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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements of the Prudential Conglomerate.

 

8  December 2014

 

The accompanying notes are an integral part of these Consolidated Financial Statements of the Prudential Conglomerate.

 

Bradesco     9             

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Notes to Bradesco’s Consolidated Financial Statements of the Prudential Conglomerate are as follows:

Page

 

1)  OPERATIONS	11
2)  PRESENTATION OF THE FINANCIAL STATEMENTS	11
3)  SIGNIFICANT ACCOUNTING PRACTICES	13
4)  CASH AND CASH EQUIVALENTS	19
5)  INTERBANK INVESTMENTS	20
6)  SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS	21
7)  INTERBANK ACCOUNTS - RESERVE REQUIREMENT	29
8)  LOANS	31
9)  OTHER RECEIVABLES	41
10) OTHER ASSETS	43
11) INVESTMENTS	44
12) PREMISES, EQUIPMENT AND LEASING	45
13) DEFERED ASSETS	45
14) INTANGIBLE ASSETS	46
15) DEPOSITS, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FUNDS FROM ISSUANCE OF SECURITIES	46
16) BORROWING AND ONLENDING	48
17) PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL LIABILITIES - TAX AND SOCIAL SECURITY	49
18) SUBORDINATED DEBT	52
19) OTHER LIABILITIES	53
20) NON-CONTROLLING INTERESTS IN SUBSIDIARIES	54
21) SHAREHOLDERS’ EQUITY (PARENT COMPANY)	54
22) FEE AND COMMISSION INCOME	56
23) PAYROLL AND RELATED BENEFITS	56
24) OTHER ADMINISTRATIVE EXPENSES	56
25) TAX EXPENSES	57
26) OTHER OPERATING INCOME	57
27) OTHER OPERATING EXPENSES	57
28) NON-OPERATING INCOME (LOSS)	57
29) RELATED-PARTY TRANSACTIONS (DIRECT AND INDIRECT)	58
30) FINANCIAL INSTRUMENTS	60
31) EMPLOYEE BENEFITS	66
32) INCOME TAX AND SOCIAL CONTRIBUTION	67
33) OTHER INFORMATION	69

 

 

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Below are the primary direct and indirectly owned companies included in the consolidation:

 

(1)  The special purpose entity International Diversified Payment Rights Company is being consolidated. The company takes part in the securitization operation of future flow of payment orders received from overseas (Note 15d); and

(2)  Company proportionally consolidated, pursuant to CMN Resolution n^o 2723/00 and CVM Rule n^o 247/96.

 

 

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3)   SIGNIFICANT ACCOUNTING PRACTICES

a)   Functional and Presentation Currencies

 

Consolidated financial statements are presented in Brazilian reais, which is also Bradesco’s functional currency. Foreign branches and subsidiaries are mainly a continuation of activities in Brazil, and, therefore, assets, liabilities and profit or loss are translated into Brazilian reais using the appropriate currency exchange rate to comply with accounting practices adopted in Brazil. Foreign currency translation gains and losses arising are recognized in the period’s income statement in the lines “Derivative Financial Instruments” and “Borrowing and On-lending”.

 

b)   Income and Expense Recognition

 

Income and expenses are recognized on an accrual basis in order to determine the net income for the period to which they relate, regardless of when the funds are received or paid.

 

Fixed rate transactions are recorded at their redemption value with the income or expense relating to future periods being recorded as a deduction from the corresponding asset or liability. Finance income and costs are prorated daily and calculated using the compounding method, except when they relate to discounted notes or to foreign transactions which are calculated using the straight-line method.

 

Floating rate or foreign-currency-indexed transactions are adjusted for inflation and foreign exchange rates respectively at the end of the reporting period.

 

c)   Cash and cash equivalents

 

Cash and cash equivalents include: funds available in currency, investments in gold, securities sold under agreements to repurchase and interest-earning deposits in other banks, maturing in 90 days or less, which are exposed to insignificant risk of change in fair value. These funds are used by Bradesco to manage its short-term commitments.

 

Cash and cash equivalents detailed balances are presented in Note 4.

 

d)   Interbank investments

 

Unrestricted repurchase and reverse repurchase agreements are stated at their fair value. All other interbank investments are stated at cost, plus income earned up to the end of the reporting period, net of any devaluation allowance, if applicable.

 

The breakdown, terms and proceeds relating to interbank investments are presented in Note 5.

 

e)   Securities - Classification

 

·       Trading securities - securities acquired for the purpose of being actively and frequently traded. They are recorded at cost, plus income earned and adjusted to fair value with movements recognized in the Income Statement for the period;

 

·       Available-for-sale securities - securities that are not specifically intended for trading purposes or to be held to maturity. They are recorded at cost, plus income earned, which is recorded in profit or loss in the period and adjusted to fair value with movements recognized in shareholders’ equity, net of tax, which will be transferred to the Income Statement only when effectively realized; and

 

·       Held-to-maturity securities - securities for which there is positive intent and financial capacity to hold to maturity. They are recorded at cost, plus income earned recognized in the Income Statement for the period.

 

Securities classified as trading and available-for-sale, as well as derivative financial instruments, are recognized in the consolidated statement of financial position at their fair value. Fair value is generally based on quoted market prices or quotations for assets or liabilities with similar characteristics. If market prices are not available, fair values are based on traders’ quotations, pricing models, discounted cash flows or similar techniques to determine the fair value and may require judgment or significant estimates by Management.

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Classification, breakdown and segmentation of securities are presented in Note 6 (a to d).

 

f)    Derivative financial instruments (assets and liabilities)

 

Derivate instruments are classified based on the intent of the underlying instrument at the date of purchase, taking into consideration its use for possible hedging purposes.

 

Operations involving derivative financial instruments are designed to meet the Bank’s own needs in order to manage overall exposure, as well as to meet customer requests to manage their positions. Gains and losses are recorded in the income or expenses accounts of the respective financial instruments.

 

Derivative financial instruments used to mitigate risk deriving from exposure to variations in the Fair value of financial assets and liabilities are designated as hedges and are classified according to their nature:

 

·       Market risk hedge: the gains and losses, realized or not, of the financial instruments classified in this category as well as the financial assets and liabilities, that are the object of the hedge, are recorded in the Income Statement; and

 

·       Cash flow hedge: the effective portion of valuation or devaluation of the financial instruments classified in this category is recorded, net of taxes, in a specific account in shareholders’ equity. The ineffective portion of the hedge is recognized directly in the Income Statement.

 

A breakdown of amounts included as derivative financial instruments, in the balance sheet and off-balance-sheet accounts, is disclosed in Note 6 (e to g).

 

g)   Loans and leasing, advances on foreign exchange contracts, other receivables with credit characteristics and allowance for loan losses

 

Loans and leasing, advances on foreign exchange contracts and other receivables with credit characteristics are classified by risk level, based on: (i) the parameters established by CMN Resolution n^o 2682/99, which requires risk ratings to have nine levels, from “AA” (minimum risk) to “H” (maximum risk); and (ii) Management’s assessment of the risk level. This assessment, which is carried out regularly, considers current economic conditions and past experience with loan losses, as well as specific and general risks relating to operations, debtors and guarantors. Moreover, the days-past-due is also considered to rate customer risk as per CMN Resolution n^o 2682/99, as follows:

 

 

(1)  For transactions with terms of more than 36 months, past-due periods are doubled, as permitted by CMN Resolution n^o 2682/99.

