In November, Bradesco celebrated a decade of being listed on the New York Stock Exchange. Over that period the success of both Bradesco and Brazil has been remarkable. Crucially, there is nothing to indicate that the next decade will not deliver the same impressive performance for both the bank and the country, according to Lázaro de Mello Brandão, chairman of Bradesco’s board, who opened Bradesco’s Investor Day in New York.
The turbulent global macroeconomic environment has failed to break Brazil’s resilience, which has transformed the economy over the past decade. "Brazil was once infamously known as the land of the future where the future never comes," recalls Luiz Carlos Trabuco Cappi, CEO of Bradesco. "It was constrained by internal and external debts, and doubts that it could overcome its past."
Trabuco says that Brazil bet on a market economy focused on social inclusion and the results have proved its strategy correct. "The past 10 years have seen debt lowered, FX reserves bolstered and internal doubts eliminated," he explains. "Political and macroeconomic stability are now embedded." Average GDP growth in Brazil from 2001 to 2010 was 3.6% compared to 2.5% from 1991 to 2000. Bradesco expects average growth of 4.3% from 2011 to 2020.
Lázaro de Mello Brandão, the chairman of Bradesco board
Brazil is now extremely well positioned. It has the second lowest fiscal deficit in the G20 and its debt to GDP ratio – estimated by Bradesco to be 36.1% in 2012 – is still falling. In November, Standard & Poor’s became the third ratings agency this year to upgrade Brazil’s sovereign debt (to triple-BBB). Brazil’s current account deficit is just 2% and its foreign exchange reserves are expected to hit $390 million in 2012.
In the immediate future, Brazil clearly faces significant challenges in the global economy. Bradesco expects growth of just 1.7% in the US in 2012 and a contraction of 0.5% in the eurozone. Emerging markets – in contrast – should still grow 5.6% (compared to 7.3% in 2010) with China, which is Brazil’s major trading partner and its largest investor, expected to grow 8.2% in 2012.
Against this backdrop, Brazil will continue to demonstrate strong resistance to the global crisis with anticipated growth of 3.2% in 2011 and 3.7% in 2012. Brazil’s strength comes from continuing strong commodity prices, which are driven by the relative strength of emerging markets: 64.6% of the country’s exports go to emerging markets while only 17.9% go to the eurozone and just 9.6% to the US.
Leading the way
The growth of Brazil’s economy has resulted in significant – positive – social changes. There is now a more formal economy, especially in the labour market, and structural unemployment is just 6.7% in 2010. Moreover, economic growth has dramatically changed the structure of Brazilian society: the gap between rich and poor is at its narrowest ever and two-thirds of Brazilians – 120 million people – are classified as social classes A, B and C.
Meanwhile, consumer confidence is higher than before the collapse of Lehman Brothers, which heralded the onset of the financial crisis, highlighting the gulf between Brazil and many OECD economies. Confidence is boosted by a real interest rate of 4.1% – the lowest in Brazil’s history – which is expected to fall further. As a consequence, Brazilian’s appetite for savings is strong.
These broad changes in Brazil’s society and economy have created unprecedented opportunities in financial services that have driven business volumes higher and increased profitability. Total loans have risen by 447.8%, total deposits by 312.9% and shareholders’ equity by 338.8%. "Bradesco has played an important part in this transformation," says Domingos Figueiredo de Abreu, CFO of Bradesco.
Bradesco has increased total assets by 556% from 2001 to 2011, loans by 580.9%, total deposits by 446.7% and shareholders’ equity by 448%. This huge growth has come without jeopardising capital adequacy (currently 14.7% and well above BIS requirements) or credit risk coverage (currently 194%). Both net interest income and fee income have risen by more than 300% over the decade with sharply higher volumes offsetting falling interest rates.
One important component of Bradesco’s consistent income growth and high, stable return on average equity is its focus on cost control. While operating expenses have necessarily risen as Bradesco has grown, its total operating expenses as a percentage of assets has fallen from 8% in 2001 to just 4.4% in 2011 due to a rigorous focus on cost discipline and improvements in IT infrastructure throughout the group.
