transactions, were R$40.3 billion, as of December 31, 2020, denominated in currencies other than the real.
Funding required for financing of 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, which amounted to R$29.0 billion (US$5.6 billion) during 2020 and funding transactions amounted R$13.6 billion (US$2.6 billion), as an additional source of funding.
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 customers of the private banking segment.|
|·||Bradesco Argentina – It was set up with the purpose of granting assistance, largely to multinational companies acting 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 intermediation of operations of fixed income and variable income of Brazilian companies for global institutional investors; raising of short-term funds for Banco Bradesco S.A., placement of IPOs for Brazilian companies; distribution of research reports and corporate access 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) program and Global Medium-Term Note program (MTN); 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 card issuance.|
|·||Bradesco BAC Florida Bank – Commercial bank in the United States with deposits guaranteed by the FDIC, providing banking products and services to resident and non-resident individuals, and corporate and institutional customers.|
|·||Bradesco BAC Florida Investments – Broker dealer that offers a complete and open platform of investments for Private, high-income, corporate and institutional customers.|
|·||Bradesco Global Advisors – Investment advisory firm that manages discretionary and non-discretionary portfolios for Private and high-income customers.|
|Ø||Revenues from Brazilian and foreign operations|
The table below breaks down revenues (interest and similar income, and fee and commission income) from our Brazilian and foreign operations for the periods shown:
|For the years ended December 31,||2020||2019||2018|
|R$ in thousands||%||R$ in thousands||%||R$ in thousands||%|
|Ø||Banking operations in the United States|
In January 2004, the United States Federal Reserve Bank authorized us to operate as a financial holding company in the United States. As a result, we may do business in the United States directly or through a subsidiary and, among other activities, may sell insurance products and certificates of deposit, provide underwriting services, act as advisors on private placements, provide portfolio management and merchant banking services and manage mutual fund portfolios.
|70 Form 20-F – December 2020|
|Ø||Import and export financing|
See information in “Financing and Onlending Operations – Import and Export Financing”, item “4.B.30.01-02.02 Loans and advances to customers”.
|Ø||Foreign exchange products|
In addition to import and export financing, our customers have access to a range of services and foreign exchange products such as:
|•||foreign loans to customers (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 (individuals and companies);|
|•||purchasing and selling of foreign currency paper Money;|
|•||cashing checks denominated in foreign currency; and|
|•||clearance certificate (international financial capacity certificate).|
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, 2020, registered total sales of 1,529,142 outstanding quotas; net income of R$1.4 billion; and fees from consortiums of R$1.9 billion. The company also manages a total volume of transactions of over R$80.2 billion.
4.B.30.02 Insurance, pension plans and capitalization bonds activities
We offer insurance products, pension plans and capitalization bonds through several corporate entities, which we refer to collectively as “Grupo Bradesco Seguros”, is a leader in the Brazilian insurance market.
The following table shows selected financial data for our insurance, pension plans and capitalization bonds segment for the periods indicated:
|As of and for the year ended December 31,||Insurance, pension plans and capitalization bonds - R$ in thousands|
|Financial margin and other income from insurance, pension plans and capitalization bonds||12,177,990||14,941,642||13,567,258|
|Fee and commission income||1,875,701||2,028,371||2,169,807|
|Other administrative expenses||(1,524,278)||(1,495,894)||(1,609,750)|
|Share of profit (loss) of unconsolidated and jointly controlled companies||98,937||276,165||206,272|
|Other operating income / expenses||(1,033,754)||(734,635)||(998,070)|
|IT/SC (Income Tax/Soc. Contrib.) and non-controlling interests||(3,425,110)||(4,490,945)||(4,374,553)|
|Technical provisions for insurance, pension plans and capitalization bonds||284,606,330||274,764,876||258,755,207|
4.B.30.02-01 Insurance products and services, pension plans and capitalization bonds
With the objective of meeting the needs of each customer, we offer a range of products and services, such as:
4.B.30.02-01.01 Life and personal accident insurance
We offer life and personal accident insurance, as well as insurance against miscellaneous events, such as job loss, through our subsidiary Bradesco Vida e Previdência. As of December 31, 2020, there were 31.9 million life insurance policyholders.
4.B.30.02-01.02 Health insurance
The health insurance policies cover medical/hospital expenses. We offer health insurance policies through Bradesco Saúde for small, medium or large corporates wishing to provide benefits for their employees.
On December 31, 2020, 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 159 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, 2020, it included 11,128 laboratories, 17,657 specialized clinics, 15,302 physicians and 2,086 hospitals located throughout the country.
4B.30.02-01.03 Automobiles 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.
Retail property/casualty insurance is for Individuals, particularly those with residential and/or equipment related risks and small and medium-sized enterprises 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. For companies, 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.
|72 Form 20-F – December 2020|
As of December 31, 2020, Bradesco Auto/RE had 1.6 million insured automobiles and 1.1 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. For purposes of the income tax return, the PGBL enables its participants to deduct from their taxable income the amount of their contributions, up to a limit of 12.0% of the total gross income. The participants of these funds are taxed upon the redemption of quotas, and/or receipt of benefits.
As of December 31, 2020, Bradesco Vida e Previdência accounted for 20.6% of the supplementary pension plans in terms of contributions, according to SUSEP. On December 31, 2020, Bradesco Vida e Previdência accounted for 24.2% of all supplementary pension plan assets under management: 22.4% of VGBL, 22.5% of PGBL and 50.2% of traditional pension plans, according to FENAPREVI.
Brazilian law currently permits the existence of both “open” and “closed” private pension entities. Open private pension entities are those available to all individuals and companies wishing 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 open supplementary pension plans covering 2.9 million participants, totaling a balance of R$251.8 billion.
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 and/or when benefits are paid out, tax will be levied on the income accrued, pursuant to current legislation.
These plans can be employed either individually as well as in business plans. Individual plans represent 58.4% of the total number of participants and the business plans account for 15.6% of the technical provisions.
The plans being commercialized allow contribution, portability, redemption and conversion into income.
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 customers.
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|
4.B.30.02-01.05 Capitalization bonds
Bradesco Capitalização is the leader among private sector capitalization bond companies, according to SUSEP and offers its customers capitalization bonds with the option of a lump-sum or monthly contributions. Plans vary in value (from R$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, 2020, we had around 7.0. million “traditional” capitalization bonds and around 16.5 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 customers to avoid delinquency, the plans are for short-terms and grace periods with low unit sales value. At the end of 2020, Bradesco Capitalização had approximately 23.5 million capitalization bonds and 2.5 million customers.
The investment grade rating of Bradesco Capitalização on a domestic scale is “brAA-/Stable/--”, assigned by S&P Global rating agency, as last reviewed on April 3, 2020.
4.B.40 Distribution channels
The following table shows our main distribution channels as of the dates indicated below:
|Distribution Channels (1) - Units||2020||2019||2018|
|- PAs - Service Points||4,623||4,054||3,816|
|- PAEs - ATMs located on a company´s premises||822||874||907|
|- Banco24Horas Network (2)||15,235||14,763||12,697|
|- Bradesco Expresso (Banking Correspondents)||39,100||39,100||39,100|
|- Bradesco Financiamentos||16,620||16,938||14,912|
|- Losango Customer Service Points||58||58||60|
|- Branches, Subsidiaries and Representation Office, Abroad||17||14||13|
|- Bradesco Network||30,694||33,900||34,997|
|- Banco24horas Network||23,828||23,820||23,102|
|(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|
4.B.40.02 Insurance, pension plans and capitalization bonds activities
We sell our insurance, pension plan and capitalization products through our website, our branches, 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:
|74 Form 20-F – December 2020|
|% of total sales, per product|
|Sales through the branches||39.8%||38.1%||38.0%|
|Sales outside the branches||60.2%||61.9%||62.0%|
|Pension plans products|
|Sales through the branches||75.0%||86.0%||87.1%|
|Sales outside the branches||25.0%||14.0%||12.9%|
|Sales through the branches||84.8%||86.4%||85.7%|
|Sales outside the branches||15.2%||13.6%||14.3%|
4.B.40.03 Partnerships with retail companies – Bradesco Expresso
“Bradesco Expresso” enables us to expand our share of the correspondent bank segment through partnerships with supermarkets, drugstores, grocery stores, department stores and other retail chains. These companies provide basic banking services like the receipt of utility bills, payment vouchers, withdrawals from current and savings accounts and social security benefits, and deposits, among others. The services are provided by employees at the relevant establishments, while decisions regarding granting of credit or opening of accounts are made by us.
The main services we offer through Bradesco Expresso are:
|·||receipt and submission of account application form;|
|·||receipt and submission of loans, financing and credit card application form;|
|·||withdrawals from checking 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, 2020, the Bradesco Expresso network totaled 39,100 service points, with an average of 36.1 million monthly transactions or 1.7 million transactions per business day.
4.B.40.04 Digital Channels
We offer various products and services anywhere and at any time through our digital channels Mobile App, Internet Banking, ATM, and Contact Center, aiming at the convenience, practicality and security for customers. In 2020, digital channels represented 98% of the transactions performed at Bradesco, highlighting the Mobile and Internet Banking channels, which represented 89% of this total.