 

Interest and inflation adjustments on past-due transactions are only recognized in the Income Statement up to the 59^th day that they are past due. As from the 60^th day, they are recognized off-balance sheet accounts and are only recognized in the Income Statement when received.

 

H-rated past-due transactions remain at this level for six months, after which they are written-off against the existing allowance and controlled in off-balance-sheet accounts for at least five years.

 

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Renegotiated transactions are held at the same rating as on the date of the renegotiation or classified in a higher risk rating. Renegotiations already written-off against the allowance and that were recorded in off-balance-sheet accounts, are rated as level “H” and any possible gains derived from their renegotiation are recognized only when they are effectively received. When there is a significant repayment on the operation or when new material facts justify a change in the level of risk, the operation may be reclassified to a lower risk category.

 

The estimated allowance for loan losses is calculated to sufficiently cover probable losses, considering CMN and Bacen standards and instructions, together with Management’s assessment of the credit risk.

 

Type, values, terms, levels of risk, concentration, economic sector of client’s activity, renegotiation and income from loans, as well as the breakdown of expenses and statement of financial position accounts for the allowance for loan losses are presented in Note 8.

 

Leasing

 

The leasing portfolio consists of contracts registered under Portaria 140/84, of the Ministry of Finance, which contains clauses: a) non cancellation; b) put option; and c) accrual based on floating or prefixed rates and accounted in accordance to the standards established by Bacen, as follows:

 

I-      Receivable Leases

 

Reflect the balance of receivable counter installments, updated according to the indexes and criteria established contractually.

 

II-    Lease deferred income and Guaranteed Residual Value (VRG)

 

Recorded at contract value, in contrast to the lease deferred income accounts and residual Value to be balanced, both presented by agreed conditions. The VRG received in advance is recorded in Other Liabilities – Lenders by Anticipation of the Residual Value, up to the maturity date of the contract. The present value adjustment of counter installments and receivable VRG of financial leasing operations is recognized as excess/insufficient depreciation on leased assets, aiming to align accounting practices. For operations that are 60 or more days past due, the appropriation to the income statements occurs when contractual installments are received, according to the CMN Resolution n^o 2682/99.

 

III-  Leased assets

 

Are stated at acquisition cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method, with the benefit of 30% reduction on the normal useful life of the asset, provided in the existing legislation. The main annual rates of depreciation used, which are the basis for this reduction, are as follows: vehicles and related, 20%; furniture and utensils, 10%; machinery and equipment, 10%; and other assets, 10% and 20%.

 

IV-  Losses on lease

 

The losses recorded in the sale of leased assets are deferred and amortized over the remaining term of the normal useful life of the assets, being demonstrated along with the Leased Asset (Note 8k).

 

V-    Excess (insufficiency) of depreciation

 

The accounting records of the leasing operations are maintained in accordance with legal requirements, specific to this type of operation. The procedures adopted and summarized in "II" to "IV" above differ from accounting practices provided in Brazilian corporate legislation, especially with regards to the accrual basis of accounting on recording revenue and expenses related to leasing contracts. As a result, according to Circular Bacen n^o 1429/89, the present value of the open counter installments has been calculated, using the internal rate of return of each contract, registering a revenue or expense of leasing, in contrast to excess or insufficiency of depreciation accounts, respectively, recorded in the Permanent Asset, aiming to suit leasing operations to an accrual basis of accounting (Note 8k).

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h)   Income tax and social contribution (assets and liabilities)

 

Deferred income tax and social contribution deferred tax assets, calculated on income tax losses, social contribution losses and temporary differences are recorded in “Other Receivables - Sundry” and the deferred tax liabilities on tax differences in leasing depreciation (applicable only for income tax) and mark-to-market adjustments on securities are recorded in “Other Liabilities - Tax and Social Security”.

 

Deferred tax assets on temporary differences are realized when the corresponding provision is used and/or reversed. Deferred tax assets on income tax and social contribution losses are used when taxable income is generated, up to the 30% limit of the taxable profit for the period. Deferred tax assets are recorded based on current expectations of realization considering technical studies and analyses carried out by Management.

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. Social contribution on net income is calculated at 15% for financial institutions and insurance companies and at 9% for other companies.

 

Provisions were recorded for other income tax and social contribution in accordance with specific applicable legislation.

 

Pursuant to Law n^o 11941/09, changes in the criteria to recognize revenue, costs and expenses included in the net income for the period, enacted by Law n^o 11638/07 and by Articles n^o 37 and n^o 38 of Law n^o 11941/09, shall not affect taxable income, and, for tax purposes, accounting methods and criteria in force on December 31, 2007 are used. For accounting purposes, the tax effects of adopting the aforementioned laws are recorded in the corresponding deferred tax assets and liabilities.

 

The breakdown of income tax and social contribution, showing the calculations, the origin and expected use of deferred tax assets, as well as unrecorded deferred tax assets, are presented in Note 32.

 

i)    Prepaid expenses

 

Prepaid expenses are represented by funds already disbursed for future benefits or services, which are recognized in the profit or loss on an accrual basis.

 

Incurred costs relating to assets that will generate revenue in subsequent periods are recorded in the Income Statement according to the terms and the amount of expected benefits and directly written-off in the Income Statement when the corresponding assets or rights are no longer part of the institution’s assets or when future benefits are no longer expected.

 

Prepaid expenses are shown in detail in Note 10b.

 

j)    Investments

 

Investments in unconsolidated companies, where Bradesco has significant influence over the investee or holds at least 20% of the voting rights, are accounted for by the equity method.

 

Tax incentives and other investments are stated at cost, less allowance for losses/impairment, where applicable.

 

Subsidiaries and jointly-controlled entities are consolidated - the composition of the main companies can be found in Note 2. The composition of unconsolidated companies, as well as other investments, can be found in Note 11.

 

k)   Premises and equipment

 

Relates to the tangible assets used by the Bank in its activities, including those resulting from transactions which transfer risks, benefits and control of the assets to the Bank.

 

Premises and equipment are stated at acquisition cost, net of accumulated depreciation, calculated by the straight-line method based on the assets’ estimated economic useful life, using the following rates: real estate - 4% per annum; furniture and utensils and machinery and equipment - 10% per annum; transport systems - 20% per annum; and data-processing systems - 20% to 50% per annum, and adjusted for impairment, when applicable.

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The breakdown of asset costs and their corresponding depreciation, as well as the unrecorded surplus value for real estate and fixed asset ratios, is presented in Note 12.

 

l)    Deferred assets

 

It is stated at a cost of acquisition or net formation of their accumulated depreciation of 20% per annum, calculated by the straight-line method. From December, 2008, the new operations have been recorded in intangible assets in accordance with the Circular Letter in 3,357/08 of Bacen.

 

The values composition of the assets costs and their depreciation are presented in Note 13.

 

m) Intangible assets

 

Relates to the right over intangible assets used by the Bank in its activities.

 

Intangible assets comprise:                                                                                         

 

·       Future profitability/acquired client portfolio and acquisition of right to provide banking services: they are recorded and amortized over the period in which the asset will directly and indirectly contribute to future cash flows and adjusted for impairment, where applicable; and

 

·       Software: stated at cost less amortization calculated on a straight-line basis over the estimated useful life (20% to 50% p.a.), from the date it is available for use and adjusted for impairment, where applicable. Internal software development costs are recognized as an intangible asset when it is possible to show the intent and ability to complete and use the software, as well as to reliably measure costs directly attributable to the intangible asset. These costs are amortized during the software’s estimated useful life, considering the expected future economic benefits.

