Bradesco(BBD) - 2023 Q4 - Annual Report

PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS This section is not applicable ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE This section is not applicable ITEM 3. KEY INFORMATION This section outlines key risks related to the company's operations, shares, ADSs, and the Brazilian macroeconomic environment Risk Factors This section details material risks affecting the company's activities, shares, and ADSs, categorized by Brazilian conditions, banking industry specifics, and securities - Key risks related to Brazil include government influence on the economy, high inflation, changes in the SELIC base interest rate, low economic growth, and geopolitical developments[12][46] - Risks related to the company and the banking industry include potential increases in past-due loans, counterparty risk, challenges in realizing collateral value, potential goodwill impairment, and the impact of credit rating downgrades[13] - Operational and regulatory risks include failures in technological infrastructure, loss of senior management, adverse legal proceedings, non-compliance with data protection laws like LGPD, and the highly competitive environment from traditional banks and fintechs[16][19] - Risks for shareholders and ADS holders involve limited voting rights for preferred shares, volatility of the Brazilian securities market, potential non-payment of dividends, and difficulties in exercising preemptive rights[24] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Banco Bradesco, covering its history, structure, assets, and business strategy across banking and insurance segments History and Development of the Company Founded in 1943, Banco Bradesco has expanded its financial services, acquiring Banco Digio, forming Tivio Capital, and investing in healthcare - In February 2022, Bradesco completed the acquisition of the remaining 49.99% of Banco Digio for R$645 million, making it a wholly-owned subsidiary to strengthen its digital presence[117] - In February 2023, Bradesco completed the formation of Tivio Capital, an independent asset manager, in partnership with Banco Votorantim S.A., with Bradesco holding a 51% stake[118] - The company is expanding into the healthcare sector through its subsidiary Atlântica, with agreements to acquire a 20% stake in Hospital Santa Lucia S.A. and to develop a new hospital in São Paulo in partnership with Hospital Mater Dei S.A[119][120] Business Overview The company's business strategy, centered on clients, digital transformation, people, and sustainability, drives its banking and insurance segments - The company's business strategy is founded on four pillars: Clients, Digital Transformation, People, and Sustainability[123] - Bradesco is advancing the integration of physical and digital channels, adopting a "phygital" approach to serve clients seamlessly[126] - The company has committed to allocating R$250 billion to assets and sectors with positive social and environmental benefits by 2025, having already directed R$227.0 billion (90.8% of the target) by year-end 2023[131] - The company operates a corporate innovation ecosystem, inovabra, which includes R&D, open innovation with startups, a collaborative lab, and a corporate venture fund to drive technological advancement[202] Organizational Structure Banco Bradesco S.A. is controlled by Cidade de Deus Participações, owned by the Aguiar Family, Fundação Bradesco, and Nova Cidade de Deus Participações S.A - The company is controlled by Cidade de Deus Participações, which is owned by the Aguiar Family, Fundação Bradesco, and Nova Cidade de Deus Participações S.A[444] Property, Plant and Equipment As of December 31, 2023, the company operates from 807 owned and 5,248 leased properties in Brazil, plus seven leased properties abroad - As of December 31, 2023, Bradesco owned 807 properties and leased 5,248 properties in Brazil for its operations[445] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes operating results and financial condition, considering Brazilian economic factors, segment performance, liquidity, capital resources, and capital expenditures Operating Results Operating results are influenced by Brazilian economic conditions; 2023 net income decreased by 32.4% to R$14.5 billion due to lower net interest income and higher credit losses Macroeconomic Indicators | Indicator | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Inflation (IPCA) | 4.6% | 5.8% | 10.1% | | Real Appreciation/(Depreciation) vs. USD | 7.2% | 6.5% | (7.4%) | | Period-end Exchange Rate (R$/US$1.00) | 4.8413 | 5.2177 | 5.5805 | | Average Base Interest Rates (SELIC) | 13.0% | 12.4% | 4.4% | - Net income for 2023 was R$14.5 billion, a 32.4% decrease from R$21.5 billion in 2022. This was primarily due to a 21.1% decrease in net interest income and a 14.5% increase in expected loss on loans and advances[461][476] - The banking segment's net income fell by 56.8% to R$6.0 billion in 2023, while the insurance, pension plans, and capitalization bonds segment's net income grew by 35.3% to R$8.8 billion[463] - Expected loss on loans and advances increased by 14.5% in 2023, driven by higher provisions in the wholesale segment, reflecting prevailing economic conditions[470] Liquidity and Capital Resources The company manages liquidity and capital under Basel III, with LCR at 191.6% and NSFR at 126.7% in 2023, and a total capital ratio of 15.8% - As of December 31, 2023, the Liquidity