Below is a brief description of our digital channels:
|Ø||Mobile App –Through apps for individuals and corporate entities, we make transactions with fluid and simple payment journeys, transfers, instant payments (Pix), balance inquiries, loans, and many other services. We have partnered with Brazil’s major mobile network operators. As a result, the person who accesses the account via cell phone does not have their data package charged.|
Among the products and services available through Mobile App, we highlight:
|·||Opening Accounts: available in the Bradesco App (for individuals) and in the Bradesco Net Empresa App (for companies/individual microentrepreneurs), which allows new customers to open an account through their mobile phone, without going to the branch, including the sending of documents by mobile. In 2020, 897 thousand individual accounts were opened, an increase of 163% in comparison to the 341 thousand accounts in 2019 and 82.4 thousand Microentrepreneur (MEI) corporate accounts (since their implementation in May 2019);|
|·||Pix: new service to pay, receive and transfer funds to accounts of any financial institutions in a few seconds, 24h a day, every day of the week. Customers simply register their keys on the Bradesco Apps to transact;|
|·||Digital Housing Loan: the customer can request a quote for a real estate financing and have it approved within one hour;|
|·||Best loan offer (smart menu): the best credit solution for current and past-due customers is decided by means of algorithms with integrated simulation and contracting journeys of the credit products;|
|·||Consortium: simulation, purchase and management of quota in real estate, automotive and heavy vehicle consortium;|
|·||Purchase of Foreign Currency: purchases of US dollars and Euros and withdrawal at the branch;|
|·||Insurance: contracting of life, home, dental and travel insurance;|
|·||Investments: a wide range of investments, simulator, view balance, make and redeem investments and pension plans; and|
|·||Cards: checking the statement and limit, payment of bank payment slip, travel block and warning, password visualization and card cancellation, access to digital wallets.|
|Ø||BIA – Bradesco Artificial Intelligence (BIA) interacts with the user, answers questions about products and services and assists with transactions. In 2020, BIA recorded 426.3 million interactions, now answers 100% of requests in the first level of services of Fone Fácil (Contact Center). It expanded its learning in services, such as checking the balance, recent transactions of the checking account, the account credit limits and credit card, the dollar exchange rate, finding the nearest branch and offer of credit in accordance with each person’s profile, among others. BIA answers questions on more than 92 of our products and services and is present in our own channels and partner channels, such as WhatsApp, Facebook Messenger, Google Assistant, Amazon Alexa and Apple Business Chat. It is available for employees and customers, and provides faster, practical and autonomous services. We were a pioneer in Brazil in the use of IBM’s cognitive computing platform, Watson.|
|Ø||Internet – Showing 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 customers through this channel in 1996.|
We can divide this communication platform into two main areas of access and dissemination of content:
|·||Bradesco Institutional Website (banco.bradesco): the website has simplified content and language adapted for digital media and provides customers and the public at large access to a wide range of information and clarification on various financial products and services; and|
|·||Bradesco Internet Banking for Financial Services: access is available with credentials and personal security devices for checking account holders and Individual Taxpayer’s ID (CPF) and password for non-account holders. Here the customers can check their statements, make payments, transfers, instant payments (Pix), investments and much more.|
Our corporate customers rely on our Net Empresa product to quickly and safely to get statements of their account balance, transfer amounts, send and receive instant payments (Pix), make investments, send files and undertake various other transactions. We also highlight for the MEI Website, which is an intuitive portal and dedicated to the Individual Microentrepreneur, with banking and non-banking solutions.
|Ø||Self-service – The self-service channel allows autonomy to customers, since it offers a portfolio of products with an intuitive navigation and focused on the digital convergence, maintaining high availability and capillarity.|
Our Self-service Network has 30,694 machines, of which 7,460 are banknote recycling machines with immediate deposit in cash and a further 159 with services for the purchase of U.S. dollars and Euros. And it still has functionality that facilitates the day-to-day operations of the customer such as withdrawals with the possibility of choosing the denomination of bank notes, quick withdrawal and email receipts.
|76 Form 20-F – December 2020|
In addition, our customers have access to 23,828 ATMs under the Banco24Horas Network to make the most common transactions and a “proof of life” feature for INSS (physical proof of pensioner status or survivor status to maintain the right to social benefits). This characterizes us as the Bank with the greatest offering on the Banco24Horas shared network.
They also have access to an advanced security technology: biometrics. Available in 100% of the machines of Own Network and Banco24Horas Network, which adds more convenience and agility in the service, because it allows the access and validation of transactions without a card.
|Ø||Telephone services – Fone Fácil (Contact Center) – We allow customers 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 customers 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 customer 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, loan contracting, support and registration of the security device in the mobile, among others.
By calling Fone Fácil, customers can access other relationship centers, such as for credit cards, private pension plans, capitalization, private and internet banking, among others.
|Ø||Social Networks – Since 2004, our pioneering and innovative use of social networks has become a market benchmark focusing on relationships, content co-creation, negotiations 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.|
The tables below show the number of transactions carried out through digital channels, the loans authorized through these channels and the quantity of customers with a digital profile:
|Year ended December 31,||In millions of transactions||% Change|
|Mobile Individuals + Companies||14,419||11,802||22.2%|
|Internet Individuals + Companies - with WebTA (1)||5,347||5,546||(3.6)%|
|Telephone Banking (Fone Fácil)||106||134||(21.1)%|
|(1) WebTA is an internet file transmission service, to the Bank, carried out by corporate customers using Net Empresa.|
In 2020, 25.3% of the total loans authorized by us were made available via digital channels, autonomously by customers. In comparison with 2019, the volume of loans authorized through digital channels grew 29% for individuals and 7% for companies. The increase of 18 percentage points in the participation of the mobile channel for individuals stands out, with the total loans authorized for individuals in 2019 of 61% and increasing to 79% in 2020.
|Year ended December 31,||2020||2019||2018|
|Loans authorized in the Digital Channels - In R$ billion|
|Clients with Digital Profile - In million|
next is a 100% digital bank, with many free features. Its main mission is to be the best digital platform to make our customers' dreams come true.
It was developed as a 100% digital platform and 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 customer relationship, with the aim of providing smart journeys of financial management, investments, and practicality in day-to-day operations, currently with the largest and most complete portfolio of financial solutions on the market and also Mimos (Pampering), a platform of benefits with over 260 brands and 860 offers. next uses the most modern Technology solutions, User Experience, Analytics and Artificial Intelligence.
Recently, next became an associate company of the Bradesco Organization, which gives it greater autonomy for the implementation of the models that a fintech needs, in addition to performing important and strategic movements seeking exponential and sustainable growth, as well as focusing on prioritizing customer relationship.
By the end of 2020, we surpassed 3.7 million accounts, 106% growth compared to 2019, being present in 100% of the municipalities in Brazil. Over the course of the year, customers executed more than 734 million transactions, a volume 95% higher than the previous year. This growth indicator demonstrates, in addition to opening accounts in a consistent way, customers are becoming more and more engaged with next.
At the beginning of 2021, Renato Ejnisman became the first CEO of the digital bank. An appointment that signals the intention to accelerate customer and revenue growth, broaden the diversity of next's quality offerings, and thereby provide a better service to our customers.
Officially launched to the market on September 14, 2020, Bitz is a digital wallet that has a free payment account in which the balance yields 100% of the CDI. The App helps people who want a low-cost solution to pay and receive in a fully digital form and directly on their cell phone. Bitz has features, such as: payment and receipt directly from the cell phone, free TEDs, payment of bills, bank payment slips and top ups for cell phone, a free debit card to pay at any payment machine and a virtual card to make purchases on the internet and in the food, delivery, series, movies and music Apps that depend on a card number to operate. Bitz also offers sporadic cashback and a bonus that encourage the recurrent use, leveraging its growth in the wave of digitalization of financial services. Accordingly, Bitz becomes a new port of entry for the ecosystem of Bradesco products. In addition, Bitz is an alternative for those who before had no way of having a bank address via a payment account.
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 13th salary and profit sharing distributions are usually paid.
We face significant competition in all of our principal areas of operation, since the Brazilian financial and banking services markets are highly competitive.
The following table presents the market share of our main products and services in the periods indicated:
|78 Form 20-F – December 2020|
|Market Share - In %||2020||2019||2018|
|Loans - Private Institutions||22.0||23.1||23.6|
|Loans - Vehicles Individuals (CDC + Leasing)||13.3||14.2||13.8|
|Social Security Institute (INSS)||19.8||21.2||19.7|
|Real Estate Financing||8.2||8.1||8.1|
|Trucks, Tractors and Agricultural Implements||18,6||20.1||18.3|
|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||22.4||24.0||24.9|
|Technical provisions for insurance, pension plans and capitalization bonds||23.3||24.2||25.6|
|Pension Plan Investment Portfolios (including VGBL)||24.2||25.0||26.7|
|Investment Funds and Managed Portfolios||17.8||18.6||20.5|
|Source: Social Security National Institute (INSS)/Dataprev|
|Benef it Payment to Retirees and Pensioners||32.1||32.1||31.6|
|Source: Brazilian Association of Leasing Companies (ABEL)|
As of December 31, 2020, state-owned financial institutions held 37.1% of the National Financial System’s (SFN) assets, followed by domestic private financial institutions (taking into consideration financial conglomerates) with a 45.8% share and foreign-controlled financial institutions, with a 17.1% 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, amended by the Circular No. 4,013/20, transfers of corporate control, takeovers, mergers, transfers of business, contracts with a view to cooperation in the financial sector, acquisitions of holdings greater than or equal to 5% and acquisitions that result in the purchaser having a stake increase interest equal to or higher than 5% in cases in which the investor holds 5% or more of the voting capital, directly or indirectly involving financial institutions must be submitted to the Central Bank of Brazil.