 

Goodwill and other intangible assets, including their changes by class, are presented in Note 14.

 

n)   Impairment

 

Financial and non-financial assets are tested for impairment.

 

Impairment evidence may comprise the non-payment or payment delay by the debtor, possible bankruptcy process or the significant or extended decline in an asset value.

 

An impairment loss of a financial or non-financial asset is recognized in the profit or loss for the period if the book value of an asset or cash-generating unit exceeds its recoverable value.

 

Impairment losses are presented in Notes 6d(10).

 

o)   Securities sold under agreements to repurchase

 

These are recognized at the value of the liabilities and include, when applicable, related charges up to the end of the reporting period, calculated on a daily prorated basis.

 

A breakdown of the contracts recorded in deposits and securities sold under agreements to repurchase, as well as terms and amounts recognized in the statement of financial position and income statement, is presented in Note 15.

 

p)   Provisions, contingent assets and liabilities and legal obligations - tax and social security

 

Provisions, contingent assets and liabilities, and legal obligations, as defined below, are recognized, measured and disclosed in accordance with the criteria set out in CPC 25, approved by CMN Resolution n^o 3823/09 and CVM Resolution n^o 594/09:

 

 

Bradesco     17          

 

·       Contingent assets: these are not recognized in the financial statements, except to the extent that there are real guarantees or favorable judicial decisions, to which no further appeals are applicable, classifying the gain as practically certain by confirming the expectation of receipt or compensation against another liability. Contingent assets with a chance of probable success are disclosed in the notes to the financial statements;

 

·       Provisions: these are recorded taking into consideration the opinion of legal counsel, the nature of the lawsuits, similarity with previous lawsuits, complexity and positioning of the courts, whenever the loss is deemed probable it requires a probable outflow of funds to settle the obligation and when the amount can be reliably measured;

 

·       Contingent liabilities: according to CPC 25, the term “contingent” is used for liabilities that are not recognized because their existence will only be confirmed by the occurrence of one or more uncertain future events beyond Management’s control. Contingent liabilities considered as possible losses should only be disclosed in the notes when relevant. Obligations deemed remote are not recorded as a provision nor disclosed; and

 

·       Legal obligations - provision for tax risks: results from judicial proceedings, which contest the applicability of tax laws on the grounds of legality or constitutionality, which, regardless of the assessment of the probability of success, are fully provided for in the financial statements.

 

Details on lawsuits, as well as segregation and changes in amounts recorded, by type, are presented in Note 17.

 

q)   Funding expenses

 

Expenses related to funding transactions involving the issuance of securities are recognized in the profit or loss over the term of the transaction and reduces the corresponding liability. They are presented in Notes 15c and 18.

 

r)    Other assets and liabilities

 

Assets are stated at their realizable amounts, including, when applicable, related income and inflation and exchange variations (on a daily prorated basis), less provision for losses, when deemed appropriate. Liabilities include known or measurable amounts, including related charges and inflation and exchange variations (on a daily prorated basis).

 

s)   Subsequent events

 

These refer to events occurring between the reporting date and the date the financial statements are authorized to be issued.

 

They comprise the following:

 

·       Events resulting in adjustments: events relating to conditions already existing at the end of the reporting period; and

 

·       Events not resulting in adjustments: events relating to conditions not existing at the end of the reporting period.

 

Subsequent events, if any, are described in Note 33.

 

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	December 31, 2014 - R$ thousand
Cash and due from banks in domestic currency	10,816,977
Cash and due from banks in foreign currency	3,685,973
Investments in gold	106
Total cash and due from banks	14,503,056
Interbank investments (1)	190,166,087
Total cash and cash equivalents	204,669,143

(1)  Refer to operations which mature 90 days or less from the date they were effectively invested and with insignificant risk of change in fair value.

 

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5)   INTERBANK INVESTMENTS

a)   Breakdown and maturity

 

 

b)   Income from interbank investments

 

Classified in the income statement as income on securities transactions.

 

 

6)   SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS

Information on securities and derivative financial instruments is as follows:

a)   Summary of the consolidated classification of securities by operating segment and issuer

 

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b)   Breakdown of the consolidated portfolio by issuer

 

22            December 2014                                                                                                                                                                                                                                                

 

c)   Consolidated classification by category, maturity and operating segment

 

I)    Trading securities

 

II)   Available-for-sale securities

 

III)  Held-to-maturity securities

 

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d)   Breakdown of the portfolios by financial statement classification

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(1)     Consistent with the criteria in Bacen Circular Letter n^o 3068/01 and due to the characteristics of the securities, we are classifying the derivative financial instruments, except those considered as cash flow hedges in the category Trading Securities;

(2)     These refer to investment fund and managed portfolio resources invested in purchase contracts with a commitment to re sale with Bradesco, whose owners are consolidated subsidiaries, included in the consolidated financial statements;

(3)     The investment fund quotas are presented according to the instruments comprising their portfolios and maintaining the classification used in the fund;

(4)     In compliance with Article 8 of Bacen Circular Letter n^o 3068/01, Bradesco declares that it has the financial capacity and intention to maintain held-to-maturity securities until their maturity dates. This financial capacity is disclosed in Note 30a, which presents the maturity of asset and liability operations;

(5)     On December 2014, the amount of R$ 17,003 thousand was reclassified from “Held-for-trading securities” to “Available-for-sale securities”;

(6)     The number of days to maturity was based on the maturity of the instruments, regardless of their accounting classification;

(7)     This column reflects book value after mark-to-market accounting in accordance with item (7), except for held-to-maturity instruments, whose fair value is higher than the original amortized cost for the amount of R$ 5,402 thousand;

(8)     The fair value of securities is determined based on the market price available at the end of the reporting period. If no market price quotation is available at the end of the reporting period, amounts are estimated based on the prices quoted by dealers, pricing models, quotation models or price quotations for instruments with similar characteristics; for investment funds, the original amortized cost reflects the fair value of the respective quotas. For investment funds, the original amortized cost reflects the fair value of the respective quotas;

(9)     For a better analysis of these items, consider the net exposure (Note 6e II); and

(10)   In the year ended December 31, 2014, there were no losses by impairment under the heading "equity securities", for the securities classified under the category "Available-for-sale securities".

 

e)   Derivative financial instruments

Bradesco carries out transactions involving derivative financial instruments, which are recorded in the statement of financial position or in off-balance-sheet accounts, to meet its own needs in managing its global exposure, as well as to meet its customer’s requests, in order to manage their exposure. These operations involve a range of derivatives, including interest rate swaps, currency swaps, futures and options. Bradesco’s risk management policy is based on the utilization of derivative financial instruments mainly to mitigate the risks from operations carried out by the Bank and its subsidiaries.

 

Securities classified as trading and available-for-sale, as well as derivative financial instruments, are recognized in the consolidated statement of financial position at their fair value. Fair value is generally based on quoted market prices or quotations for assets or liabilities with similar characteristics. Should market prices not be available, fair values are based on dealer quotations, pricing models, discounted cash flows or similar techniques for which the determination of fair value may require judgment or significant estimates by Management.