Coverage Ratio (LCR) was 191.6% and the Net Stable Funding Ratio (NSFR) was 126.7%, both in compliance with Basel III requirements[503] Capital Ratios | Capital Ratio | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Tier I Capital | 13.2% | 12.4% | 13.7% | | Common Equity | 11.7% | 11.0% | 12.5% | | Additional Capital | 1.6% | 1.5% | 1.2% | | Total Ratio | 15.8% | 14.8% | 15.8% | Capital Expenditures (R$ in thousands) | Capital Expenditures (R$ in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Infrastructure | 1,071,481 | 752,394 | 571,338 | | Information Technology | 5,223,193 | 5,992,979 | 3,470,023 | | Total | 6,294,674 | 6,745,373 | 4,041,361 | Research and Development, Patents and Licenses This section is not applicable Trend Information Future performance will be influenced by Brazilian economic conditions, regulatory changes, international turmoil, inflation, and currency/interest rate fluctuations - Future results will be influenced by the Brazilian economic environment, legal and regulatory developments, international turmoil, inflation, and currency/interest rate fluctuations[556] Critical Accounting Estimates This section is not applicable ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the composition, compensation, and practices of the Board of Directors and Executive Officers, along with employee information - The Board of Directors is composed of eleven members, four of whom are independent. The Board of Executive Officers consists of 19 members[561] - In 2023, the total compensation for Directors and the Statutory Board of Executive Officers was R$647.2 million. A portion of variable compensation is deferred and paid in restricted shares over three years[621] - As of December 31, 2023, the company had 86,222 employees, with the vast majority (85,592) located in Brazil[638][639] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section outlines the company's ownership structure, identifying major shareholders and summarizing related party transactions conducted at market rates - As of March 11, 2024, the primary controlling shareholders are Cidade de Deus Participações (23.04% total capital) and Fundação Bradesco (8.61% direct and 22.83% indirect participation)[649][652][654] - Direct market holdings accounted for 62.40% of the total share capital as of March 11, 2024[649][658] - Transactions with related parties are conducted on terms and rates consistent with those for third-party transactions[659] ITEM 8. FINANCIAL INFORMATION This section refers to IFRS financial statements, details legal proceedings, and outlines the company's dividend distribution policy - The company is a party to various legal proceedings. As of December 31, 2023, the total provisioned amount for probable losses was R$20,269 million, allocated to civil (42.4%), tax (34.8%), and labor (22.8%) matters[663] - The company has a policy of distributing dividends monthly since 1970, primarily through payments of interest on shareholders' equity (JCP)[664] - The mandatory minimum dividend distribution is at least 30% of the annual adjusted net income as per the company's bylaws[681][683] ITEM 9. THE OFFER AND LISTING This section details the trading of the company's ADSs on NYSE and shares on Brazil's B3, adhering to Level 1 Corporate Governance - The company's ADSs are traded on the NYSE under the symbols "BBD" for preferred shares and "BBDO" for common shares[668] - The company's shares are listed on Brazil's B3 stock exchange and are part of major indexes like IBrX-50, IBrX-100, and the Corporate Sustainability Index (ISE)[668] - Bradesco adheres to B3's "Level 1" of Differentiated Corporate Governance Practices, which requires enhanced transparency, disclosure, and a minimum free float of 25%[674][676] ITEM 10. ADDITIONAL INFORMATION This section provides supplementary details on corporate structure, governance, dividend policies, voting rights, exchange controls, and tax considerations for shareholders - The company's bylaws require a mandatory dividend distribution of at least 30% of adjusted net income[681] - Preferred shareholders are entitled to dividends 10% higher than those paid to common shareholders but have limited voting rights[684] - In the event of a transfer of control, the acquirer must offer non-controlling common shareholders 100% of the price paid to the controlling shareholders, and preferred shareholders 80% of that price[689] - Interest on Shareholders' Equity (JCP) paid to non-resident shareholders is subject to a withholding income tax of 15%, or 25% if the recipient is in a tax haven[726] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details market risk exposure, primarily interest rate and foreign exchange, using VaR, sensitivity analysis, EVE, and NII methodologies - The primary market risks for the company's portfolios are interest rate risk and foreign exchange risk[747] - The company uses the Delta-Normal methodology with a 99.0% confidence level to calculate Value at Risk (VaR) for its trading portfolio[754] Trading Portfolio VaR (1-day, net of tax) - 2023 | Trading Portfolio VaR (1-day, net of tax) - 2023 | Average (R$ thousands) | Minimum (R$ thousands) | Maximum (R$ thousands) | | :--- | :--- | :--- | :--- | | 1st Quarter | 13,062 | 4,982 | 24,849 | | 2nd Quarter | 19,211 | 6,314 | 45,150 | | 3rd Quarter | 15,041 | 8,374 | 23,229 | | 4th Quarter | 12,335 | 7,187 | 19,472 | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section