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, as amended, which provides that on the establishment and operation of the Direct Loan Companies (SCD) and Interpersonal Loan Companies (SEP), regulating loans 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 loans 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.
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, microenterprises 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 entered 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.
In June 2020, the CMN edited Resolution No. 4,822/20, regulating the joint-guarantee society and the counter-guarantee society, provisioning on the constitution, organization and functioning of these societies, introduced by Complementary Law No. 169/19. The joint-guarantee society has as main objective the granting of guarantees in favor of its participating members in the context of loans contracted by them, and counter-guarantee societies, in turn, is aimed at granting the counter-guarantee to joint-guarantee societies.
Open banking is seen as one of the ways of fostering innovation and competition. The concept, which has been developing rapidly around the world, in Brazil is shaped by the strong leadership of the Central Bank of Brazil and the participation of associations representing different segments of the financial market, such as banks, credit unions, payment institutions and fintechs.
The implementation of regulatory open banking was instituted by Joint Resolution No. 01/20, edited by the Central Bank of Brazil and the National Monetary Council in April 2020, with the aim to stimulate innovation, promote competition, increase the efficiency of the National Financial System and Brazilian Payment System and promote financial citizenship. For this purpose, it establishes that standards of systemic integration between institutions will be adopted so that the customer can exercise his right to decide which institutions can use his data, i.e., he may authorize Bradesco to access his information in other institutions, for example balance and bank statements, or vice versa, the customer may authorize other companies to share information with us.
Other regulatory documents were released in 2020 to support in the process of implementing open banking:
|i.||Circular No. 4,015/20, which provisions provide the scope of data and services;|
|ii.||Circular No 4,032/20, which provisions provide the initial structure responsible for the governance of the process of implementation in the country; and|
|iii.||Resolution BCB No. 32/20, which provisions provide the technical requirements and operational procedures for the implementation of open banking.|
Institutions authorized to operate by the Central Bank of Brazil assume the following roles as participants in open banking:
(a) institution transmitting the data
(b) institution receiving the data;
(c) institution holding a demand or savings deposit account or prepaid payment account;
(d) institution initiator of the payment transaction; and
(e) institutions that have a correspondent contract in Brazil.
Due to Bradesco's importance in the National Financial System and the characteristics of its activities, it is mandatory to implement open banking as a participant in roles "a", "c" and "e", the other roles are optional.
The implementation of open banking in Brazil consists of four stages, according to the schedule established by Joint Resolution No 02/20 and highlighted below:
|80 Form 20-F – December 2020|
|•||Stage 1: up to February 1, 2021 to implement the necessary requirements for sharing institution data on service channels and products and services related to demand and savings deposit accounts, prepaid and postpaid accounts and credit operations;|
|•||Stage 2: up to July 15, 2021, for the sharing of registration details and information of bank accounts (deposit, savings and payment) as well as credit card, and loans by the customers;|
|•||Stage 3: up to August 30, 2021, for the implementation of the requirements needed for the service sharing of the initiation of the payment transaction and forwarding of the proposed loan; and|
|•||Stage 4: up to December 15, 2021, for the implementation of the requirements needed for the data sharing on products and services and transaction data, as foreign exchange transactions, accreditation services, investments, insurance supplementary pension plan and salary account, in addition to transactional information related to these products and services by customers.|
In order to deliver the regulatory scope, already highlighted in the text, and to create the necessary skills to capture the opportunities that open banking will provide, Bradesco has constituted a structure that operates with an agile methodology. The Open Banking Village is led by the Bradesco Experience area and with the participation of all other areas of the bank.
The deposit market is highly concentrated, with our main competitors being Itaú Unibanco, Caixa Econômica Federal, Banco do Brasil and Santander. The five largest institutions hold 76.0% of deposits in the Brazilian market.
4.B.60.02 Loans 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.60.03 Credit 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. However, the banks that operate only in digital channels have increased their importance in the Brazilian market, working with much lower margins than the traditional participants. Management believes that the primary competitive factors in this area are card distribution channels, both physical and digital ones, the services and benefits offered, in addition to better usage experience for the customer card holder.
In December 2020, according to the Central Bank of Brazil, the consortia market included 141 administrators, divided between the bank, manufacturer and independent administrators.
Our main competitors are Porto Seguro and Itaú 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 throughout 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.
In general, our main competitors in the Brazilian leasing market are Santander Leasing, Banco IBM, HP Financial Service and Daycoval Leasing. We currently enjoy certain competitive advantages, as we have a larger service network than any of our private sector competitors.
4.B.60.07 Asset management
On December 31, 2020, the asset management industry in Brazil managed funds worth R$6.0 trillion in shareholders’ equity according to ANBIMA’s investment funds management ranking. BRAM held a portion of R$529.1 billion or 8.8% of market share. We are one of the leading institutions as measured by the number of investment fund quotaholders with 3.0 million. Our main competitors are BB DTVM and Itaú Unibanco.
According to SUSEP, in 2020, 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. 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 claims handling, automation level, and development of long-term customer relationship.
Our principal competitors are BB Seguridade, Caixa Seguridade, SulAmérica Seguros, Zurich/Santander, Itaú Seguridade and Porto Seguro, which account for a combined total of approximately 50.8% of all premiums generated in the market, as reported by SUSEP in 2020.
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.
4.B.60.09 Supplementary Pension plans sector
The Brazilian government’s monetary stabilization policies stimulated the supplementary 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 BrasilPrev, Caixa Seguridade, Zurich/Santander, Itaú Seguridade, Icatu and XP Previdência.
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.
|82 Form 20-F – December 2020|
Our main competitors are BrasilCap, Santander, Cia. Itaú de Capitalização, Icatu and Caixa Seguridade, which together represent approximately 61.3% of the total capitalization revenue generated in the market, according to information provided by SUSEP in 2020.
4.B.70 Regulation 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.70.01 Principal regulatory agencies
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 SBR 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 of Brazil
The Central Bank of Brazil was created by Law No. 4,595/64 and is the primary executor of the guidelines of the CMN, responsible for ensuring the purchasing power of the national currency, including responsibility for:
|•||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 of Brazil 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.|
On February 24, 2021, Complementary Law No. 179/21 was sanctioned, guaranteeing the autonomy of the Central Bank of Brazil, defining its objectives and regulating the autonomy, appointment and dismissal of its president and officers Thus, it conferred greater freedom to the Central Bank of Brazil in the use of monetary instruments for the fulfillment of goals established by the CMN. Through this law, price stability was defined as the primary objective of the Central Bank of Brazil, in addition to ensuring the stability and efficiency of the financial system, smoothing out economic activity level fluctuations and promoting full employment.
The president and officers of the Central Bank of Brazil shall be appointed by the President of the Federative Republic of Brazil for non-coinciding fixed mandates of 4 years, which partially overlap the presidential mandate. The resignation of the Central Bank of Brazil’s president and officers will only occur in justified cases and upon approval by an absolute majority of the Brazilian Senate.
In addition, the Central Bank of Brazil shall be considered an autarchy of a special nature, characterized by the absence of any ties to a ministry.
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.|
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 market as a competitive source of financing;|
|•||to reduce the costs of observance of market participants;|
|84 Form 20-F – December 2020|
|•||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.70.02 Banking 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 of Brazil. In the case of foreign banks, approval of the Central Bank of Brazil, 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 of Brazil issued Circular No. 3,977/20, which recognizes the shareholding in the capital of financial institutions headquartered in Brazil, by natural persons or corporate entities resident or domiciled abroad, provided that the requirements and procedures for constitution, operating permit, cancellation of the permit, control changes and corporate restructuring of financial institutions, provided for in the regulations of the Central Bank of Brazil 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 its reference equity (RE) 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 loans with related parties. Exempted from the prohibition are loans with related parties that comply with all of the following conditions:|
|o||the loans 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 customers with the same profile as the respective institutions. The parameters adopted by the institution in loans 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 loans 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 of Brazil and in financial institutions abroad, observing the following individual caps: (i) 1% for hiring an individual; and (ii) 5% for hiring a corporate entity, safeguarding the exceptions established in the Resolution.|
|·||The following loans 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 loans 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;|
|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 of Brazil 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 or companies), 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|
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 companies in the capital of financial institutions and of leasing companies or of these institutions in the capital of companies, equivalent to 15% or more of the respective shares or quotas representing the share capital.|
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 of Brazil 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 of Brazil’s Circular No. 3,857/17. We can highlight, among other things: (i) the caps of the fines provisioned by the Central Bank of Brazil 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$50.0 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 of Brazil; (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 of Brazil 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.
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, Circular No. 3,748/15, as amended, and Resolution No. 4,615/17 provide 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%.
|86 Form 20-F – December 2020|
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 of Brazil; (ii) consortium administrators; (iii) payment institutions; (iv) organizations that acquire loans, including real estate and credit rights; and (v) other corporate entities headquartered in Brazil that are solely engaged in holding interests in the entities set out above.
In accordance with Resolution No. 4,866/20, which amended Resolution No. 4,280/13, subsidiaries, directly or indirectly, controlled by the institutions mentioned in the caput, formed specifically to execute innovative projects in the scope of the Controlled Testing Environment for Financial and Payment Innovations (the Regulatory Sandboxes) are not part of the prudential conglomerate.