 

Quoted market prices are used to determine the fair value of derivative financial instruments. The fair value of swaps is determined by using discounted cash flow modeling techniques that use yield curves, reflecting adequate risk factors. The information to build yield curves is mainly obtained from the Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the domestic and international secondary market. These yield curves are used to determine the fair value of currency swaps, interest rate and other risk factor swaps. The fair value of forward and futures contracts is also determined based on market price quotations for derivatives traded at the stock exchange or using methodologies similar to those outlined for swaps. The fair values of credit derivative instruments are determined based on market price quotation or from specialized entities. The fair value of options is determined based on mathematical models, such as Black & Scholes, using yield curves, implied volatilities and the fair value of corresponding assets. Current market prices are used to calculate volatility.

 

Derivative financial instruments in Brazil mainly refer to swaps and futures and are registered at the OTC Clearing House (Cetip) and BM&FBOVESPA.

 

Operations involving forward contracts of interest rates, indexes and currencies are contracted by Management to hedge Bradesco’s overall exposures and to meet customer needs.

 

Foreign derivative financial instruments refer to swap, forward, options, credit and futures operations and are mainly carried out at the stock exchanges in Chicago and New York, as well as the over-the-counter (OTC) markets.

 

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I)    Amount of derivative financial instruments recorded in balance sheet and off-balance-sheet accounts

 

 

Derivatives include operations maturing in D+1.

 

(1)  Includes cash flow hedges to protect CDI-related funding, totaling R$ 21,107,308 thousand (Note 6g); and

(2)  Includes specific hedges to protect foreign investments totaling R$ 37,598,682 thousand.

 

To obtain greater payment assurance for operations with financial institutions and customers, Bradesco established compensation and settlement agreements for liabilities within the National Financial System, in accordance with CMN Resolution n^o 3263/05.

 

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II)   Breakdown of derivative financial instruments (assets and liabilities) shown at original amortized cost and fair value

 

 

III) Futures, options, forward and swap contracts - (Notional)

 

 

IV) Types of margin offered in guarantee of derivative financial instruments, mainly futures contracts

 

 

V)  Revenues and expenses, net

 

 

 

28            December 2014

VI) Total value of derivative financial instruments, by trading location and counterparties

 

 

(1)    Comprised of operations carried out on the Chicago and New York Stock Exchanges and over-the-counter markets.

 

As of December 31, 2014, a total of 92.7% of counterparties are corporate entities and 7.3% are financial institutions.

f)    Credit Default Swaps (CDS)

In general, these represent bilateral agreements in which one of the parties purchases protection against the credit risk of a certain financial instrument (the risk is transferred). The selling counterparty receives remuneration that is usually paid linearly over the term of the agreement.

 

In the case of a default, the purchasing counterparty will receive a payment to offset the loss incurred on the financial instrument. In this case, the selling counterparty usually receives the underlying asset of the agreement in exchange for the payment.

 

On December 31, 2014, Bradesco had credit default swaps (CDS) with the following characteristics: (i) the amount of risk transferred under credit swaps whose underlying assets are “Brazilian government securities” is R$ (1,326,900) thousand; and (ii) the risk received in credit swaps whose underlying assets are “derivative with companies” is R$ 13,281 thousand, amounting to a total net credit risk value of R$ (1,313,619) thousand, with an effect on the calculation of required shareholders’ equity of R$ (71,519) thousand.

 

Bradesco carries out operations involving credit derivatives to better manage its risk exposure and its assets. The contracts related to credit derivatives transactions described above are due in 2019. The mark-to-market of the protection rates that remunerates the counterparty that received the risk totaled R$ (4,434) thousand. There were no credit events, as defined in the agreements, during the year.

 

g)   Cash flow hedge

Bradesco uses cash flow hedges to protect its cash flows from payment of interest rates on funds, which have a floating interest rate - the Interbank Deposit Rate (DI Cetip), thus converting them to fixed cash flows.

Bradesco has traded DI Future contracts at BM&FBOVESPA since 2009, using them as cash flow hedges for funding linked to DI. The following table presents the DI Future position, where:

 

(1)  The adjustment in shareholders’ equity is R$ 187,010 thousand, net of taxes.

 

The effectiveness of the hedge portfolio was assessed in accordance with Bacen Circular Letter n^o 3082/02.

 

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h)   Income from securities, insurance, pension plans and capitalization bonds and derivative financial instruments

 

7)   INTERBANK ACCOUNTS - RESERVE REQUIREMENT

a)   Reserve requirement

 

(1)  For further information regarding new rules on reserve requirement, see Note 33c.

 

b)   Revenue from reserve requirement

 

 

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8)   LOANS

Information relating to loans, including advances on foreign exchange contracts, leasing and other receivables with credit characteristics is shown below:

a)   By type and maturity

 

 

Bradesco     31          

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(1)  Including credit card loans and advances on credit card receivables of R$ 17,422,034 thousand;

(2)  Advances on foreign exchange contracts are classified as a deduction from “Other Liabilities”;

(3)  The item “Other Receivables” comprises receivables on sureties and guarantees honored, receivables on sale of assets, securities and credits receivable, income receivable from foreign exchange contracts and export contracts and credit card receivables (cash and installment purchases at merchants) totaling R$ 19,594,184 thousand;

(4)  Recorded in off-balance sheet accounts; and

(5)  Percentage of each type in relation to the total loan portfolio, including sureties and guarantee, loan assignment and acquisition of receivables.

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b)   By type and levels of risk

 

(1)  Percentage of each type in relation to the total loan portfolio, excluding sureties and guarantees, loan assignments, acquisition of receivables and co-obligation in rural loan assignments; and

(2)  See Note 9a.

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c)   Maturity ranges and levels of risk

 

(1)  Percentage of maturities by type of installment; and

(2)  For transactions with terms of more than 36 months, past-due periods are doubled, as permitted by CMN Resolution n^o 2682/99.

 

Bradesco     35          

                                                                                                                                                                                                                                               

(1)  Percentage of maturities by type of installment;

(2)  The grand total includes performing loans of R$ 324,003,756 thousand  and non-performing loans of R$ 22,435,590 thousand; and

(3)  On December 31, 2014, it includes provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which was identified within the excess provision, and totals R$ 421,596 thousand (Note 19b).

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d)   Concentration of loans

 

(1)  Percentage on total portfolio (as defined by Bacen).

 

e)   By economic sector

 

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f)    Breakdown of loans and allowance for loan losses

 

(1)  Percentage of level of risk in relation to the total portfolio; and

(2)  Cumulative percentage of level of risk on total portfolio.

 

 

38            December 2014

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(1)  Percentage of existing provision in relation to total portfolio, by level of risk; and

(2)  On December 31, 2014, it includes provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which was separated from the excess provision, and totals R$ 421,596 thousand (Note 19b).

 

 

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g)   Changes in allowance for loan losses

 

 

(1)  For contracts with installments past due for more than 14 days;

(2)  Recorded based on the customer/transaction classification and therefore not included in the preceding item;

(3)  The additional provision is recorded based on Management’s experience and the expectation in relation to the loan portfolio, to determine the total provision deemed sufficient to cover specific and general credit risk, when considered together with the provision calculated based on levels of risk and the corresponding minimum percentage in the provision established by CMN Resolution n^o 2682/99. The excess provision per customer was classified according to the level of risk in Note (Note 8f); and

(4)  On December 31, 2014, it includes provision for collateral, comprising sureties, guarantees, letters of credit and standby letter of credit, which was recorded in a separate account from the excess provision, totaling R$ 421,596 thousand (Note 19b).