details fees payable by ADS holders to the depositary bank and the US$12.1 million reimbursement received by the company in 2023 ADS Fees | Service | Fee | | :--- | :--- | | ADS Issuance | US$5.00 (or less) per 100 ADSs | | ADS Cancellation | US$5.00 (or less) per 100 ADSs | | Cash Distribution | US$0.02 (or less) per ADS | | Depositary Services | US$0.02 (or less) per ADS per year | - From January 1 to December 31, 2023, Bradesco received US$12.1 million from its depositary bank as reimbursement or payment[762] PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES This section is not applicable ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS This section is not applicable ITEM 15. CONTROLS AND PROCEDURES This section confirms the effectiveness of disclosure controls and internal controls over financial reporting as of December 31, 2023, with IFRS 17 adoption as a key change - Management, including the CEO and CFO, concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[766] - Management assessed the internal controls over financial reporting based on the COSO framework (2013) and concluded they were effective as of December 31, 2023[768] - Changes to internal controls in 2023 were primarily driven by the adoption of the IFRS 17 standard for insurance contracts[770] ITEM 16. [RESERVED] This section covers governance, audit fees, share repurchases, NYSE compliance, insider trading, and the company's comprehensive cybersecurity strategy Principal Accountant Fees and Services This subsection details fees paid to KPMG Auditores Independentes Ltda. for audit and other services in 2023 and 2022 Principal Accountant Fees (R$ in thousands) | Fee Type (R$ in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Audit fees | 63,298 | 51,796 | | Audit-related fees | 725 | 2,622 | | Other fees | 1,761 | 4,090 | | Total fees | 65,784 | 58,508 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers The company has an active share repurchase program for up to 106.6 million shares, though no repurchases occurred in 2023 - A share repurchase program is in effect from November 2023 to November 2025, authorizing the acquisition of up to 106.6 million shares (common and preferred)[776] - No common or preferred shares were repurchased by the company during any month in the fiscal year 2023[777][778] Corporate Governance This subsection compares Bradesco's corporate governance with NYSE standards, highlighting differences in board independence and committee structures due to Brazilian law - Unlike NYSE rules requiring a majority of independent directors, Brazilian law does not mandate this. Bradesco's Board has four independent directors out of eleven members[561][782] - The company's Nomination and Remuneration Committees are not composed entirely of independent directors, differing from NYSE standards[782][783] - The Audit Committee is a separate statutory body as required by the Central Bank of Brazil, not a committee of the Board of Directors, and the company relies on an exemption under Exchange Act Rule 10A-3(c)(3)[775][783] Cybersecurity This subsection details the company's cybersecurity framework, based on prevention, detection, and correction, with robust governance and adherence to NIST standards - The company's cybersecurity strategy is based on a framework of prevention, detection, and correction, with a focus on protecting client data, strengthening resilience, and identifying threats[787] - Cybersecurity risk management follows a three-line model and is grounded in principles of confidentiality, integrity, and availability, aligning with standards like ISO 27005 and the NIST Cybersecurity Framework[793][795] - Governance is managed through a robust structure including the Board of Directors, a Risk Committee, and an Executive Committee for Information Security/Cybersecurity, ensuring oversight at the highest levels[799][803] - Two key departments, Corporate Security and IT Infrastructure, are responsible for implementing the cybersecurity strategy, covering areas from policy and fraud prevention to network security, vulnerability management, and cloud engineering[806][813] PART III ITEM 17. FINANCIAL STATEMENTS This section directs the reader to Item 18 for the company's financial statements ITEM 18. FINANCIAL STATEMENTS This section presents the company's audited consolidated financial statements for 2023, prepared under IFRS, including key financial statements and notes Consolidated Statement of Financial Position (R$ thousands) | Consolidated Statement of Financial Position (R$ thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 1,927,523,249 | 1,792,288,792 | | Loans and advances to customers, net | 579,501,819 | 602,418,607 | | Total Liabilities | 1,760,509,125 | 1,632,277,955 | | Deposits from customers | 621,934,680 | 590,682,206 | | Total Equity | 167,014,124 | 160,010,837 | Consolidated Statement of Income (R$ thousands) | Consolidated Statement of Income (R$ thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | 55,082,419 | 69,811,272 | 83,102,023 | | Expected loss on loans and advances | (30,176,989) | (26,346,068) | (9,358,234) | | Net Income | 14,502,765 | 21,456,770 | 23,380,804 | | Basic Earnings Per Common Share (R$) | 1.27 | 1.89 | 2.07 | | Basic Earnings Per Preferred Share (R$) | 1.41 | 2.09 | 2.27 | ITEM 19. EXHIBITS This section lists all documents filed as exhibits to the annual report, including bylaws, deposit agreements, policies, and certifications