The guidelines for the operation of the Regulatory Sandbox and the conditions for the supply of products and services in the context of this environment are laid down in CMN Resolution No. 4,865/20, BCB Resolution No. 29/20, BCB Resolution No. 40/20 and BCB Resolution No. 77/21, instituting the Strategic Management Committee of the Regulatory Sandbox (CESB), with the duty of working on processes regarding the Controlled Environment of Tests for Financial Innovations and for Payment (Regulatory Sandbox), as well as its Regulation.
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.
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.
In addition, as a result of the Covid-19 pandemic the CMN, by means of Resolution No. 4,820/20, prohibited equity compensation by financial institutions, including in the form of anticipation, above the amount equivalent to the compulsory minimum dividend in the terms of the Brazilian Corporate Law, in the case of joint stock companies or compensation equivalent to the minimum profit sharing established in the articles of association, in the case of limited liability companies. In addition, the repurchase of own shares was prohibited, as well as the reduction of capital share and the increase of compensation, fixed or variable, including in the form of anticipation, of officers, managers and members of the Board of Directors and of the Fiscal Council. In December 2020 the CMN, by means of Resolution No. 4,885/20, relaxed some of the prohibitions for the fourth quarter of 2020, only prohibiting equity compensation above the amount equivalent to 30% of the adjusted net income and the amount equivalent to the minimum compulsory dividend established by the Brazilian Corporate Law, in the case of joint stock companies, or established in the articles of association, in the case of limited liability companies, whichever is higher.
4.B.70.02-04 Risk Weighting
Pursuant to Circular No. 3,644/13, as amended, the Central Bank of Brazil consolidated the risk-weighted assets (RWA) applied to different exposures in order to calculate capital requirement through a standardized approach (RWAcpad). According to such a 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 of Brazil. 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, amended by Circulars No. 4,026/20 and No. 4,030/20, new criterion for application of the 85% Fact of Risk Weighting (FPR), by Circular No. 3,921/18, and new criterion for application of the 100% FPR by BCB Resolution No. 12/20.
In addition, there are specific standards of the Central Bank of Brazil 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 of Brazil’s 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 of Brazil’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 of Brazil’s Circular No. 3,641/13, may not exceed 30.0% of its Reference Equity (RE), pursuant to Central Bank of Brazil’s 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.40 Capital Compliance – Basel III”.
4.B.70.02-05 Compulsory Deposits
The Central Bank of Brazil periodically sets compulsory deposit and related requirements for financial institutions based in Brazil. The Central Bank of Brazil uses reserve requirements as a mechanism to control liquidity in the SFN.
According to the Central Bank of Brazil’s rules, we must place a percentage of the savings deposits and time deposits we receive from our customers with the Central Bank of Brazil:
|88 Form 20-F – December 2020|
|Ø||Time deposits: we are required to deposit 17.0% of the average amounts recorded under time deposits and other operations, as described in the regulations, deducting R$30.0 million as provided for in Article 3 of Circular No. 3,916/18. As per Circular No. 3,993/20, the percentage was decreased from 25% to 17% as a result of the Covid-19 pandemic. In view of the changes provided by BCB Resolution No. 78/20 from the period of calculation beginning on December 29, 2021 and the adjustment on December 13, 2021, the percentage will be 20%.|
In addition, for the calculation period from April 6 to April 9, 2020, where the adjustment occurred on April 20, 2020, Central Bank of Brazil’s 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 was 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, and deduction from the balance of Financial Bills of own issue repurchased by the Issuing financial institution as laid down in the Central Bank of Brazil’s Circular No. 4,001/20.
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.
|Ø||Demand 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$500.0 million, pursuant the provisions of Circular No. 3,917/18, as amended. The verification of compliance with these requirements is made on the basis of established positions on each day of the period of transactions. Such verification used to be performed considering the position of compulsory deposits, the daily balance of closure of the Bank Reserve accounts. Since November 2020, such criteria for verification of compliance with these requirements were altered with the use of Circular No. 4,038/20, due to the institution of the Instant Payment System. The position of the compulsory deposits began to consider the balance position recorded in the Banking Reserve account on the closure of the regular grid of operations of the participants in the Reserves Transfer System (STR), calculated before the start of the additional window for Instant Payment Account (PI Account) contributions. Thus, the verification of compliance with the compulsory deposits on demand resources occurs at the time of closure of the regular grid of operations of the STR, without being impacted by cash transactions from the Bank Reserve account to the PI Account.|
|Ø||Savings deposits – each week we are required to deposit in an account with the Central Bank of Brazil 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, as amended. The balance of the account is remunerated by the “TR” plus interest, as detailed in the same circular.|
In addition, for the calculation period from June 22 to June 26, 2020, the adjustment of which will occur on July 6, 2020, Central Bank of Brazil’s Circular No. 4,033/20 provides that, on the chargeability calculated under the rules in force, there will be deduction in the balance of loans for financing working capital for companies whose annual revenues are up to R$50.0 million, and the balance of investments in DPGE (Time Deposits with Special Guarantee) from institutions that do not pertain to the conglomerate itself.
In February 2013, the Central Bank of Brazil 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 of Brazil regulations require that we:
|•||allocate a minimum of 27.5% 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 of Brazil.|
Standards on compulsory deposits and additional reserve requirements are periodically altered by the Central Bank of Brazil.
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 customer 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) loans of responsibility of the Government; (ii) credits arising from transactions with derivatives of responsibility of the Government; and (iii) installments of loans guaranteed by the government. Under the terms of Resolution No. 4,589/17, as amended, the amount of loans with bodies and entities of the public sector is limited to 45% of the Reference Equity, according to the regulations in force. In 2020, CMN Resolution No. 4,869/20 changed the annual limits for purchasing loans for the bodies and entities of the public sector.
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 of Brazil 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’s Capital. 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 of Brazil.
In September 2016, the Central Bank of Brazil 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 of Brazil issued Circular No. 3,990/20, amended by Circular No. 3,992/20, establishing the criteria and conditions for the practice of repo operations in foreign currencies by the Central Bank of Brazil, 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 in reais 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 of Brazil’s Circular No. 3,434/09, the total of loans and advances made against these funds must be delivered to the Central Bank of Brazil as collateral, as a condition for the release of the amount to the financial institution.
|90 Form 20-F – December 2020|
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 of Brazil to operate in the foreign exchange market.
Beginning in 1999, the Central Bank of Brazil adopted a foreign exchange free float system, which gave rise to increased volatility. Since mid-2011, the Brazilian real has depreciated against the U.S. dollar and the Central Bank of Brazil has intervened in the foreign exchange market to control the foreign rate volatility.
The Central Bank of Brazil 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 of Brazil. In 2019, the Central Bank of Brazil 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 is still being considered in the Brazilian House of Representatives. The Central Bank of Brazil 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.
4.B.70.02-10 Registration of cross-border derivatives and hedging transactions and information on derivatives
In December 2009, the Central Bank of Brazil 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 of Brazil 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
For statutory reporting purposes, 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 of Brazil 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 loans are classified according to the loss perspective, as per E-H ratings as follows:
A similar nine-category ranking system exists for transactions with individuals. We grade credit based on data including the individual’s income, equity and credit history, as well as other personal data.
For regulatory purposes, financial institutions are required to classify the level of risk of their loans according to the Central Bank of Brazil’s 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 loan losses. For more information, see “Expected losses of loans and advances, Item 4.B.100.06 Loans and advances to customers”.
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 (PRN1), and once every twelve months for all loans, 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 (BR GAAP), which is measured as a percentage of the total amount of the loan and advance operation, as follows:
|92 Form 20-F – December 2020|
|Classification of Loan||Minimum Provision %|
|(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$10,000 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 of Brazil.
Financial institutions must make their lending and loan classification policies available to the Central Bank of Brazil and to their independent accountants. They are also required to submit information relating to their loan portfolio to the Central Bank of Brazil, 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 of Brazil requires authorized financial institutions to compile and submit their loans and advances portfolio data.
4.B.70.02-12 Exclusivity in loans and advances to customers
In January 2011, the Central Bank of Brazil’s Circular No. 3,522/11 prohibited financial institutions that provide services and loans 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, the Central Bank of Brazil started regulating the financing of the debit balance of the credit card bill and other post-paid instruments, not settled in full at maturity.
As a result, credit card administrators were no longer allowed to finance customers’ outstanding balance through revolving credit for more than a month Therefore, after the maturity of the following month’s invoice, if there is still a debit balance related to the amount subject to revolving credit, it may be financed through a credit line in installments, to be offered by the financial institution, under more advantageous conditions or full payment by the client.
CMN Resolution nº 4,882/20, which provides for the collection of charges as a result of late payment or settlement of obligations relating to credit operations, financial leasing and credit card bills and other post-payment instruments paid. Thus, in case of a delay in the payment or settlement of obligations related to these shares, certain charges may be charged exclusively: (I) remunerative interest, paid per day of delay on the overdue installment or on the outstanding debt balance, as the case may be (depending on the situation); (ii) fine; and (iii) late payment interest. It’s prohibited to charge any other remuneration or arrears charges for late payment or settlement of overdue obligations related to credit operations, financial leasing and credit card bills and other post-paid payment instruments, without prejudice charges arising from the debtor provided for in the Brazilian Civil Code.
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 of Brazil’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 came into force on June 1, 2020.