 

h)   Allowance for Loan Losses (ALL) expense net of amounts recovered

 

Expenses with the allowance for loan losses, net of credit write offs recovered, are as follows.

 

 

(1)  includes provision for guarantees provided, comprising sureties, guarantees, letters of credit and standby letter of credit, which are included in the “excess” ALL concept, totaling R$ 83,973 thousand; and

(2)  Classified in income from loans (Note 8j).

 

i)    Changes in the renegotiated portfolio

 

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j)    Income from loans and leasing

 

k)   Composition of leasing portfolio, present value, with accounting balances (Note 3g e 8b):

 

9)   OTHER RECEIVABLES

 

a)   Foreign exchange portfolio

 

Balances

 

 

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Foreign exchange results

 

Adjusted foreign exchange results for presentation purposes

 

 

(1)    Recognized in “Income from loans”;

(2)    Recognized in “Income from security transactions”;

(3)    Related to funds for financing of advances on foreign exchange contracts and import financing, recognized in “Borrowing and on-lending expenses”; and

(4)    Refers to funding expenses of investments in foreign exchange.

 

b)   Sundry

 

 

(1)  Primarily includes receivables from the acquisition of financial assets from loans without substantial transfer of risks and benefits.

 

 

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10)    OTHER ASSETS

a)   Foreclosed assets/other

 

b)   Prepaid expenses

 

(1)  Commissions paid to brokers and representatives on sale of insurance, pension plans and capitalization bond products;

(2)  Prepaid expenses of future advertising and marketing campaigns on media; and

(3)  Mainly related to card issue costs.

 

 

 

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11)    INVESTMENTS

a)   The adjustments resulting from the assessment of equity method investments were recorded in the income statement, under “Equity in the Earnings (Losses) of Unconsolidated Companies”, correspond to R$ 9,202,443 thousand in the year 2014, and the investments under the caption "Equity in Subsidiaries and Affiliates", correspond to R$ 33,927,450 thousand on December 31, 2014.

 

 

(1)   Data for December 31, 2014;

(2)   The adjustment considers income calculated periodically by the companies and includes equity variations by the investees not recognized in profit or loss, as well as alignment of accounting practice adjustments, where applicable; and

(3)   Basically, refers to investments in the following entities: Serel Participações em Imóveis S.A., Bankpar Consultoria e Serviços Ltda., Caetê Holdings Ltda., Ganant Corretora de Seguros Ltda., Miramar Holdings S.A., Neon Holdings S.A. and Imagra Imobiliária e Agrícola Ltda.

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b)      Composition of investments in the consolidated financial statements

 

 

12)    PREMISES, EQUIPMENT AND LEASING

 

The Bradesco Organization’s premises and equipment have an unrecorded surplus of R$ 559,746 thousand. This is due to an increase in their market price, based on valuations by independent experts in 2014, 2013 and 2012.

 

The consolidated finance fixed assets to net worth ratio is 47.2%, whereas the maximum limit is 50%.

 

In the year 2014 contains impairment charges under “Premises and equipment” totaling R$ 802 thousand, basically, in “Facilities, furniture and equipment in use”

 

13)    DEFERED ASSETS

 

 

Bradesco     45          

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14)    INTANGIBLE ASSETS

 

a)   Intangible assets

Acquired intangible assets consist of:

 

 

(1)  Intangible assets are amortized over an estimated period of economic benefit and recognized in “other administrative expenses” and “other operating expenses”, where applicable;

(2)  Software acquired and/or developed by specialized companies;

(3)  Mainly composed of goodwill on the acquisition of equity interest in Banco Bradescard (currently Banco Ibi) - R$ 770,055 thousand, Cielo/Investidas – R$ 567,217 thousand l e Banco Bradesco BBI S.A. – R$ 161,652 thousand;

(4)  Based on the pay-back of each agreement; and

(5)  Mainly refers to the 2016 Olympic Games sponsorship program.

 

b)   Changes in intangible assets by type

 

 

(1)  In 2014, contains impairment charges under “Intangible assets” totaling R$ 84,806 thousand.

 

15)    DEPOSITS, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FUNDS FROM ISSUANCE OF SECURITIES

 

a)   Deposits

 

 

(1)  Classified as “1 to 30 days”, not considering average historical turnover; and

(2)  Considers the actual maturities of investments.

 

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b)   Securities sold under agreements to repurchase

 

 

(1)   Represented by government securities.

 

c)   Funds from issuance of securities

 

(1)   Issuance of securities on the international market to invest in foreign exchange transactions, pre-export financing, import financing and working capital financing, predominately in the medium and long terms.

 

d)   Since 2003, Bradesco has used certain agreements to optimize its funding and liquidity management activities by using an SPE - Special Purpose Entity. This SPE, known as International Diversified Payment Rights Company, is financed with long-term debt and settled through future cash flows from underlying assets which basically include flows from current payment orders and future remittances made by individuals and companies located overseas to beneficiaries in Brazil for which the Bank acts as a paying agent.

Long-term securities issued by the SPE and sold to investors are settled with proceeds from the payment order flows. Bradesco is obliged to redeem these securities in specific cases of delinquency or if the SPE discontinues operations.

Funds from the sale of current and future payment order flows, received by the SPE, must be maintained in a specific bank account until a minimum amount has been reached.

 

Bradesco     47          

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Below are the main features of the notes issued by the SPE:

 

e)     Cost for market funding and inflation

 

16)    BORROWING AND ON-LENDING

a)   Borrowing

 

 

b)   On-lending

 

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c)   Borrowing and on-lending expenses

 

 

17)     PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL LIABILITIES - TAX AND SOCIAL SECURITY

a)   Contingent assets

Contingent assets are not recognized in the financial statements. However, there are ongoing proceedings where the chance of success is considered probable, such as: a) Social Integration Program (PIS), claiming to offset PIS against Gross Operating Income, paid under Decree-Laws n^o 2445/88 and n^o 2449/88, regarding the payment that exceeded the amount due under Supplementary Law n^o 07/70 (PIS Repique); and b) other taxes, the legality and/or constitutionality of which is being challenged, where the decision may lead to reimbursement of amounts paid.

 

b)   Provisions classified as probable losses and legal obligations - tax and social security

Bradesco Organization is a party to a number of labor, civil and tax lawsuits, arising from the normal course of business.

 

Management recorded provisions based on their opinion and that of their legal counsel, the nature of the lawsuit, similarity to previous lawsuits, complexity and the courts standing, where the loss is deemed probable.

 

Management considers that the provision is sufficient to cover losses generated by the respective lawsuits.

 

Liability related to litigation is held until the conclusion to the lawsuit, represented by judicial decisions, with no further appeals or due to the statute of limitation.

               I -   Labor claims

These are claims brought by former employees and outsourced employees seeking indemnifications, most significantly for unpaid overtime, pursuant to Article 224 of the Consolidation of Labor Laws (CLT). In proceedings in which a judicial deposit is used to guarantee the execution of the judgment, the labor provision is made considering the estimated loss of these deposits. For proceedings with similar characteristics, the provision is recorded based on the average calculated value of payments made for labor complaints settled in the past 12 months; and for proceedings originating from acquired banks, with unique characteristics, the calculation and assessment of the required balance is conducted periodically, based on the updated recent loss history.

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Overtime is monitored by using electronic time cards and paid regularly during the employment contract and, accordingly, the claims filed by former employees do not represent significant amounts.