Bradesco is also committed to sustainability in its broadest sense. The bank actively promotes microfinance, financial education and mobility and is a signatory to the Equator Principles for responsible investment and the Carbon Disclosure Project. Its environmental credentials ensure that Bradesco is a constituent of the Dow Jones Sustainability Index and BM&FBOVESPA’s Corporate Sustainability Index. Bradesco also has a long track record of strong and transparent corporate governance, and is part of the Level 1 Corporate Governance segment on BM&FBOVESPA, requiring greater disclosure, governance and compliance.
Delivering for shareholders
Bradesco’s decision to list in New York in 2001 has brought a broad pool of investors to the bank’s shareholder register. "In the 10 years that Bradesco has been listed in New York, it has significantly diversified its shareholder base and increased liquidity in its shares," says Brandão. "Our pledge of transparency to the capital markets at all times has benefited investors and Bradesco."
Bradesco Investor Day celebrates 10 years listed on NYSE
From 2001 to 2011, share liquidity increased by 16 times in Brazilian real trading terms. Over that period the proportion of Bradesco shares traded in New York has increased from 17% in 2001 to 62% in 2011. The growth in trading of Bradesco’s shares has benefited from strong performance of the bank, which has been reflected in share price performance: over a decade Bradesco has gained 922% compared to just 22% for the Dow Jones Index.
Over the decade shareholders have received dividend payments of R$22 billion, resulting from a dividend payment of a minimum of 30% of net profit – higher than the Brazilian requirement of 25%. "While Bradesco’s share evolution has placed it among the banks with the highest market capitalisation in the world, its price to book value of just 2.2 times is historically low and does not reflect the expected return outlook," says Abreu. "It is attractively priced."
The opportunities open to Bradesco – both as a result of changes in Brazil and the bank’s dynamic approach to building its businesses – mean that its share price has considerable upside. At a strategic level, Bradesco is pledged to compete in every segment – from consumer to SME and corporate to securities – because it anticipates opportunities in each. Moreover, its focus on segmentation has led to improved service quality and productivity gains.
While the Brazilian banking market is expected to continue to be dominated by two state owned banks, two private domestic banks (including Bradesco) and two foreign-owned banks, Bradesco recognises that its success is built on people – serving its clients effectively and employing and nurturing talent – and technology.
Bradesco has made a big commitment to innovative service channels, growing its internet transactions from 151 million in 2001 to 1.93 billion in 2011 while mobile phone transactions have grown from 3 million in 2007 to 61 million in 2011. At the same time, Bradesco has grown its branch network from 2,570 in 2001 to 3,945 in 2011 giving the bank’s 64.3 million clients the best network in Brazil.
Chief among the opportunities created by Brazil’s economic success is the insurance market. "You need to have something worth protecting to buy insurance," says Marco Antonio Rossi, president of Bradesco Seguros, the group’s multi-segment insurance business, which is the largest business of its type in Latin America. "Now many people in Brazil have something to protect and have the means to be able to do so."
Over the past decade the insurance market in Brazil has outpaced GDP growth by a considerable margin: from 2001-10 personal insurance grew by 385%; health insurance by 231.8%; pension plans by 512%; and personal accident insurance by 267.9%. Given that Brazil’s insurance premiums as a percentage of GDP are just 3.42% – well below the 9% of some OECD countries – that only 24% of Brazilians have health and dental insurance, and just 10% of homes are insured, there remains huge potential for growth.
Bradesco Seguros’s evolution in the past decade reflects the changes in the Brazilian market. Through organic growth and selective acquisitions – such as that of dental insurance firm OrdontoPrev in 2009 – Bradesco Seguros has ensured that it has products to meet for the needs of every part of Brazilian society. By differentiating each business, Bradesco Seguros ensures it retains expertise in market segments while creating synergies across its brands.
Bradesco Seguros is also present in every region in the country, including high growth markets such as the north-east and northern regions and, with 38 million policy-holders, is represented in every city in Brazil. The effectiveness of Bradesco Seguros’s strategy is reflected in its share of revenues of the domestic insurance market, which has remained steady at around 24% from 2001 to 2010. Over the same period, revenues have risen by 229.8% and net income by 254.1%.