4.B.70.02-15 Brazilian Clearing System (Sistema de Pagamentos Brasileiro, 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 of Brazil 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 of Brazil. 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 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;|
|94 Form 20-F – December 2020|
|•||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 of Brazil 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$500.0 million in total value of transactions and 25 million transactions, in the case of payment arrangements. In relation to payment institutions in the modality of issuer of electronic money, BCB Resolution No. 24/20 of the Central Bank of Brazil has altered the parameters and progressively reduced the limits of the financial volumes which trigger the obligation to request the regulatory authorization to operate until, from March 1, 2021, the payment institutions wishing to issue electronic money shall require prior authorization to the Central Bank of Brazil to start the provision of payment services in this modality. For the institutions which, on that date, already provide service in the modality of issuer of electronic money and are not authorized, a timeline was stipulated in which the institutions must request authorization, if they achieve certain volumes of financial transactions, as follows:
i) Up to December 31, 2021:
(a) R$500.0 million in payment transactions; or
(b) R$50.0 million in resources held in a prepaid payment account;
(ii) Between January 1, 2022 and December 31, 2022:
(a) R$300.0 million in payment transactions; or
(b) R$30.0 million in resources held in a prepaid payment account; and
(iii) From January 1, 2023 to June 30, 2023, all who have not reached the financial transactions established in items (i) and (ii) above. In case of payment institutions in the modality of payment transaction initiator, they shall request authorization to the Central Bank of Brazil to start providing the payment service.
As for the other methods of payment institutions, the parameters for the submission of a request for authorization have not been altered. To achieve these volumes, the payment institution or 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 of Brazil. 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.
On March 25, 2021, the Central Bank of Brazil issued (i) BCB Resolution No. 80/21, which regulates the constitution and operation of payment institutions, establishes the parameters for filing applications of authorization for operation on the part of these institutions and provides for the provision of services for the payment by other institutions authorized to operate by the Central Bank of Brazil; and (ii) BCB Resolution No. 81/21, which regulates the processes of authorization related to the operation of payment institutions and to the provision of services of payment by other institutions authorized to operate by the Central Bank of Brazil. Both resolutions shall enter into force on May 3, 2021, as Resolution No. 80/21 revokes rules currently in force related to the establishment and operation of payment institutions, such as Circular No. 3,885/18, BCB Resolution No. 24/20 and BCB Resolution No. 49/20, among other provisions, consolidating and improving the current ones.
In March 2020, the Central Bank of Brazil, 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.
In recent years, the Central Bank of Brazil has led the process of implementation of the system for instant payments in Brazil, which includes the open arrangement established by the Central Bank of Brazil, the PIX, the payment service providers participating in the arrangement (financial institutions and payment institutions), the unique platform that settles 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 of Brazil. By means of Circular No. 3,985/20, replaced by Resolution BCB No. 01/20, as amended, the Central Bank of Brazil 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 of Brazil 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, account operated by an institution on behalf of member entities of public administration, PI account of member institution in the PIX, account of indirect participant in the SPI or accounting account maintained in the Caixa Econômica Federal for transactions of correspondents to the services allowed) and governmental entity that participates solely to make or receive their own payments. As a financial institution, we are required to participate in the PIX, as a direct participant. The PIX was instituted and regulated by BCB Resolution No. 01/20, and its regulation was subsequently amended by BCB Resolutions No. 39/20, No. 42/20 and No. 79/21 of the Central Bank of Brazil. Initially, the regulation of the PIX allowed for (i) a new modality of participant of transactional account, which is the special liquidator; (ii) increased participation by smaller payment institutions, which would integrate the Brazilian Payment System, and therefore, subject to a minimum regulation and a reduction of the minimum paid-in capital required of these institutions; (iii) the possibility of doing a scheduled PIX, i.e., at a future and pre-determined date; and (iv) a digital platform for the use of the PIX. The need for changes in the original resolution occurred envisaging a more extensive coverage to the transactional account, broadening the scope of transactions covered by the PIX. In this context, to cover the desired transactions, PIX began to also include accounts of members of the public administration and ledger accounts of lottery units.
Circular No. 4,027/20, as amended, establishes the Instant Payment System (SPI) and the Instant Payment Account (PI Account), approving their respective regulations. SPI came into operation on November 3, 2020, with the possibility of gradual availability of system features, including in relation to the hours of operation.
PIX Cobrança, the function that consists in the possibility of the recipient user managing and receiving, in a facilitated manner, collections related to immediate payments and payments with maturity, was included in the regulation by BCB Resolution No. 30/20, in which its implementation, previously scheduled for January 4, 2020 for payments with maturity, will now occur on May 14, 2021, in accordance with the deadlines for implementation provided for by Normative Instruction No. 43/20, as amended. In relation to instant payments, the start remained as November 16, 2020.
The procedures necessary for accession to the PIX by institutions permitted are laid down in BCB Normative Instruction No. 49/20, as amended, which provides for (i) the registration stage; (ii) mandatory authorization stage; (iii) approval stage for products and services of optional offer; and (iv) stage of restricted operation. In the same sense, BCB Normative Instruction No. 47/20 announced the procedures necessary for direct participation in the SPI and the opening of a PI Account (account held by a direct participant in the SPI, maintained in the Central Bank of Brazil for the purpose of transferring funds in the scope of the SPI), which are divided into (i) request for participation; (ii) tests for attesting the operational and technological capacity; and (iii) the opening of the PI Account and beginning of operations.
The participants of PIX can also establish maximum limits of value for initiation of a PIX, per payer user, which can be, per day, per transaction or month, according to the terms of BCB Normative Instruction No. 20/20, as amended. About the information that must be provided by the participants of PIX, BCB Normative Instruction No. 32/20, as amended, which establishes the format, periodicity and information to be provided by the participants of PIX and Normative Instruction No. 43/20 was edited, as amended, which defines the format and periodicity of remittance, in relation to transactions that occurred between the period from November 16 to December 31, 2020, including: (i) system for sending data; (ii) daily base-date between November 16, 2020 and December 31, 2020; (iii) daily periodicity of the remittance, from November 17, 2020 to January 2, 2021; (iv) limit date for the remittance; and (v) the form sent electronically.
In 2020, Resolution No. 4,781/20 was also edited. This Resolution authorizes the Central Bank of Brazil to grant a re-discount line to financial institutions participating in the Instant Payment System (SPI), which can perform operations of purchase with resale commitment of federal securities registered in the Special System for Settlement and Custody (SELIC), whereby these operations are governed by BCB Resolution No. 20/20. Circular No. 4,027/20, mentioned above was amended by BCB Resolution No. 40/20
|96 Form 20-F – December 2020|
which guarantees to direct participants of the SPI new rights, in accordance with the amendments made to the regulations that deal with PIX. Thus, the direct participants of the SPI shall be entitled to (a) send and receive instant payments also (i) for the benefit of organizations, funds or similar entities linked to Public Administration whose account or sub account is operated by it and (ii) guarantees to direct participants of the SPI obligations and own rights, provided that the other party of the transaction is not another payment institution or other financial institution; (b) receive timely information on the processing of credit orders issued by it and targeted, relevant information related to the management of their PI Account of the SPI and inclusion, modification or deletion of direct and indirect participants; (c) receive information, upon request, on the balance of their PI Account, details of specific launch and list of transactions in their PI Account within an interval of 24 hours; (d) register indirect participants for which it acts as liquidator in the SPI; and (e) terminate the provision of the service of liquidation to indirect participants registered by it.
4.B.70.02-16 Special Temporary Administrative, Intervention and Extrajudicial Liquidation Regimes – Under Law No. 6,024/74
The Central Bank of Brazil 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|
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.
The Central Bank of Brazil 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 of Brazil 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 of Brazil may end the extrajudicial settlement of a financial institution, in the following cases:
|•||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 of Brazil.|
|Ø||Temporary Special Administration Regime|
The Temporary Special Administration Regime, known as (RAET), is a less severe form of Central Bank of Brazil 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 of Brazil created the Fundo 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$250,000.00, maintained until the present date.
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 of Brazil 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 of Brazil, 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.
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.
|98 Form 20-F – December 2020|
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$250,000.00; (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 of Brazil 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, the Central Bank of Brazil 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, 2021, as amended in the review of Circular No. 4,023/20. 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 loans 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$20.0 million to R$40.0 million.
4.B.70.02-18 Internal compliance procedures
All financial institutions must have in place internal policies and procedures to control:
|•||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.
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 of Brazil the power to recognize the government’s interest in the viability of investment operations. On January 22, 2020, the Central Bank of Brazil issued Circular No. 3,977/20, which recognizes the shareholding in the capital of financial institutions headquartered in Brazil, of natural persons or corporate entities resident or domiciled abroad, as of interest to the Brazilian Government, provided that the requirements provided for in the regulations of the Central Bank of Brazil 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 of Brazil 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 of Brazil authorized us to create an ADR program for our common shares in the U.S. market. Foreign interest in our share capital 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, Law No. 13,260/16 and Circular No. 3,978/20, new standard edited by Central Bank of Brazil on the matter, in force since October 1, 2020, as amended by Circular No, 4,005/20, the financial institutions and other Institutions authorized to operate by the Central Bank of Brazil must, among others:
|•||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 all transactions made, products and services contracted, including withdrawals, deposits, contributions, payments, receipts and transfers of resources; and|
|•||keep records and include additional information about withdrawal operations, including those carried out by means of a check or money order, of individual value equal to or greater than R$50 thousand, as well as inform the Council of Control of Financial Activities (COAF).|
The financial institution must review transactions or proposals whose characteristics may indicate the existence of a crime and inform COAF about suspicious operations 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 of Brazil’s Circular No. 3,978/20, which extended the qualification of the politically exposed person. Politically exposed are those 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, the Federal Public Prosecutor, Minister of State, members of the Court of Auditors (at federal, state and municipal), as well as individuals who held or still hold relevant positions in foreign governments.