 

              II -   Civil claims

These are claims for pain and suffering and property damages, mainly relating to protests, returned checks, the inclusion of information about debtors in the credit restriction registry and the replacement of inflation adjustments excluded as a result of government economic plans. These lawsuits are individually controlled using a computer-based system and provisioned whenever the loss is deemed as probable, considering the opinion of Management and their legal counsel, the nature of the lawsuits, and similarity with previous lawsuits, complexity and positioning of the courts.

 

Most of these lawsuits are brought to the Special Civil Court (JEC), in which the claims are limited to 40 times the minimum wage and do not cause significant impact on Bradesco Organization’s financial position.

 

It is worth mentioning the significant number of legal claims pleading alleged differences in adjustment for inflation on savings account balances is due to the implementation of economic plans that were part of the federal government’s economic policy to reduce inflation in the ‘80s and ‘90s.

 

Although Bradesco complied with the law and regulation in force at the time, these lawsuits have been recorded in provisions, taking into consideration the claims where the Bank is the defendant and the perspective of loss, which is considered after the analysis of each demand, based on the current decision of the Superior Court of Justice (STJ).

 

Note that, regarding disputes relating to economic plans, the Federal Supreme Court (STF) suspended the prosecution of all lawsuits on cognizance stage, until the Court issues a final decision on the right under litigation.

 

             III -   Legal obligations - provision for tax risks

The Bradesco Organization is disputing the legality and constitutionality of certain taxes and contributions in court, for which provisions have been recorded in full, although there is good chance of a favorable outcome, based on the opinion of Management and their legal counsel. The processing of these legal obligations and the provisions for cases for which the risk of loss is deemed as probable is regularly monitored in the legal court. During or after the conclusion of each case, a favorable outcome may arise for the Organization, resulting in the reversal of the related provisions.

 

The main cases are:

-        PIS and COFINS – R$ 1,792,621 thousand: a request for authorization to calculate and pay PIS and COFINS based on effective billing, as set forth in Article 2 of Supplementary Law n^o 70/91, removing from the calculation base the unconstitutional inclusion of other revenues other than those billed;

-        IRPJ/Credit Losses – R$ 2,059,542 thousand: we are requesting to deduct from income tax and social contributions payable (IRPJ and CSLL, respectively) amounts of actual and definite loan losses related to unconditional discounts granted during collections, regardless if they comply with the terms and conditions provided for in Articles 9 to 14 of Law n^o 9430/96 that only apply to temporary losses;

-        PIS – EC 17/97 - R$ 321,748 thousand: for the period from July 1997 to February 1998, request to calculate and pay PIS contributions as established by LC 07/70 (PIS Repique) and not as established by EC 17/97 (PIS on Gross Operating Income); and

 

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-        PIS – R$ 320,067 thousand: we are requesting the authorization to offset overpaid amounts in 1994 and 1995 as PIS contribution, corresponding to the surplus paid over that calculated on the tax base established in the Constitution, i.e., gross operating income, as defined in the income tax legislation – (set out in Article 44 of Law no 4506/64), which excludes interest income

            IV -   Provisions by nature

 

(1)  Note 19b; and

(2)  Classified under “Other liabilities - tax and social security” (Note 19a).

 

              V -   Changes in provisions

 

(1)  Mainly include legal liabilities.

 

c)   Contingent liabilities classified as possible losses

The Bradesco Organization maintains a system to monitor all administrative and judicial proceedings in which the institution is plaintiff or defendant and, based on the opinion of legal counsel, classifies the lawsuits according to the expectation of loss. Case law trends are periodically analyzed and, if necessary, the related risk is reclassified. In this respect, contingent lawsuits deemed to have a possible risk of loss are not recorded as a liability in the financial statements. The main proceedings in this category are the following: a) leasing companies’ Tax on Services of any Nature (ISSQN), total lawsuits correspond to R$ 1,840,272 thousand which relates to the municipal tax demands from municipalities other than those in which the company is located and where, under law, tax is collected; b) 2006-2010 income tax and social contribution, relating to goodwill amortization being disallowed on the acquisition of investments, for the amount of R$ 991,924 thousand; c) IRPJ and CSLL deficiency notice relating to the disallowance of loan loss deductions, for the amount of R$ 1,034,018 thousand; d) IRPJ and CSLL deficiency note relating to disallowance of expense and exclusions on revenues from the mark-to-market of securities from 2007 to 2010, revenues differences in depreciation expenses depreciation of leased assets and operating expenses and income, amounting to R$ 1,226,665 thousand; and e) IRPJ, CSLL, PIS and COFINS deficiency note, amounting to R$ 348,129 thousand, on alleged tax-exempt gain, when BOVESPA shares were merged into Nova Bolsa (BM&FBOVESPA), in 2008.

 

 

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18)    SUBORDINATED DEBT

 

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19)    OTHER LIABILITIES

a)   Tax and social security

 

 

b)   Sundry

 

 

(1)  On December 31, 2014, it includes provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which was identified within the excess provision, and totaling R$ 421,596 thousand (Note 8g).

 

 

 

20)    NON-CONTROLLING INTERESTS IN SUBSIDIARIES

 

 

21)    SHAREHOLDERS’ EQUITY (PARENT COMPANY)

 

a)   Capital stock in number of shares

 

Fully subscribed and paid-in capital stock comprises non-par, registered, book-entry shares.

 

 

b)    Changes in capital stock in number of shares

 

 

c)    Interest on shareholders’ equity/dividends

 

Preferred shares have no voting rights, but are entitled to all other rights and advantages given to common shares and, in compliance with Bradesco’s Bylaws, have priority for repayment of capital and an additional ten percent (10%) interest on shareholders’ equity and/or dividends, in accordance with the provisions of Paragraph 1, item II, of Article 17 of Law n^o 6404/76, amended by Law n^o 10303/01.

 

According to Bradesco’s Bylaws, shareholders are entitled to interest on shareholders’ equity and/or dividends amounting to at least 30% of the net income for the year, adjusted in accordance with Brazilian Corporate Law.

 

Interest on shareholders’ equity is calculated based on the shareholders’ equity limited to the variation in the Federal Government Long-Term Interest Rates (TJLP), subject to available profits before deductions, or transfer to retained earnings or profit reserves for the amounts equivalent or greater than twice its value.

 

Bradesco’s capital remuneration policy aims to distribute interest on shareholders’ equity at the maximum amount calculated under current legislation, and this is included, net of Withholding Income Tax, in the calculation for mandatory dividends for the year under the Company’s Bylaws.

 

The Board of Directors’ Meeting held on June 24, 2014 approved the Board of Executive Officers’ proposal to pay shareholders’ supplementary interest on shareholders’ equity and dividends for the first half-year of 2014, totaling R$ 829,000 thousand, at R$ 0,188201395 per common share and R$ 0,207021535 per preferred share, which was paid on July 18, 2014.

 

The Board of Directors’ Meeting held on December 22, 2014 approved the Board of Executive Officers’ proposal to pay shareholders supplementary interest on shareholders’ equity for 2014, for the amount of R$ 2,600,300 thousand, at R$ 0,590325800 (net of 15% withholding income tax - R$ 0,501776930) per common share and R$ 0,649358380 (net of 15% withholding income tax - R$ 0,551954623) per preferred share, which was paid on March 6, 2015.

 

54                 December 2014

 

Interest on shareholders’ equity and dividends for the year ending December 31, 2014 is calculated as follows:

 

 

(1)  Percentage of interest on shareholders’ equity/dividends after adjustments.

