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This was the year that Bradesco absorbed HSBC’s Brazilian bank.
The deal, valued at R$16 billion ($4.8 billion), added five million current account clients, around 22,000 employees, 851 branches and 448 ‘mini-branches’. However, the bank said it wanted to retain 100% of HSBC’s customers as well as target deal synergies of 30% of HSBC’s pre-merger expenses.
“I think potentially those synergies will rise to above 40%,” says Alexandre Gluher, executive vice-president at Bradesco. “We completed the integration of HSBC in 2017, but it’s important to stress that the full adjustment will only be felt in the P&L in 2018.”
Bradesco’s rationalization of HSBC fits within a wider and aggressive cost-cutting initiative.
In 2017 the bank launched a voluntary redundancy programme that was taken up by 7,400 employees at a cost of R$2.3 billion – which will realize annual savings of R$1.5 billion from next year.
Total headcount rose to 111,000 after the HSBC acquisition but is already back under 100,000. Bradesco, with Luiz Trabuco as CEO, is leading the private-sector banks in cutting branches; it closed over 500 in 2017 and is continuing to cut.
Analysts at UBS think that “Bradesco has the most potential to reduce its branch network”.
The bank’s push into digitization helps this reduction in its physical footprint. A record 30-day strike by bank workers in 2016 has enabled banks to accelerate branch closures, because the industrial action forced older customers to adopt digital banking channels. Many have remained online, citing a positive banking experience.
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Whatever the specific causes, the migration to digital banking has been a boon for efficiency. With digital costs less than one-third of non-digital, Bradesco has benefited from a successful customer-conversion strategy: 95% of transactions now happen on the internet, via mobile phones or at ATMs.
However, Bradesco has been slower to cut in other areas than its private-sector peers, most notably its non-performing loan rates and its level of provisioning.
The bank’s NPLs peaked later and at higher rates (first quarter 2017 and 5.6% respectively) than its main competitor Itaú (September 2016 and 4.8%). Does this mean that Bradesco was slower to react to the collapse in economic growth when recession hit (Brazil suffered negative GDP growth of -3.8% in 2015 and -3.6% in 2016)?
“No, it’s not that we were slower to react, it’s just that we are different,” says Gluher. “We are more of a retail bank than our competitors – we are more spread around the country and we have stronger positions in some markets that were most badly hit by the recession than our competitors, so it took us a little longer for our NPLs to peak. We would have actually seen NPLs peak in the fourth quarter of 2016 if it wasn’t for one specific corporate case.”
Provisions have also started to fall, down by 33% in the third quarter 2017, the bank reported, surprising the market. That was driven by a stronger performance in both delinquencies and credit recoveries.
While asset performance improves, the loan portfolio has shrunk, particularly in the corporate segment.
Loans to small and medium-sized enterprises were down 17.8% year on year in the third quarter of 2017, corporates down 10.3% and large corporates -6.8%. The retail loan portfolio has held up better – up by 0.7% year on year, although inflation is lower in real terms.
Below that relatively stable headline, the bank has achieved an improvement in credit risk with increases in payroll loans (11.6%) and mortgages (5%), while unsecured segments have fallen, such as credit cards (1.8%) and personal loans (8.1%).
Carlos Firetti, Bradesco’s director of investor relations, says this has been “an important change to our portfolio and brings better duration and lower levels of delinquency”.
Firetti also says these results do not capture a recent uptick in credit demand seen in the (as yet unreported) fourth quarter: “We are seeing an improvement in credit origination and credit growth for individuals. Most lines have been growing. For example, we have had an increase in our car loan portfolio for the first time in three years, and the individuals segment is going in the right direction.”
Credit Suisse analysts expect Bradesco’s return on equity will fall to 17.3% for full-year 2017, before accelerating to 20.4% in 2019.
“We are seeing signs of an economic recovery and of unemployment falling, and we are probably the best bank to capture that recovery,” says Firetti. “Our loan book will grow again in 2018 and this will also be the first year we are running with all the cost synergies from the HSBC transaction, so these should be very positive drivers of our performance.”