In 2008, the Central Bank of Brazil 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 be deemed 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 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$20.0 million. We have an obligation to send to the regulatory or inspection agency information regarding the non-existence of suspicious financial transactions and other situations that generate the need for communications.
|100 Form 20-F – December 2020|
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 of Brazil 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 responsible officer, 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.
Also in 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 BCB Resolution No. 44/20 replacing Circular No. 3,942/19 since January 4, 2021.
In January 2020, the Central Bank of Brazil issued Circular No. 3,978/20 which came into force on October 1, 2020. This Circular revoked 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 thousand;|
|·||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 corporate 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;|
|·||Guidelines for hiring: inclusion in the AML/TF 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 of Brazil, the institution’s access to the identification of the final recipients of resources for purposes of the AML/TF 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.|
In August 2020, SUSEP issued Circular No. 612/20, which provides on the policy, procedures and internal controls intended specifically for preventing and combating the crimes of money laundering or concealment of assets, rights and values, or the crimes that they can relate to, as well as preventing and combating the financing of terrorism.
4.B.70.02-21 Anticorruption Law
In August 2013, Law No. 12,846/13 was enacted to regulate civil and administrative liability of corporate entities for performing acts against public management, either domestic or foreign. Based on this legal provision, corporate entities shall 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.
The Decree 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$60.0 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 strategic drivers of Bradesco, because we understand that the management of environmental, social and governance (ESG or ASG in Portuguese) 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.
4.B.70.02-22.01 Guidelines and governance
Our work is based on best practices and local standards, like Resolution No. 4,327/14, of the National Monetary Council, which determines procedures for socio-environmental responsibility for financial institutions. The corporate guidelines are established by policies and internal rules, as well as for voluntary commitments assumed.
Our Corporate Sustainability Policy aims to promote the sustainability of our Organization and guide the actions related to socio-environmental factors of our business. Other policies and rules incorporate these guidelines, consolidating the practices of socio-environmental responsibility, including from a risk management perspective.
The Social and Environmental Responsibility Standard defines the main compliance procedures for socio-environmental criteria in business, in the relationship with stakeholders and in the governance of the theme. Our Social and Environmental Risk Standard establishes the scope and approach to managing these risks, discussed in more detail in the section on “-Social, environmental and governance criteria in business decisions”.
|102 Form 20-F – December 2020|
The main governance body on the topic is the Sustainability and Diversity Committee, which includes members of the Board of Directors and of the Board of Executive Officers, including the CEO. The Committee is advised by the Sustainability Committee, an executive body composed of officers and managers of various areas, ensuring the implementation of the strategy, monitoring the execution of projects and their impact on our performance. From the perspective of socio-environmental risk, the main decision-making forums are the Executive Risk Management Committee and the Integrated Risk Management and Capital Allocation Committee.
4.B.70.02-22.02 Sustainability Strategy
Sustainability is one of the pillars of our corporate strategy and is integrated with our way of doing business and managing operations. Considering the main challenges and trends on the subject, our sustainability strategy is structured in six pillars:
|Sustainable business||Climate change||Customer Relationship|
|The goal is to expand the offer of products and services that favor a more inclusive society and support customers in the transition to a more sustainable economy.||To ensure that our businesses are prepared for climate challenges, seeking continuous improvement in business management, strategic reviews, in addition to more transparency regarding the climatic impacts on the Organization.||We aim to serve our customers with excellence, constantly improving the way we serve them, based on their needs and objectives, in order to contribute to their achievements.|
|Diversity||Innovation||Private social investment|
|We seek to welcome and promote diversity among our employees and customers. The goal is to attract and retain talent, expanding the access to career opportunities and adequately serving an increasing range of customer profiles.||The mission is to promote innovations that contribute towards sustainability and the solution of ESG challenges, fomenting the cooperation between companies and our ability to remain sustainable and increasingly relevant for society.||As one of the largest private donors in Brazil, we will seek to leverage the management of results and impacts of our social investment in the country.|
These strategic objectives are aligned to the 2030 Agenda of the United Nations and incorporate the commitment to contribute to the Sustainable Development Goals (SDGS), with an emphasis on six goals that we prioritize:
4 – Quality education
5 – Gender equality
8 – Decent work and economic growth
9 – Industry, innovation and infrastructure
10 – Reduction of inequalities
13 – Action against global climate change
4.B.70.02-22.03 Voluntary commitments
Our practices and strategies are reinforced by the establishment of dialogs with various stakeholders and through the incorporation of internationally recognized initiatives and voluntary commitments, such as: Global Compact Initiatives, Equator Principles, Principles for Responsible Investment (PRI), Principles for Sustainable Insurance (PSI), Principles for Banking Responsibility (PRB), Women’s Empowerment Principles (WEPs), Task force on Climate-related Financial Disclosures (TCFD), Investors for the Climate (IPC, In Portuguese), among others.
4.B.70.02-22.04 Social, environmental and governance criteria to business decisions
We seek to incorporate and to constantly improve the analysis of the socio-environmental and governance criteria to the business decisions, as well as to the offer of credit, investments and insurance.
We have a governance structure, comprising committees, policies, standards and procedures, which is intended to identify, measure, mitigate, monitor and report the risks.
Following our guidelines of Corporate Policies for Sustainability, the area of Analysis and Control of Social and Environmental Risk conducts processes of assessment of operations and customers, rating formulation of socio-environmental risk, and monitoring of the activities, in accordance with the scope and criteria set out in the Social and Environmental Risk Standard, in addition to the requirements and obligations established by the Brazilian legislation and regulations.
Part of the scope of the Standard is the assessment of funding large projects and other loans of customers with evidence of involvement with work that characterizes slave labor and/or qualified in the framework of environmental relevance that considers sectors with greater potential of socio-environmental impact and the financial exposure of the activity.
Since 2004, we have been signatories of the Equator Principles and we ensure that the projects funded and advised by us and that are included in these Principles are developed in compliance with the legislation in force and also adhere to supra-legal environmental practices foreseen in the International Finance Corporation’s (IFC) Performance Standards and the World Bank’s Health, Safety and Environmental Guidelines, including: climate change, biodiversity, human rights and indigenous peoples.
Project financing operations covered by the Equator Principles and also those with identified environmental risks are monitored periodically, in order to ensure compliance with the applicable standards and guidelines. In the monitoring of these projects follow up is made of the aspects of human rights, impacts on indigenous peoples, biodiversity and climate change.
When necessary, action plans are drawn up and audit procedures are established that assist in the management and evaluation of the socio-environmental compliance of the projects.
BRAM has a methodology of analysis of ESG factors for all modalities of assets under management, including private and public securities. In the case of private securities, they are considered the material themes of each sector to identify the risks and opportunities that companies face. For the public securities, the methodology considers indicators that measure the regulatory quality and the public policies for good basic services provided to the population, i.e. basic services, environmental conservation and reduction of social inequality. Therefore, the socio-environmental aspects are incorporated in BRAM’s business, whose mission has been to provide superior and sustainable returns in managing the investments of customers.
On December 31, 2020, BRAM managed R$529.1 billion, of which R$526.5 billion was evaluated taking into account ESG issues, representing 99.5% of total assets.
BRAM also conducts engagement activities for companies and business partners to adopt the best practices in their fields of business and annually discloses the results in the Transparency Report of the Principles for Responsible Investment (PRI), of which it is a signatory. The application of the PRI, which takes place transversally to the activities of investment and relationship with BRAM’s stakeholders, has the following scope and practices:
|·||integration of ESG issues with the analysis and management of assets;|
|·||involvement of investees;|
|·||creation of a database of ESG information from investees;|
|·||training of BRAM professionals in ESG issues and its importance to investment activities;|
|104 Form 20-F – December 2020|
|·||institutional participation of BRAM in forums and work groups related to the issue of responsible investment; and|
|·||flow of information from reporting on the increased application of the principles in the Organization to the PRI and BRAM.|
BRAM reformulated the FIA Fund Corporate Sustainability, with investment in shares of companies that offer the best ESG performances. The rates of management and their ticket were reduced allowing greater access to the fund. The same principle was applied for the SRI (Socially Responsible Investment) credit fund, which contains companies that are better prepared for the socio-environmental challenges.
In addition, four new ESG funds were launched in December 2020. Two of them of active management, containing a mixture of local and global actions. The FIC FIA ESG Global BDR Level I, has 50% of shares of Local Equity and 50% of shares related to the Global Equity. Now the FIC MM ESG Global, has 50% of shares of Local Fixed Income and 50% of shares of Global Fixed Income. Both seeking excellence in ESG assets. The other two funds, FOF Global ESG RV IE and FOF Global ESG RF IE are funds of ESG funds, with the objective of investing in global funds, of fixed income and equity with the best global performance in ESG.
Grupo Bradesco Seguros works and contributes towards environmental, social and economic sustainability, as well as the creation of innovative sustainable solutions, capable of reducing risks. Therefore, since 2012, Grupo Bradesco Seguros has integrated the Principles for Sustainable Insurance (PSI), voluntary commitment to the United Nations Environment Programme Finance Initiative (UNEP FI) that seeks to maintain the continuous evaluation of demand for financial and insurance products that offer adequate solutions to the customers, both to boost a low-carbon economy and protect them from the impacts or adapt them to the transformations originating from climate change.