 

Interest on shareholders’ equity was paid or recorded in provisions, as follows:

 

 

(1)  Paid on March 6, 2015; and

(2)  Paid on July 18, 2014.

 

d)    Treasury shares

 

The Board of Directors’ Meeting held on June 25, 2013 resolved to renew the term for the share buy-back program based on the previous conditions, which remained in force until June 26, 2014, The Board of Directors’ Meeting held on June 24, 2014 resolved to renew the term for the share buy-back program, based on the previous conditions, It is valid until June 26, 2015.

 

A total of 2,898,610 common shares and 8,984,870 preferred shares had been acquired, totaling R$ 298,015 thousand until December 31, 2014, and remain in treasury, The minimum, average and maximum cost per common share is R$ 23,62221, R$ 25,41203 and R$ 27,14350, and per preferred share is R$ 25,23185, R$ 27,16272 and R$ 33,12855, respectively, The fair value was R$ 34,32 per common share and R$ 35,06 per preferred share on December 31, 2014.

 

 

Bradesco     55          

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22)    FEE AND COMMISSION INCOME

 

 

23)    PAYROLL AND RELATED BENEFITS

 

24)    OTHER ADMINISTRATIVE EXPENSES

 

 

 

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25)    TAX EXPENSES

 

 

26)    OTHER OPERATING INCOME

 

27)    OTHER OPERATING EXPENSES

 

28)    NON-OPERATING INCOME (LOSS)

 

 

 

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29)    RELATED-PARTY TRANSACTIONS (DIRECT AND INDIRECT)

a)      Related party transactions (direct and indirect) are carried out under conditions and at rates consistent with those entered into with third parties, when applicable, and effective on the dates of the operations, The transactions are as follows:

 

b)   Compensation for Key Management Personnel ⁽¹⁾

                                                                                                     

Each year, the Annual Shareholders’ Meeting approves:

 

·       The annual grand total amount of management compensation, set forth at the Board of Directors Meetings, to be paid to board members and members of the Board of Executive Officers, as determined by the Company’s Bylaws; and

 

·       The amount allocated to finance Management pension plans, within the Employee and Management pension plan of the Bradesco Organization.

 

For 2014, the maximum amount of R$ 355,100 thousand was set for Management compensation and R$ 354,600 thousand to finance defined contribution pension plans.

 

The current policy on Management compensation sets forth that 50% of net variable compensation, if any, must be allocated to the acquisition of preferred shares of Banco Bradesco S.A., which vest in three equal, annual and successive installments, the first of which is in the year following the payment date, This procedure complies with CMN Resolution n^o 3921/10, which sets forth a management compensation policy for financial institutions.

 

Short-term Management benefits

 

 

Post-employment benefits

 

 

(1)  Considers all the key personnel of the Administration, regardless of the companies members of prudential consolidated.

 

Bradesco does not offer its Key Management Personnel long-term benefits related to severance pay or share-based compensation, pursuant to CPC 10 – Share-Based Payment, approved by CMN Resolution n^o 3989/11.

 

 

Bradesco     59          

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Other information

 

I)    Under current law, financial institutions are not allowed to grant loans or advances to:

 

a)   Officers and members of the advisory, administrative, fiscal or similar councils, as well as to their respective spouses and family members up to the second degree;

 

b)   Individuals or corporations that own more than 10% of their capital; and

 

c)   Corporations in which the financial institution itself, any officers or administrators of the institution, as well as their spouses and respective family members up to the second degree own more than 10% of equity.

Therefore, no loans or advances are granted by financial institutions to any subsidiary, members of the Board of Directors or Board of Executive Officers and their relatives.

 

II)   Shareholding

 

Together, members of the Board of Directors and Board of Executive Officers had the following shareholding in Bradesco:

 

 

(1)  On December 31, 2014, direct and indirect shareholding of the members of Bradesco’s Board of Directors and Board of Executive Officers amounted to 2,98% of common shares, 1,08% of preferred shares and 2,03% of all shares; and

(2)  Considers all the key personnel of the Administration, regardless of the companies members of prudential consolidated.

 

30)    FINANCIAL INSTRUMENTS

 

a)      Risk Management

Risk management is highly strategic due to the increasing complexity of services and products and the globalization of the Organization’s business, The dynamic markets lead Bradesco to an ongoing improvement of this activity in the pursuit of best practices, For that reason, Bradesco was authorized by Bacen to use its internal market risk models, which were already in force, to calculate regulatory capital as of January 2013.

 

The Organization controls risk management in an integrated and independent manner, preserving and valuing the Board's decisions, developing and implementing methodologies, models, and measurement and control tools. It also provides training to employees from all Organization levels, from the business areas to the Board of Directors.

 

The management process allows the risks to be proactively identified, measured, mitigated, monitored and reported, which is necessary in view of the Organization’s complex financial products and activity profile.

 

Credit risk management

 

Credit risk refers to the possibility of losses as a result of the non-compliance by the borrower or counterparty with their financial obligations under agreed terms, as well as to the reduction in the value of a loan agreement resulting from a deterioration of the borrower’s risk rating, reduced earnings or remuneration, the advantageous terms / conditions given in a renegotiation, recovery costs and other values related to the counterparty’s non-compliance with its financial obligations.

 

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

 

 

60                 December 2014

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The Organization controls its exposure to credit risk, which mainly results from loans, securities and derivative financial instruments, Credit risk also stems from financial obligations related to credit commitments or financial guarantees.

 

In order not to compromise the quality of the portfolio, it includes all aspects related to the lending process, concentration, guarantee requirement, terms, among others.

 

The Organization continuously maps all activities that can generate exposure to credit risk, with their respective ratings related to probability and magnitude, as well as the identification of their managers, measurement and mitigation plans.

Market risk management

 

Market risk is represented by the possibility of financial losses due to fluctuating prices and interest rates of the Organization’s financial instruments as its asset and liability portfolios may have mismatched maturities, currencies and indexes.

 

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

 

All transactions exposing the Organization to market risk are mapped, measured and classified by probability and importance, and the whole process is approved by the corporate governance structure.

 

The process of market risk management is performed at the corporate level. This process involves several areas, with specific assignments, ensuring an efficient structure, with the measurement and control of market risk being performed centrally and independently, The management process, approved by the Board of Directors, is reviewed at least annually by the Committees and by the Board of Directors.

 

In line with the Corporate Governance practices, aiming to preserve and strengthen the management of market and liquidity risks in the Organization, and to meet the provisions of CMN Resolution n^o 3464/07, the Board of Directors approved the Market and Liquidity Risk Management Policy, whose review is performed at least annually by the competent Committees and by the Board of Directors, providing the main guidelines for acceptance, control and management of market and liquidity risks, In addition to this policy, the Organization has specific rules to regulate the market and liquidity risk management process.

 

 

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Below is the statement of financial position by currency

 

(1)  Amounts originally recorded and/or indexed mainly in USD;

(2)  Excluding operations maturing in D+1, to be settled at the rate on the last day of the month; and

(3)  Other commitments recorded in off-balance-sheet accounts.

 

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Liquidity Risk

 

Liquidity Risk is 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.

 

It is crucial to measure and monitor this risk, so that the Organization can settle its obligations in a timely and reliable way.