The Group has its own Sustainability Committee, subject to the Steering Committee of Bradseg Participações S.A., which rely on the participation of the Executive Officers and Superintendents of the companies of the Group and of the Holding, and aims to propose strategies and solutions that promote the implementation of best practices of sustainability to the activities and business. Bradesco Seguros also has its own area of Social and Environmental Risk Management, which reports to its Risk Committee and, through it, to the Boards of the business units on the evolution of the socio-environmental risks.
Bradesco Seguros established three standards, regarding: Socio-environmental Responsibility, Socio-environmental Risk and Donations and Sponsorships. Both have guidelines for the management of ESG aspects and are valid for all of the Grupo Bradesco Seguros companies. The rules cover issues such as product and service development and supply, management of real estate developments; relationships with suppliers, customers and partners; donations and sponsorships; contract and investment management; environmental preservation, eco-efficiency and climate change; in addition to repudiating discriminatory acts, harassment, child and slave labor, and sexual exploitation.
4.B.70.02-22.05 Socio-environmental management of operating activities
The management of our operations also incorporates socio-environmental criteria and good practices. Among them, we highlight:
|·||In 2020, we assumed the commitment (since the end of the same year) to have 100% of our operations supplied by renewable energy resources. With the implementation of the initiative, we start 2021 as one of the first major financial institutions in the world to complete the transition. In addition, we committed to neutralize 100% of greenhouse gas emissions (carbon equivalents) generated by operations of the Organization from 2019 onwards, being the first major Brazilian bank to assume such a level of carbon offsetting;|
|·||Through the Eco-Efficiency Management Program, we invest in initiatives with specific goals to reduce our environmental impact. For example, between 2017 and 2019, we decreased our electricity consumption by 3% and our total greenhouse gas emissions by 5%; and|
|·||In the homologation of companies that provide a service to us, we consider ESG aspects. Additionally, suppliers that are considered critical are submitted to socio-environmental auditing in order to identify, manage and mitigate the risks found, as well as promote their development.|
4.B.70.02-22.06 Climate Change
Climate change generates, in the short-, medium- and long-term, significant changes in our society and economy. Its impacts are physical or environmental – such as rising global temperature and increasingly extreme weather events, each day more severe and frequent –, as well as political and market movements, as new public policies and changes in consumption and production patterns.
In this context, we seek to ensure that our operations and businesses are prepared for climate challenges, with the main objectives stated below:
|·||To reduce and mitigate the generation of greenhouse gases by its operations and manage the exposure of our operational structures to climate risks (more information in the “Socio-environmental management in the operational activities” section).|
|·||To integrate current and future climate risk assessment and opportunities into the decision-making and management processes of our business (more information on “Social, environmental and governance criteria in business decisions”).|
|·||To provide financial solutions that support consumption and production patterns with lower carbon generation and more resilient to climate impacts – such as: financing for low-carbon agriculture and solar power generation panels; and|
|·||To promote engagement and awareness of the topic with the public with which we relate, such as employees, partners and suppliers, customers and entities of civil society.|
In 2020, we formalized the governance on Climate Change, integrated to the structures for risk management and sustainability, consisting of three levels:
|·||Strategic: Sustainability and Diversity Committee, in accordance with the guidelines of the Board of Directors;|
|·||Executive: Executive Officer responsible for Risk and Sustainability, with the support from the Sustainability Commission and the Risk Committees; and|
|·||Operational: Coordination by the areas of Corporate Sustainability and Socio-environmental Risk, with the involvement of different dependencies of the Organization.|
We have updated and offer our position on climate change on our page on sustainability.
More information on our action in line with the recommendations of the climate information follows, where possible, the recommendations of the Task (TCFD), is available in our Integrated Report.
4.B.70.02-22.07 Performance and highlights of 2020
|·||We joined the Partnership for Carbon Accounting Financials (PCAF), an international collaboration between financial institutions to develop a methodology to measure and disclose the carbon emissions generated by the activities funded and invested by the institutions.|
|·||We became a signatory of the Brazilian Coalition on Climate, Forests and Agriculture with the goal of participating with other companies and organizations of civil society in the promotion of policies and actions that boost Brazil towards a sustainable, low-carbon and inclusive economy.|
|·||Issuing our first ESG security: the fund raising of R$1.2 billion will fund projects and assets that support the transition toward a less carbon-intensive economy.|
|·||Partnership between Bradesco, Itaú and Santander to launch the Amazon Plan, an action plan comprising 10 integrated measures to promote the sustainable development of the Amazon region, with a focus on 3 pillars: the environmental conservation and the development of the bioeconomy; the investment in sustainable infrastructure; and the guarantee of basic rights of the Amazonian population. An Advisory Board with seven experts recognized by acting on the challenges in the region will be responsible for guiding the measures and enhancing the results of the partnership.|
|106 Form 20-F – December 2020|
|·||Contribution to the fight against Covid-19, either individually or in partnership with other companies, supporting actions that range from the manufacture and distribution of masks, purchase and donation of hospital equipment and kits for testing, to the construction of field hospitals.|
Maintaining our trajectory of evolution on ESG performance, we ended 2020 with important recognitions:
|·||Fifth global position among the banks in the Dow Jones Sustainability Indexes, as the Brazilian bank with the best performance in the index;|
|·||Leader in Climate Management, in the evaluation of the CDP, with the concept of "A-";|
|·||ESG leadership, according to the MSCI ESG Ratings, with an AA rating;|
|·||Sixteenth consecutive participation in the Corporate Sustainability Index (ISE), of B3; and|
|·||Evaluated above the market average by the major ESG rating agencies: Vigeo Eiris – Best EM Performers, FTSE4Good, Bloomberg Gender-Equality Index, ISS ESG Corporate Rating, Sustainalytics’ ESG Ratings, among others.|
Our Integrated Report (full and summary versions – not incorporated by reference herein) comprises main financial and non-financial actions and results of the year based on topics considered most relevant to us and our stakeholders.
In addition, specific contents are disclosed like the ESG presentation, the positioning of Climatic Change and the role on the incorporation of ESG issues in business. The contents are available on our Investor Relations and Sustainability websites.
To prepare the Report we follow the Global Reporting Initiative (GRI) and International Integrated Reporting Council (IIRC) methodologies. We also consider the transparency guidelines of the Sustainability Accounting Standards Board (SASB) and the Abrasca Code for Self-Regulation and Good Practices of Publicly Traded Companies. We seek to meet the transparency requirements used by B3’s Corporate Sustainability Index (ISE) and the Dow Jones Sustainability Index (DJSI); and the disclosure of climate information follows, where possible, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
The prioritization of themes plus materials follows our Framework of Relevance, built from the engagement of the Board of Directors, Presidency and various stakeholders, including employees. The Matrix presents graphically the most relevant and strategic themes of the Organization to be addressed in the disclosure of information to the market.
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 Brazil 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 three 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 auditors’ report 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 the 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”.
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, prepared in accordance with BR GAAP, audited every six months, applicable to institutions authorized to operate by the Central Bank of Brazil. Quarterly financial information filed with the CVM is also subject to review by independent auditors. Additionally, as required by CMN Resolution No. 4,818/20, which came into force on January 1, 2021, 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.
Resolution No. 4,818/20, which entered into force on January 1, 2021, consolidates the general criteria for preparation and disclosure of financial statements and other institutions, authorized to operate by the Central Bank of Brazil, with the exception of the managers of consortium and payment institutions. These institutions must draw up and publish annual financial statements relating to the fiscal year, and semiannual, relating to the six months ended June 30 and December 31, which are: (i) balance sheet; (ii) income statement; (iii) comprehensive statement of income; (iv) statement of cash flows; and (v) statement of changes in stockholders’ equity.
Due to the scenario resulting from the Covid-19 pandemic, Circular No. 3,999/20 was edited, which amended the deadlines for disclosure of financial statements and remittance of accounting documents to the Central Bank of Brazil of documents relating to base dates from March to November 2020. Since its semiannual and intermediate financial statements for periods ending in 2020, they should be disclosed until ninety (90) days after the base date.
In addition, in December 2020, the CMN edited Resolution No. 4,877/20 which contains provisions on the general criteria for the measurement and recognition of social and labor obligations by institutions authorized to operate by the Central Bank of Brazil (except consortium managers and payment institutions). With this resolution, the authorized institutions are obliged to recognize as a monthly liability, when drawing up trial balance or balance sheets, the values due on the portions of the results of the period allotted or to be allotted to employees, managers or to funds and assistance and other obligations with employees.
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.
|108 Form 20-F – December 2020|
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 amended 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 a 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 semiannual 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 of Brazil supervises Brazilian financial institutions’ foreign branches, subsidiaries and corporate properties, and prior approval from the Central Bank of Brazil 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.
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 of Brazil, 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. In 2020, CVM Instruction No. 555/14 was amended by CVM Resolution No. 03/20, with flexibility and update of the rules on issuance of BDRs.
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 of Brazil (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 of Brazil; and|
|•||be directly exposed to crypto assets. The CVM recommends avoiding 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 controlling 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 entities and 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 of Brazil and CVM regulation and supervision. Brokerage and distribution firms must be authorized by the Central Bank of Brazil and are the only institutions 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.
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 customers to exclusively use the goods in the provision of guarantees for operations, provided that the requirements of said Resolution are met.
In November 2020, with Resolution No. 4,871/20, there was a new amendment of the regulation applicable to brokers and distributors, allowing their role as issuers of electronic money. However, such activity will be exclusionary in comparison to the offer of register accounts currently offered. If they choose to offer payment accounts, the register accounts should be closed to all the customers and replaced by payment accounts.
|110 Form 20-F – December 2020|
|Ø||Internet brokerage services|
The CVM approved regulations on Internet brokerage activities, which may be carried out only by registered companies. Brokers’ website 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.