 

The process of liquidity risk management is performed at the corporate level, It involves several areas with specific assignments, ensuring an efficient structure, Liquidity risk is measured and controlled centrally and independently and includes the daily monitoring of the composition of available funds, compliance with the minimum liquidity level, and the contingency plan for stress situations.

 

One of the objectives of the Organization’s Policy on Market and Liquidity Risk Management, approved by the Board of Directors, is to lay down the rules, criteria and procedures that guarantee the establishment of the Minimum Liquidity Reserve (RML) for the Organization, as well as the strategy and action plans for liquidity crisis situations.

 

As part of the criteria and procedures approved, the Organization establishes a minimum liquidity reserve to be held and the types of assets eligible for this reserve, Moreover, instruments for managing liquidity in a normal scenario and in a crisis scenario and the strategies to be implemented in each case are established.

 

 

 

 

Bradesco     63          

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The statement of financial position by maturity is as follows

 

 

 

(1)  Investments in investment funds are classified as 1 to 30 days;

(2)  Repurchase agreements are classified according to the maturity of the transactions; and

(3)  Demand and savings deposits are classified as 1 to 30 days, without considering average historical turnover.       

 

64                 December 2014 

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Operational Risk

Operational risk is the possibility of losses resulting from failure, deficiency or inadequacy of internal processes, people and systems, or from external events. This definition includes legal risk associated with the activities undertaken by the Organization.

 

The process of operational risk management is performed at the corporate level. This process involves several areas, with specific assignments, ensuring an efficient structure, with the measurement and control of operational risk being performed centrally and independently.

 

Among the plans to mitigate operational risk, we highlight that the most important is business continuity management, which consists of formal plans to be adopted during moments of crisis to guarantee the recovery and continuation of business as well as preventing loss.

 

Internal Controls

 

The existence, effectiveness and implementation of controls that ensure acceptable risk levels in the Organization's processes are certified, and the results are reported to the Audit Committee and to the Compliance and Internal Controls Committee, as well as to the Board of Directors, aiming to provide assurance regarding the proper conduct of business and the achievement of the established goals, in accordance with applicable external laws and regulations, policies, internal rules and procedures, codes of conduct and self-regulation.

 

The effectiveness of the Organization’s internal controls is supported by trained professionals, well-defined and implemented processes, and technology compatible with the business needs.

 

The Compliance and Internal Controls Policy and the Internal Control System Standards are aligned with the main control frameworks, such as COSO - Committee of Sponsoring Organizations of the Treadway Commission and COBIT - Control Objectives for Information and Related Technology, which cover aspects related to Business and Information Technology, respectively.

 

Below is the Capital Adequacy Ratio:

 

 

(1)  Pursuant to CMN Resolution n^o 4192/13.

 

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b)   Capital Management

 

The primary objective Capital Management structure is to providing the necessary conditions for a continuous process of capital assessment, monitoring and control, contributing to the achievement of the Organization’s strategic objectives, The following are considered: the business environment and a prospective and consistent vision for capital adequacy planning, This structure is composed of the Statutory, Non-Statutory and Executive Committees that assist the Board of Directors and the Board of Executive Officers in decision making.

 

The process of assessing capital adequacy is carried out so as to ensure that the Organization has a solid Reference Equity base to support the development of activities and cope with risks, whether in normal or in extreme market conditions, as well as meeting managerial and regulatory requirements in capital management.

 

31)    EMPLOYEE BENEFITS

Bradesco and its subsidiaries sponsor an Unrestricted Benefit Pension Plan (PGBL) for employees and directors, PGBL is a private defined contribution pension plan that allows financial resources to be accumulated by participants throughout their careers by means of employee and employer contributions and invested in an Exclusive Investment Fund (FIE).

 

The PGBL scheme is managed by Bradesco Vida e Previdência S.A. and BRAM – Bradesco Asset Management S.A. The Securities Dealer Company (DTVM) is responsible for the financial management of the FIE funds.

 

The PGBL Supplementary Pension Plan was reformulated in October 2014, with contributions from employees and directors of Bradesco and its subsidiaries equal to at least 4% of their salaries, Contributions from Bradesco and its subsidiaries increased from 4% to 5% of salary, plus the percentage destined for death and disability coverages, The contributions concerning participants who in 2001 chose to migrate from the benefit plan defined for PGBL were maintained at the same levels of the previous benefit plan.

 

Actuarial obligations of the defined contribution plan (PGBL) are fully covered by the plan assets of the corresponding FIE.

 

In addition to the aforementioned plan (PGBL), participants who chose to migrate from the defined benefit plan are guaranteed a proportional deferred benefit, corresponding to their accumulated rights in the plan, For participants of the defined benefit plan (retirees and pensioners), whether they migrated to the PGBL plan or not, the present value of the actuarial plan obligation is fully covered by the plan assets.

 

Banco Alvorada S.A. (successor from the spin-off of Banco Baneb S.A.) maintains defined contribution and defined benefit retirement plans, through Fundação Baneb de Seguridade Social - Bases (related to the former employees of Baneb).

 

Banco Bradesco BBI S.A. (formerly Banco BEM S.A.) sponsors both defined benefit and defined contribution retirement plans, through Caixa de Assistência e Aposentadoria dos Funcionários do Banco do Estado do Maranhão (Capof).

 

Bradesco sponsors a defined benefit plan through Caixa de Previdência Privada do Banco do Estado do Ceará (Cabec), exclusively to former employees of Banco BEC S.A.

 

In accordance with CPC 33 (R1) – Employee Benefit, as approved by CVM Resolution n^o 600/09, Bradesco and its subsidiaries, as sponsors of these plans, taking into consideration the economic and actuarial study, calculated their actuarial commitments using a real interest rate and recognizing their obligations in the financial statements.

 

The assets of pension plans are invested in compliance with the applicable legislation (government securities and private securities, listed company shares and real estate properties).

 

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Below are the main premises adopted by the independent actuary in the actuarial evaluation of our plans, based on CPC 33 (R1):

 

 

Based on the assumptions above and according to CPC 33 (R1), the present value of actuarial liabilities of the benefit plans and its assets to cover these obligations, on December 31, 2014, represented: (i) R$ 1,070,636 thousand for the plan’s net assets; (ii) R$ 1,182,761 thousand in actuarial liabilities; and (iii) deficiency amounting to R$ 112,125 thousand.

 

The table below, is a sensitivity analysis of the obligation of the benefit plans, and demonstrates the impact on the actuarial exposure due to the change of the discount rate premise (11,74% p,a,) by 1 percentage -point:

 

 

At its overseas units, Bradesco provides its employees and administrators with pension plans that allows financial resources to be accumulated throughout the participant’s career, in compliance with local regulations.

 

Expenses related to contributions made in the year ended December 31, 2014 totaled R$ 622,807 thousand.

 

In addition to this benefit, Bradesco and its subsidiaries offer other benefits to their employees and administrators, including: health insurance, dental care, life and personal accident insurance, and professional training, These expenses, including the aforementioned contributions, totaled R$ 3,063,655 thousand in the year ended December 31, 2014.

 

32)    INCOME TAX AND SOCIAL CONTRIBUTION

 

a)   Calculation of income tax and social contribution charges

 

(1)  The social contribution rate for companies of the financial and insurance sectors was increased to 15%, in accordance with Law n^o 11727/08, remaining at 9% for other companies (Note 3h); and

(2)  Includes, primarily, the exchange variation of overseas investments and tax incentives.

 

 

Bradesco     67

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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