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 of Brazil 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.70.03 Insurance, health and pension plans regulation
4.B.70.03-01 Principal regulatory agencies
4.B.70.03-01.01 National 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 of Brazil and the CVM.
In addition to laying down the guidelines and standards of private insurance policy, it is the responsibility of the CNSP:
|•||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.70.03-01.02 Private 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 (Article 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.70.03-01.03 National 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|
|•||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.|
|112 Form 20-F – December 2020|
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 utilize 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.|
Subsequently, Resolution No. 302/13 was revoked by Resolution No. 316/14 and Resolution No. 321/15. 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.
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 subsequently amended and consolidated SUSEP Circular No. 612/20 is currently in force, as amended by Circular No. 622/21.
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.70.03-03 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, in accordance with Law No. 10,185/ 01, 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 2001, SUSEP had authority over insurance companies, which were authorized to offer private health plans. Since 2001, 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. However, in accordance with the terms of Law No. 10,185/01, and the terms of this article, the insurance companies specializing in health insurance will remain subject to the rules on the application of assets guaranteeing the technical provisions issued by CMN.
4.B.70.03-04 Supplementary 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 of Brazil 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. In turn, CNSP edited CNSP Resolution No. 376/19, amending Resolution No. 321/15, which among various subjects, also regulates the investments by insurers, open entities of complementary pensions plans, capitalization companies and local reinsurers.
Currently, Resolution CNSP No. 349/17 and SUSEP Circular No. 563/17, as amended by Circular No. 585/19, in addition to the Supplementary Law No. 109/01, regulate the Supplementary Pension Plan activity.
Insurance companies must operate with reinsurers registered with SUSEP, and may, exceptionally, contract reinsurance or retrocession operations to reinsurers not authorized when the lack of capacity of the local reinsurers is proven.
Currently, due to the Decree No. 10,167/19, the Brazilian law provides that the insurer or the cooperative society, may concede occasional reinsurers 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 Supplementary Pension Fund Entity (EAPC) (Article 2, paragraph 1); and (ii) Closed Supplementary Pension Fund Entity (EFPC) and operators of private health care plans (Article 2, paragraph 3).
|114 Form 20-F – December 2020|
4.B.80 Taxes on our main transactions
4.B.80.01 Taxes on financial operations (IOF)
4.B.80.01-01 On loans
IOF levied on loans has as its taxable event the delivery of the obligation amount or value.
Rate applicable to loans and advances of any type, including credit opening is 0.0041% per day to corporate 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 corporate entity. For corporate 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 loans is levied on operations between individuals and corporate entities domiciled 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 loans where the lender is located abroad, and the borrower is in Brazil.
To help the Brazilian economy tackle the adverse effects caused by the Covid-19 pandemic, the IOF rate was reduced to zero on loans carried out between April 3, 2020 and November 26, 2020, and between December 15, 2020, and December 31, 2020, in accordance with Decrees No. 10,551/21 and No. 10,572/20.
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 housing system (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;|
|·||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 thousand per 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%. On March 1, 2021, Provisional Measure No. 1,034/21 was edited, which increases the rates for Social Contribution by 5% for the majority of financial institutions (including banks of any kind) during the period from July 1, 2021 to December 31, 2021. The impacts of this Provisional Measure are being analyzed. 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 a 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 subsidiaries. With regard to the subsidiaries, the controller corporate entities in 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 the 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.80.03 PIS 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.
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 0.0%, including those arising from operations carried out for purposes of hedge, earned by corporate entities subject to the system of non-accrual of these contributions. In April 2015, Decree No. 8,426/15 established 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 corporate entity, including loans and financing; and (ii) hedge operations carried out on the stock exchange, of commodities and of futures, or in the organized OTC market.
|116 Form 20-F – December 2020|
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 (Escrituração Fiscal Digital – EFD) for PIS and Cofins taxes. Under this rule, financial and similar institutions must keep digital records (EFD) for PIS and Cofins taxes relating to taxable events occurring as of January 2012.
In 2020, to minimize the impacts of the Covid-19 pandemic on companies and businesses in the Brazilian territory, Decrees were issued by the RFB extending the term of collection of PIS and Cofins taxes. RFB Decree No. 139/20 has extended the deadline for payment of amounts due for March 2020 to August 25, 2020; and amounts due for April 2020 to October 25, 2020. RFB Decree No. 245/20 has extended the deadline for payment of amounts due under the competence from May 2020 to November 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.80.04 Compliance 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.
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.90 Centralized Registration and Deposit of Financial Assets and Securities
In August 2017, the Brazilian Congress converted Provisional Measure (PM) 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 of Brazil. 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 (i) applicable to bilateral operations (meaning operations directly with customers), with some exemptions in certain situations; and (ii) 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 of Brazil as a condition for engaging in certain negotiations and in assumption of custody. The Central Bank of Brazil will issue regulations governing the implementation of such rules, including the creation of an electronic system for constitution of liens and encumbrances.
In December 2020, by means of BCB Normative Instruction No. 61/20, the financial institutions and other institutions authorized to operate by the Central Bank of Brazil, should inform the standardized identifier of the loan (IPOC), dealt by in Circular No. 3,953/19, as amended, in the registry of financial instruments representative of loan and leasing operations, including those subject to assignment of credit, chattel and portability and in the form of credit rights, in systems of registration and financial settlement of assets authorized by the Central Bank of Brazil.
4.B.100 Selected Statistical Information
Selected statistical information shown in this section as of December 31, 2020 and 2019 and for the three year period then ended is derived from our audited consolidated financial statements prepared in accordance with IFRS, included elsewhere in this annual report. The data as of December 31, 2018, 2017 and 2016 and for the years ended December 31, 2017 and 2016, 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, 2020, 2019, and 2018) in conjunction with “Item 5. Operating and Financial Review and Prospects” and with our consolidated financial statements in “Item 18. Financial Statements”.
|118 Form 20-F – December 2020|
4.B.100.01 Average 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.
|Ø||Interest-earning and non-interest earning assets|
|For the year ended December 31,||R$ in thousands, except %|
|Average balance||Interest and similar income||Average rate||Average balance||Interest and similar income||Average rate||Average balance||Interest and similar income||Average rate|
|Financial assets at fair value through profit or loss||251,892,319||13,982,931||5.6%||240,554,612||19,436,407||8.1%||226,255,745||17,538,227||7.8%|
|Financial assets at fair value through other comprehensive income||180,175,796||13,632,071||7.6%||155,773,766||12,567,751||8.1%||182,237,700||16,666,298||9.1%|
|Financial assets at amortized cost||170,156,931||15,698,407||9.2%||150,042,781||13,139,371||8.8%||101,777,446||12,120,868||11.9%|
|Loans and advances to banks||130,746,455||6,802,466||5.2%||97,965,424||6,874,429||7.0%||119,022,489||9,546,878||8.0%|
|Loans and advances to customers||484,602,733||67,596,056||13.9%||415,669,729||68,063,693||16.4%||373,376,534||62,200,740||16.7%|
|Central Bank compulsory deposits||70,833,791||2,017,605||2.8%||79,302,914||4,304,875||5.4%||68,226,005||3,916,299||5.7%|
|Other interest-earning assets||191,287||13,835||7.2%||546,050||31,179||5.7%||1,250,275||63,829||5.1%|
|Total interest-earning assets||1,288,599,312||119,743,371||9.3%||1,139,855,276||124,417,705||10.9%||1,072,146,194||122,053,139||11.4%|
|Cash and balances with banks||23,330,719||-||-||16,124,897||-||-||15,152,436||-||-|
|Central Bank compulsory deposits||8,002,186||-||-||6,900,733||-||-||6,587,662||-||-|
|Financial assets available for sale (shares)||17,205,887||-||-||16,646,199||-||-||13,999,412||-||-|
|Non-performing loans and advances to customers (1)||17,197,660||-||-||17,576,507||-||-||17,474,231||-||-|
|Expected losses for loans and advances||(38,941,865)||-||-||(33,251,132)||-||-||(28,130,043)||-||-|
|Investments in associates and joint ventures||7,187,218||-||-||8,165,368||-||-||8,385,253||-||-|
|Property and equipment, net of accumulated depreciation||14,494,397||-||-||9,531,260||-||-||8,302,022||-||-|
|Intangible assets and goodwill, net of accumulated amortization||14,512,492||-||-||19,718,843||-||-||15,587,020||-||-|
|Current and deferred income tax||92,736,867||-||-||63,292,404||-||-||59,130,804||-||-|
|Other non-interest-earning assets||78,882,902||-||-||87,113,632||-||-||75,349,224||-||-|
|Total non-interest-earning assets||234,608,463||-||-||211,818,711||-||-||191,838,021||-||-|
|(1) Overdue by more than 60 days.|
|Ø||Interest-bearing and non-interest-bearing liabilities|
|For the year ended December 31,||R$ in thousands, except %|
|Average balance||Interest and similar expense||Average rate||Average balance||Interest and similar expense||Average rate||Average balance||Interest and similar expense||Average rate|
|Time deposits (1)||303,480,700||5,662,574||1.9%||192,298,337||7,974,767||4.1%||158,396,848||6,389,594||4.0%|
|Obligations for repurchase agreements||199,579,332||8,423,041||4.2%||191,481,640||11,784,845||6.2%||211,9|